REIT’s Have Bragging Rights

Real-estate companies are expected to deliver robust second-quarter profits as office, retail and apartment landlords were able to raise rents and sign up new tenants.

The expected gains come despite Europe’s debt crisis and concerns about the economy, which have rocked financial markets around the world. For the most part, real-estate-investment-trust stocks have remained above the fray, outpacing broader equities because the stocks are viewed as a haven from global turmoil.

While economists, workers and public officials have been disappointed with the pace of job creation, analysts say enough have been created to have a positive impact on landlords.

“We added 1.8 million private-sector jobs in the last 12 months. That is a big enough number to [boost] occupancy and rents” in the second quarter, says Hessam Nadji, managing director of research and advisory services for Marcus & Millichap.

He notes that the job growth should be reflected in stronger funds from operations, a key profit metric for Reits, and net operating income.

Mr. Nadji says future earnings could be clipped if hiring doesn’t pick up. “I think if we get another month of lackluster jobs numbers, I wouldn’t be surprised to see some [REITs] revise” third-quarter estimates down slightly, he says.

Although REITs outperformed the broader stock market in the second quarter, real-estate stocks have been hit along with other stocks in the past few days on concerns that landlords could lose their ability to charge higher rents and raise occupancy rates if companies stop expanding and hiring.

Investors have favored REIT stocks over other financial stocks during the past two years mainly because they were confident that the worst of the commercial real-estate crisis was over; the REIT stocks also have healthy dividend yields. This has attracted a cross section of investors, including those that typically buy bonds.

Among REITs expected to report earnings this month is Simon Property Group, the nation’s largest mall landlord and REIT by market capitalization. Simon is expected to report earnings of 61 cents a share for the second quarter, compared with 52 cents the same period last year, according to analysts polled by Thomson Reuters. Revenue is expected to increase 7% to $998 million. Funds from operations are projected at $1.58 a share from $1.38 last year.

Avalon Bay Communities, the nation’s second-largest publicly held apartment landlord, is expected to post earnings of 64 cents a share, compared with 61 cents last year, and an 11% gain in revenue to $242 million. Funds from operations are projected at $1.12 a share from $1.04 last year. Multifamily landlords like Avalon have benefited from a surging pool of renters.

Haendel St. Juste, an analyst at Keefe, Bruyette & Woods, says he expects earnings for many apartment landlords to beat targets due in part to conservative earnings projections in January. Demand for apartments continued at a healthy clip because younger renters got more jobs, Mr. St. Juste says, with 800,000 jobs created over the past year for people 21-to-34 years old.

“That age group has the highest propensity to rent,” he says.

Office landlords in New York, like Boston Properties Inc. and Vornado Realty, should stand out from operators in suburbs, where there is an oversupply of space and little company expansion.

“The availability of big blocks of space in New York is shrinking, and there is still very limited development,” says Alexander Goldfarb, an analyst at Sandler O’Neill + Partners. He notes, however, concern about recent layoffs at investment banks, which are big employers in New York.

While many retail landlords are suffering from falling rents and rising vacancies, some of the largest retail REITs are doing better than the industry overall because they own higher-quality properties. That is especially the case for landlords to discount, “big box” electronic and apparel retailers like Best Buy and Target.

“The rental rates should be in the landlord’s favor,” says Carol Kemple, a retail REIT analyst at Hillard Lyons. Retailers “want to expand into the higher-quality malls, and those are usually owned by publicly traded companies,” Ms. Kemple says.

Among the 14 retail REITs she covers, Ms. Kemple says she expects Tanger Factory Outlet Centers Inc. to exceed expectations because outlet centers are “the sweet spot for retail.”

Simon Property, she says, may deliver an earnings surprise, given the company’s recent acquisition of Prime Outlets. Outlets usually carry the same designer names found at upscale malls, but at a discount, so cash-strapped shoppers don’t feel like they are downgrading.

“There are a certain amount of bragging rights,” she says, “attached to buying a Coach purse for $100 or less.” (credit a.d. pruitt, wsj)


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