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Holding Up

Regional mall REITs posted solid gains in net operating income (NOI) during the second quarter, buoyed by portfolios chock-full of creditworthy national tenants.

Despite recession-wary consumers reining in spending on luxury goods, apparel and discretionary items sold by retailers located predominantly in regional malls, most REITs in that sector have continued to perform well and are meeting or beating consensus analyst estimates. As REITs have reported, many have pointed to the fact that in recent years leasing pros have focused on bringing in top-credit national tenants. REITs have lessened their exposure to weaker players as well as cut back on the number of regional and local retailers. Furthermore, most REITs continue to command strong balance sheets providing a further buffer as the economy continues to slip.

“On the mall side, you've got a lot of retailers with very, very good balance sheets and they can weather the storm far better than the little guys with the community centers,” says Rich Moore, an analyst with RBC Capital Markets.

Out of the seven regional mall REITs on the major stock exchanges, five, including Simon Property Group, Glimcher Realty Trust, Macerich Co., CBL & Associates Properties Inc. and Pennsylvania REIT (PREIT), beat estimates. Two, General Growth Properties Inc. and Taubman Centers Inc., missed.

Simon Property Group, the largest mall owner in the United States, led the pack and beat analysts' estimates by $0.07 per share. The Indianapolis-based company reported a 10.1 percent increase in its FFO to $2.95 per share. Simon's same-property NOI grew 5.4 percent during the period. Occupancy at Simon's community and lifestyle centers rose 30 basis points, to 93.2 percent, compared with the same period last year. However, the REIT, with a 242-million-square-foot portfolio, did see occupancy at its regional malls decline 20 basis points to 91.8 percent while occupancy at its Chelsea Outlet Centers fell 110 basis points to 98.3 percent. “With Simon's size and stable of high-quality tenants, we expect this company to weather any economic storm, and we continue to rate its shares a top pick,” Moore wrote in a note.

On the other hand, Taubman Centers Inc. stumbled during the second quarter. The Bloomfield Hills, Mich.-based REIT, which owns almost 25 million square feet of space, missed estimates by $0.05 per share and reported its FFO declined 2.9 percent to $0.66 per share. Taubman's same-property NOI increased 3.3 percent and its occupancy rose 10 basis points to 90 percent.

Meanwhile, Chicago-based General Growth Properties missed consensus estimates by $0.03 per share with core FFO declining 1.4 percent, to $0.72 per share. General Growth, the second largest mall owner in the United States with 180 million square feet, reported its same-property NOI rose 2.6 percent and its occupancy jumped 30 basis points to 93.2 percent. The REIT continues to suffer from its high debt load. As of mid-July, the company had $28.4 billion in long-term debt, representing a debt-to-market cap ratio of 68.6 percent — up 9 percentage points from 57.6 percent in the second quarter of 2007.

During General Growth's second-quarter conference call, executives told analysts they reduced their development costs by $500 million by delaying several new projects. While the move may help the REIT's balance sheet, it will have a negative impact on long-term growth, wrote Jeffrey J. Donnelly, an analyst with Wachovia Capital Markets.

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