Rouse results fall short in 2Q

Firm says taxes prevented reaching expectations

2nd Howard REIT tops prediction

July 30, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Though income from malls and land development spiked, hard-to-predict taxes kept the Rouse Co. from meeting analysts' expectations in the second quarter, the company reported yesterday.

Hoping to add predictability where it can, Rouse also announced that it is launching a long-term contract program with homebuilders to lock in residential lot purchase agreements for three to four years - providing a much clearer view of future revenue streams.

Rouse's funds from operations, the key benchmark for real estate investment trusts, was $97.5 million, down about 11 percent.

Another Columbia REIT, Corporate Office Properties Trust, saw its operating income surge well beyond analyst projections in the same April-to-June period. It was put over the top by collecting a $4 million one-time fee.

Corporate Office Properties' funds from operations hit $21.4 million, up 32 percent.

The companies have something in common, though: Their stock, pushed up to record highs before being pounded by interest-rate fears in April and May, is popular with investors again.

Rouse's share price is up nearly 20 percent since mid-May - not nearly enough to put it back to its record high of just under $54 a share at the beginning of April, but still well above its 52-week low of about $40. It closed at $47.55 yesterday, down 10 cents.

Corporate Office Properties' share price has leaped more than 25 percent since mid-May. The stock, hovering near its all-time high of $25.35, closed at $24.89 yesterday, down 11 cents.

"The question is, is the stock too expensive?" said Rich Anderson, senior REIT analyst with New York-based Maxcor Financial Group Inc., who follows Corporate Office Properties. "That might be the case."

Rouse's $97.5 million in funds from operations came to 93 cents a share. Analysts expected about $1.01 per share, though some weren't worried by the miss. A bigger-than-average portion of its annual taxes on land sales had to be paid this quarter, the timing of which is difficult to forecast.

Ryan Dobratz, a Morningstar Inc. analyst, said Rouse's performance - except for the taxes - was right in line.

"We're not overly concerned with how they do quarter by quarter," he said. "We take the long-term perspective."

That's what Rouse wants people to do; it no longer gives out quarterly guidance. It noted yesterday that it remains on track to finish the year as it expected.

"I think people are more understanding of the quarterly fluctuations now than they have been in the past," said Timothy J. Lordan, director of investor relations for Rouse. "The core fundamentals of the company's two primary segments, retail centers and land, have never been better, so we're very optimistic."

The new contract program is designed to show investors that community development income is just as secure as long-term rents from malls, he said.

"We think it will have a profound impact on how people will view community development," said Anthony W. Deering, Rouse's chairman and chief executive.

The company also announced yesterday that it is buying for $123 million a mall in Louisville, Ky., and selling a half-interest in the mall it owns next door to help fund the purchase.

Rouse said that net operating income produced by retail centers rose 9 percent in the second quarter, compared with the corresponding period last year. Net operating income from community development jumped 34 percent as both land prices and sales moved higher.

Still, its overall funds from operations performance was down about 11 percent - or 12 cents a share - from a year earlier. That's because it had a one-time gain of about 22 cents a share in the second quarter of last year, when it paid off debt by selling retail centers in Philadelphia.

Corporate Office Properties, which leases many of its properties to intelligence agencies and contractors, is still benefiting from the homeland security boom: Its $21.4 million in funds from operations came to 50 cents per share, up 32 percent from the 38 cents per share the same time last year.

Analysts expected to see 41 cents a share in the second quarter, but whether the company beat that depends on how you measure it. All of the extra 9 cents a share comes from a one-time $4 million fee paid by a company terminating part of its lease at a Corporate Office Properties building in Virginia.

Anderson, the analyst, called the quarter "not terribly strong, but certainly not weak."

"I view Corporate Office Properties as one of the better names," he said.

Randall M. Griffin, president and chief operating officer of the REIT, said it gets lease termination fees of about $4 million to $6 million in a typical year so the upside in the past quarter is not unusual. It worked out well for the company because business and government consultant Booz Allen Hamilton immediately picked up the space, he said.

"The trend line is excellent," Griffin added. "As we've been renewing, ... we've been increasing the rental rates. Most places around the country have been experiencing [a] 10, 15 percent decrease."

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