The bleeding may not have stopped in the retail sector since the first of the year, but on the whole the shopping center REITs are doing just fine, thank you. How do you explain the disparity?

In late June, Wolf Camera announced that it was filing for Chapter 11, citing its acquisition of 450 Fox Photo stores in 1998 as a mistake and vowing a return to profitability.

That same week, Gap Inc. announced that the company plans to reduce its headquarters staff of 10,000 by between 5% and 7%. The Gap also scaled back its planned annual square footage growth for 2002 and 2003 from 15% to 10%. That means the specialty retailer will open 200 less stores next year than originally planned. At the close of trading on June 28, Gap shares registered $29.70, well below their 52-week high of $39.13.

The news coming out of the drugstore sector has been equally gloomy. Late last month, CVS Corp. said its per-share earnings would be as much as 8% lower than forecasts for the second quarter. The company attributed the disappointing results in part to customers cutting back their purchases of non-pharmacy items during a softening economy. At the close of trading June 28, CVS shares were listed at $37.80 on the New York Stock Exchange, dramatically off their 52-week high of $63.75. The conventional wisdom now is that not even the drugstore sector is recession proof.

Is the sky really falling?

But against that retail backdrop of falling corporate earnings, consolidation and a slowdown in new store openings, several shopping center REITs appear to be thriving, including Kimco Realty Corp., The Rouse Co., and CBL & Associates Properties Inc., to name a few. As of June 29, Kimco was trading at a near 52-week high of $46.80.

Similarly, CBL was trading at or near its 52-week high of $31.12. With its acquisition of The Richard E. Jacobs Group's interests in 21 malls and two associated centers earlier this year for $1.3 billion, CBL now ranks as the third-largest mall REIT in the U.S. in terms of the gross leasable space it owns.

“You've had a tech wreck and dividends are in vogue,” said Charlie Willett, vice president of real estate finance for CBL, referring to Wall Street's mood swing and REITs' track record of carrying strong dividend yields. In the current economic climate, where there has been a dramatic downturn in tech stocks, the ability of REITs to deliver a 10% to 15% return to investors looks rather favorable, Willett added.

In CBL's case, the market may also be responding favorably to the company's growth potential in a recessionary environment, said Kelly Sargent, director of investor relations for CBL. The company is committed to a substantial renovation of its newly acquired assets from The Richard E. Jacobs Group to attract new tenants and boost occupancies.

And what about the rash of negative headlines? “Some of the research I've seen is that although retail REITs are affected by bankruptcies and tenant closings, the publicly traded companies have some of the best real estate, and therefore will be less affected by tenant closings,” Willett said.

Time will tell.

Charting the Retail REITs
Top Ten Year-to-Date Return Bottom Ten Year-to-Date Return
1. Crown America 47.5% 1. Center Trust -18.1%
2. Mills Corp 39.0% 2. Weingarten -0.3%
3. Kramont 38.8% 3. Kimco 0.7%
4. JP Realty 35.5% 4. Philips International 1.2%
5. Sizeler Property 32.5% 5. Saul Centers 2.4%
6. New Plan Excel 28.5% 6. Regency 3.7%
7. IRT Property 27.7% 7. General Growth 4.3%
8. Glimcher 27.5% 8. Federal Realty 5.6%
9. Developers Diversified 26.7% 9. Rouse 6.5%
10. Agree Realty 26.1% 10. Pan Pacific 6.6%
* As of May 24, 2001
Source: FactSet, company reports and UBS Warburg, LLC


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