REITs Have Yet to Feel Full Force of Slowing Economy
The slowing economy has not yet had a major effect on the earnings of Southern California-based real estate investment trusts, but REIT executives and industry analysts sounded some cautionary notes as they examined third-quarter results.
Among major locally based REITs that have released earnings statements, Kilroy Realty Corp. of El Segundo reported a slight decline from year to year, and Los Angeles-based Arden Realty Inc. posted a year-to-year gain.
Kilroy blamed its decline of 2 cents a share in funds from operations primarily on the collapse of EToys, which formerly occupied a 151,000-square-foot office building Kilroy owns in West Los Angeles. Kilroy’s third-quarter funds from operations totaled $20.5 million, or 67 cents a share, down from $21.1 million a year ago. Arden posted funds from operations of $50.1 million, or 76 cents a share, compared with $46.7 million, or 71 cents, a year ago.
Kilroy and Arden, which own and operate office buildings, are among nearly two dozen Southern California-based REITs specializing in the ownership and operation of commercial properties.
REIT executives and analysts expect the properties owned by the Southland companies to continue making money, but the rate at which profit grows is expected to slow--and could vary considerably from company to company--as rents flatten as a result of waning demand for commercial space.
“In general, when you look at the office companies, the L.A. market is doing better on a relative basis than other markets,” said analyst Michael Torres of Lend Lease Rosen. “The demand has all but vanished in most of the other markets in the country.”
But if the economy continues to slow as expected, demand for commercial space will continue to wane here as elsewhere, Torres said, so the growth rates of REIT earnings will flatten. Analyst Jay Leupp of Robertson Stephens agreed, saying he foresees a “mild correction” in the Los Angeles office market.
“These companies are still going to make money, and the dividends are extremely secure, but the headlines are not going to look that attractive,” Torres said, predicting that future news reports will describe higher vacancy rates in commercial buildings.
Officials at Arden and Kilroy spoke confidently of the strength of their companies in conference calls regarding their third-quarter earnings, but both pointed to the economic uncertainty caused by the Sept. 11 terrorist attacks.
Arden Chairman Richard Ziman cited “slower decision-making by tenants” but said the market remains fundamentally sound. Kilroy President John B. Kilroy Jr. said new leases and expansions “are clearly taking longer to complete” because of the uncertainties caused by the slowing economy and the events of Sept. 11.
The number of prospective tenants considering renting space in Kilroy office buildings actually increased during the third quarter, Kilroy said, but he said it remains to be seen how many of those will sign leases.
One reason that rents here haven’t fallen sharply, as they have in other markets, is that Southern California rental rates “never achieved the unrealistic, unsustainable levels as they did in some other parts of the country,” Arden President Victor Coleman said.
“We do not expect market rental rates to deteriorate,” Coleman said, “but we do expect them to remain flat.”
Among the other Southland-based REITs that have released earnings statements is Health Care Property Investors Inc. of Newport Beach, an owner of long-term care facilities, hospitals and medical buildings, which reported funds from operations was up by 2 cents a share to 84 cents.
The company reported quarterly funds from operations of $46.5 million, compared with $42.5 million in the third quarter last year.
Arden Realty shares slipped 36 cents Monday to $24.93, and Kilroy Realty was off 16 cent to $23.79, both on the New York Stock Exchange.
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Tracking Southland REIT Stocks
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