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Regional Mall REITs Anchored in Choppy Water

Regional Mall REITs Anchored in Choppy Water

As regional mall REITs began filing their 2007 fourth quarter and year-end earnings last week, two overriding questions emerged for 2008. Will the sluggishness in the retail sector result in rising vacancies and, therefore, falling rents? And will the debt loads hurt REIT performance?

With five of the eight regional mall REITs having reported, the answer to both questions so far is "No."

Of the five companies reporting their earnings, two, General Growth Properties, Inc. and Macerich Company, barely missed consensus estimates. Meanwhile, Simon Property Group, Taubman Centers, and CBL & Associates Properties beat expectations for the quarter. Overall, three of the firms--Macerich, Simon and Taubman--posted FFO growth year-over-year for the quarter (see chart below) while General Growth and CBL declined.

For the year, two of the five firms--Simon and Taubman--beat expectations while the other three missed by $0.05 per share or less. Still four of the five firms grew FFO per share for the year with only CBL posting a decline on an annual basis.

Still to come, Glimcher Realty Trust and PREIT are scheduled to report later this month. (Feldman Mall Properties, meanwhile, has consistently delayed reporting its results. It reported its third quarter figures in late December and has not yet announced when it will disclose its fourth quarter and full year results.)

"Overall, the regional mall sector is one of the more stable and defensive REIT sectors because of the long-term leases and high quality assets," says Jason Lail, senior research analyst with SNL Financial LC, a Charlottesville, Va.-based research firm. "The missed earnings are more indicative of the performance of the financial markets in the past year than of the performance of the regional mall REITs specifically."

General Growth Properties fell short of consensus estimates by $0.02 per share, with a core FFO decline of 7.1 percent from last year's figure, to $0.92 per share. (Overall its FFO came in at $0.64 per share in the fourth quarter of 2007 compared with $1.02 per share in the fourth quarter of 2006. The company attributed the large drop to a falloff in land sales, which fell by 85 percent year-over-year.)

However, the Chicago-based company posted slight increases in other metrics. Its same-store NOI grew 5.8 percent, its occupancy increased 20 basis points, to 93.8 percent, and sales per square foot rose about 2 percent to $462.

During the company's conference call on Tuesday, General Growth officials addressed concerns that 2008 will generate a greater number of vacancies, as an increasing number of tenants delay store openings and file for bankruptcy in the wake of waning same-store sales. But the company insists its weekly leasing deal flow in December was identical to what it experienced in December 2006.

"It is my belief that slowing retail sales will not necessarily translate to more bankruptcies," General Growth CEO John Bucksbaum told analysts, adding that retailers are in better financial shape than during previous slowdowns and therefore would be able to stay afloat. Still, the company expects to slow its development activity in the U.S. and throw more resources into its burgeoning business in Brazil.

RBC Capital Markets analysts agree with this outlook. In a February 5 report, Rich Moore and Dave Rodgers wrote even when facing slow short-term growth prospects, retailers have continued to open new stores.

General Growth, however, faces other challenges in 2008. The company has $2.8 billion of debt maturing this year, and its interest expense rose 15 basis points, to 5.17 percent during the quarter. However, if the financial markets continue to perform erratically over the following 12 months, companies with over-leveraged balance sheets could face problems and potentially become buyout targets, says Lail.

"Currently, REITs are trading at a 22 percent discount to consensus NAV," he says. "That means we could see a resurgence of merger and acquisition activity in 2008 from REITs that are well-positioned and don't have a lot of debt maturing this year."

Elsewhere, Santa Monica, Calif.-based Macerich missed consensus estimates by $0.03, with FFO per share of $1.45 for the fourth quarter. Still, that represented growth of 7 percent year over year. Occupancy at its 72 centers declined 10 basis points, to 93.5 percent. Its sales per square foot, however, still registered an increase of 4.4 percent, to $472, and its same-store NOI rose 2.1 percent.

Simon Property Group also beat consensus estimates by $0.10 per share, with FFO per share coming in at $1.76, a 12.1 percent increase over the fourth quarter of 2006. The Indianapolis-based firm also saw healthy growth in both occupancy levels and sales per square foot at its 320 properties in the United States. For its 169 regional malls, Simon reported an occupancy rate of 93.5 percent, a 30 basis point increase over last year. Occupancy at its 37 outlet centers grew at the same pace finishing the quarter at 99.7 percent.

Meanwhile, Simon's sales at regional malls rose 3.2 percent, to $491 per square foot, and 7 percent at outlet centers, to $504 per square foot. Its same-store NOI increased 6.9 percent for the fourth quarter.

During its conference call on February 1, Simon's president David Simon acknowledged the firm was delaying construction on some of its projects because of the weak sales climate.

Bloomfield, Mich.-based Taubman and Chattanooga-based CBL both bested consensus estimates by $0.01 per share. Taubman posted a 4.8 percent increase in FFO in the fourth quarter, to $0.87 per share, and a same-store NOI growth of 2 percent. Its sales rose 4 percent, to $555 per square foot, and its occupancy went up 10 basis points, to 91.4 percent.

Due in part to a write-down on its securities position, CBL posted a 14.4 percent decrease in its FFO in the fourth quarter, to $0.83 per share. Its operating metrics, showed flat sales growth, at $346 per square foot, and a 10 basis point decrease in occupancy to 94 percent. However, CBL managed same-store NOI growth of 0.9 percent. Looking forward, the REIT might suffer greater instability than its peers because its B-class assets make it more vulnerable to store closings and bankruptcies, noted Moore.

"The threat of potential additional store closings further weighs on near-term organic growth," Moore wrote in a note on February 11.

He added, CBL's strong suit this year will be its stable balance sheet, having only $380 million in debt due in 2008.

Overall, this year will continue to be challenging for REITs, with more misses than hits, says Lail. "The biggest concerns going forward are going to be debt levels and balance sheets," he says. "REITs really need to be cognizant of their debt levels and concentrate on improving the efficiency of their core portfolios."

--Elaine Misonzhnik

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