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Mall REITs Stall on Slowdown in Consumer Spending

Consumers' tightened purse strings constricted regional mall REIT performance in the first quarter.

With six of the eight regional mall REITs reporting results so far, half saw a decline in sales per square foot and a drop in occupancy levels. Still, four firms beat consensus estimates, including Simon Property Group, Inc., General Growth Properties, Inc., CBL & Associates Properties, Inc. and Glimcher Realty Trust. Pennsylvania REIT met expectations and Taubman Centers, Inc. was the only firm to miss, falling short of Wall Street's consensus by $0.03 per share.

There's another reason for gloom: For the three months ended March 31, the regional mall sector performed last among all REIT sectors, which collectively posted their weakest performance in five quarters. Overall, one-third of the 76 REITs RBC Capital Markets covers missed analyst FFO estimates.

“Obviously, the consumer slowdown is going to have an effect on all mall REITs going forward, but the effect will vary based on the quality of assets the REIT carries,” says Jason Lail, senior real estate research analyst with SNL Financial LC, a Charlottesville, Va.-based market research firm. “You will probably see an increase in store closings in 2008, both strategic, where retailers are identifying unprofitable locations and [because of] Chapter 11. But the demand for class-A space is not going to drop as quickly as for B and C assets.”

The sector's largest REIT, Indianapolis-based Simon Property Group, which owns 242 million square feet of retail space, reported a 10 basis point drop in occupancy at its regional malls to 91.7 percent and a 120 basis point decline at its community and lifestyle centers to 93.3 percent compared to the first quarter 2007. Meanwhile, sales at Simon's malls rose 0.8 percent, to $491 per square foot, while its lifestyle and community centers had a much stronger quarter with sales rising 5.4 percent, to $511 per square foot, compared to the same period a year ago.

Simon’s FFO of $1.46 per share beat estimates by $0.02, representing growth of 6.6 percent. Same-store NOI for its regional malls increased 2.8 percent. Simon’s relatively stable performance in spite of the current economic slowdown is due primarily to its well-positioned portfolio and conservative balance sheet, wrote Credit Suisse analyst Michael Gorman. Simon is approximately 47 percent leveraged, according to Morningstar.

Meanwhile, General Growth Properties beat estimates by $0.01, with FFO of $0.76 per share, representing growth of 16.9 percent. The Chicago-based REIT, owner of a 180-million-square-foot portfolio, reported same-store NOI growth of 5.1 percent, but the increase was due largely to lease termination fees. In the first quarter, occupancy at General Growth properties decreased 20 basis points, to 92.7 percent, while its sales increased 0.2 percent to $460 per square foot.

Although Glimcher Realty Trust, owner of a 22.1-million-square-foot portfolio, bested consensus estimates by $0.04, with FFO of $0.49 per share, the figure was still a 2 percent decline. Analysts question the ability of the Columbus, Ohio-based REIT to maintain its performance through the year because its FFO of $0.49 per share was the result of out-parcel sales. Hilliard Lyons analyst John Roberts wrote that given Glimcher’s middling asset quality and its leverage ratio, which at 70.2 percent is the highest in the sector, the best thing for the company might be a buyout offer from a bigger firm.

Glimcher's occupancy during the quarter rose 10 basis points to 92.8 percent, while sales slipped 2 percent to $363 per square foot. The company reported NOI growth of 2.3 percent.

CBL & Associates Properties also beat consensus estimates, by $0.01, and reported FFO of $0.80 per share, which was an increase of 2.6 percent. Its NOI increased 0.9 percent. The occupancy for the Chattanooga, Tenn.-based REIT, which owns a 79.7-million-square-foot portfolio, increased 60 basis points, to 91.6 percent; but sales fell 2.7 percent to $341 per square foot. “CBL’s mall tenants continue to show evidence of the slowing economy’s impact on B quality malls,” wrote Bear Stearns analyst Ross Smotrich.

Unexpectedly, Taubman Centers Inc., which owns 24.5 million square feet of space comprised of upscale malls, missed consensus estimates by $0.03. It was the result of higher interest expenses and lower lease termination fees, according to Deutsche Bank analyst Lou Taylor, who wrote it does not reflect on-going problems with Taubman’s core business. FFO of $0.68 per share was a 4.6 percent increase over the first quarter of 2007. However, the Bloomfield Hills, Mich.-based REIT did have some bright spots. Its occupancy rate rose 90 basis points in the quarter, to 93 percent, and its sales increased 3 percent to an industry-leading $555 per square foot.

Philadelphia-based Pennsylvania REIT (PREIT), reported an FFO increase of 4.9 percent to $0.85 per share and a NOI increase of 2.3 percent. Occupancy at PREIT’s 38 enclosed malls declined 20 basis points, to 88 percent, while its sales decreased 1.4 percent to $356 per square foot. PREIT operates a 26-million-square-foot retail portfolio, including both enclosed malls and shopping centers.

Two of the companies in the regional mall sector have yet to file their results. Santa Monica, Calif.-based Macerich Company, which owns an 81-million-square-foot portfolio, is scheduled to report tomorrow. Great Neck, N.Y.-based Feldman Mall Properties, which owns 4.7 million square feet of space, has not released a date for filing its first quarter results.

--Elaine Misonzhnik
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