Going Forward, BarCap Expects Mixed Results from REITs
Analysts at Barclays Capital (BarCap) project mixed results from the real estate investment trust (REIT) sector, as the companies begin releasing their Q409 and year-end earnings reports. On average, the analysts expect fourth quarter funds from operations per share (FFOPS) for the REIT sector to increase 6.1% year-over-year, but decline 28.1% on an operating basis, which they define as excluding non-recurring items. For 2009, BarCap expects FFOPS to decrease 4%, or 17.8% on an operating basis compared to 2008. Looking forward, BarCap projects FFOPS to increase 4.5% in 2010, but decrease 10.2% on an operating basis. The difference between the positive FFOPS and negative operating basis projections are a function “material one-time charges taken by most of the companies” BarCap covers. The greatest disparity will come in the multi-family and industrial REIT sectors, while the analysts expect the office sector to fare the best, despite showing FFOPS declines of 20.7%. Regional malls and shopping centers are also projected to show FFOPS declines for the quarter. BarCap warned additional non-recurring items may also impact REIT results. “While not baked into our Q409 estimates, we would not be surprised to see additional non-recurring items this quarter. The transaction market has improved somewhat, which may cause some companies to mark down development projects and/or land banks; ongoing debt buyback activity could similarly drive charges and/or gains,” the analysts wrote. Last week, BarCap downgraded the REIT industry over concerns that earnings growth will lag compared to other investment opportunities. In that report, BarCap projects REITs will come out of the current downturn with a greater absolute market share, citing a trend of a growing distinction between real estate broadly and publicly traded real estate, “and further between those REITs with access to capital and growth potential and those that are more challenged,” the research said, resulting in an uptick in the number of companies seeking to go public. BarCap’s analysis seems to echo a Deutsche Bank report on the sector. “We see full valuations and few catalysts that would give us another year like '09 which saw the industry storm back from considerable turmoil. However, we don't see many negative catalysts, which would drive REIT share prices meaningfully lower either,” the Deutsche analysts wrote. “On balance, we are looking for a 5-10% total return for the group in 2010 with investors receiving, at the low end, little more than the dividend and, at the high end, benefiting from some early earnings-accredited capital deployment,” the outlook added. Write to Austin Kilgore.