The consumer's unwavering demand for necessities drove shopping center REITs into positive territory while miserly purchases of discretionary items such as apparel cut into earnings among mall REITs during the first quarter.

Nine of the 13 shopping center REITs either beat or met consensus estimates for the three months ended March 31. And, four came in below estimates by less than $0.03.

Five, half of the 10, regional mall REITs reported losses for the latest quarter. Collectively, the sector posted its weakest performance since the third quarter of 2006. According to RBC Capital Markets, of the 76 REITs it covers, one-third missed analysts' estimates.

“Obviously, the consumer slowdown is going to have an effect on all mall REITs going forward, but the effect will vary based on the quality of assets the REIT carries,” says Jason Lail, senior real estate research analyst with SNL Financial LLC, a Charlottesville, Va.-based market research firm. “You will probably see an increase in store closings in 2008, both strategic — where retailers are identifying unprofitable locations — and [because of] Chapter 11. But the demand for class-A space is not going to drop as quickly as for B and C assets.”

The mall sector's largest REIT, Indianapolis-based Simon Property Group, which owns 242 million square feet of retail space, reported a 10-basis-point drop in occupancy at its regional malls to 91.7 percent and a 120-basis-point decline at its community and lifestyle centers to 93.3 percent compared to the first quarter 2007. Simon's relatively stable performance in spite of the current economic slowdown is due primarily to its well-positioned portfolio and conservative balance sheet, wrote Credit Suisse analyst Michael Gorman. Simon is approximately 47 percent leveraged, according to Morningstar. Simon's FFO of $1.46 per share beat estimates by $0.02, an increase of 6.6 percent. Same-store NOI for its regional malls increased 2.8 percent.

Feldman Mall Properties reported it lost $5 million in the first quarter compared to a loss of $900,000 the same quarter a year ago. The Great Neck, N.Y.-based REIT said its FFO amounted to a loss of $1.33 million compared to a gain of $2.97 million for the first quarter of 2007.

Conversely, shopping center REITs dominated by grocery- anchored centers and drugstores saw gains as consumers' demand for staples remained strong. Drugstores saw same-store sales growth of 2.9 percent in the first four months of this year, according to ICSC, higher than the 1.7 percent same-store sales growth figure for all U.S. chain stores.

The sector's strength comes from its reliance on supermarkets and drugstores as anchors, says Rich Moore, an analyst with RBC Capital Markets. “In hard times, people quit eating out and return to the grocery store,” says Moore. “The grocers are going to continue to do fine and grocery-anchored centers will continue to do fine.”

However, Moore did express concern about REITs that focus heavily on ground-up development because they could find it challenging to secure tenants in this sluggish economic climate. For now, Moore noted, the best strategy is redevelopment, which offers yields ranging from 10 percent to 14 percent, compared to yields of 8 percent to 9 percent on new projects.

Kimco Realty Corp., which told analysts it plans to concentrate on redevelopment going forward, reported FFO of $0.64 per share, $0.01 above consensus estimates. The figure represents a 17.9 percent decline from the first quarter of 2007, due to a disproportionate gain from the company's investment last year in the supermarket chain Albertsons, LLC. Occupancy amid its portfolio slid 10 basis points, to 96 percent; and its same-store NOI growth of 3.3 percent was below its eight-quarter average of 4.7 percent. The New Hyde Park, N.Y.-based REIT has about 20 projects in the pipeline, totaling approximately $325 million.