Comparisons show weakening US office market
Equity Office Properties Trust — owner of 731 buildings containing 11.6 million m² of office space — achieved significantly higher 4th quarter returns in 2002: funds from operations up 41% to $US365.3 million, & up 49% to US79c/fully diluted share, while fully diluted earnings/share rose 50% to US42c.
But taking out a $US124.2 million writedown in 2001, the comparison was markedly different: funds from operations would have been down US1c & earnings/share down US13c, or 23.6%.
A big earner in both years has been lease termination fees — $US24.4 million in the 4th quarter 2001, $US44.7 million this time. For the whole of 2002 those fees totalled $US152 million, but Equity Office says it expects only $US25-30 million in 2003.
For the full year, Equity Office increased funds from operations as a percentage of revenue from 38.2% ($US1.177 billion on revenue of $3.081 billion) to 42.9% ($US1.505 billion on revenue of $$$US3.506 billion). On a fully diluted share basis, funds from operations rose 12.2% to $US3.21/share, and earnings/share rose 9.7% to $US1.70/share.
Writedowns hit 2001, termination fees boost 2002
Writedowns totalling $US132.7 million cut the full-year 2001 figures by US32c (FFO) & US33c (earnings/share). The poorer 2002 operating results are illustrated in rental comparisons, in the small gains from asset sales and in the level of fees for lease termination.
Lease termination cost tenants $US41.2 million in 2001, rising to $US152 million in 2002. The 2002 figure included $US40 million received for an office development which was proposed but not built.
Equity Office said it lost 570,000m² of occupancy — roughly 5% of total portfolio space — through early lease terminations in 2002.
Average rent slips for year, slides in 4th quarter
The average rental rate (weighted average gross rents, including straight-line rent) for the whole of 2002 on expiring & terminated leases was $US28.61/ft² ($NZ562.19/m²), but on new & renewing leases was US13c lower — $US28.48/ft² ($NZ559.63/m²).
The fall was more pronounced in the 4th quarter: $US27.41/ft² ($NZ538.61/m²) on expiring/terminating leases, down $US1.42 to $US25.99/ft² ($NZ510.70/m²) on new/renewing leases, a fall of 5.2%.
Property operating margins fell from 68.6% in the 4th quarter of 2001 to 67.6% in 2002.
Office occupancy fell from 91.8% at the end of 2001 to 88.6%, and industrial occupancy from 92.8% to 89.3%.
Same-store returns fall
Same-store net operating income for the year fell 4.9% (4% excluding straight-line rents) and same-store occupancy, on 378 buildings in the portfolio, fell from 94.7% to 89.7%.
Again, the 4th quarter picture was more depressed: same-store net operating income fell 5.9% (5.2% excluding straight-line rents), and same-store occupancy (on 723 properties) fell from 93.8% to 89.2%.
Actual 4th quarter occupancy across the whole portfolio fell from 89.2% in September to 88.6%, but the industrial portfolio gained, from 88.1% in September to 89.3% occupancy.
Over the whole year, Equity Office sold 47 buildings totalling 300,000m², & 4 parking facilities for a gross $US508.3 million and net gain of $US17.9 million.
Lower 2003 earnings forecast
Equity Office management is predicting an earnings range of $US2.80-3 funds from operations in 2003, down from $US3.21. Among its assumptions is a moderate US economic recovery, 1% office job growth and lower lease termination fees.
Equity Office proclaims itself as the biggest office building owner & manager, and biggest real estate investment trust, in the US with $US24.6 billion of property. But, like many others, its share performance has not been up to the level management wants. It began a share buyback programme in mid-2002 and has bought 9.5 million shares at an average $US24.72/share. On Wednesday its shares picked up US17c to hit $US24.
Website: Equity Office Properties Trust
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