Simon Property Completes Mall Acquisition

INDIANAPOLIS ( TheStreet) -- Shares of Simon Property Group ( SPG) rose 1% on Tuesday after the real estate investment trust completed its latest acquisition.

Simon Property Group, the largest mall owner in the U.S., said late Monday it completed its $2.3 billion acquisition of 21 outlet shopping malls from Prime Outlets Acquisition.

Under the terms of the deal, first announced last December, Simon paid $700 million for the Prime's interests in Baltimore-based Prime Outlets and took on $1.55 billion of Prime's debt and preferred stock.

The deal was amended for Prime to retain several properties, including Prime Outlets-Saint Augustine and the Livermore and Grand Prairie development projects.

RBC analyst Rich Moore noted that Simon said its retail tenants are looking at recovery plans in anticipation of economic recovery after weathering the financial crisis of the last two years.

"Management indicated that, in general, retailers appear to have identified the bottom to the current economic environment," Moore said. "Most have moved to a mode of low expense growth and are maintaining reasonable levels of inventory to guard against a further deterioration in the economy. Likewise, most express a higher level of confidence to Simon in pursuing further store openings or maintaining existing stores."

Retail bankruptcies have "returned to more typical levels," he added, which should help keep Simon's occupancy rates at healthy levels.

While industry trends trends in the retail-focused real estate investment trust sector have been improving, trouble may yet be on the horizon.

>>Retail REITs: Trouble Ahead

Real estate investment trusts in the retail sector have suffered in recent years as consumers' cutbacks in discretionary spending led to softer demand for retail space. Many retail-focused REITS suffered through tenant bankruptcies and store closings, and some reduced the rents they charged to keep retailers.

While firms such as Developers Diversified Realty ( DDR), CBL & Associates Properties ( CBL) and Simon Property Group have reported improving occupancy and rental trends in their recent quarterly reports, there remains a few key obstacles for REITs that rent space to retailers.

Low consumer confidence and high rates of joblessness keep Americans from opening their wallets, hurting retailers and, in turn, hurting retail REITs. Soft consumer confidence often leads to pullbacks in consumer spending which is widely considered to account for 70% of the U.S. economy.

Retail behemoth Wal-Mart Stores ( WMT) also poses a potential threat to retail REITs, according to equity research shop Stock Call.

Wal-Mart has been expanding into the grocery business, posing a threat to grocery store chains like Kroger ( KR) and Safeway ( SWY). Grocery stores are generally the primary traffic anchors for retail developments and strip malls, Stock Call pointed out, and Wal-Mart's growing grocery business could steal grocery shopper traffic away from higher-priced chains.

"While two companies in this retail-focused REIT sector have Wal-Mart as a tenant, Wal-Mart owns the vast majority of its own stores meaning the REIT-Retail sector could see a significantly negative impact if Wal-Mart's expansion proves successful."

Even so, Stock Call said recent financial reports from retail-focused REITs showed that "occupancy and tenant net operating incomes have been trending upward toward pre-recession levels."

It was a welcome trend after high vacancy rates and softer rental demands kept much of the sector under tight pressure for some time.

Strengthening average rents have moved the needle higher in terms of industry fundamentals, Stock Call said, pointing to a recovery of sorts.

Developers Diversified Realty, a mall and shopping center owner, recently narrowed its quarterly losses thanks in large part to improved business activity, higher demand and increased occupancy.

CBL & Associates Properties recently said occupancy increased by 160 basis points in its recent quarter.

Simon said its recent strengthening was driven by lower expenses and higher occupancy at its malls and outlet centers.

Separately, shares of Apollo Commercial Real Estate Finance ( ARI) were upgraded Monday to outperform, from market perform, by FBR Capital, citing the company's recent success getting attractive returns on its loan portfolio. The REIT recently grew quarterly earnings by nearly 40% year-over-year.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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