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Shopping Center REITs See Gains in Third Quarter

Amid the slowing economy, flagging housing market and unfolding credit crunch, neighborhood and community center REITs posted lackluster results during the third quarter, suffering as consumers reined in spending. Still, the sector as a whole is outperforming much of the rest of the REIT universe.

To date, 10 shopping center REITs have filed their third quarter reports. Four, Developers Diversified Realty Corp., Kimco Realty Corp., Acadia Realty and Weingarten Realty Investors, beat consensus estimates by as much as a nickel. Four others met analysts' expectations and three, Inland Realty, Equity One and Cedar Shopping Centers, missed targets.

Kite Realty Group Trust will be the last company in the sector to report when it releases its results later today.

The sector's performance was impacted by weak same-store growth--a problem that's plagued the retail industy since the summer. In September, same-store sales inched up just 1.7 percent--below the average gain of 2.3 percent to date in 2007. For October, things don't look much brighter with ICSC forecasting growth of 2 percent. And for the last two months of the year the trade group says same-store sales will grow 2.5 percent.

Home goods, furniture and dollar stores have come under particular scrutiny, because they are more susceptible to slowdowns in residential construction, says Jeff Berkes, executive vice president and chief investment officer with Federal Realty Investment Trust.

The results--though not quite as robust as the sector has become used to--are still ahead of many other REIT sectors. Industry analysts rank shopping center REIT performance behind only regional malls, beating office, industrial, multi-family and self-storage REITs. And there's further reason for optimism as REIT executives expect the sector to withstand the downturn with out incurring any major losses in part because properties have high occupancy rates and boast long-term leases.

RBC Capital Markets analyst Rich Moore singled out Weingarten Realty Investors, as one of the strongest performers in the quarter beating consensus estimates by $0.04. The Houston, Texas-based firm, which operates 336 community and neighborhood shopping centers, as well as 78 industrial properties, posted FFO per share of $0.79, a 10 percent increase over the third quarter in 2006, and same-store NOI growth of 2 percent for its retail assets. The occupancy rate in its retail portfolio also increased 20 basis points during the quarter, to 95.2 percent. Weingarten estimates FFO per share for 2007 will be at the higher end of its targeted $2.98 to $3.04 range.

Meanwhile, Port Washington, N.Y.-based Acadia Realty Trust exceeded consensus estimates by $0.05. Acadia, which has a portfolio of 74 properties totaling 10 million square feet, reported FFO per share of $0.39, a 30 percent increase from the third quarter in 2006, and same store NOI growth of 2.2 percent. The occupancy rate at its centers rose 60 basis points to 93.8 percent. For 2007, Acadia projects FFO per share will fall in the $1.30 to $1.35 range.

The largest shopping center REIT, New Hyde, N.Y.-based Kimco Realty Trust, bested consensus estimates by $0.02, with FFO per share of $0.57. The figure represents an increase of 1.8 percent from the third quarter in 2006. Kimco operates 950 centers totaling 147 million square feet, and its same-store NOI growth outperformed the rest of the sector, at 4.2 percent. Its portfolio occupancy reached a record high of 96.2 percent, an increase of 90 basis points from the same period in 2006. Kimco gave investors guidance for 2007 in the $2.56 to $2.59 range.

Although Kimco's management has cited it is well positioned to withstand the current slowdown in consumer spending, the company did scale back its development pipeline to $2 billion from $2.1 billion. That's a move that might be replicated by its peers in the future, Moore says, as REITs postpone construction on projects that don't have a mandated completion date.

"We continue to worry about the consumer and we believe that some retailers will have issues in 2008," said Kimco Realty Corp. chairman and CEO Milton Cooper during the company's conference call on Oct. 26.

However, Cooper and Berkes maintain that overall leasing at their portfolios continues to be strong and they don't foresee major adjustments in retailer expansion plans next year. Any modifications are likely to take place in Florida, Georgia and other states that have seen a lot of fallout from the housing bust, noted Jason Lail, senior research analyst with Charlottesville, Va.-based research firm SNL Financial. Developments insulated from the effects of the current downturn include grocery-anchored shopping centers in dense, affluent areas. "Some of the REITs are planning to move away from the big box anchors, which are less reliable right now," he says.

Beachwood, Ohio-based Developers Diversified Realty Corp. eclipsed consensus estimates by $0.01 in the quarter. The company, which operates 170 properties totaling 160 million square feet, reported a 14.7 percent increase in FFO per share, to $2.97, and an increase of 2.3 percent in same store NOI. Occupancy, however, decreased 20 basis points, to 95.9 percent.

Equity One, which saw its occupancy decline 160 basis point during the quarter, to 93.5 percent, missed consensus estimates by $0.03, as a result of a significant portion of its 19 million square foot portfolio being in the hard-hit state of Florida. The Miami-based company operates 89 of its 180 properties in the Sunshine State.

A result of its ongoing non-core asset dispositions, Equity One reported a decrease of 14.3 percent in its FFO, to $0.30 per share, and downwardly revised its 2007 FFO guidance to $1.33 from $1.37 as had been previously forecast. However, during the quarter, the REIT posted same store NOI growth of 4.1 percent.

--Elaine Misonzhnik

Company FFO per Share FFO Growth NOI Growth
Cedar Shopping Centers, Inc. $0.31 32% 3.5%
Acadia Realty Trust 0.39 30 2.2
Developers Diversified Realty Corp. 2.97 14.7 2.3
Weingarten Realty Investors 0.79 10.0 2.0
Federal Realty Investment Trust 0.92 8.2 4.5
Ramco-Gershenson Properties Trust 0.66 4.8 2.3
Inland Real Estate Corp. 0.35 2.9 0
Kimco Realty Corp. 0.57 1.8 4.2
Regency Centers Corp. 0.97 -3.0 2.3
Equity One, Inc. 0.30 -14.3 4.1

Source: Company Reports

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