Last week's 2008 fourth quarter earnings calls from San Francisco-based BRE Properties and Alexandria, Va.-based AvalonBay Communities continued a streak of multifamily REITs taking impairments, slowing or cancelling development activity, confirming personnel layoffs, and warning of negative rent and revenue growth in 2009 and into 2010.
While funds from operations (FFO) at AvalonBay increased by 7 percent for the quarter and about 9 percent during the full year, FFO still clocked in at $0.30 per share for the fourth quarter, compared to $1.14 per share for the fourth quarter of 2007, a plunge of approximately $66.6 million.
AvalonBay CEO Bryce Blair said the weight of national job losses this year is likely to result in additional revenue and net operating income (NOI) declines across virtually all of the company's markets. "Portfolio-wide, we're expecting revenue declines of between 1.5 percent and 3.5 percent," Blair said during the call. "The markets of most concern are New York and Southern California, both being driven by weakness on the job front. With expected revenue declines and expense growth of 3 percent to 4 percent, we're expecting NOI growth for the year to decline within a range of 4 percent to 6 percent."
BRE's CEO Constance Moore told analysts that the nation's economy defies description. She referred to the current crisis as possibly being a depression that could have sizeable, long-term effects on apartment fundamentals. "We believe we are looking at a negative rent curve for the next two years," Moore said. "All eyes are on the proposed government stimulus package, and if it is successful in helping to create jobs and grease the credit skids, it may soften the magnitude and duration of the pricing compression. Regardless, we believe on a composite basis, market rents in 2009 could fall between 3 percent and 6 percent from peak levels in 2008, and the rate cuts in 2010 could be deeper depending on how this next phase of the economy plays out."
Both REITs also cited impairment charges and layoffs in the fourth quarter related to scaled-back development activity for 2009. Moore reiterated BRE's development deceleration plan, first announced in January, which includes a $5.1 million impairment charge for the abandonment of sites in San Jose, Calif., and California's Inland Empire. The firm does not plan to start any development in 2009. As a result, BRE cut 33 positions in development, reducing the team's size by 36 percent.
AvalonBay, meanwhile, declared a fourth quarter and year-end impairment charges of $57.9 million for development-related abandonment and severance activities. The firm does not plan to start any new developments through the first half of the year, as it continues to evaluate market opportunities.
Moore added that BRE will move to a sequential development model compared to a parallel model, where planning, design, and entitlements occur in tandem to save development time. BRE could also abandon development entirely, if the business unit continues to negatively impact the company. "Let me be clear," Moore said. "If we had information that suggested or clearly indicated that all future development would be dilutive from a credit and earnings perspective, we would cease all development activity and jettison the program."