Apartment Glut Sends Citadel Profit Plunging

In a clear signal of how the economic slump has weakened Southern California’s apartment market, the parent of Fidelity Federal Bank said its profit in the first three months of 1993 plunged to a mere $135,000 from $6.1 million a year ago.

Fidelity Federal, whose parent company is Glendale-based Citadel Holding, is a mid-size thrift with a major stake in the apartment market. About 71% of its loans as of March 31 were “multifamily” residential loans.

But the recession has severely eroded apartment occupancy rates, rents and property values, and Citadel President Richard M. Greenwood said the company does not expect improvement in the near future.

The results jolted investors, who responded by wiping away a third, or $40 million, of the company’s market value. The company’s stock tumbled $6 a share to $12.625 in American Stock Exchange composite trading, making it the Amex’s biggest percentage loser for the day.

Citadel said its problem loans soared to $271 million--or 5.7% of its total assets of $4.8 billion--from $178 million, or 3.5% of assets, a year earlier.

Other factors also lowered Citadel’s profit. The company’s operating costs jumped 15% to $21.5 million as the company hired more workers. Citadel defended the larger staff, saying the extra personnel are part of the thrift’s aggressive bid to restructure its problem loans.

In an interview, Greenwood noted that the weakness in the apartment market is particularly evident in the San Fernando Valley, South-Central Los Angeles and Long Beach. However, he added, problems abound throughout Southern California because of layoffs in the aerospace industry.

“People are out of work, they don’t have the money to pay the rent, so then the apartment owners don’t have enough cash flow to make the payments on their loans,” he said.

Charlotte Chamberlain, a thrift analyst at Wedbush Morgan Securities in Los Angeles, said that while much of the publicity about the region’s real estate slump centers on slow sales of single-family houses, the apartment market is actually “much more unemployment-driven.”

“People will hang on to their houses as long as they can,” she said. “But if you’re renting and you get an unemployment notice, the first thing you think about is moving, doubling up, whatever. Multifamily housing is far more sensitive to jobless problems.”

Fidelity Federal has been cutting back its loans to apartment owners for the last year or so and is tightening its lending standards for those apartment loans it does make, Greenwood said. About half the loans Fidelity Federal made in the latest quarter were for single-family houses, he said.

Citadel’s first-quarter profit equaled 4 cents per share, down from $1.84 a share a year earlier. However, the company’s total shares outstanding have doubled since then--to 6.6 million from 3.3 million--because of a rights offering to Citadel’s stockholders that was completed in March.