Many real estate observers predict it is only a matter of time before the condo bubble bursts, but until then some of the nation’s biggest apartment REITs who have entered the condo arena are enjoying the financial rewards of a frothy for-sale market. Three of the 11 multifamily REITS tracked by Bank of America Securities earn a significant portion of their income from condo conversion/sales. The three REITS are Equity Residential with 9% of its AFFO (defined as funds from operations minus capital expenses) derived from condo conversion sales; Post Properties with 4% and United Dominion with 6%.

Post Properties (NYSE: PPS), the multifamily REIT based in Atlanta, for example, began with a modest start in its for-sale condo business in first quarter of 2005. In spite of its late entrance into the condo market last fall, the company is already reaping the benefits. Post Properties reported FFO of 52 cents a share in the second quarter, beating analysts’ expectations by 8 cents, according to Deutsche Bank. The difference stemmed from higher condo sales gains, which accounted for 14 cents per share vs. the analysts’ estimate of 5 cents per share.

Much of the earnings can be attributed to a complete sellout of a community in Tampa, and one community each in Dallas and Atlanta, representing a total of 175 units with an average sales price of $223,000.

“Although the blistering pace set in second-quarter 2005 will have to moderate over the second half of the year as the company stocks its pipeline, the quarter’s performance certainly affirms the validity of PPS’s condo business,” say KeyBanc Capital Markets analysts. New condo developments in Washington, D.C, Atlanta and Tampa, along with possible conversions in New York, could help sustain the company’s condo business going forward.

Other factors, however, could shift earnings downward. “We are concerned about the sustainability of this income if interest rates rise and the demand and prices of condos fall. Consequently, we believe condo income should be valued at a lower multiple than rental based earnings,” warn Bank of America Securities analysts.

Analysts also noted that the sales volume of existing condo units fell by 5% in July while condo sale prices year-over-year rose 11.3% — well below the 14.6% increase in single-family home prices during the same period. Additionally, the inventory of condos for sale rose 23.8% in July.