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Retail REITs Sailed Through Profitable Quarter

Retail REIT performance exceeded consensus analyst expectations in the first quarter, with companies across the board posting strong FFO and earnings growth. And with consumer spending holding up, observers are bullish for the rest of the year meaning more strong quarterly results to come in addition to continued appreciation in stock prices.

So far this year, regional mall REITs have posted weighted average total returns of 14.1 percent, with FFO growth estimates for 2007 of 6.8 percent, according to a comparative valuation survey of 21 retail REITs from Citigroup. Meanwhile, the weighted average total returns for shopping center REITs was 6.3 percent, with projected FFO growth of 10.1 percent. Last year, regional mall REITs posted total returns of 27.2 percent while shopping center REITs came in at 37.4 percent.

Retail REIT results were buoyed by a strong March. According to ICSC, same-stores sales rose 5.9 percent -- the biggest year-over-year gain since April 2006. The results exceeded the projected jump of between 4 percent and 5 percent. The early Easter this year pushed more sales activity into March. However, retailers may end up paying the price for that now. Same-store sales data for April, which will be released tomorrow, is expected to be negative for the first time since March 2003, according to ICSC and UBS Securities LLC, because of the Easter shift and the coldest April in 10 years.

But most expect April results to be momentarily lapse and that retail will continue its ascent this month. One big reason for optimism is that the first quarter ended without any notable bankruptcy announcements. There have been only 743 store closings in the first three months of 2007, according to the Retail Quarterly report from Merrill Lynch, compared to 2,082 closings in the first quarter of 2006 and 999 closings during the same period in 2005. “This is the most bankruptcy free year I can remember in about a decade,” says Richard Moore, analyst with RBC Capital Markets.

Among the best performers year-to-date in the regional mall sector has been General Growth Properties, which posted total returns of 21.6 percent, as well as Simon Property Group with 13.3 percent and Taubman Centers with 10.8 percent.

General Growth’s same store NOI for the first quarter of 2007 was only 0.5 percent compared to 8.5 percent in the first quarter of 2006, due to lease termination fees carried over from last year, but its occupancy rate, at 92.9 percent, was 1.8 percent higher during the same period last year and its sales per square foot increased more than 3 percent since the first quarter of 2006 to $458. “We remain confident in the inherent growth of General Growth Properties’ in-place portfolio and feel [the company] can obtain its goal of 5 percent same store NOI growth for the years 2007-2009,” writes A.G. Edwards & Sons, Inc. analyst Mark Hoffmeister.

The company’s core FFO per share went down more than 8 percent in 2007, compared to $0.71 for the same period in 2005, but its fully diluted FFO per share rose 115 percent, from $0.77 to $1.66.

Simon Property Group is also doing well, with a 3.7 percent increase in same store NOI and a 5.6 percent increase in sales per square foot to $487. “Our estimates imply 7 percent to 8 percent growth in 2007, and 2008 driven by solid organic growth,” writes Citigroup analyst Jonathan Litt. Simon’s diluted FFO per share rose 8.7 percent from $1.26 in the first quarter of 2006 to $1.37 in 2007.
However, Litt lowered his estimates for CBL & Associates Properties Inc., from $4.46 per share to $3.39 per share, citing same store NOI growth of 1.8 percent compared to the company’s goal of 2.5 percent. Litt is also concerned about CBL’s positioning in secondary markets, which he feels are more vulnerable to an economic downturn. “We worry that [those markets] could be the first that retailers exit in tougher times,” he writes–a concern that Moore doesn’t share. CBL’s diluted FFO per share went down 6.4 percent, from $0.83 percent to $0.78 percent.

One company that stumbled slightly was Macerich Co., which announced FFO of $0.96 per diluted share, down from $1.05 per diluted share last year.

In the shopping center world, Equity One, with total returns of 10.6 percent and FFO per share of $0.40, Acadia Realty, with total returns of 9.9 percent and FFO of $0.36, and Kimco Realty, with total returns of 8.6 percent and FFO of $0.78, are posting strong performances.

“All of them are meeting and beating expectation for the first quarter,” says Moore. “There is demand for space in all segments–primary markets, secondary markets, regional malls, lifestyle centers, strips…”

The takeout? Moore says expect to see rising stock prices and more joint ventures with institutional partners, of the kind that Inland Western Retail Real Estate Trust Inc. signed with a Morgan Stanley pension fund client last week for the acquisition of up to $1 billion worth of shopping centers around the country. With performances this strong, institutional investors will continue to be interested in retail, so much so that the joint venture deals might start spilling over into the regional mall sector, which hasn’t gotten as much interest previously, says Moore.

--Elaine Misonzhnik

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