Regional Mall REITs Ring Up Solid Quarter
Oct 31, 2007 1:34 PM
In spite of lackluster retail sales growth in recent months and a slowing economy, regional mall REITs continued their solid performance in third quarter 2007.
With five of the eight regional mall REITs filing their third quarter reports and a sixth, Feldman Mall Properties, reporting its delayed second quarter results, top-echelon players Simon Property Group and Taubman Centers Inc. emerged as the frontrunners, with rising occupancy levels and managements fees, while B-mall operators Pennsylvania Real Estate Investment Trust and Glimcher Realty Trust made headways in improving portfolio metrics. Meanwhile, Macerich Co. posted strong overall results, though it missed consensus estimates by a penny.
The solid performance for the sector came in the face of weak September same-store sales growth--which came in at 1.7 percent, below year-to-date average of 2.3 percent. ICSC expects that sales growth will improve somewhat in October, with 2 percent, and will rise to 2.5 percent in November and December. Meanwhile, economists are projecting full-year GDP growth for the U.S. economy to come in at about 2 percent, the weakest figure since 2002, with projections that 2008 won't be much better. Economists expect GDP to grow about 1.8 percent next year.
But the regional mall sector seems particularly well insulated from any problems that may crop up as a result of an economic slowdown because companies built so few new properties in the past decade, says Jason Lail, senior research analyst with SNL Financial, a Charlottesville, Va.-based research firm. Instead, most regional mall REITs have spent billions in renovating, redeveloping or expanding existing properties, invested internationally or built open-air mixed-use and lifestyle centers.
"There seems to be a consistent belief that class-A malls are not going to be affected by the current consumer market, and in the broader picture, you are not going to see a new saturation of regional malls," he says. "Competition will be non-existent."
The numbers for the third quarter bear this out.
Indianapolis-based Simon Property Group, which serves as the bellwether for the retail REIT sector as the largest company, according to Friedman, Billings, Ramsey analyst Paul Morgan, beat consensus estimates by $0.04 this quarter, with FFO per share of $1.46. The figure represents an increase of 12.3 percent from the third quarter of 2006. Same store NOI for the company's regional malls rose 5.6 percent, while NOI for its outlet center division rose 9.4 percent.
Simon increased both rents and occupancy levels throughout its portfolio--at regional malls, occupancy climbed 20 basis points this quarter, to 92.7 percent, while the outlet centers are now near full occupancy, at 99.6 percent. The number represents an increase of 30 basis points. Rents at regional mall properties rose 4.8 percent, to $36.92 per square foot, while rents at outlet centers grew 5.8 percent, to $25.45 per square foot.
Simon also posted an 8 percent increase in sales per square foot at its outlet centers, to $499. CEO David Simon attributes this robust growth to the influx of foreign tourists eager to take advantage of the weak dollar. Sales at regional malls went up 3.6 percent, to $491 per square foot.
Starting in July, Simon also started receiving management fees from its partner Farallon Capital Management for its work on the Mills Corp. portfolio. Mills rents, at an average of $35.10 per square foot, still trail Simon's by about 5 percent and have a lower occupancy level, at 88.5 percent, but company executives say they already started work on improving those numbers. The Mills portfolio contains 38 properties--about half of which are value megamalls, while the rest are more traditional regional malls.
During Simon's conference call on Oct. 29, chairman and CEO David Simon said the company has seen minimal impact from the slow retail sales growth in recent months, with most tenants still planning to go ahead with new store openings. "There is a lot of economic uncertainty out there and it would be naïve to suggest that there won't be some impact," he said. "But we actually embrace these economic changes, that's when we have done some of our best work."
Simon expects to continue undeterred through the rest of 2007 and into 2008, though company executives concede they might be more conservative with new project rollouts going forward.
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