REIT Results Assume
A Variety of Meanings
It's no wonder people who don't spend a lot of time in the sector have issues with the measure that real-estate investment trusts use to gauge financial performance. But even people involved in the industry have issues with it.
To see how truly confusing REITs' earnings calculations can be one need only look up fourth-quarter numbers reported by Thomson Financial/First Call, which tracks analysts' estimates.
In the case of CenterPoint Properties Trust, John S. Gates Jr., chief executive of the Oak Brook, Ill., REIT, told analysts in a conference call in February that the company had a loss of 76 cents a share for fourth-quarter funds from operations, due to a $41.5 million charge primarily for the write-down of an office building left vacant by a company that filed for bankruptcy-court protection. Funds from operations is the supplemental earnings measure used by REITs to assess performance.
Yet if you looked at Thomson Financial/First Call's statistics, CenterPoint met analysts' estimates of 98 cents a share. That's because the majority of analysts who reported to the firm chose to exclude the charge, even though Mr. Gates instructed them to include it.
The National Association of Real Estate Investment Trusts recommends that REITs include recurring and nonrecurring charges in their main funds-from-operations figure. (REITs report two sets of results -- one including charges, one excluding them.) But part of the industry's problem is that Nareit's recommendations aren't enforceable. Also, funds from operations aren't audited.
Some analysts argue that because the charges aren't a continuing part of the business, they shouldn't be included.
"Yes, theoretically Nareit's right and that's the proper number," says Lee Schalop, analyst at Banc of America Securities in New York. "But it's just not a useful number to measure a company's ability to generate cash flow year in and year out."
Along with CenterPoint, Equity Office Properties Trust, the nation's largest office landlord, encouraged analysts to focus on the fourth-quarter number that included a charge, in accordance with Nareit, even though those numbers made their results look worse. Most analysts, however, focused on the number without the charge. "These companies were doing it the right way, and the analysts were taking a different path," says Jim Sullivan, an analyst at Green Street Advisors Inc., Newport Beach, Calif. "At best, it's confusing; at worst, misleading." Green Street uses First Call numbers in its research reports.
Joe Cooper, research analyst at Boston-based Thomson Financial/First Call, says the firm posts whatever number the majority of analysts choose to report as a REIT's funds from operations.
To try to make REIT results more comparable with other sectors, REIT analysts late last year agreed to forecast results using operating net income, which excludes gains and losses. But it's just as subject to interpretation as funds from operations.
Equity Office, Chicago, and CarrAmerica Realty Corp. of Washington, D.C., each reported write-offs for the fourth quarter on their investments in HQ Global Workplaces, a provider of furnished offices majority-owned by Frontline Capital Group Inc., New York. Thomson Financial/First Call listed Equity Office's funds from operations as being in line with estimates at 82 cents a share, and CarrAmerica's at 85 cents, a penny above estimates. Including the charges, their results would have been 55 cents and 14 cents, respectively.
Richard D. Kincaid, Equity Office's chief operating officer, says the company's decision to lead with the figure is in line with Nareit's definition of funds from operations.
Steve Walsh, CarrAmerica's senior vice president of capital markets, says, "We just say, 'Here are the two numbers.' We don't think a company should stress one number or another. It's the analysts' choice."
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