REIT Earnings Disappointing

Two of the largest REITs, Simon Property Group and Vornado Realty Trust, reported earnings results this morning. Contrary to the recent surge in their shares, which would imply that REITs were having a bang-up quarter, both posted losses, sharp declines in FFO, and lower vacancy rates amid deteriorating fundamentals in the commercial real estate market. Simon Property Group posted a $14.1 million loss on a $140. 5 million write-down, compared with a year ago profit of $114.4 million. Funds from operations fell to 96 cents from $1.49 last year. Revenue decreased 11% to $903.6 million. Occupancy rates were down to 90.9% while average rents rose 3.8%. Vornado Realty reported a loss of $37.6 million on a $122.7 million loan loss, compared with a year-earlier profit of $131.1 million. Funds from operations declined to 54 cents a share from $1.19. Revenue was slightly higher by 0.6% to $678.4 million. Occupancy rates fell to 96.1% from 97.5% in New York offices, but rose to 95.4% from 93.9% in DC. The loan loss was related to the company's 33% interest in Toys "R" Us which the REIT helped take private in 2005.

What is with all the recent bullishness in REIT stocks? The WSJ had a front page story yesterday questioning the rally in the sector. According to the article, REITs face $152 billion in debt maturities through 2013 while commercial property values have plummeted and seem likely to continue to do so. The most compelling reason to buy REITs in an environment where asset values are declining has been the yield, which during the lows hit roughly 10%. But at current prices, yields are roughly 4.7%, lower than some corporate bonds. Certainly the bulls will throw out the argument of 4.7% yield plus all that upside appreciation potential. But with the way the commercial real estate market looks today, the days of appreciation in commercial real estate properties are very far away. So if you think a 4.7% yield is "juicy", go buy some long bonds.