Why One REIT
Measures a Different Way

CenterPoint Properties Trust marches to the beat of a different REIT.

In reporting financial results, most REITs follow the National Association of Real Estate Investment Trusts' guidelines to exclude gains and losses on sales of older properties from their key operating earnings measure. CenterPoint, though, adds gains from sales of all its assets, old and new, to its results.

The addition of these gains makes it appear as if CenterPoint's funds from operations, a commonly used measure of REITs' financial performance, are higher, and growing faster, than its peers.

"CenterPoint is playing the same game but using different rules for keeping score," says Jim Sullivan, analyst at Green Street Advisors Inc. in Newport Beach, Calif. "It makes their [results] not comparable."

It's unusual for any REIT to wholly reject the association's guidelines on accounting for property sales, much less a REIT with a chief executive officer who is a member of the association's executive committee. But CenterPoint officials justify its stance, arguing that the game is indeed not the same and that its definition of funds from operations more accurately reflects its business model.

"Our core business is creating value by developing and redeveloping assets, and ultimately by selling those assets, hopefully for a gain, as opposed to holding onto properties and collecting rent," says John S. Gates Jr., president and chief executive of CenterPoint, based in Oak Brook, Ill. "Then we redeploy those proceeds into new developments that create value."

CenterPoint has been calculating its results this way for years and in its reports has disclosed that it does so. So while some big investors and analysts may be uncomfortable with CenterPoint's inclusion of gains and losses on sales to its results, few of them should be surprised. But the Enron Corp. scandal has put Wall Street and investors on alert for companies with any financial reporting that appears too complex.

While what CenterPoint and other REITs do isn't Enron-ish, illegal, or even hidden, analysts say it can be misleading, and recommend investors consider this when valuing companies' earnings.

CenterPoint's disregard for Nareit's guidelines is one example of a host of problems analysts have found with REIT results. Funds from operations, a supplemental earnings measure that adds back depreciation on real-estate properties -- adopted by Nareit in 1991 -- has long been criticized because it isn't audited, tends to overstate earnings, and isn't enforceable.

Nareit leaves it up to REITs to implement its guidelines on funds from operations. The guidelines are recommended, not mandatory, so the measure is subject to interpretation. During the first quarter of 2001, CenterPoint itself excluded an $8 million loss on the $20 million sale of its sole apartment asset, saying that it wasn't part of its core portfolio.

Most analysts laud CenterPoint for creating value. Its annualized five-year total return -- stock price plus dividend -- has risen 15%, according to Morgan Stanley, compared with 8% for First Industrial Realty Trust Inc. and 7% for ProLogis Trust, the largest industrial REIT.

CenterPoint had an average growth rate in funds from operations of 14% since going public in 1993, exceeding its peers. But on Feb. 11, it reported a 40% drop in 2001 funds from operations due to a $41.5 million charge related to the write-down of a building left vacant by a company that filed for bankruptcy-court protection.

Fred Carr, principal at Penobscot Group Inc., a Cambridge, Mass. real-estate research firm, barely looks at funds from operations when evaluating CenterPoint. "We use a separate financial model," he says, "because [building and selling] is a regular part of their business."

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