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Tickers in this Article: SPG, GGWPQ.PK, KIM, TCO, BXP, VNO
The number one shopping mall REIT, Simon Property Group (NYSE: SPG), sees better things ahead despite slashing its dividend after its recent first-quarter earnings report and the current difficulties in the real estate market. The REIT's FFO, or funds from operation, the customary measure for REITs rather than earnings per share, showed improvement, mostly on lowered costs, but the company still trimmed its dividend to conserve cash through these challenging times. But is the company's mild optimism for the economic climate for REITs next year warranted?

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Perilous Malls
General Growth Properties (OTCBB: GGWPQ), the nation's second-largest mall owner, filed for Chapter 11 bankruptcy protection on April 16, 2009, a casualty of the potent downward forces in the recession, with the loss of shoppers, tenants and difficulties in the credit markets all converging to severely pressure commercial REITs. In comparison, Simon Property, which saw its FFO climb to $476.8 million ($1.61 per share) from $420.1 million ($1.46 per share), has obviously performed well despite the brutal conditions for shopping center REITs. Simon had previously gone to a combination cash and stock dividend (which REITs are now allowed to do), the total value of which was 90 cents a share, but was lowered to 60 cents per share. The intent, Chief Executive David Simon said, is to get through the severe downturn and eventually "restore the full cash dividend". The company recently had a stock offering and lowered its full-year FFO outlook.

Strip Centers Hurt as Well
Kimco Realty Corp. (NYSE: KIM), which operates strip centers, had to deal with tenant bankruptcies and an occupancy rate of 92.6%, due to the harsh economy, which dampened their FFO to 43 cents a share from a year ago 64 cents, or $117.8 million, down from $164.4 million. With consumers pulling away from large malls more to the strip centers in recent years, Kimco would perhaps have been expected to fare better.

Taubman Centers Inc.
(NYSE: TCO), another large mall operator, saw a nearly 3% increase in its year over year first-quarter FFO which, excluding special charges, would be a 7.4% increase from the quarter ended March 31, 2008. Taubman's occupancy rate ending the quarter for March 31, 2009 was 88.6%, so their strong FFO performance in the face of tenant bankruptcies is noteworthy.

The depth of the economic downturn has seen both the strip centers and malls strongly affected. Given consumer wariness, it's not clear how soon either will rebound. For the large mall operators, though Simon and some others are clear exceptions, the fate of REIT giant, General Growth Properties, may have signaled serious permanent damage to the large mall concept.

Office REITs Feeling the Pressure Too
Boston Properties (NYSE: BXP), owner of prime office buildings on the east coast, saw its FFO for the quarter rise 3%, but still plans to cut its dividend to 50 cents from 68 cents per share, a move that would save $100 million. Boston Properties' move is a proactive one, as the company is not under the kind of stress some of the shopping center REITs are. Vornado Realty (NYSE: VNO), a Washington and New York office building REIT, reported a slight increase in FFO, excluding special charges. The softer New York market was offset by the stronger Washington one, showing, as does Boston Properties' performance, that there is currently more resilience in the office building market than the shopping center and mall market.

While the office REITs have not experienced the dramatic pressures that the shopping center REITs have, the credit market scarcity has dampened prospects in both areas, at least for expansion, if not survival for the weaker players. There is an estimated $1 trillion credit exposure to the commercial real estate market, about half of what the consumer or residential credit market had been. But values haven't plummeted for commercial real estate in the same way, though the business has been highly leveraged in the last few years. Look for an earlier and stronger rebound in the office building REITs than the shopping center REITs, as the office sector has held up better throughout the economic downdraft.

So Should You Buy?
That's always the question for investors. Neither Simon's nor the other REITs move to a combination cash and stock dividend has been appealing, as income investors often buy REITs for their cash yield. Although the stock prices have been beaten into the ground, this doesn't necessarily make these companies attractive yet. It might be better to see FFO increases for a couple of quarters, wait until the cash dividends are fully restored and keep an eye on both the debt load as well as their access to the credit market. Though Simon is optimistic about their near-term future, we're not yet convinced. Be a bit more cautious and monitor these REITs and real estate market conditions; watching and waiting seems to be the best course for now. (Learn about how REIT valuations in our article: Basic Valuation Of A Real Estate Investment Trust)

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