Residential REITs Have
Reason to Be Cautious
Two large real-estate investment trusts, Equity Residential Properties Trust and ProLogis Trust, posted fourth-quarter results above year-ago levels but delivered pessimistic outlooks for the nation's apartment and industrial real-estate markets.
Because of their size and geographic diversity, the two REITs' results are widely used to gauge the health of their respective real-estate sectors.
Equity Residential, the nation's largest apartment owner based on stock-market capitalization, further lowered earnings guidance for 2002 and warned of "a challenging year ahead," citing declining job growth in many of its markets due to the weakened economy.
ProLogis, the largest publicly traded owner of industrial properties, also remains cautious about this year and has been shifting its development efforts to Europe, where demand for warehouses is stronger.
Equity Residential, Chicago, reported fourth-quarter net income of $141.5 million, or 43 cents a share, compared with $126.3 million, or 37 cents a share, in the year-ago period. Revenue rose to $536.5 million from $529.2 million.
The company said funds from operations, a commonly used measure of REITs' financial performance, rose to $206.3 million, or 66 cents a share, from $197 million, or 64 cents a share, in the year-ago quarter. Analysts' estimates compiled by Thomson Financial/First Call expected Equity Residential to report 65 cents.
Equity Residential said same-store net operating income, or income generated from operating the company's 185,105 units, rose 0.8% to $278.2 million. But occupancy in its portfolio fell to 93.89% from 94.56%, with the worst drops reported in Austin, Texas; the San Francisco Bay area; Phoenix; Seattle and Atlanta. Citing uncertainty in the economy, the company said it will build only half the apartment units it planned for 2002.
The company's results follow similarly troubling reports by other apartment REITs. "We continue to have new supply being delivered into a market with weak operating fundamentals," said Robert Stevenson, an analyst at Morgan Stanley in New York. "The typical demand drivers of this space -- new household formation and job growth -- continue to languish and are not expected to bounce back anytime soon," he said.
ProLogis, Aurora, Colo., reported a net loss of $38.5 million, or loss of 27 cents a share, compared with net income of $58.7 million, or 27 cents a share, in the year-ago period. The company incurred charges of $125 million in the latest quarter to reflect a write-down of its cold-storage operations and technology related to the cold-storage business. Funds from operations, before charges, rose to $107 million, or 60 cents a share, from $97.5 million, or 57 cents a share. Revenue fell to $172.8 million from $179 million.
"The industrial markets [in general] are suffering from decreasing occupancy, flat to declining rents and very anemic tenant demand, and until the economy recovers, those conditions probably aren't going to change that much," said James Sullivan, analyst at Green Street Advisors in Newport Beach, Calif.
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