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What REIT Earnings Say About the Future of the Market


May 01, 2020 by Matthew DiLallo
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For many real estate investment trusts (REITs), the first quarter started as the best of times. Unfortunately, it quickly became one of the worst markets the sector has experienced. That's evident when contrasting the first-quarter earnings reported by a couple of REITs with their subsequent outlooks for what's immediately ahead. That near-term caution, however, isn't having too much impact on their long-term plans just yet.

From boom to bust almost overnight

Brandywine Realty Trust (NYSE: BDN) operates a portfolio of urban, town center, and transit-oriented properties focused in the Philadelphia, Washington, D.C., and Austin markets. It primarily leases these properties to office tenants, though it does have some retail and coworking tenants.

Brandywine's CEO, Gerard Sweeney, said on the company's first-quarter call, "We opened the year strong. Our first-quarter results were among the best we've had in recent years. We had excellent leasing activity. … Same-store numbers were tracking slightly ahead of our original plan."

Because of that, the company was able to generate $0.35 per share of funds from operations (FFO), which met expectations. Further, Sweeney noted that "our leasing pipeline was building nicely, including some excellent forward leasing activity on several of our development projects."

However, he then advised, "That strong start is, of course, in the rearview mirror and all somewhat irrelevant given the circumstances, and our entire focus is on the path forward."

Overall, Brandywine has made the following market observations:

  1. While it had several development projects in the pipeline that it could have started this year, it will only begin construction on one of them, down from its prior estimate of two.
  2. Even though the public market value of real estate has declined -- Brandywine's stock is down 30% year to date -- the private value has held up. Because of that, it's in discussions with institutional investors and private equity firms on joint venture transactions that could provide growth funding.
  3. The company noted that while there are questions about the future of office demand due to the increased likelihood of telework, Sweeney stated on the call that "the immutable constant will be that high-quality office space will be a recipient of any demand drivers. Tenants clearly want safe, secure, healthy environments." Brandywine has this high-quality space and will adjust future developments to changes in tenant preferences.

Only a bump in the road

Washington Real Estate Investment Trust (NYSE: WRE), or WashREIT, operates a diversified portfolio of real estate in the Washington, D.C., metro area. It boasts almost 4 million square feet of office and retail space and nearly 6,900 multifamily apartments. Overall, multifamily contributes 49% of its income, while office tenants provide 45%, and retail makes up the final 6%.

Like Brandywine, WashREIT, started the year off strong. CEO Paul McDermott said on the company's first-quarter conference call, "We posted excellent first-quarter results." It generated $0.38 per share of FFO while same-store net operating income (NOI) from its multifamily portfolio rose 6.8%.

However, McDermott pointed out that the company "started to see the first signs of the impact of the virus on our tenants' ability to pay rent about three weeks ago, and we are still in the midst of assessing the full economic effect that this crisis may have." The company noted that it had collected 95% of April rent from its multifamily portfolio and 91% of April office rents. Meanwhile, it has yet to receive about $500,000 of April retail rent.

Given the current uncertainty, the company has decided not to break ground on one of its multifamily projects this year. However, it still believes in its long-term multifamily-focused development plan. While it anticipates that there will be some near-term impact, it expects that once conditions stabilize, it will be able to continue expanding in a post-COVID-19 world.

People will still need places to work and sleep

The COVID-19 outbreak has had a near-term negative impact on the ability of REITs to collect rent from office, multifamily, and retail tenants. However, both Brandywine and WashREIT see these as temporary issues, at least in the office and multifamily sectors. They believe that tenants will continue to demand good office space, and people will still need a place to live. Because of that, even though they're both pausing some near-term developments, they don't plan to change their long-term growth strategies.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.