Office REITs Deliver Mixed Results

Columbia, MD-based Corporate Office Properties Trust [COPT], in its earnings call last week, reported a 17.3% increase in diluted FFO to $2.24 for the year. But in the words of president and CEO Randall M. Griffin, the REIT has "conservatively planned for a recession" this year despite feeling that it is "well positioned for strong growth in 2008." The company's tenants are heavily concentrated in the US government and defense information technology sectors, known for stability in good times and bad.

On the opposite coast from COPT, president and CEO Jordan L. Kaplan of Douglas Emmett Inc., commenting in that company's earnings conference call, acknowledged 2007 as "an extremely volatile year for the real estate industry," but noted that the REIT's portfolio, which includes Sherman Oaks Galleria in the San Fernando Valley, reached a record level of nearly 96% leased in the year. The Santa Monica, CA-based Emmett is one of the newest public REITs, just finishing its first year as a publicly held company, having gone to the public markets at a time when other REITs were going in the opposite direction--being taken private.

One reason it was able to raise the funds in public markets when it did, according to analysts, is that Emmett's portfolio includes a high concentration of top-tier properties on the Westside of Los Angeles. The company also owns property in some of the best suburban Los Angeles office markets, including its Sherman Oaks Galleria project in the San Fernando Valley.

Among the other REITs with substantial office holdings that reported results last week was Edison, NJ-based Mack-Cali Realty Corp., which posted higher FFO but lower net income for the fourth quarter and the year on revenues that edged up slightly. As the other chief executives did in their remarks during conference calls, Mack-Cali president and CEO Mitchell E. Hersh commented on the economic slowdown. "While it is widely held that the nation's economy is slowing and the capital markets are constrained, we enter this period of uncertainty with an extremely well-leased portfolio with high caliber tenants, minimal 2008 lease expirations and a strong balance sheet," Hersh said. He said that the REIT's approach to 2008 will be "to operate efficiently as well as be opportunistic going forward."

Emmett CEO Kaplan also sounded a note of optimism, saying that after a "very challenging acquisition climate" in 2007, the company is "beginning to be increasingly optimistic" about the prospects of acquiring new assets this year and sees "signs that sales activity will accelerate during 2008." Nonetheless, Kaplan suggests that Emmett might not see as many opportunities in its market as other companies find in theirs. "Unlike other markets, our markets do not contain a significant number of buildings owned by overleveraged parties" that would be likely to sell in 2008, he explained.