Down and down the stock market goes. Yet real estate's solid performance is keeping its stocks afloat.

At a time of ebbing consumer spending and waning corporate profits, real estate firms are turning in strong financial results. Funds from operations (FFO) for real estate stocks, including real estate investment trusts (REITs) and other publicly-traded real estate companies, rose an average of 5.7 percent in the second quarter, compared to the second quarter of 2000, according to the National Association of Real Estate Investment Trusts (NAREIT).

This is slightly slower than the first quarter's 7.8 percent FFO growth. But while earnings growth did fall, about 80 percent of real estate firms rated by industry analysts met or exceeded their consensus FFO per share estimates for the second quarter.

"As the nation's economy has slowed, FFO per share growth for real estate stocks has moderated over the past few quarters," said Michael Grupe, senior vice president of research and investor outreach for NAREIT. "However, many other sectors of corporate America have been beleaguered.

"The sluggish economy has taken a severe toll on the country's corporations for the second consecutive quarter," Grupe added.

Most of Wall Street has taken a header. During the second quarter, year-over-year earnings for the S&P 500 Index plummeted 21.8 percent. Strangely enough, that poor performance was rewarded by a 5.5 percent increase in stock price for the second quarter. Not that it matters now, since prices for the S&P 500 have fallen below its closing marks at the end of the first and second quarters.

Also during the second quarter, the Dow Jones Industrial Average saw an increase of 6.3 percent. Of course, those gains also have been almost completely erased in the last few weeks.

So far this year, however, real estate stocks have been on the rise. Industry insiders likely will still complain that shares remain undervalued. But oh what a difference this year has made.

The NAREIT Index of all REITs has seen prices rise nearly 17 percent so far this year, including a 5 percent increase in August alone. Equity REITs have performed well on Wall Street, with stock prices up more than 15 percent, while mortgage REITs are up 50 percent. And don't forget hybrids, which have soared 52 percent this year.

The best performing sectors in the second quarter included the mortgage finance, self storage and office sectors.

Digging a little deeper reveals growth in earnings per share for many sectors. Office saw year-over-year earnings growth in the second quarter of 28 percent, while industrial saw earnings increase nearly 58 percent.

Retail also posted earnings gains: 28 percent overall, nearly 37 percent for regional malls and 22 percent for free-standing retail centers.

So why the stark contrast between the earnings of real estate firms and their counterparts in other sectors? Many industry analysts argue that real estate firms are akin to contrarian investments by offering slower average growth, yet higher long-term stability.

Perhaps another key is steadily dropping interest rates. In theory, easier money should aid businesses across all sectors. But many industrial, technology and telecommunications firms are being pummeled by decreased demand for their products, making a quarter-point here and a half-point there insignificant.

Real estate, on the other hand, consistently requires high, long-term fixed costs. And with each downward tick of interest rates, there is the potential of a corresponding upward tick in profitability.

For more articles by Lesley Hensell, please press here.

Published: September 6, 2001

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