Bellwether REIT Paints
Mixed Financial Picture
Bellwether real-estate investment trust Equity Office Properties Trust said that a sharp fall in its fourth-quarter operating results was mostly due to a one-time charge. But U.S. office markets continue to weaken, particularly on the West Coast.
Equity Office said funds from operations, a commonly used measure of REIT earnings, fell to 55 cents a share from 75 cents a share a year earlier. The results include a charge of $124.1 million, or 27 cents a share, to write off a drop in value of some of its investments, mostly in HQ Global Workplaces, a provider of furnished offices that is majority-owned by Frontline Capital Group Inc., New York. Excluding the charge, Equity Office met analysts' expectations of 82 cents a share, according to a Thomson Financial/First Call survey.
Equity Office, Chicago, said net income rose 16% to $135 million, or 28 cents a diluted share, from $116.3 million, or 35 cents a share, a year earlier. The net-income rise was due to the July acquisition of Spieker Properties Inc., Menlo Park, Calif., for $4.48 billion. The disparity between net income and earnings per share was due to the company's issuance of a large block of shares in the deal.
Revenue rose 37% to $901.4 million from $657.2 million, mostly on the acquisition.
On a conference call, Tim Callahan, Equity Office's chief executive, said the West Coast markets over the past year were "hit harder than we anticipated" when the deal was announced in February 2001. Partly as a result, Equity Office lowered 2002 earnings targets to $3.10 to $3.30 a share, from a range of $3.40 to $3.50.
The sharp slide in the Northern California markets has been a major theme in real-estate circles this year.
Mr. Callahan said the REIT was well-positioned to weather the "stress test" that the current economic climate had placed on earnings. He said it remained too early to tell whether the corporate-leasing slowdown had bottomed out, but he expected an upturn in activity in the second half of the year. He said markets still were too volatile to provide guidance for 2003.
The fourth quarter showed a worrisome decrease in occupancy rates. The company's overall occupancy rate dropped to 91.8% at year end from 93.7% as of Sept. 30. The 1.9-percentage-point drop roughly mirrored the national average, analysts said. But for the entire year, Equity Office's portfolio held up better than the national markets: Its occupancy rate dropped to 91.8% from 94.6%, compared with a drop of more than five percentage points in national office surveys.
Stuart Seeley, an analyst with UBS Warburg, said Equity Office "won ugly" in that it met earnings expectations only thanks to one-time lease termination fees of $24 million. But he was encouraged by the portfolio's outperforming of the national average.
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