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Regional Mall REITs Muddle Through Fourth Quarter

Regional Mall REITs Muddle Through Fourth Quarter

Despite the challenging marketplace, regional mall REITs posted a respectable performance in the fourth quarter of 2008. With more than half of the seven REITs reporting so far, two beat analysts’ consensus estimates and two missed; primarily due to impairment charges on suspended projects. Those halted developments will likely bode well for the companies’ long-term health, say analysts.

Simon Property Group (NYSE: SPG) and Macerich Co. (NYSE: MAC) exceeded analysts’ consensus estimates for the quarter ended Dec. 31, 2008, by $0.09 per share and $0.15 per share respectively. CBL & Associates Properties (NYSE: CBL)and Taubman Centers, Inc. (NYSE: TCO)fell short of estimates by $0.17 per share and $1.36 per share respectively. Three of the seven regional mall REITs that have yet to report results are: Glimcher Realty Trust (NYSE: GRT), which will report on Feb. 18; General Growth Properties (NYSE: GGP), which will report on Feb. 23, and PREIT (NYSE: PEI), which will report on Feb. 25.

“Given a weak economy, obviously we are seeing decreases in occupancy levels,” says Robert McMillan, industry analyst with New York City-based Standard & Poor’s Equity Research Services. “Nothing catastrophic, but we expect [this trend] will pick up. That’s offset by the fact that rent growth is still continuing.”

Simon’s occupancy levels decreased by 110 basis points at its regional mall portfolio, to 92.4 percent, and by 80 basis points at its outlet center portfolio, to 98.9 percent. It reported an increase in FFO per share of 5.7 percent in the fourth quarter to $1.86 from $1.76 per share in the same period of 2007. The figure reflects a $21 million impairment charge incurred by Simon for having abandoned several projects in the pre-development stage.

Average rents posted by Simon showed increases in the fourth quarter—rents rose 6.5 percent at regional malls, to $39.49 per square foot, and by 7.7 percent at outlet centers, to $27.65 per square foot. Analysts say that performance will be difficult to maintain in 2009 as retailer bankruptcies increase and remaining tenants gain more leverage to negotiate down, says Michael Magerman, senior vice president responsible for the REIT sector with Realpoint LLC, a Horsham, Pa.-based credit rating agency. (Read story here).

“Nothing is going down at an alarming rate, but there are signs that things are slipping,” Magerman says. “There’s clearly a noticeable difference from recent years when retail REITs had been showing consistent same-store NOI increases of 4 percent and 5 percent. Now we are approaching zero.”

Macerich reported its NOI fell 2.4 percent, due to a decrease in rents and an increase in bad debt, said Tom O’Hern, senior executive vice president and CFO of Macerich, during last week’s earnings call. Its FFO grew 30 percent to $2.08 per share for the quarter compared with $1.45 for the same period a year earlier. Macerich’s occupancy decreased 80 basis points in the quarter to 92.3 percent from 93.1 percent the year prior.

Missing analysts’ consensus estimates, Taubman Centers reported earnings of $1.36 per share in the quarter, due to a $116 million impairment charge related to a reversal of a previous court decision that it would not have to submit an environmental impact statement for its Oyster Bay project on Long Island, N.Y., which was handed down last year. As a result, Taubman reported a decline in FFO growth of $0.55 per share, compared with an increase of $0.87 per share in the fourth quarter of 2007. Occupancy at Taubman’s malls decreased 90 basis points during the period, to 90.3 percent from 91.2 percent from the year prior, but average rents registered an increase of 4.0 percent to $45.12 per square foot.

CBL & Associates Properties missed estimates, by $0.17 per share. It reported a 3.6 percent decline in FFO per share in the fourth quarter to $0.80 per share from $0.83 per share a year ago. The company incurred an $8 million impairment charge on its abandoned projects. CBL’s same-store NOI declined 4.0 percent for the quarter while its occupancy fell 90 basis points to 92.3 percent from 93.2 percent in the same quarter of 2007.

“While CBL’s portfolio was resilient in the fourth quarter, we believe that tougher times are ahead,” David Wigginton, analyst at Macquarie Research, wrote on Feb. 6. “We don’t believe the fourth quarter felt the full impact of the bankrupt tenants and we expect that to weigh on operating metrics in the first quarter of 2009. In general, we expect property fundamentals to decline through the first half of 2009 for all mall owners.”

Chicago-based General Growth Properties, the second largest retail REIT in the country with 180 million square feet of space, announced that it will report its quarterly results two weeks later than previously expected, on Feb. 23. The move comes as a result of the company’s ongoing search for strategic alternatives as it struggles with upcoming debt maturities in 2009. General Growth will not hold an earnings call for the fourth quarter 2008.

--Elaine Misonzhnik

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