The economic slowdown has begun to take its toll on shopping center REITs. Retailers are hurting as consumers cut back on spending. Firms are opening fewer stores and increasing store closings. As a result, vacancies are piling up and helped drive down earnings for many REITs during the second quarter. • Overall, nearly half of the shopping center REITs missed consensus analyst estimates. During earnings calls, a common refrain emerged with REIT executives preaching caution and predicting that going forward portfolio metrics will continue to erode. • Net operating income (NOI) “growth was a little slower — there was softness around the edges,” says Rich Moore, an analyst with RBC Capital Markets. “Anything associated with development seemed to be more difficult than usual,” he added.

Out of the 14 shopping center REITs, only six — Kimco Realty Corp., Regency Centers Corp., Acadia Realty Trust, Kite Realty Group, Ramco-Gershenson Properties Trust and AmREIT — beat analysts' estimates. Two, Cedar Shopping Centers, Inc. and Weingarten Realty Investors, met analyst expectations, while six, Developers Diversified Realty, Equity One, Inc., Saul Centers, Inc., Federal Realty Investment Trust, Inland Real Estate Corp. and Urstadt Biddle Properties Inc., missed.

Those results reflect broader trends within the shopping center space. New York City-based data provider Reis Inc. measured a 50 basis point increase in vacancy rates at neighborhood and community shopping centers during the second quarter. Vacancy rates now stand at 8.2 percent — a 13 year high. Vacancies are also up nearly a full percentage point in the last 12 months alone.

Inside the numbers

Beachwood, Ohio-based Developers Diversified had the roughest quarter with its earnings coming in $0.06 per share below estimates. The company's FFO, $0.82 per share, also represented a 34.9 percent decrease from the second quarter in 2007.

Meanwhile, occupancy at the company's 163-million-square-foot portfolio fell 40 basis points, to 95.5 percent. Its same-property NOI increased 2.5 percent and average rent, excluding Brazil, rose 2 percent, to $12.41 per square foot. That means, notably, that rents are growing at less than the pace of inflation.

Elsewhere, Equity One, Inc. posted FFO of $0.32 per share, a 5.9 percent decrease from the same period a year ago. Its same-property NOI decreased 2.9 percent and occupancy within its portfolio fell 10 basis points, to 92.8 percent. Contributing to the Miami Beach, Fla.-based REIT's trouble is its footprint. The bulk of its 17.1-million square-foot portfolio is in the Southeast, an area that has suffered disproportionately from the housing downturn, Moore says.

“Given the continued poor outlook for Florida retail in the face of the housing crisis, which has hit that state hard, we remain very cautious on shares of Equity,” he wrote last month in a note.

Meanwhile, Saul Centers, Inc. missed estimates by $0.01 per share, with a 1.5 percent decline in FFO, to $0.66 per share. The company's same-property NOI rose 1.2 percent, while its occupancy level went down 100 basis points, to 94.8 percent. Bethesda, Md.-based Saul owns a 6.2-million-square-foot portfolio.

Inland Real Estate Corp. missed by $0.01 per share as well. The Oak Brook, Ill.-based REIT reported that its FFO rose 2.9 percent, to $0.36 per share. Same-property NOI for its 71-million-square-foot portfolio went up 3.2 percent. The company did report healthy rent bumps. Average base rents for new and renewal leases rose 14.9 percent and 12.6 percent, respectively, over expiring rents.

Federal Realty Investment Trust and Urstadt Biddle Properties were the other two REITs that missed consensus estimates for the quarter.

Rockville, Md.-based Federal Realty Investment Trust saw occupancy within its 18.2 million-square-foot portfolio drop 30 basis points, to 95.8 percent. And occupancy at Greenwich, Conn.-based Urstadt Biddle Properties' 3.7-million-square-foot portfolio declined more than 5 percentage points to 92.4 percent from 98 percent a year ago.

Beating estimates

Meanwhile, preeminent developer Kimco Realty Corp., the second largest shopping center owner in the United States with 120 million square feet of space, has analysts concerned even though it beat consensus estimates by $0.01 per share. The problem? New Hyde Park, N.Y.-based Kimco's FFO declined 7 percent to $0.66 per share, compared with the same period last year.

During its analyst call on July 30, Kimco chairman and CEO Milton Cooper said Kimco too will face continued problems with its portfolio occupancy levels as a result of the slumping economy. “All indications are that this downturn will punish the consumer,” Cooper said.

Citing the lack of development opportunities, in July, Credit Suisse analyst Michael Gorman downgraded Kimco's shares to “neutral” from “outperform.”

One of the bright spots was White Plains, N.Y.-based Acadia Realty Trust, which beat consensus estimates by a whopping $0.07 per share. (See an interview with Acadia CEO Kenneth Bernstein on p. 104 for more). The company, which operates an eight-million-square-foot retail portfolio, posted FFO of $0.41 per share, representing an increase of 57.6 percent. Acadia's same-store NOI rose one percent in the second quarter and its occupancy increased 60 basis points, to 93.9 percent.

Regency Centers Corp., a Jacksonville, Fla.-based REIT, which owns 51 million square feet of shopping center space, also beat estimates by $0.07 per share, with FFO growth of 3.2 percent, to $0.97 per share. Regency's NOI rose 2.2 percent in the second quarter.

Houston-based AmREIT beat estimates by $0.04 per share. The company's FFO rose 100 percent, to $0.12 per share, and its same-property NOI went up 0.6 percent. AmREIT's portfolio occupancy, however, declined 100 basis points, to 97.1 percent. The company owns 3.4 million square feet of commercial space.

Farmington Hills, Mich.-based Ramco-Gershenson Properties Trust beat consensus estimates by $0.01 per share. The REIT's FFO rose 3.3 percent in the second quarter, to $0.62 per share, though its same-property NOI declined 0.3 percent. Occupancy at its 20-million-square-foot portfolio remained at 94.7 percent.

Indianapolis-based Kite Realty Group beat estimates by $0.01 per share. The firm reported that FFO remained flat, at $0.31 per share, and NOI rose 0.1 percent. Kite operates 5.6 million square feet of shopping center space.

SECOND QUARTER EARNINGS
REIT FFO per Share FFO Growth NOI Growth Hit/Miss
Acadia Realty Trust $0.41 57.6% 1.0% $0.07
Cedar Shopping Centers 0.31 10.1 -3.0 0.00
Developers Diversified Realty 0.82 -34.9 2.5 -0.06
Equity One 0.31 -5.9 -2.9 -0.01
Federal Realty Investment Trust 0.96 5.5 4.1 -0.01
Kimco Realty 0.66 -7.0 2.4 0.01
Ramco-Gershenson Properties Trust 0.62 3.3 -0.3 0.01
Urstadt Biddle Properties 0.30 -45.0 12.1 -0.01
Weingarten Realty Investors 0.79 500.0 2.0 0.00
Regency Centers 0.97 3.2 2.2 0.07
Inland Real Estate 0.36 2.9 3.2 -0.01
Kite Realty Group 0.31 0.0 0.1 0.01
AmREIT 0.12 100.0 0.6 0.04
Saul Centers 0.66 -1.5 1.2 -0.01
Sources: RBC Capital Markets, SNL Financial