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Regional Mall REITs Hold Up Under Pressure

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 reigning in spending on luxury goods, apparel and discretionary items sold by retailers located predominately 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 at top pick,” Moore wrote in a note last week.

Columbus, Ohio-based Glimcher Realty Trust bested consensus estimates by $0.05 per share. The REIT, which owns 22.1 million square feet of retail space, posted second quarter FFO of $0.50 per share, a 25 percent increase from the same period a year ago. Glimcher’s same-property NOI rose 1.3 percent and its occupancy increased 40 basis points to 92.2 percent.

Both Macerich and PREIT beat consensus estimates by $0.02 per share in the quarter. Santa Monica, Calif.-based Macerich reported FFO growth of 11.5 percent to $1.16 per share. Meanwhile, same-property NOI increased 3.4 percent. However, like Simon, Macerich experienced a 30 basis point drop in its occupancy to 92.9 percent at its 81-million-square-foot-portfolio.

Philadelphia-based PREIT reported FFO growth of 6.1 percent to $0.87 per share. The company’s same-property NOI rose 2.1 percent while its occupancy decreased 170 basis points to 87.8 percent. PREIT owns 26.1 million square feet of space.

Chattanooga, Tenn.-based CBL & Associates Properties beat analysts' estimates by $0.01 per share. The REIT’s FFO rose 9.5 percent during the second quarter, to $0.81 per share. Its same-property NOI declined 0.8 percent and its portfolio occupancy remained at 91.6 percent.

“CBL’s valuation remains compelling, but in our view the weak second quarter 2008 operating results are likely to overshadow the valuation,” Moore noted.

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.

Much of Taubman’s troubles in the quarter arose from an unplanned increase in the pre-development costs for the REIT’s Asian ventures, wrote Deutsche Bank analyst Lou Taylor in a July 25 note. Otherwise, “operations remained very resilient despite a much tougher economic environment,” he noted.

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. That's largely due to the sell-off that has occurred in REIT stocks and lowered firms' market capitalizations.

Going forward, General Growth's debt load could continue to hurt the company, Moore notes. 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.

Donnelly has since downgraded the company’s shares to “underperform.” He added, “There are no easy solutions for General Growth’s predicament.”

--Elaine Misonzhnik

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