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Commercial Real Estate Earnings On Deck

Posted: Oct 27, 2009 15:52 PM by Billy Fisher

Tickers in this Article: JLL, BPX, VNO, SLG, RWR

The turn in commercial real estate stocks has been stunning. The sector absorbed more than its fair share of the beating handed out by the credit crunch. In 2009, it has rebounded and outperformed many of the sectors that it lagged in 2008. To illustrate the reverse in fortunes, the SPDR Dow Jones REIT ETF (NYSE:RWR) plummeted 42% in 2008, fell even further at the beginning of 2009, but has risen almost 100% since March 6.

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Q3 earnings will play an important role in terms of which direction these stock go from here. Here are three stocks in the space to keep an eye on as they report their quarterly results in the days ahead.

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REITs on the Rise
Shareholders of the commercial office space real estate investment trust (REIT) SL Green Realty (NYSE:SLG) have been among the prime beneficiaries in the recent run up in the prices of commercial real estate stocks. SL Green shares are up over 60% so far in 2009. This move higher is especially impressive in light of the fact that the vacancy rate in Q3 for the Manhattan office market rose to its highest level in five years.

Although SL Green's portfolio is more heavily concentrated in the New York City market than some of its competitors, such as Vornado Realty Trust (NYSE:VNO), the firm has not had a difficult time filling its properties with tenants. At the end of the Q2, the REIT had an occupancy rate of 96.2%.

Another positive sign for SL Green is the fact that its average Manhattan office starting rents increased by 27.3% on new leases signed during Q2 over previously fully escalated rents. SL Green is slated to report its Q3 results after the market close on Monday.

Boston Properties (NYSE:BXP) has also followed the general trend of commercial real estate stocks. Shares of BXP have more than doubled since March 6. The company, which currently pays its common shareholders a dividend yield of 3.1%, is set to report its Q3 results after the market close on Tuesday.

In Q2, Boston Properties saw its funds from operations (FFO) rise 13.8% on a year-over-year basis. The company reported that its occupancy rate at the end of Q2 was 92%. BXP has been making moves to strengthen its balance sheet including a secondary offering in June that raised $842 million. A portion of these proceeds were used to pay down the company's revolving credit facility.

Property Management On The Mend
On Wednesday, Jones Lang LaSalle (NYSE:JLL) said in a report that the worst of the global commercial property meltdown is over, but the recovery will be uneven. Fortunately it appears that the worst has been over for shareholders of Jones Lang LaSalle for some time now. The stock is at a 52-week high as the property management company prepares to announce its earnings on Tuesday.

In Q2, the company reported a net loss of $14 million on a 13% decrease in revenue. Had it not been for restructuring costs and other non-cash charges, JLL would have made an $11 million profit. In a move similar to that of Boston Properties, the company raised $218 million from a secondary offering and also used a portion of the proceeds to repay debt on its credit facilities.

The Bottom Line
Although a fair amount of uncertainty continues to surround the future prospects of commercial real estate, stock prices in this space have made significant rebounds over the past two quarters. Q3 earnings have the potential to extend these gains even further. The coming days should present investors with a clearer picture as to the health of this sector of the market. (For additional reading, check out Basic Valuation of a Real Estate Investment Trust (REIT).)

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By Billy Fisher

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