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Stock Analyst Update

Two Great Companies at a Good Price

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Sister real-estate investment trusts Equity Office Properties (EOP) and Equity Residential Properties (EQR) reported strong first-quarter earnings Wednesday. Even better, their stock prices still don't reflect the companies' underlying strength.

Equity Residential was first at bat. The Chicago-based apartment owner and developer, which shares its chairman with Equity Office, reported March 2000 diluted funds from operations (the REIT version of net income) of $1.19 per share, up 10.2% from the year-ago quarter. Occupancy levels remained high, at 95%, while controllable expenses inched up by 0.7%. (Noncontrollable expenses, mostly property taxes, rose by 3.7%.)

Stronger markets included Boston and the San Francisco Bay Area. The company's goal for 2000 is to sell properties in less-robust markets while developing and acquiring additional properties in the stronger markets. Since the beginning of this year, Equity Residential has already sold 14 properties for $132.4 million.

Equity Office Properties reported later in the afternoon. The company, which owns office buildings across the United States, reported diluted funds from operations of $0.62 per share, up 11.3% from the prior-year quarter. Equity Office's exposure to some of the country's tightest office markets accounted for most of that increase. Boston, for example, accounts for about 15% of Equity Office's portfolio (measured by net operating income), New York represents about 7%, and San Francisco about 5%. 

Equity Office's investments in telecommunications providers will play a bigger role in future reported results. The company has partnered with several telecom providers to provide high-speed Internet access and other services to its tenants. Equity Office typically receives warrants in the telecom companies and a cut of the revenue generated by its tenants.

REITs have been in a general slump for the past two years, but they've rebounded in recent months as investors have rediscovered their rich yields and lower-than-average volatility. Equity Residential and Equity Office are two of the stronger companies in this sector. Get them while they're still cheap.

Olivia Barbee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.