REITs Outperform Barclays Capital Q1 Expectations
Real estate investment trusts (REITs) performed better in Q110 than what Barclays Capital (BarCap) analysts expected, according to a post-earnings season report. Average funds from operation per share (FFOps) were down 25.6% year-over-year, better than BarCap’s projected 28.5% decline. On an operating basis — which excludes non-recurring gains and charges — FFO per share was down only 20.1% year-over-year, better than the projected 23.5% decline for the sector. The better than expected results in Q110 led BarCap to improve its projections for the sector for the rest of the year. “We now expect operating FFOps to fall 11.3% [year-over-year] in 2010 better than our previous 12.7% projected decline; we expect a 9.0% increase in 2011 driven by better core fundamentals and easier comparisons,” BarCap analyst Ross Smotrich wrote. Adding to the brighter outlook is “management body language” that supports a more “constructive fundamental outlook,” BarCap added. From an investment perspective, the REIT sector could be poised for a 14.1% 12-month total return, which includes a 3.3% dividend yield. However, BarCap is maintaining its neutral investment outlook due to the possibility of continued short-term declines in commercial real estate. “Longer term, we remain constructive on the group; REITs should come out of the current downturn with a greater absolute market share, and benefit from a late 2H10 earnings inflection, the global search for yield and the perception that they are a good inflation hedge,” Smotrich wrote. Among the primary REIT sectors, office was the top performer, down 12.4% on an operating basis. That’s better than industrial REITs, which experienced a 74.3% year-over-year operating decline, the result of net operating income (NOI) declines, reduced development profits and “most paramount,” BarCap said, dilution from equity raises. Somewhere in between the office and industrial sectors were the multifamily, regional malls, and shopping centers REITs, which declined 17.7%, 14.8% and 30.7%, respectively, on an operating basis, BarCap said. “The key point is that while 1Q results reflect earlier fundamental stability than expected, the pace of recovery will vary by property type,” Smotrich said. Write to Austin Kilgore.