Retailer's Woes Spark
Concern About REITs
Concerns about Kmart Corp. have been driving investors away from real-estate investment trusts that own community shopping centers.
Investors in mall REITs breathed a collective sigh of relief recently as December retail-sales results beat the most dismal of holiday forecasts, with discounters Wal-Mart Stores Inc., Bentonville, Ark., and Target Corp., Minneapolis, saying sales were better than expected. But investors in community shopping-center REITs weren't so pleased as results at the Troy, Mich., discount retailer, which occupies stores in such shopping centers, fell short of expectations. Kmart posted a December sales drop and says it will miss estimates for the year and is exploring its financial options.
Community shopping-center REITs with exposure to Kmart include Kimco Realty Corp., New Hyde Park, N.Y.; New Plan Excel Realty Trust, New York; and Developers Diversified Realty Corp., Beachwood, Ohio.
The total returns -- stock price plus dividend -- of community-shopping-center REITs have fallen 0.2% year to date as of Jan. 14, according to the Morgan Stanley REIT index. Kimco's total returns were down 3.5%; New Plan's was off 4%; and Developers Diversified's was down 2.3%. The sector turned in strong total returns last year, especially after Sept. 11, on expectations that consumers would flock to grocery-anchored centers to stock up on necessities.
But experts say investors shouldn't worry too much about Kmart's effect if retail REITs' exposure to tenants with significant credit risk continues to decrease. In general, retail REITs' exposure decreased in the third quarter from the second quarter to 1.8% of mall tenants and 1.9% of shopping-center tenants, from 2.1% and 2%, respectively, according to a recent report released by Morgan Stanley. The firm's calculations are based on a methodology used by Edward Altman, a professor of finance at New York University's Stern School of Business and a leading bankruptcy authority.
"Given the soft retail environment, we expected more signs of financial distress," says Matthew Ostrower, an analyst at Morgan Stanley in New York. "Instead, fairly stable financial results keep most larger retailers off our watch list." But he cautions that the report doesn't incorporate retailers' fourth-quarter results, which, he says, given the high level of discounting during the holiday season, could cause credit quality to deteriorate.
The report identifies shopping-center REIT Federal Realty Investment Trust, of Rockville, Md., as having funds from operations with the greatest potential exposure to tenants considered high credit risks. Funds from operations is a commonly used measure of REITs' financial performance. Crown American Realty Trust, of Johnstown, Pa., and Glimcher Realty Trust, Columbus, Ohio, are the mall REITs with the greatest potential exposure.
Greg Andrews, an analyst at Green Street Advisors Inc. of Newport Beach, Calif., says, "There usually aren't many bankruptcies until you get to the new year, when retailers find out holiday retail sales didn't save the day. We expect to see some bankruptcy announcements this year. Most people are aware that this is that time of the year so it's already priced into the stocks."
James Kammert, an analyst at Goldman Sachs in New York, says his firm is maintaining its cautious ratings on shopping-center REITs for the time being. "We hope that we have captured all the potential bad news," he says. "It's very likely there are more shoes to drop. We'll have to see how the economy goes and what happens with some of these retailers."
As for mall REITs, Steve Sakwa, analyst at Merrill Lynch in New York, says investors can take comfort in the fact that the number of stores opening this year will decrease from 2001. "That coupled with the relatively positive sales numbers don't lead me to be any more pessimistic about the mall sector," Mr. Sakwa says.
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