Sliding Earnings Dominate Q3

LOS ANGELES-A flurry of quarterly reports from office REITs and other publicly held companies in the L.A. area lately is reinforcing the adage that a rising tide lifts all ships and a falling tide lowers them. Although some of the publicly held real estate firms are holding their own or even reporting improved results, the economic slump is definitely having an impact in the publicly held portion of the office sector.

Among those who have reported quarterly results in recent days are CB Richard Ellis, Thomas Properties Group Inc., Douglas Emmett Inc. and Pacific Office Properties Trust. While all are publicly held companies, Emmett and Pacific Office are REITs, but CBRE and Thomas are not.

While CBRE reported comparable revenue versus last year’s third quarter, the company’s net income dropped to $40.4 million and 19 cents per share compared to nearly $115 million and 48 cents per share. Although CBRE’s management team noted a significant portion of the decline resulted from one-time charges, the company’s prepared statement regarding its quarterly performance summarized the forces that are vexing commercial real estate around the globe. “Results during the quarter were impacted by weak sales activity caused by the global credit market turmoil, and soft leasing performance reflecting weaker economic conditions, particularly in the US and the U.K. Constraints in the capital markets also adversely affected the achievement of incentive-based revenues by the global investment management business,” according to the release.

Despite these forces, CBRE continued to generate significant growth in its fee-based services during the quarter. Revenue from the business line rose by 30% in the third quarter and accounted for more than one-third of global revenue, a figure that was up from about 23% since Q3 2007.

At Douglas Emmett Inc., FFO increased to $51.1 million and 33 cents per diluted share compared to $46.6 million and 29 cents per share in Q3 2007. REIT experts generally consider FFO a more telling measure of performance, but Emmett nonetheless reported a loss of $9.7 million and eight cents per share for the quarter, up from a loss of $2.8 million and three cents per share last year.

At Thomas Properties Group, the company reported a net loss of nearly $3 million and 12 cents per share versus income of $271,000 and a penny a share for last year’s third quarter. A report by analysts at Milwaukee-based Robert W. Baird & Co., however, argues that quarterly earnings are less important than after-tax cash flow in TPGI’s business model, which is nearly completely based on the company’s net asset value. TPGI reported after-tax cash flow of 15 cents per share for the quarter.

Founder James Thomas commented in a press release that “the office property fundamentals of our markets are relatively stable, particularly in Philadelphia, Houston, Downtown Los Angeles and Downtown Austin, despite the current crisis in the capital markets.” Thomas, who is chairman and CEO, says the firm is “well positioned to be responsive to the market conditions we are facing,” with sufficient cash on hand and manageable debt.

At Pacific Office Properties Trust, the REIT reported FFO of more than $1 million and six cents per share along with a net loss of $1.19 million and 39 cents per share. The company did not compare these results to those from last year because this is only its second quarter as a REIT.

Dallas E. Lucas, president and CEO of Pacific Office, cited the “adverse conditions and challenges recently posed by the capital markets and related economic environment” as one of the factors affecting its fortunes. In a prepared statement, Lucas said “we are optimistic about our future prospects, given that 80% of our rental revenue for the three months ended September 30, 2008 was derived from Honolulu and Southern California submarkets, which are some of the strongest office markets in the US.” Lucas also said the REIT recently lined up a new $40-million revolving line of credit and faces “minimal near-term debt maturities.”