REITs Show Overall Acceleration Of Earnings Growth by Lesley Hensell
NAREIT proudly proclaimed this week that fourth-quarter earnings for REITs and other publicly traded real estate companies illustrate an overall acceleration of earnings growth. This good news, however, was offset by declining stock prices that have accompanied escalating earnings. Funds from operations per share – the REIT industry’s measure of financial performance also known as FFO – rose an average of 12.3 percent in the fourth quarter when compared to the same time period in 1998, according to the National Association of Real Estate Investment Trusts. “Overall, fourth-quarter FFO per share growth reflects the fact that the economic fundamentals of the real estate economy remain quite solid,” said Michael Grupe, NAREIT vice president and director of research. “The economy remains ebullient, and real estate fundamentals continue to be relatively well balanced in most parts of the country. “Moreover, the pace at which new space is being created appears to be moderating,” Grupe added. “For example, the level of total private sector, non-residential construction spending has declined from its level of early last year, and the levels of new construction starts in several major property sectors also have fallen below their recent peaks. Thus, building occupancy levels and rental rates remain firm in most markets." Unfortunately for publicly traded real estate companies, their efforts were not rewarded by shareholders. Despite significant improvements in FFO performance, stock prices for the NAREIT index at the close of 1999 were down 6.5 percent over the year before Last year’s third quarter financial performance results were consistent with fourth-quarter numbers, as third-quarter FFO per share rose an average of 10.2 percent. Even more frustrating for the industry is the lack of Wall Street excitement, keeping in mind that most industry analysts are bullish on real estate stocks. The combined equity market capitalization of all the real estate companies tracked by NAREIT at the end of December 1999 was $139.3 billion. For all reporting companies that are tracked by market analysts, 84 percent of earnings reports met or exceeded consensus analyst expectations. Both mortgage REITs and publicly traded real estate operating companies reported particularly strong earnings growth in last year's final quarter. Of particular note were earnings in the mortgage REIT sector, which rebounded from the fourth quarter of 1998. Average FFO per share growth for all equity REITs rose from 8.7 percent in the third quarter of 1999 to 10.8 percent in the fourth quarter. Among the larger property sectors, office, retail and apartment REITs, all reported higher FFO per share growth in the fourth quarter. So why the positive earnings reports? “Robust economic growth, rising employment, and strong household spending likely are the driving forces behind these results,” Grupe said Michael. “In addition, most property market data suggest that commercial real estate markets overall remain in relative equilibrium.” Grupe contends that higher FFO per share growth in the retail sector suggests that many companies are working with their tenants to develop effective strategies for blending the benefits of online retailing with onsite retailing. “The pickup in earnings growth may provide some early evidence that e-commerce can be more of an ally than a threat to traditional retail property owners and managers,” he said. | 
