This week several retail REITs announced first quarter results and the overall improvements were largely attributed to healthy NOI growth and sound balance sheet management practices. In addition, the overall retail market has seen a healthy increase in same-store sales growth and that translates into improved occupancy levels for landlords and REITs.
Starting with America's largest shopping center landlord, Kimco Realty Corp. (KIM) turned in a strong first quarter report card. The New Hyde Park-based REIT's financial results showed improvement on several fronts including increases in earnings and in funds from operations. Net income available to common shareholders for the first quarter of 2012, ending March 31, was $38.1 million, or 9 cents per diluted share. That compares to $14.1 million, or 3 cents per diluted share, for the same quarter last year. Kimco said its funds from operations were $126.2 million, or 31 cents per diluted share, for the first quarter of 2012 compared to $122 million, or 30 cents per diluted share, for the same period in the prior year. Raymond James explains Kimco's attractive valuation:
"The company's "back-to-basics" strategy has consistently produced positive same-store NOI growth (eighth consecutive quarters) with the U.S. portfolio contributing a greater percentage of the increase in 1Q, and given the improved retailer profitability and balance sheets, we expect the growth to continue."
Kimco said it ended the quarter with gross occupancy in its combined -- international along with United States -- portfolio of 93.1 percent and its U.S.-only shopping center portfolio with 93.0 percent. Both those amounts were increases, of 30 and 50 basis points, respectively, over the first quarter of 2011. Kimco shares Thursday afternoon traded at $19.63, on the upper end of its 52-week range of $13.55 to $20.31.
Retail Opportunity Investment Corporation (ROIC) also turned in strong first quarter results. The smaller shopping center REIT has a market cap of around $842 million and the REITs strategy of acquiring west-coast shopping centers has earned the company the title of being the local "sharp shooter" experts.
ROIC's pistol is packing plenty of gunpowder as it has only $192.9 million of debt outstanding, equating to a 22.9% debt-to-total market cap ratio. At March 31, 2012, 73.9% of ROIC's debt was at fixed interest rates and the company had $15.0 million outstanding on its $175.0 million unsecured credit facility. At March 31, 2012, 87.4% of ROIC's portfolio was unencumbered based on gross leasable area.
Including in first quarter results was a 10 percent increase in same-center cash NOI and a 100 bps increase in occupancy (currently 92.3 percent). With Q1 FFO of $8.4 million (0.17 per diluted share), ROIC also announced a quarterly cash dividend of $0.13 per share of common stock declared - an 8.3 percent dividend increase. The most recent closing price was $12.17 and the current dividend yield is 3.9 percent.
Excel Trust (EXL) also continues to build its retail credit-driven shopping center platform. During the most recent quarter the San Diego-based REIT closed on around $100 million of acquisitions while successfully issuing $92 million of perpetual preferred shares. The $407 million (market cap) REIT reported first quarter FFO of $6.5 million ($0.19 per share) and it declared a second quarter 2012 dividend of $0.1625 per share.
Gary Sabin, Excel Trust's CEO explains his company's latest results,
"We are pleased with the progress we made this quarter on executing our plan for growth. We successfully issued $92 million of perpetual preferred shares and closed on three high quality properties worth approximately $100 million. In addition we bolstered our pipeline with several attractive properties."
RJ Milligan, analyst at Raymond James explains Excel's recent performance and results,
"We reiterate our Outperform rating on shares of EXL given the attractive growth profile. The company has the sourcing capabilities to drive sector leading earnings growth over the next two years and the infrastructure in place to support the increase in asset base. While the majority of the shopping center REITs are focused on acquiring in the top ten markets in the U.S., Excel continues to look elsewhere, looking for off-market transactions at higher going-in yields with NOI upside. We believe the company's focus on quality assets outside of the overheated top 10 markets, unique access to off-market transactions, and growth potential offer investors a differentiated strategy within the shopping center REIT sector."
The triple net sector is also seeing signs of retail growth as National Retail Properties Inc. (NNN) posted a 28 percent increase in first-quarter revenue, as well as a 29 percent jump in profits. The Orlando-based real REIT reported net income available to common stockholders of $24.8 million, or 23 cents per share, in the three months ended March 31. That compared with net income of $19.1 million, or 23 cents per share, for the same period a year prior. The REIT reported $78.7 million in first-quarter 2012 revenue, which compared with $61.5 million in the year-earlier period.
As Raymond James, RJ Milligan, explains,
"We reiterate our Outperform rating on shares of NNN. We believe National Retail's stable portfolio and well-covered dividend makes for a good defensive stock, which is backed by a portfolio of quality assets and a very attractive 5.7% yield. Additionally, we believe management's recently updated 2012 acquisition guidance could see further upward revisions as the company takes advantage of the large spread between cap rates and interest rates."
Finally, Regency Centers (REG), America's largest grocery anchored REIT, posted strong fourth quarter results. Regency reported 1Q12 FFO per share of $0.55. Excluding one-time items, recurring FFO per share came in at $0.62, above our recurring estimate of $0.59 and the Street consensus at $0.55 (though consensus included a mix of recurring and non-recurring FFO estimates and thus is not a relevant comparison metric in our view). The upside relative to our model was driven by higher property NOI.
Regency also raised its recurring 2012 FFO per share guidance to $2.42-2.54 from $2.38-2.52. The company also increased its 2012 FFO per share guidance (which includes non-recurring items) to $2.30-2.42 from $2.23-2.39. The guidance range increase is driven by an increase in expected same-property percentage leased (now 93.25-94.25% from 92.5-93.5%) and same-store NOI growth (now 2.0-3.25% from +1.5-3.0%).
Raymond James upgraded Regency to outperform and the RJ Milligan, analyst for Raymond James explains,
"We are upgrading shares of REG to Outperform from Market Perform on what we believe to be an inflection point in portfolio fundamentals against the backdrop of improving retailer demand for space and limited new supply. While small shop leasing is improving, we still expect it to remain challenged over the near-term as the "mom and pops" wait on the sidelines. However, we believe Regency has taken the bulk of its medicine (shop move-outs, rent roll-downs), and expect to see positive same-store NOI growth going forward."
This week was a strong indication that the retail REITs are providing valuable risk-aligned growth and income. The sector has demonstrated that retail fundamentals are improving and the rebound is well underway. The capital markets arena is healthy as investors are continuing to gravitate towards high-quality assets in densely-populated markets. The second quarter promises continued asset pruning by most REITs and continued growth in core net operating income fundamentals.