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Strong Grocery, Drugstore Sales Buoy Shopping Center REITs

Consumers spending on staples and necessities buoyed shopping center REITs during the first quarter.

Nine of the 13 shopping center REITs reporting results to date either beat or met consensus estimates. Acadia Realty Trust, Cedar Shopping Centers, Inc., Equity One, Inc., Kimco Realty Corp., and Regency Centers Corp. bested their consensus estimates. Weingarten Realty Investors, Inland Real Estate Corp., Kite Realty Group and Urstadt Biddle were in-line with expectations. Only four companies, including Federal Realty Investment Trust, Developer's Diversified Realty Corp., Ramco-Gershenson Properties Trust and Saul Centers, came in below estimates, by $0.01 to $0.03.

The sector’s strength comes from its reliance on supermarkets and drugstores as anchors, says Rich Moore, an analyst with RBC Capital Markets. “In hard times, that’s when people quit eating out and return to the grocery store,” says Moore. “The grocers are going to continue to do fine and grocery-anchored centers will continue to do fine.”

In addition, drugstores saw same-store sales growth of 2.9 percent in the first four months of this year, according to ICSC, higher than the 1.7 percent same-store sales growth figure for all U.S. chain stores.

However, Moore expressed concern about REITs that focus heavily on ground-up development because those firms could find it challenging to secure tenants in this economic climate. Shopping center REITs that currently have large development pipelines include Developers Diversified Realty, Weingarten Realty Investors and Regency Centers. Now, Moore noted, the best strategy is redevelopment, which offers yields ranging from 10 percent to 14 percent, compared to yields of 8 percent to 9 percent on new projects.

Kimco Realty Corp., which told analysts it plans to concentrate on redevelopment going forward, reported FFO of $0.64 per share, $0.01 above consensus estimates. The figure represents a 17.9 percent decline from the first quarter of 2007, due to a disproportionate gain from the company’s investment in the supermarket chain Albertson’s, LLC last year. Occupancy amid its portfolio slid 10 basis points, to 96 percent; and its same-store NOI growth of 3.3 percent was below its eight-quarter average of 4.7 percent. However, it still represents a “reasonably healthy long-term pace,” wrote Jeffrey J. Donnelly, an analyst with Wachovia Securities. The New Hyde Park, N.Y.-based REIT has about 20 projects in the works, totaling approximately $325 million.

Acadia Realty Trust beat consensus estimates by $0.06, reporting FFO of $0.38 per share; a 5.5 percent increase over the first quarter 2007. The White Plains, N.Y.-based firm, with 8 million square feet, posted NOI growth of 7.5 percent, and occupancy remained flat at 94.1 percent.

Equity One Inc.'s FFO of $0.44 per share beat consensus estimates by $0.03, representing a 10 percent increase from the same period a year ago. However, analysts remain concerned about the company’s modest NOI growth of 1.3 percent, and the 140 basis point drop in its occupancy level to 92.7 percent. Bear Stearns analyst Ross Smotrich notes Equity’s major problem is its exposure in Florida, which is one of the weakest markets in the U.S. because of the severity of the housing downturn in the state.

Cedar Shopping Centers, Inc. reported FFO of $0.30 per share in the quarter, beating estimates by $0.01. The Port Washington, N.Y.-based REIT also reported its occupancy of 92 percent was flat and a 2.7 percent fall in same-store NOI. Cedar owns 12 million square feet of shopping center space. “Operationally, we find the portfolio is performing okay, but a bit below our expectations,” wrote Philip Martin, an analyst with Cantor Fitzgerald.

Regency Centers Corp., a Jacksonville, Fla.-based REIT with a 51-million-square-foot portfolio, beat consensus estimates by $0.02, with FFO of $0.87 per share. The figure represents a 23 percent decline from the first quarter 2007. Its NOI rose 3.1 percent.

Missing analysts' consensus estimates, Developers Diversified Realty Corp. reported FFO of $0.91 per share, $0.02 below forecasts. That was an 8.8 percent decrease from the same quarter last year. The Beachwood, Ohio-based REIT reported same-store NOI grew 2 percent, which was below the sector average of 2.5 percent. Its occupancy dropped 20 basis points to 95.8 percent. Developers Diversified owns 163 million square feet of shopping center space in the United States. With Developers Diversified's penchant for development, Donnelly wrote, it might suffer disproportionately from low real estate capital market flows.

Saul Centers Inc. missed consensus estimates by $0.03 for the quarter. The Bethesda, Md.-based owner of 6.2 million square feet of retail space, reported FFO growth of 1.5 percent, to $0.68 per share. Saul’s occupancy level fell 50 basis points, to 95.4 percent, compared to the same period a year ago. However, its same-store NOI growth of 3.2 percent was above average.

“There was a pretty fair amount of hits, so overall they have performed well considering the broader market conditions," says Jason Lail, senior research analyst with Charlottesville, Va.-based research firm SNL Financial. "And it’s the same caveat as for the regional mall REITs will apply here—the quality of your assets will affect how well you do. Tenant diversification is certainly a good safety net. I think it’s a lot of the same influences you would expect for regional malls. I think it’s on an individual company basis, I don’t think it’s a broader sentiment.”

--By Elaine Misonzhnik

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