AMB Predicts Occupancy, Rent Gains in Late 2010

SAN FRANCISCO-AMB Property Corp., an industrial REIT said Wednesday it expects occupancy and rents to bottom out in the next two quarters and begin to show improvement in the second half of 2010. Company executives cited industrial’s lagging relationship with the US economy, which is expected to show growth in the first half of 2010.

“Leasing and capital expenditures have been on hold as businesses focused on cutting costs and gaining efficiencies [but] decision making has resumed,” AMB chief executive Hamid R. Moghadam told analysts Wednesday afternoon. “Property showings and deals in negotiation are starting to increase and our strongest customers are beginning to execute previously shelved plans. The first wave of this [resumption of activity] will fill empty leased space, followed by demand for new space. It will take at least three to six months for the increased demand to show up as occupancies gains and revenue.”

For the time being, however, occupancy and rents remain unstable. While occupancy increased 50 basis points during the third quarter to 91%, same-store NOI is off by 7% from the same year-earlier period due primarily to lower than average same-store occupancies and rent changes on rollovers. On a trailing four-quarter basis, the average rent change on renewals and rollovers in AMB’s operating portfolio decreased 3.9%, including a 10.3% decline in the third quarter. To balance things out, AMB says it sold more than $200 million of real estate in the third quarter at an average cap rate of 6.2% for a net gain of $60 million.

As a result of the dispositions and lower expenses, the company reported better-than-expected quarterly funds from operations, or FFO, which does not account for depreciation. Third quarter FFO was $106.5 million, or $0.71 per share, up from $71.1 million or $0.69 per share, in the same year-earlier period, when the company had 50% fewer shares outstanding. Excluding development gains, FFO was $0.35, a couple of pennies above analysts’ average forecast. Net income available to common stockholders per fully diluted share for the third quarter of 2009 was $0.43, as compared to $0.24 for the same quarter in 2008.

The company commenced leases totaling 9.9 million square feet in its operating portfolio, a record. The company also leased approximately 935,000 square feet in its development portfolio. In the second quarter, the company commenced leases on 5.8 million square feet in its operating portfolio and leased approximately 434,000 square feet in its development pipeline.

In the peaks of 2007 and 2008, AMB executives told analysts it leased approximately eight million square feet per year in its development pipeline. This year it expects to lease about half that amount and maybe two thirds of that total in 2010.

Looking forward, the company says it expects average occupancy for 2010 to be somewhere between 90% and 92% and for same-store NOI growth to be flat to down 2%. In this third quarter of 2008 occupancy was upwards of 95% and same-store NOI growth was 3.5%.

In addition to increasing occupancy in 2010 the company expects to also focus on stabilizing development projects and monetizing its land bank. Together, the company says the potential is for $110 million of added FFO over the next 12- to 18 months–potential for which it believes it is getting very little credit in today’s market.

Next year also could produce some good investment opportunities, AMB executives told analysts. “We don’t believe the levels of distress are such that quality investments will become available at double-digit cap rates,” one executive told analysts, “but we do expect to be able to acquire good assets at significant discounts to replacement value, even with materially lower land cost assumptions.”

GlobeSt.com recently asked Jay Cornforth, managing director of the East Region at AMB Property Corp., when he thought the industrial market would rebound. For that interview, click here.