Real estate investors have a lot to be thankful for this year. Despite a near-collapse in the high-tech and general equity markets since labor day, quarterly earnings growth for equity REITs accelerated significantly in the third quarter.

Funds from operations (FFO) rose an average of 10.2 percent for equity REITs in the third quarter, compared to the same period last year, according to the National Association of Real Estate Investment Trusts (NAREIT). This follows a health second quarter, which saw FFO growth of 8.7 percent over the second quarter of 1999.

Earnings for other large publicly traded real estate companies (REOCs) edged a hair lower, but still substantially outperformed the market. REOCs showed year-over-year earnings per share growth of a little more than 30 percent in the third quarter, compared to a nearly 32 percent increase in the second quarter.

“When the performance of equity REITs and REOCs is combined with that of mortgage and hybrid REITs, per share earnings for the REIT and publicly traded real estate industry increased 12.2 percent on average in the third quarter when compared with the same period last year,” said Michael Grupe, NAREIT's vice president and director of research.

Of the companies tracked by market analysts, three-quarters met or exceeded consensus analyst earnings expectations in the third quarter of 2000. Specifically, 41 percent of the companies reported third quarter per share earnings that exceeded their expected level of earnings, and another 36 percent of the companies met their earnings estimates. The remaining 23 percent of the companies fell short of their earnings estimates in the third quarter.

Among equity REITs, the strongest third quarter average FFO per share growth was reported by the diversified, lodging and office sectors, with each of these sectors reporting average FFO per share growth above 13 percent, according to Grupe.

The apartment, regional mall and mixed office/industrial sectors also reported double-digit FFO per share growth rates on average.

On the fuel front, with rising fuel prices affecting business around the world, one real estate investment trust (REIT) is taking steps to increase its energy efficiency by making a deal with one of the country’s largest energy firms.

Enron Energy Services, a subsidiary of Enron Corp. (NYSE: ENE), will manage energy needs for the Macerich Company’s (NYSE: MAC) more than 40 wholly owned and joint venture properties.

Through this agreement, Enron will manage the supply of electricity and natural gas and provide related energy management services including energy infrastructure upgrades that will increase the energy efficiency of Macerich properties.

“Our agreement with Enron allows us to manage the volatile energy costs associated with deregulating markets, such as California,'” said Arthur Coppola, president and CEO of the Macerich Company. “Moreover, it will allow Macerich to enhance and actively manage energy systems at our properties side-by-side with Enron, the leading innovator in the field.”

As deregulation begins taking hold in powerhouse real estate markets in California, New York and Texas, more and more real estate firms expect to turn over at least a portion of their energy management functions to energy companies, who can use their considerable buying power to negotiate lower energy prices. These firms also take on a consultative role to make recommendations on how to reduce energy use and increase overall efficienct.

Enron Energy Services (EES) is one such business, providing integrated energy and facility management solutions. EES currently manages energy at more than 20,000 customer sites. Contracts signed with customers in the last two years will reduce energy use by an estimated 6 billion kilowatt hours of electricity and more than 113 million Btus of natural gas consumption between 2000 and 2012 -- a reduction of 10.5 million tons of carbon dioxide emissions.

“We applaud the Macerich Company for demonstrating the foresight to proactively manage energy purchasing, infrastructure and systems within their world-class portfolio,” said Jeremy Blachman, chief operating officer of EES. “By working with Enron, Macerich has access to proven experience in managing the risks and uncertainty associated with a non-core, but essential part of their business.”

Macerich focuses on the acquisition of redevelopment of regional malls and community centers throughout the United States. The company owns or has ownership interest in 48 regional shopping centers and five community shopping centers, totaling approximately 41 million square feet of gross leasable area (GLA).

Published: December 6, 2000

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net