Smooth Sailing

Retail REIT performance exceeded consensus analyst expectations in the first quarter, with companies across the board posting strong FFO and earnings growth. And with consumer spending holding up, observers are bullish for the rest of the year, meaning more strong quarterly results to come in addition to continued appreciation in stock prices.

So far this year, regional mall REITs have posted weighted average total returns of 14.1 percent, with FFO growth estimates for 2007 of 6.8 percent, according to a comparative valuation survey of 21 retail REITs from Citigroup. Meanwhile, the weighted average total returns for shopping center REITs was 6.3 percent, with projected FFO growth of 10.1 percent. Last year, regional mall REITs posted total returns of 27.2 percent while shopping center REITs came in at 37.4 percent.

Among the best performers year-to-date in the regional mall sector has been General Growth Properties, which posted total returns of 21.6 percent, as well as Simon Property Group with 13.3 percent and Taubman Centers with 10.8 percent.

General Growth's same-store NOI for the first quarter of 2007 was only 0.5 percent compared to 8.5 percent in the first quarter of 2006, due to lease termination fees carried over from last year, but its occupancy rate, at 92.9 percent, was 1.8 percent higher than during the same period last year and its sales per square foot increased more than 3 percent since the first quarter of 2006 to $458.

In the shopping center world, Equity One, with total returns of 10.6 percent and FFO per share of $0.40, Acadia Realty, with total returns of 9.9 percent and FFO of $0.36, and Kimco Realty, with total returns of 8.6 percent and FFO of $0.78, are posting strong performances. “All of them are meeting and beating expectations for the first quarter,” says Moore. “There is demand for space in all segments — primary markets, secondary markets, regional malls, lifestyle centers, strips.”

The conclusion? Richard Moore, analyst with RBC Capital Markets says expect to see rising stock prices and more joint ventures with institutional partners, of the kind that Inland Western Retail Real Estate Trust Inc. signed with a Morgan Stanley pension fund client last month for the acquisition of up to $1 billion in shopping centers around the country. With performances this strong, institutional investors will continue to be interested in retail.