In the face of pedestrian retail sales and crashing stock prices, four of the eight regional mall REITs delivered solid second quarter results. The most successful firms — those with portfolios in high-barrier-to-entry markets with strong fundamentals — saw healthy FFO and NOI growth. And analysts expect the sector to remain strong throughout the rest of the year, despite investors' sudden squeamishness.

The results came in after the sector saw one of its sharpest sell-offs in years. Stock prices for the entire REIT sector have tumbled in recent months as investors have fled everything related to real estate in the face of the sagging housing market and concerns about the debt markets that started with the blowup in subprime mortgages. In July, regional mall REIT total returns dropped 8.39 percent and are now down 11.21 percent for the year, according to NAREIT. (The NAREIT Equity Index as a whole is down 13.23 percent for the year.) That's a sharp contrast from the past seven years when regional mall REITs have posted total returns on average of 31.07 percent per year.

But analysts think that investors have sharply overreacted.

Even the slowdown in retail spending this year has not affected regional mall REIT performance. “The consensus is that the market is still a little bearish, but as long as business performance indexes will be stable, we hope to see a little bit of an [improvement] in the third and fourth quarters,” says Niti Nguansiri, manager of real estate research with SNL Financial, a Charlottesville, Va.-based research firm. Meanwhile, most firms are reporting healthy occupancies and development activity.

RBC Capital Markets' analyst Rich Moore thinks there is no cause for worries and there might even be some good news in the next few months. This week, ICSC reported that chain store sales in July rose 3.1 percent, the biggest increase since March. Chain store sales growth had averaged 2.3 percent between February and June, 1.6 percentage points below the growth experienced during the same period last year. Last July, chain store sales posted an increase of 3.5 percent.

In the second quarter 2007, Bloomfield Hills, Mich.-based Taubman was the frontrunner with FFO of $0.68 per share, up 23.6 percent over the same quarter in 2006 and well above NAREIT's expected growth for the sector of 8.54 percent from 2007 to 2008. It also posted same-store NOI growth of 6.4 percent.

The largest U.S. REIT, Simon Property Group, which owns a 201-million-square-foot portfolio, delivered strong results as well. The Indianapolis-based firm reported FFO of $1.31 per share, a 3.9 percent increase and same-store NOI growth of 1.6 percent. Sales per square foot for the REIT's mall division rose 4.5 percent to $489, and sales per square foot for its outlet division jumped 8.6 percent, to $492.

SHOPPING CENTER REIT PERFORMANCE
Company Q2 '07 FFO/Sh. Q2 '06 FFO/Sh. Percent Change
Taubman Centers $0.68 $0.55 23.6
General Growth Properties 0.73 0.62 17.7
Macerich Co. 1.04 0.96 8.2
Simon Property Group Inc. 1.31 1.26 4.0
CBL & Associates Properties Inc. 0.77 0.76 1.3
PREIT 0.82 0.81 1.2
Glimcher Realty Trust 0.40 -0.67 N/A
Source: Company reports