REIT Earnings to Diverge -- WSJ
October 26 2016 - 3:02AM
Dow Jones News
By Esther Fung
Early results in the third-quarter reporting season for
real-estate investment trusts are highlighting the opportunity --
and pain -- in retail property stemming from the e-commerce
revolution.
SL Green Realty Corp., a large New York landlord, reported last
week that the bankruptcy filing by AĆ©ropostale dented its net
operating income. The teenage apparel retailer closed some stores
in SL Green buildings during the quarter.
Manhattan street retail rents are generally flat, said Marc
Holliday, SL Green's chief executive in a call with analysts and
investors. "We are still seeing tenant demand, but I would say
tenants are slower to make decisions."
Meanwhile, owners of logistics space are starting to report
surprisingly strong results, thanks partly to demand from internet
retailers. Both Prologis Inc. and EastGroup Properties Inc. posted
double-digit increases on expiring leases, especially on West Coast
distribution centers and warehouses.
One thing is clear: "rents are briskly rising," said a report by
Green Street Advisors analyst Eric Frankel.
Real-estate investment trusts generally have posted solid
results this year, with the recovering economy boosting rents and
occupancies. But investors have been cautious about buying shares
because REITs tend to be interest-rate sensitive and there is
widespread worry that rates might soon rise.
REIT shares have generally tracked the broader market. The
sector is up more than 4% for the year, compared with about 5% for
the S&P 500-stock index. But investor concern is reflected in
the fact that many of the companies' shares are trading at values
below the market value of the property they own.
Other signs of the industry's health will emerge in coming days
as giants like Simon Property Group, Vornado Realty Trust and
Boston Properties Inc. report their third-quarter results.
Weakness is expected in some sectors. Growth in office rents is
forecast to moderate this year to 2.8% compared with the 4%
recorded last year, according to a semiannual survey by the Urban
Land Institute.
Radnor, Penn.-based Brandywine Realty Trust last week reported
it saw no lease-up progress on its 47-story FMC Tower in
Philadelphia in the third quarter. The company lowered guidance for
its 2016 earnings, with its funds from operations, or cash flow,
ranging at $1.26 to $1.32 per diluted share to $1.28 to $1.30 per
diluted share.
REITs in the lodging sector continue to face pressure from a
supply glut in major cities, weaker demand from corporate clients
and a stronger dollar. They have also generally been trading below
valuation, driving some asset disposal activity.
Hotel REITs with exposure in Florida, such as Host Hotels &
Resorts, could see a dent in their third-quarter earnings on
disruption from the Zika virus and from Hurricane Matthew.
"Generally speaking, our expectations for the third quarter are
lower than the first and second quarter," said Jeffrey Donnelly, a
senior analyst at Wells Fargo Securities. "Earnings are on a slow
grind."
LaSalle Hotel Properties, which reported results last week, saw
4.3% growth in revenue per available room after operations last
year were disrupted by allegations of health and safety violations
from the union of its two New York City hotels, which have been
resolved. Analysts noted that the underlying economic conditions
for hotels remain weak.
Write to Esther Fung at esther.fung@wsj.com
(END) Dow Jones Newswires
October 26, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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