NEW YORK CITY-Vornado Realty Trust’s financial results for the fourth quarter and full-year 2010, announced Wednesday, marked the latest in a series of strong quarterly showings by major REITs, with LaSalle Hotel Properties and Pennsylvania Real Estate Investment Trust also reporting year-over-year gains on Wednesday. It also provided further evidence of recovery across commercial real estate.
REIT stocks, which cratered in early 2009 following the capital markets collapse, are attracting investors once again thanks to an improving industry outlook as well as high dividend yields and strong quarterly earnings, the Wall Street Journal reported earlier this month. Shares of Vornado, for example, traded in the high $80s on Wednesday, far closer to the $108.15 the shares commanded just before the Wall Street meltdown in September 2008 than to the low of $27.01 six months later. The National Association of Real Estate Investment Trusts says the FTSE NAREIT All REITs Index of US companies posted a 3.64% total return in January, better than the S&P 500 at a 2.37% total return and beating the NASDAQ Composite, which was up only 1.78% for the month.
“2010 proved to be a great year for REITs overall, and I predict the same for 2011 with maybe slight corrections in the first two quarters,” NAREIT’s REIT.com quoted Jeffrey Rogers, president and COO of Integra Realty Resources, as saying during a panel discussion earlier this month. IRR’s ’11 outlook for commercial property as a whole calls for multifamily and office to “lead the way toward a commercial real estate recovery taking hold,” Rogers says in a release.
Credit rating agencies, too, have given REITs a vote of confidence, albeit with some caveats. Fitch Ratings in January reiterated its “stable” outlook for US equity REITs, noting that many investment trusts have strengthened their liquidity positions in recent months, “with several issuers accessing the capital markets to repay or refinance near-term maturing debt.”
As a case in point, locally based iStar Financial announced on Wednesday that it has hired JPMorgan Chase to arrange up to $3 billion in senior secured credit, which would be used to pay off loans coming due this year and next. Fitch in turn said Wednesday it expected to upgrade its issuer default rating on iStar, citing its “improved liquidity profile.”
However, Fitch’s outlook for REITs is tempered by “expectations of continued negative property-level fundamentals across most asset classes” as well as “a fragile improvement in the economy and continued elevated leverage across the sector,” according to a report from the agency. Similarly, Moody’s Investors Service sounded a note of caution last month in its outlook for the REIT sector. “While real estate fundamentals have been moving in the right direction, Moody’s SVP Philip Kibel said in a release in early January, “we expect that the REITs will continue to face operating challenges as economic conditions pressure occupancy levels and rental income in many property sectors through at least the first half of ’11.”
Vornado’s funds from operations for Q4 ’10 improved to $335.8 million, or $1.76 per diluted share, up from $20,000 a year earlier. The office and retail REIT’s net income for the quarter was $243.4 million, compared to a net loss of $151.2 million for Q4 ’09. Earlier this month, one of Vornado’s key competitors in the Manhattan office sector, SL Green Realty Corp., also reported year-over-year gains in FFO.
At Philadelphia-based PREIT, Q4 FFO totaled $32.2 million in Q4, compared to a deficit of $23.8 million the shopping center REIT reported the year prior. LaSalle Hotel Properties, headquartered in Bethesda, MD, reported year-over-year improvements in RevPAR and EBITDA, as well as in adjusted FFO.