The recession and credit crunch continue to take a toll on retail REITs. During the fourth quarter, REITs experienced a smorgasbord of difficulties including one-time charges, occupancy declines and decreasing net occupancy incomes (NOI). As a result, many REITs missed analysts' consensus estimates during the dreary final three months of 2008.

Among shopping center REITs, just one, Saul Centers Inc., beat analysts' consensus estimates. The other 10 that had reported fell short by a range of $0.01 per share to $1.73 per share for the quarter ended Dec. 31. Nine posted FFO that was negatively impacted by impairment charges related to factors ranging from slumping land values to severance payments for laid-off workers. (As of press time, two other shopping center REITs had not yet reported results.)

Shopping center REITs defied the long-held position that they could weather a recession better than regional mall REITs because their tenants sell staples including food and pharmaceuticals rather than discretionary goods, says Michael Magerman, senior vice president for the REIT sector with Realpoint LLC, a Horsham, Pa.-based credit rating agency.

“I am not sure if I agree with the premise that shopping center REITs are more insulated from the recession,” says Magerman. “It's true shopping center REIT [properties] have supermarkets and drugstores, but they also have a lot of apparel and electronics tenants that are going to suffer along with the regional mall tenants.” By the second quarter, Magerman forecasts, many shopping center REITs will post negative same-store NOI.

Regional mall REITs, meanwhile, posted a respectable performance in the fourth quarter of 2008. Of the seven sector REITs, three beat analysts' consensus estimates and four 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, Macerich Co. and Pennsylvania REIT (PREIT) exceeded analysts' consensus estimates for the quarter ended Dec. 31, 2008, by a range of $0.06 per share to $0.15 per share. CBL & Associates Properties, Taubman Centers, Inc., General Growth Properties and Glimcher Realty Trust fell short of estimates by a range of $0.03 per share to $1.36 per share.

“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.”

The shopping center REIT exceeding analyst expectations, Saul Centers Inc., beat consensus estimates by $0.01 per share for the quarter. The Bethesda, Md.-based firm posted FFO of $0.66 per share, 5.7 percent below the $0.70 per share it reported in the fourth quarter of 2007. Occupancy at Saul's portfolio fell 110 basis points during the quarter, to 94.2 percent from 95.3 percent the same quarter in 2007. Its same-store NOI in the fourth quarter of 2008 decreased 1.7 percent.

At the opposite end was Developers Diversified Realty (DDR). The REIT reported fourth-quarter FFO that missed analysts' consensus by $1.73 per share. It was a decrease of $0.95 compared to an increase of $0.82 per share during the same period in 2007. The Beachwood, Ohio-based REIT's occupancy fell 380 basis points in the quarter to 92.2 percent, from 96.0 percent a year ago. However, its same-store NOI for the year rose 1.7 percent. DDR announced last month, it had agreed to sell 30 million of its common shares for $3.75 per share, with the option to purchase an additional 10 million shares over the next five years for $6.00 per share, to German shopping center developer Alexander Otto and his family. (For more details on the transaction, go to p. 12) The move will help the company pay down debt coming due in 2009 and 2010, notes Rich Moore, an analyst with Cleveland-based RBC Capital Markets.

Weingarten Realty Investors, the Houston, Texas-based REIT, missed consensus estimates by $0.58 per share, with FFO of $0.14 per share, reflecting a decrease of 82.0 percent from $0.78 per share a year ago. Occupancy at Weingarten's 42-million-square-foot retail portfolio declined 150 basis points, to 93.0 percent from 94.5 percent. Its fourth quarter NOI fell 3.5 percent. (For other REIT results, see chart below.)

Declining occupancies

On the regional mall side, rising vacancies were the big story. 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.

“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 Santa Monica, Calif.-based Macerich, during the fourth quarter earnings call. Its FFO grew 30 percent to $2.08 per share for the quarter compared to $1.45 for the same period a year earlier.

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 the reversal of a previous court decision, which was handed down last year, that it would not have to submit an environmental impact statement for its Oyster Bay project on Long Island, N.Y. As a result, Taubman reported a decline in FFO growth of $0.55 per share, compared to an increase of $0.87 per share in the fourth quarter of 2007.

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.”

Company Symbol 4Q 08 FFO per Share 4Q 07 FFO per Share FFO Growth NOI Growth 2008 FFO per Share 2007 FFO per Share 2009 FFO Guidance
SHOPPING CENTER REITS
Federal Realty FRT $0.99 $0.92 7.0% 5.5% $3.87 $3.63 $3.80-$3.92
Saul Centers BFS 0.66 0.70 -5.7 -1.7 2.68 2.75 N/A
Urstadt Biddle UBP 0.28 0.30 -6.7 N/A 1.10 1.33 N/A
Inland Real Estate Corp. IRC 0.26 0.36 -27.8 -2.9 1.33 1.43 1.20-1.35
Kite Realty Group KRG 0.24 0.34 -29.4 -1.2 1.17 1.26 0.83-0.97
Regency REG 0.72 1.16 -37.9 3.0 3.75 4.20 3.30-3.70
Ramco-Gershenson Properties RPT 0.35 0.64 -45.3 -3.5 2.21 2.56 2.21-2.34
Acadia Realty AKR 0.12 0.29 -58.6 1.2 1.16 1.26 1.05-1.19
Weingarten WRI 0.14 0.78 -82.0 -3.5 2.44 3.06 2.30-2.60
Kimco Realty KIM 0.04 0.53 -92.5 1.3 2.02 2.59 1.70-1.90
Developers Diversified DDR -0.95 0.82 N/A N/A 1.52 3.79 N/A
REGIONAL MALL REITS
Glimcher Realty GRT 0.52 -0.02 N/A -2.0 2.04 1.37 1.85-1.95
Macerich MAC 2.08 1.45 30.0 -2.4 5.50 4.62 4.50-4.75
Simon Property Group SPG 1.86 1.76 5.7 6.42 5.90 6.40-6.60
(malls) 10
(outlets) 7.7
Pennsylvania REIT PEI 1.08 1.12 -3.6 -1.3 3.57 3.90 2.75-2.95
CBL & Associates CBL 0.80 0.83 -3.6 -4.0 3.22 3.10 3.10-3.25
General Growth Properties GGP -2.4 N/A
Core FFO 0.72 0.92 -0.2 2.83 2.97
FFO 0.70 0.64 9.4 2.72 7.71
Taubman Centers TCO -0.55 0.87 N/A 4.0 1.54 2.88 2.69-2.94