Return Of The REITs

By Greg Sushinsky | July 27, 2009 AAA

Boston Properties (NYSE: BXP), the large office-building real estate investment trust (REIT), posted solid numbers in the key funds from operations (FFO) measure in its latest earnings report. Though commercial real estate has been hammered throughout the recession, Boston Properties' encouraging results and outlook is positive news in the face of the last dismal year or so.

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The Earnings Mix
Boston Properties reported net income for the second quarter this year of $67 million, or 53 cents a share, down from $75 million or 62 cents a share for last year's second quarter. In the key FFO numbers (which add back amortization and depreciation to net income), a better gauge of REIT performance, Boston Properties posted $166.7 million or $1.32 per share versus $141 million or $1.16 per share. The company's forecast for the third quarter is $1.08-$1.11 per share, and for the year it's $4.55-$4.63 per share. These are healthy numbers in what has been a battered industry.

Awful Times for REITs
In a year that has seen rising vacancies in the office REITs, continuing pressure on commercial real estate from lower rents, and the bankruptcy of a major REIT, mall operator General Growth Properties, things have been bleak for some time. Investors noticed these tough times and the stocks were trimmed accordingly. There are signs, however, that things may be turning up, slowly.

Duke Realty (NYSE: DRE), which owns office and industrial properties, has had rising earnings, while Corporate Office Property (NYSE: OFC), which has many suburban office complexes, has also improved earnings. More significantly, perhaps, is Vornado Realty Trust (NYSE: VNO), a large office REIT with major New York City exposure, which plans to create a private equity fund to pick up distressed properties. Highwood Properties (NYSE: HIW), a large office REIT with strong holdings in the southeast, completed a stock offering in June which raised $143 million, and the company also has strong future earnings prospects.

Is the Worst Over?
While the news is definitely still mixed on commercial real estate, particularly with shopping mall REITs, and vacancies in the office-building REITs continue to be a problem, there may be signs that this commercial real estate pain is bottoming out. Some observers disagree, and feel the economy will remain weak with commercial real estate facing continuing or even greater pressures, but the steadily improving earnings and FFOs of some of these REITs indicate that the trend may turn. The availability of financing for projects, as well as the stock offerings and the bargain hunting possibilities for distressed properties show that the industry may be bottoming out.

Bottom Line
Investors may want to look at easing into REITs, especially Boston Properties and some of the office REITs which look to be facing a potentially healthier climate than the shopping mall REITs. Before plunging in to buy Boston Properties or any of the others, though, keep an eye on the commercial real estate trends, such as office vacancies and the availability of credit. The vacancies in particular tend to lag the overall economic direction coming out of recession, as vacancy is quite connected to unemployment. As the economy and real estate recover, Boston Properties and these other REITs may be setting themselves up as terrific long-term bargain stocks. (To learn more, read The REIT Way.)

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