Retail Traffic

Shopping Center REITs Post Strong Quarter

The early results are in and so far shopping center REITs are bucking pessimistic expectations and posting strong operating results for the second quarter despite the massive sell-off that has swept through REIT stocks in recent weeks.

REITs that own and operate neighborhood centers and community centers, such as Kimco Realty Corp., Developers Diversified Realty Corp. and Weingarten Realty Investors, have delivered strong operating results in the second quarter. Analysts and investors were pleased to see the strong FFO and NOI figures, but there are lingering concerns about troubles in the debt market and lackluster retail sales and how both trends might affect REITs in the coming months.

"The consumer continuing to spend has certainly helped the REITs," says Akash Dave, an analyst with Morningstar. "Whether that will continue, we'll have to see."

Of the seven REITs that have released their earnings in the past two weeks, the majority posted positive FFO and NOI growth, outperforming NAREIT's estimates for the shopping center sector, which forecasted FFO growth of 6.91 percent from February 2007 to February 2008. New Hyde Park, N.Y.-based Kimco, the largest shopping center REIT with a 174-million-square-foot portfolio, reported FFO of $0.71 per share, representing a 31.5 percent growth compared to the second quarter of 2006. However, Kimco posted same-store NOI growth of 4 percent, down slightly from the 4.6 percent the company averaged during the past eight quarters.

A star within the grocery-anchored sector, Kimco, which has been diversifying its revenue sources through merchant building, joint ventures and preferred equity, has withstood the volatile fluctuations in the real estate market, wrote A.G. Edwards analyst Mark Hoffmeister. The REIT beat analysts' expectations by $0.11 this quarter.

Another high-flier during the second quarter was Beachwood, Ohio-based Developers Diversified Realty Corp., which posted FFO of $1.26 per share, a 27.3 percent increase over the second quarter in 2006. For DDR, which owns 117 million square feet of space, same-store NOI rose 2.2 percent during the first six months of 2007 compared to the same period in 2006. And with rental rates growing more than 30 percent this quarter, prognosis for DDR's future remains positive, wrote Lehman Brothers analyst David Harris. However, he noted that if the nation's retail sales continue to show the same lackluster performance as they did in recent months, rents could stagnate.

Chain store sales rose 2.3 percent during the period between February and June, dropping 1.6 percentage points from the 3.9 percent growth experienced during the same period in 2006, according to ICSC.

Ramco-Gershenson Properties Trust's second quarter numbers were mixed. The Farmington, Mich.-based REIT, which owns an 18-million-square-foot portfolio, posted FFO of $0.60 per share, a 4.8 percent decrease. However, Ramco's same-store NOI increased by 3.4 percent. The company cited the sale of some of its assets to joint ventures as the main reason for the decline in FFO.

"Ramco's relatively small size may result in more volatile FFO per share results, which can be more significantly impacted by the timing of new development projects, acquisitions and capital markets activity," wrote Cantor Fitzgerald analyst Philip Martin. Martin supports the company's decision to concentrate on joint venture partnerships, which reduce leverage, add new sources of revenue and open the way for investment in value-added opportunities.

Houston-based Weingarten Realty Investors, which owns 42 million square feet of shopping center space, saw its FFO increase 10 percent to $0.75 per share and NOI grow 3.3 percent.

These second quarter results come as no surprise to analysts including Rich Moore of RBC Capital Markets, who pointed to the underlying health of the shopping center REITs. He says the recent REIT share sell-offs, spurred by troubles in the debt markets, reflect shortsightedness on the part of investors. Since February, REIT share prices have fallen precipitously. The Morgan Stanley Capital International Inc.'s REIT index, for example, was at the 900 mark as of mid-day on Wednesday, down 27 percent off its peak of 1,238.34 reached on February 8.

"Unfortunately, what's going on is a bunch of issues that don't have a direct impact on these companies, but the mortgage market and bad loans are a macro thing that everyone will think about for a while," he says. "When we see something bad happening to the fundamentals of these companies, that's when we get concerned--not when some banks made some bad loans."

Moore also played down concerns about lackluster growth in retail sales. Retailers, he says, make decisions to open or close stores with a long-term view in mind, while retail sales numbers reflect short-term fluctuations.

Nevertheless, the community center sector has been somewhat less robust than the regional mall sector--only one regional mall REIT, Glimcher Realty Trust, has missed analyst estimates so far, while three companies in the community center sector have, including Ramco and Weingarten, according to an RBC Capital Markets report. An article published in Business Week on July 11 predicted as much, noting that regional mall REITs benefit from higher barriers to entry, unlike grocery-anchored and community centers.

Niri Nguansiri, manager of real estate research with SNL Financial, a Charlottesville, Va.-based research firm, says, "It looks like the enclosed mall sector is performing a little better year-to-date compared to the shopping center sector, but hopefully, in the third and fourth quarter we'll see the shopping center REITs edge toward positive territory."

The industry is still waiting for reports from several notable players in the community center sector, including Regency Centers and Federal Realty Investment Trust, which will release their second quarter earnings on Aug. 2, Inland Real Estate Corp, which will put out its report on Aug. 6, Cedar Shopping Centers, Inc., which is scheduled to report on Aug. 7, and Equity One, Inc., which will report on Aug. 8.

Editor's Note: Retail Traffic will look at regional mall REIT results in next week's newsletter.

--Elaine Misonzhnik

Shopping Center REIT Performance
Company Q207 FFO/Sh. Q206 FFO/Sh. Percent Change
Urstadt Biddle Properties $0.55 $0.28 96%
Kimco Realty Corp. $0.71 $0.54 31.5%
Developers Diversified Realty Corp. $1.26 $0.99 27.3%
Weingarten Realty Investors $0.75 $0.68 10.3%
Ramco-Gershenson Properties Trust $0.60 $0.63 -4.8%
Acadia Realty Trust $0.26 $0.30 -13.3%
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