Battered REIT Discovers
Another Problem Market
Add the Washington, D.C., area to Summit Properties Inc.'s list of problem apartment markets.
The Charlotte, N.C.-based, real-estate investment trust said recently that net income from the area -- historically its strongest market -- declined 5.3% in the fourth quarter, after 6.7% growth in the third quarter. The drop was blamed mostly on the poor performance of a single complex in Northern Virginia's high-tech corridor plus an increase in area property taxes. Reston, Va., made up about 25% of Summit's Washington-area portfolio.
Summit's disappointing results came on top of the REIT's expected bad news about its troubled portfolio in Atlanta, Austin, Texas, and Charlotte and Raleigh, N.C.
The collapse of dot-com and telecom firms that set up shop in what is known as the Dulles Corridor in Northern Virginia not only affected the office sector but also the apartment sector, as laid-off workers moved in with friends, family members or to cheaper alternatives. And Summit has suffered the most since about 400 units of its 1,600-unit Washington, D.C. portfolio are in a complex in Reston in the Dulles Corridor.
"We believe the level of deterioration there is a Summit-specific issue," says Craig Leupold, an analyst at Green Street Advisors Inc. in Newport Beach, Calif.
Todd Canter, senior vice president for Baltimore-based LaSalle Investment Management Securities, which manages $4 billion in real-estate assets, generally agrees, saying Summit's Washington-area results don't appear to have wider implications on the D.C. or Northern Virginia market.
Yet Mr. Canter cautions that the final verdict is still out, given that Archstone-Smith Trust, the bellwether for the Washington, D.C. area, has yet to report its results. Denver-based Archstone-Smith, the second-largest apartment REIT, is expected to post fourth-quarter results Feb. 11. About 30% of the company's entire portfolio of 80,000 apartment units is located in the Washington, D.C., area.
Summit President and Chief Executive Officer Steve LeBlanc says the company is focused on increasing occupancy, in general, but at its Reston asset, specifically. He says he spoke with the management team responsible for that asset immediately after a conference call with analysts on Jan. 24 to discuss ways to perform better in 2002.
Summit reported on Jan. 23 that fourth-quarter funds from operations fell to 53 cents a share, excluding a nonrecurring charge of six cents a share, from 62 cents a year earlier. Funds from operations is a commonly used measure of REITs' financial performance. Analysts were expecting 56 cents, according to estimates compiled by Thomson Financial/First Call. Summit lowered projections for 2002 to between $2.20 and $2.30 a share, from the $2.39 to $2.50 it had projected in the third quarter.
Several analysts also have lowered estimates and have downgraded the stock.
Summit's Mr. LeBlanc remains bullish on the Washington area. He says he plans to expand in the area, including in Northern Virginia, as he believes the region will be one of the quickest to rebound when the economy recovers.
But investors aren't as optimistic. Summit's shares dropped to a 52-week low of $22.16 on Jan. 24, partly on the Washington-area results and then fell 1% on Jan. 28 to a new 52-week low of $22.05. While the stocks of other apartment REITs also declined, none did so as much as Summit.
Robert Stevenson, an analyst at Morgan Stanley in New York, says his firm, which downgraded the sector to "underweight" from "market weight" in December, is more pessimistic about the apartment sector than any other real-estate asset class. "The demand drivers of the industry, primarily job growth and new-household formation, remain weak," he says, "and this continues to have a negative impact on operating fundamentals."
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