PLD Prologis

By Esther Fung 

Early results in the third-quarter reporting season for real-estate investment trusts are highlighting the opportunity -- and pain -- in retail property stemming from the e-commerce revolution.

SL Green Realty Corp., a large New York landlord, reported last week that the bankruptcy filing by Aéropostale dented its net operating income. The teenage apparel retailer closed some stores in SL Green buildings during the quarter.

Manhattan street retail rents are generally flat, said Marc Holliday, SL Green's chief executive in a call with analysts and investors. "We are still seeing tenant demand, but I would say tenants are slower to make decisions."

Meanwhile, owners of logistics space are starting to report surprisingly strong results, thanks partly to demand from internet retailers. Both Prologis Inc. and EastGroup Properties Inc. posted double-digit increases on expiring leases, especially on West Coast distribution centers and warehouses.

One thing is clear: "rents are briskly rising," said a report by Green Street Advisors analyst Eric Frankel.

Real-estate investment trusts generally have posted solid results this year, with the recovering economy boosting rents and occupancies. But investors have been cautious about buying shares because REITs tend to be interest-rate sensitive and there is widespread worry that rates might soon rise.

REIT shares have generally tracked the broader market. The sector is up more than 4% for the year, compared with about 5% for the S&P 500-stock index. But investor concern is reflected in the fact that many of the companies' shares are trading at values below the market value of the property they own.

Other signs of the industry's health will emerge in coming days as giants like Simon Property Group, Vornado Realty Trust and Boston Properties Inc. report their third-quarter results.

Weakness is expected in some sectors. Growth in office rents is forecast to moderate this year to 2.8% compared with the 4% recorded last year, according to a semiannual survey by the Urban Land Institute.

Radnor, Penn.-based Brandywine Realty Trust last week reported it saw no lease-up progress on its 47-story FMC Tower in Philadelphia in the third quarter. The company lowered guidance for its 2016 earnings, with its funds from operations, or cash flow, ranging at $1.26 to $1.32 per diluted share to $1.28 to $1.30 per diluted share.

REITs in the lodging sector continue to face pressure from a supply glut in major cities, weaker demand from corporate clients and a stronger dollar. They have also generally been trading below valuation, driving some asset disposal activity.

Hotel REITs with exposure in Florida, such as Host Hotels & Resorts, could see a dent in their third-quarter earnings on disruption from the Zika virus and from Hurricane Matthew.

"Generally speaking, our expectations for the third quarter are lower than the first and second quarter," said Jeffrey Donnelly, a senior analyst at Wells Fargo Securities. "Earnings are on a slow grind."

LaSalle Hotel Properties, which reported results last week, saw 4.3% growth in revenue per available room after operations last year were disrupted by allegations of health and safety violations from the union of its two New York City hotels, which have been resolved. Analysts noted that the underlying economic conditions for hotels remain weak.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

October 25, 2016 15:16 ET (19:16 GMT)

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