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Regional Mall REITs Post Mixed Results

In the face of pedestrian retail sales and crashing stock prices, four of the eight regional mall REITs delivered solid second quarter results. The most successful firms--those with portfolios in high-barrier-to-entry markets with strong fundamentals--saw healthy FFO and NOI growth. And analysts expect the sector to remain strong throughout the rest of the year, despite investors' sudden squeamishness.

The results came in after the sector saw one of its sharpest sell offs in years. Stock prices for the entire REIT sector have tumbled in recent months as investors have fled everything related to real estate in the face of the sagging housing market and concerns about the debt markets that started with the blowup in sub-prime mortgages. In July, regional mall REIT total returns dropped 8.39 percent and are now down 11.21 percent for the year, according to NAREIT. (The NAREIT Equity Index as a whole is down 13.23 percent for the year). That's a sharp contrast from the past seven years when regional mall REITs have posted total returns on average of 31.07 percent per year.

But analysts think that investors have sharply overreacted.

Even the slowdown in retail spending this year has not affected regional mall REIT performance. "The consensus is that the market is still a little bearish, but as long as business performance indexes will be stable, we hope to see a little bit of an [improvement] in the third and fourth quarters," says Niti Nguansiri, manager of real estate research with SNL Financial, a Charlottesville, Va.-based research firm. Meanwhile, most firms are reporting healthy occupancies and development activity.

RBC Capital Markets' analyst Rich Moore thinks there is no cause for worries and there might even be some good news in the next few months. This week, ICSC reported that chain store sales in July rose 3.1 percent, the biggest increase since March. Chain store sales growth had averaged 2.3 percent between February and June, 1.6 percentage points below the growth experienced during the same period last year. Last July, chain store sales posted an increase of 3.5 percent.

In the second quarter 2007, Taubman was the frontrunner with FFO of $0.68 per share, up 23.6 percent over the same quarter in 2006 and well above NAREIT's expected growth for the sector of 8.54 percent from 2007 to 2008. The Bloomfield Hills, Mich.-based firm, which owns a 24-milliom-square-foot portfolio of upscale regional malls, also posted same store NOI growth of 6.4 percent, but sales growth per square foot of 3.6 percent was below historic high single digits levels.

Noting Taubman's performance, Morgan Stanley analyst Matthew Ostrower thinks that the company's stock price should not be as affected as that of the other REITs. "The portfolio's high price point tenant orientation should insulate it from a material decline in retail sales," he wrote.

The largest U.S. REIT, Simon Property Group, which owns a 201-million-square-foot portfolio, delivered strong results as well. The Indianapolis-based firm reported FFO of $1.31 per share, a 3.9 percent increase; and same store NOI growth of 1.6 percent. Sales per square foot for the REIT's mall division rose 4.5 percent to $489, and sales per square foot for its outlet division jumped 8.6 percent, to $492.

Analysts also forecast that Simon's $1 billion stock buyback, announced on July 26, will contribute to a stronger performance next year. "Our model suggests $200 million of repurchases could be $0.03 accretive in 2008," wrote John J. Stewart, analyst for Credit Suisse.

General Growth, which owns a 178-million-square-foot portfolio, reported FFO of $0.73 per share during the quarter, an 18 percent increase from the $0.62 per share posted in 2006. NOI from Chicago-based General Growth's consolidated properties grew 3.3 percent during the quarter and sales per square foot climbed 2.2 percent, to $458 from $448 in the same period last year.

General Growth and Simon were among the Top Five on Credit Suisse's "REIT Defensive Rankings," a measure of what the company's analysts see as the safest bets. The rankings are based on 10 criteria: size, financial condition, earnings stability, dividend record, earnings growth, price/FFO ratio, price/NAV ratio, dividend yield, lease duration and Beta. Simon ranked as No. 1 in size and FFO stability, but ranked No. 41 for its price/FFO ratio and No. 38 in leverage. Overall, it was ranked the No. 1 defensive REIT.

And General Growth took the No. 1 spot for FFO growth, but ranked as No. 67 in leverage, and came in as No. 4 defensive REIT overall. Jonathan Litt, analyst for Citigroup, wrote that General Growth could be at risk if negative traffic trends continue. Year-to-date General Growth's same store NOI growth of 3.6 percent is below guidance of 5 percent and potential store closings could bring its share price below the current level. As of noon on Tuesday, General Growth's stock was trading at $47.96 per share, 29 percent below its 52-week high of $67.43.

Meanwhile, Macerich, a Santa Monica, Calif.-based REIT with a 77-million-square-foot portfolio, posted FFO of $1.04 per share for the second quarter, up 8.2 percent from the $0.96 reported during the quarter last year. Its sales rose to $458 per square foot, up 5.7 percent from the second quarter of 2006; and same store NOI rose 3.4 percent. "With an in-line quarter and steady progress on the development pipeline, the company is on track to reach the high end of its $300 to $500 million annual development spend. This keeps the long term earnings and NAV growth rate very attractive at 10 percent per year," wrote Deutsche Bank analyst Lou Taylor.

At the same time, Philadelphia-based PREIT, which operates 38 malls within its 34-million-square-foot portfolio, is still in turnaround mode, wrote Lehman Brothers analyst David Harris. The company posted FFO per share of $0.82 this quarter, a 1.2 percent increase from $0.81 during the same period in 2006, and its same store NOI rose 0.9 percent.

REITs that didn't shine as brightly included CBL & Associates and Glimcher Realty. In the case of Chattanooga, Tenn.-based CBL, which has a 72-million-square-foot portfolio, FFO of $0.77 per share was up slightly, 1.3 percent, in the second quarter, but below NAREIT's estimates for the sector. CBL's same store NOI growth fell to 2.4 percent in the second quarter of 2007 from 4 percent in the second quarter of 2006. Analysts are concerned about the rate of growth and leasing delays at CBL's new developments, with Taylor describing CBL's outlook as "muted." Like Simon, CBL has initiated a stock buyback program.

Glimcher Realty, with a 25-million-square-foot portfolio, reported an FFO of $0.40 per share, a 40 percent decline; and same store NOI growth of 1.8 percent. The Columbus, Ohio based REIT blamed a $2.5 million impairment charge related to its Northwest Mall in Houston and a $1 million write-off on discontinued development costs for the drop in FFO. Glimcher's "core growth remains modest…and the development pipeline is growing at a snail's pace," Taylor wrote. As a result, he lowered Glimcher's FFO estimate for the year to $2.21 per share from $2.29.

One company that has still to file its second quarter earnings is Great Neck, N.Y.-based Feldman Mall Properties, Inc., which owns a 7-million-square-foot portfolio. Earlier this year, Feldman was late filing its annual report for 2006.

--Elaine Misonzhnik

Shopping Center REIT Performance
Company Q207 FFO/Sh. Q206 FFO/Sh. Percent Change
Taubman Centers $0.68 $0.55 23.6%
General Growth Properties $0.73 $0.62 17.7%
Macerich Co. $1.04 $0.96 8.2%
Simon Property Group Inc. $1.31 $1.26 4.0%
CBL & Associates Properties Inc. $0.77 $0.76 1.3%
PREIT $0.82 $0.81 1.2%
Glimcher Realty Trust $0.40 -$0.67 N/A
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