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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: H James Morris who wrote (9449)	11/16/2002 5:27:52 AM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

<< I don't subscribe to Cramers bull shit...>> I don't either - at times he's just entertaining and I just borrow his updates from other SI threads <G>...Cramer was on a CNN talk show last night pushing his new investing book (he was saying great things about Amazon too).

To: H James Morris who wrote (9449)	11/16/2002 8:06:24 PM
From: stockman_scott	Respond to of 89467

Office market corners Zell Returns slump as vacancies rise By Alby Gallun November 18, 2002 Crain's Chicago Business After bulking up on office buildings at the top of the market, Samuel Zell is hoping investors stick with him through a steep decline that's testing his deal-making reputation and his vision of a more efficient real estate investment trust. Mr. Zell, the billionaire financier who earned his "grave dancer" nickname by buying low and selling high, is focused less on bargain-hunting these days and more on managing his Equity Office Properties Trust through a nationwide office leasing slump that has driven vacancies up and rents down. It was Mr. Zell's uncharacteristic decision to buy when prices were peaking that will likely prolong the pain for Equity Office investors, who have seen their shares in the Chicago-based real estate investment trust (REIT) fall more than 17% this year. As a result of its $7.3-billion acquisition last year of Spieker Properties Inc., Equity Office's portfolio is heavily skewed to the tech-ravaged San Francisco Bay area — one reason some analysts expect a recovery at Equity Office to lag the overall market. If the market continues to decline at the current pace, investors will grow increasingly concerned about the company 's ability to cover its dividend. Mr. Zell insists the dividend is safe, saying that Equity Office's occupancy rate, now at 89.2%, would have to fall into the low-80% range to jeopardize the payout. Just wait: Sam Zell says his big investment in California office properties will eventually pay off. Equity Office, the nation's largest REIT, is centralizing functions like accounting and engineering in a bid to boost profit margins. In a pilot project, the company cut operating expenses by about 15%, or $2.6 million, in Boston. The moves follow an acquisition spree that included the 1997 buyout of Beacon Properties Inc., a Boston-based office REIT, and the 2000 purchase of New York-based Cornerstone Properties Inc. The Spieker deal — the largest ever in the REIT industry — boosted Equity Office's portfolio to 125 million square feet and its annual revenues to $3.1 billion. The purchase also increased Equity's exposure to the tech-heavy Bay area market just as it was crashing. The region now accounts for about 18% of the company's space and about 28% of its net operating income. Conditions 'grim' The overall occupancy rate at Equity Office fell to 89.2% in the third quarter from 93.7% a year ago. In San Francisco, its rate fell to 79.7% in the third quarter from 84% in the second quarter. "The economic conditions are just rather grim," says Michael Pitre, managing director in the San Francisco office of real estate firm Julien J. Studley Inc. "I think we're a couple years away from stability, forget improvement." Mr. Zell, who controls 3.6% of Equity Office's shares, says the decline in West Coast office markets came as no surprise and was factored into the company's projections for the Spieker buyout. He asserts that the move will turn out to be a good one in the long run. "I didn't make the acquisition with the next 12 months in mind," says Mr. Zell, who holds the company's chairmanship and is serving as president and CEO while it searches for a replacement for Timothy Callahan, who resigned in April. Investors will likely be waiting longer than 12 months for a recovery. The company slashed its earnings forecast last month, projecting it will earn funds from operations (FFO) of $2.80 to $3 a share in 2003, down from a projected $3.17 to $3.20 this year and $3.20 in 2001. FFO — net income excluding gains or losses from property sales or debt restructuring and including depreciation — is widely accepted as the best measure of financial performance for REITs. Equity Office "is handicapped by having a portfolio with a high exposure to the still-troubled technology industry and to financial services, where the pain has only just started to be felt," Lehman Bros. analyst David Shulman writes in a recent research report. Mr. Shulman expects Equity Office to report FFO of $2.75 a share next year, below the company's guidance. That helps explain why the company's stock has lagged its peers. Equity Office shares have fallen 17.4% this year, vs. a 14.5% drop for the office REIT sector and a 7.6% drop for REITs in general. Impact on dividend The question is whether the downturn will jeopardize the company's dividend, the primary appeal of REITs, which are required by law to pay out 90% of their profits to shareholders. At this point, analysts agree it 's a remote possibility. Yet, it could get tight if the downturn continues, raising the prospect of the company borrowing or selling off assets to raise the cash to pay the dividend. Calling the dividend "inviolate," Mr. Zell says Equity Office has plenty of financial breathing room to continue the $2.00-per-share annual dividend. The company didn't boost its dividend this year, the first time that's happened since it went public in 1997. Equity Office is selling off properties anyway, under a plan to exit 14 cities where it has a small presence — including Nashville, Tenn.; Charlotte, N.C., and Salt Lake City — and focus on its top 20 markets. The company has sold $556 million in assets this year. Indeed, Mr. Zell says now is the right time to sell, noting that investors have shifted money into real estate as stocks and other investments have slumped. Office building prices in many markets are rising even though rents and occupancies are falling — a trend that many consider unsustainable. ©2002 by Crain Communications Inc.