While most other equity investments are struggling to regain pre-September 11 losses, much less post-terrorism decreases, publicly traded real estate companies generally gained in the third quarter when compared to last year.

Funds from operations (FFO) for real estate investment trusts (REITs) and other publicly traded real estate companies rose 3.8 percent per share in the third quarter, compared to the same period last year. The rate of growth did drop, however, from the second quarter, when average year-over-year FFO per share growth was 5.7 percent overall. These statistics were compiled by the National Association of REITs (NAREIT).

Although the rate of growth for real estate firms as a whole decreased in the third quarter, negative results from a single sector -- the lodging industry -- were largely responsible for the drop. Take out the hard-hit lodging sector and FFO per share growth for REITs and publicly traded real estate companies was 6.7 percent in the third quarter.

In terms of FFO, the best-performing sectors in the third quarter included specialty, self-storage and retail.

Income increases for the third quarter turned negative, thanks to tremendous losses by hotel firms as both business and leisure travelers decided to stay home. Growth in earnings per share for non-lodging real estate issues remained a healthy 3.1 percent. Yet the level of growth was down significantly from the second quarter, which saw a year-over-year increase in income of nearly 19 percent.

The most profitable sectors in the third quarter included the mortgage and specialty sectors.

Both FFO and income have been turned upside down in the lodging industry after Sept. 11. The sector already had seen a downturn in business from earlier this year, as corporate travel was slashed in companies being negatively impacted by a slowing economy.

After Sept. 11, lodging firms saw both occupancy and revenue per available room (RevPAR) plunge. Some upscale properties in central business districts have seen occupancy drop below 40 percent and RevPAR declines of 50 percent compared to this time last year. As a result, analysts predict a drop in earnings this year for hotel companies along the order of 15 to 20 percent.

For real estate issues generally, "FFO per share growth remained positive during an otherwise dismal third quarter earnings season elsewhere in corporate America. Preliminary reports indicate that corporate profits overall declined more than 20 percent on average in the third quarter," said Michael Grupe, NAREIT senior vice president for research and investment affairs.

Approximately 70 percent of the real estate companies monitored by industry analysts met or exceeded their consensus FFO per share estimates for the third quarter. However, FFO per share earnings of real estate investment companies has slowed in recent quarters, according to Grupe.

The study results were based on data for 126 publicly traded real estate companies with a combined equity market capitalization of $137.8 billion representing 85 percent of the total industry. Average earnings per share growth rates were weighted by equity market capitalization.

Worsening financial results are showing up across a broad range of financial indices, which were weakening significantly before Sept. 11. The Dow Jones Industrial Average was off 7 percent at the end of the third quarter, compared to the same time a year before. The Russell 2000 index, which historically has most closely mirrored the NAREIT index, was down 18 percent from third quarter last year to third quarter 2001.

Yet REITs are generally faring well, up nearly 12 percent on the year. And mortgage REITs continue to exceed all possible expectations, with prices up 57 percent on the year.

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