Regency Centers Trust

In this report, we focus on two things: 1. whether the firm has an ability to raise cash from operating enough to keep its status as a REIT. 2. If yes, whether it is able to continually enlarge this ability. Therefore, a healthy REIT should be identified by its capability of generating cashes from operating. We will discuss on the first question in debt and liquidation section and second question in growth section. However, we truly believe, given structure of portfolios of a retail REIT, the growth will be determined heavily by the whole retail industry environment, which is also the driver behind acquisition and development activities. We thus will analyze shopping center industry in an independent report.

Current economy

Starting from 2007, the sub-prime mortgages crisis did not yet impact on earning or dividends but on the estimation of future risk and the expectation of future performance. A direct result of sub-prime mortgages crisis is tight debt market and the weak stock market make financing from market more difficult. In addition, the uncertainty of economy also causes firms more cautious of development and acquisition activities. Therefore, we will see much more negative impacts on those firms who have large maturing debts in near future and that heavily depend on acquisition to gain growth. Moreover, the current economy may influence shopping centers industry by reducing consumers’ spending. The retailers may also encounter the financial problems. It thus causes concerns on firms’ ability to charge higher rental rate, receive more rents from cost reimbursements and keep occupancy rate. High energy costs may cause consumers to reduce visits to shopping centers.

Interest Rate Risk

The effect of changes in interest rates may mainly include required return rate, the interest expense for variable rate debt, and the fair value of the outstanding debt. Under current situation, there is a potential possibility that Fed will turn the decreasing trend, considering a strong dollar may be the key to solve many problems currently. If the interest rate goes up the investors will require high return rate, resulting in a higher cap rate. Swap can help firms hedge the risk when rate goes up. But if the rate goes down they have to pay more than market cost.

Investment Positives (company-specific)

REG focuses on the relationships with major national retailers and build a mutual interest relationship with them and meet their demands, such as Kroger, Publix and Safeway. REG generally have an executed lease from the anchor before starting construction. The bigger retailers will be more likely to survive in weak economy. Most of lease contracts between REG and the anchors will not expire in the next few years, and a huge percentage of revenue of REG come from these contracts. We think the slowing economy, which will impact the revenue of all

retailers, will have a much smaller impact on the revenue of REG. In the next two years, 62% REG’s leases (GLA) are not going to expire.Grocery Anchor Percentage of Company owned GLA Kroger 8.8% Publix 6.8% Safeway 5.3%Super Valu 3.1% Source: company data

Our analysis indicates that grocery retailers are those who received the smallest impact of negative changes in economy and housing market. This section has been able to keep stable sales growth. Since the most top anchors of REG come from this section the stability of its rent flow may benefit its anchors’ performance.

High rent Per Sq. Ft The quality of FRT property is also reflected in its quite high base rent Per Sq. Ft, which is $36.39. There is even an increase of $17 compared with the end of 2007. This could be the best present of FRT’s strictly following its operating principle. When compared with the numbers of its major comparators, DDR ($12.41, $0.25) and REG ($20.47, $3.32) FRT possess huge competition advantage in terms of revenue and its growth.

REG’s strategy that development must be driven by customers may be one of its advances in the down turning economy. Its growth less depends on the revenue’s increase, which is usually accompanied by aggressive development and capital spending. We think that this strategy can mitigate the risk of their in-process development prosperities.

REG’s capital spending (5 year average growth rate) is only 2.04% compared with industry average 5.59%. It currently has $1.1 billion of properties under development, not a significant proportion compared with its $42 billion total asset. Accordingly, its sales growth is smaller compared with industry average, 5.85% and 14.75% separately. However, REG makes a 14.27% EPS (5 year’s growth), which is far above industry average number 5.89%. Although this means REG may have a large debt ratio (in fact, it is) this can be explained more by its high profit margin and management effectiveness.

REG Industry

Operating Margin - 5 Yr. Avg. 44.87 25.21Return on Assets - 5 Yr. Avg. 4.01 1.88Source: Yahoo finance

REG’s debt-to-equity ratio calculated is 1.33 at end of June 2008. The company ratio is relatively close to the industry average ratio of 1.01, especially when compared with 1.72 of FRT and 2.16 of DDR, which are their major competitors, REG’s relative low ratio may be its

advantage in negotiating for borrowing in currently specific situation. Although REG is not utilizing high leverage for operation, it avoids high financing risk of default when debt is due.

Investment Risks (company-specific)

Focus on areas weak to the changes in economy.

Although California accounts for 22% of total GLA (consolidated properties), those areas other than coastal provide 78% of total GLA ( consolidated properties) . Only Florida, Texas and Ohio account for almost 40% of the total, and the percentage of the revenue from those three areas has a similar number. Compared with coastal areas, it is reasonable to think that those areas are weaker to change in economy. Moreover, considering the lower entry barrier in those areas the competition that REG have to face may be much larger as well.

Revenue will depend on the performance of a couple of major tenants.

It is true that REG’s revenue number may benefit from its long contracts with large, national retailers. However, the extent to which it will benefit from concentrating on big retailers relies on how bad the economy will be. If the economy does not get so slow that a considerable percentage of tenants get into bankrupt a diversified portfolio may better serve purpose of REG to mitigate risk resulted from changes in some certain retail sections.

Illiquidity of property caused by partnership structure

REG’s partnership structure may make it difficult to liquidate properties when it is a better choice to the whole firm. Because partners who own the property will have to pay extra taxes if the property were sold. Therefore, they may disagree with such decisions. This conflict may become obvious as down turning economy may cause some property less profitable, create more acquisition opportunities, and make borrowing a less preferred way to finance such activities.

Balance Sheet and Capital Structure

Common Stocks and OP Unites On a fully diluted basis, REG had 76 million shares of common stocks outstanding as of June 30 and 0.5 million OP units option. This means that as of June 30 REG had 76.5 million shares and units outstanding that are not owned and can be converted into common stock on a one-for-one basis at the holder’s and 99% controls partnership unites.

Preferred unitsAt June 30 REG has one series preferred units issued - the Series D Preferred Units of $50.0 million face value with a fixed distribution rate of 7.45%, which is about 0.93 million quarterly dividend. The Preferred Units may be called by Regency (through RCLP) at par beginning

September 29, 2009 and may be exchanged by the holder for Cumulative Redeemable Preferred Stock at an exchange rate of one unit for one share at beginning January 01, 2016. We note that on November 27, 2006, REG redeemed $135 million 8.5% Series B Cumulative Redeemable Preferred Shares at their face value.

Preferred stock underlying five million depositary shares. Series Shares Liquidation Preference Distribution Rate Callable By CompanySeries 3 3,000,000 $ 75,000,000 7.45% 04/03/08Series 4 5,000,000 125,000,000 7.25% 08/31/09Series 5 3,000,000 75,000,000 6.70% 08/02/10 11,000,000 $275,000,000Source: company data Stock-based compensation when Regency issues common shares as compensation it receives a like number of common units from the Partnership. Therefore, REG’s stock based compensation will not dilute other shares holders’ stocks.

Debt Notes Payable (as of June 30, 2008, in thousands) :

Fixed rate mortgage loans $ 257,024 Variable rate mortgage loans 5,540 Fixed rate unsecured loans 1,597,431 Total notes payable 1,859,995 Unsecured credit facilities 334,667 Total $ 2,194,662

Scheduled Principal Payments by Year Total Payments Percentage of Total

2008 $ 21,712 1%2009 63,050 3%2010 181,622 8%2011 (includes Unsecured credit facilities) 590,284 (334.7 million credit) 27%2012 254,571 12%Beyond 5 Years 1,084,072 49%Unamortized debt discounts, net (649)Total $ 2,194,662 100%Source: company data

As of June 30, 2008, REG’s debt includes secured notes, unsecured notes and unsecured credit facilities. This translated unto roughly $2.2 billion of aggregate debt outstanding at a weighted average interest rate of 5.76% and weighted average maturity of 5.5 years (including line of credit). Roughly 87%, or $1.93 billion of the total, is unsecured debt, and the remaining is secured debt. About 84.5% of the total debt is fixed rate debt with weighted average fixed

interest rate of 6.18%. Only 15.5% is variable rate debt with current average rate 3.48%. REG’s corporate credit and senior unsecured ratings is BBB from Standard and Poor’s Rating Services. REG also has $643.2 million unconsolidated debt, of which 94.7% had weighted average fixed interest rates of 5.3% and the remaining had variable interest rates based on LIBOR plus a spread in a range of 50 to 135 basis points.

2Q08 Debt Covenant Analysis

Minimum Net Worth $1.9 billionTotal Liabilities to Gross Asset Value (before depreciation) 49.2%Recourse Secured Indebtedness to GAV 6.1%Consolidated EBITA to consolidated interest expense 227% EBITDA to Fixed Charges 283%Dividend distribution to FFO (for common shareholders only) 74.7%Total unsecured debt to Gross asset value 40.1%Unencumbered adjusted NOI to unsecured interest expense

GAV (before depreciation)= 4,276,268+538,779=4,815,047EBITA (consolidated 2Q08) =income from continuing operation+interest expense-gain from sale=31,397+23,453=54,850Interest expense (consolidated 2Q08)=net interest expense + interest income=23.453+657=$24,110Total unsecured debt= unsecured fixed rate debt+unsecured credit facilities=1,597,431+334,666=$1,932,097 FFO (for common shareholders, consolidated) =net income (for common shareholders) + depreciation – gain from sales=31,866+26.929= $58,795

Unsecured credit facilities REG’s current balance of unsecured credit facility is $334.7 million. REG has currently $941.5 million of total capacity of unsecured credit facilities, including three-years term loans of $341.5 million ( March 2008) with a variable interest rate equal to LIBOR plus 105 basis points and a four-years line commitment of $600 million ( Feb 2007) with an interest rate of LIBOR plus 55 basis points. Risk on variable rate debtAt June 30, 2008, 84.5% of REG’s total debt had fixed interest rates, compared with 89.4% at December 31, 2007. REG is supposed to limit the percentage of variable interest rate debt to be no more than 30% of total debt. Based upon the variable interest rate debt outstanding at June 30, 2008, if variable interest rates were to increase by 1%, its annual interest expense would increase by $3.4 million.

Liquidity To keep its status to be REITs, REG has to use at least 90% of its taxable income to pay dividends. Instead of paying attention to REG’s ability to pay interest charge and other operating expense, which are deductable for tax, we think it is also necessary to monitor its ability to pay scheduled principle payment (mortgage and capital leases) and maintaining capital expenditure, which, for a healthy firm, should be covered by remaining cashes from operating (after dividends) and gains from properties sales. It is reasonable to think REG should be able to use proceeds from property sales to pay the cost of development and redevelopment and use new unsecured debt borrowed to repay its old ones. The

volatility of real estate price may reduce REG’s proceeds from sales and thus hurt its ability to pay the cost of in-process development and redevelopment.

Cash flow Six months ended June 30 of each year (in millions)

2008 2007 2006 2005

Net income $68 $106 $107 $82Dividend paid $111.4 $95 $91 $81(Growth rate) 17% 4% 12%Dividend per share and unit $1.45 $1.32 $1.19 $1.1(Growth rate) 10% 10% 10%

Net cash provided by operating activities $117 $ 121 $108 $98Gain from property sales $7.8 $48 $59 $29Capital expenditure to improve properties ($6.1) ($5.1) ($4.8) ($5.2)Scheduled principle payment to mortgage loans ($2.3) ($2.1) ($2.3) ($3.2)

Ratio of dividend paid to net cash from Operating minus maintaining capital Expenditure and principle mortgage payment 103% 83% 90% 90%Source: company data

REG has been trying to keep 10% growth rate for its dividend payment. While we do not worry too much about its status as REITs because taxable income has not grown at same rate, it is reasonable to concern on whether it is able to raise sufficient cashes from operating activities to keep its dividend payment at that rate. The ratio of dividend paid to net cash from operating (after maintaining capital expenditure, capital lease payment and principle mortgage payment) has been pretty high and even over 100% in 2008. This mean if operating activities can not create more cash REG will have to either lower its dividend growth rate or borrow money or use proceed from sales to pay dividend. The proceeds from sales of property may also face the pressure of capital demand for development and acquisition. It is always not easy to liquidate the property in weak economy.

Other cash obligations and resourceREG’s estimated net development cost at completion is $475 - $525 million. REG has 58 million, $176 million, $ 250 million and $250 million maturing unsecured debt in 2009, 2010, 2011 and 2012, respectively. REG still has $600million capacity of unsecured facilities. REG is cautious of raising capital from market while its access to market is good. It may think doing so will dilute the dividend payment and make it more difficult to keep a constant growth. Net income In addition, we see net income from operating has been increasing without too much negative impact from down turning economy. However, we must realize that REG is benefiting from its business strategy of focusing on major retailers. This can help it gain a constant rent income. But REG may be able to negotiate for the same rent rate as a large percent of lease are going to expire in the next three years.

Leveraged ratio Currently, REG has a debt –to- total market cap ratio of 52.6% (market cap $4.2B) . On Dec 31,

2007, this number is 44.5%. The debt plus preferred –to- total market cap ratio is 58.7%. Based on the data of 2Q08, REG’s fixed charge ratio and interest ratio are 3.4 and 2.8, separately. (we used FFO rather than AFFO in calculating coverage ratios. Since most of capital expenditures are used to acquire new properties and since those properties can keep their fair value in the future we think capital expenditures should be deducted from FFO)

Dividends policy REG paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 40 consecutive years. REG currently pays a quarterly common stock dividend of $0,725 per share or unit ($2.9 annually), which presents an increase of 10% from the same period of last year. This equates to a current 4.9% yield.

REG Company Background and Current Portfolio Overview

Company background Regency is a qualified real estate investment trust (“REIT”), which began operations in 1993. All of its operating, investing and financing activities are performed through its operating partnership, Regency Centers, L.P. (“RCLP”), RCLP’s wholly owned subsidiaries, and through its investments in co-investment partnerships with third party investors.

Regency currently owns 99% of the outstanding operating partnership units of RCLP.At June 30, 2008, REG directly owned 232 shopping centers representing 25.8 million square feet of gross leasable area. It owns partial interests in 211 shopping centers representing 24.8 million square feet of GLA. Its base rent Per Sq. Ft is $20.47(consolidated properties). This present an increase of about $2 compared with the first quarter of 2008 and an increase of $3 compared with the last quarter of 2007. REG is a grocery anchored REITs. As of 1 Aug, 2008, REG’s Market cap is 4.1B. No tenant represents more than 6% of the total of our annual base rental revenues and our pro-rata share of the base revenues of the Unconsolidated PropertiesCurrent portfolio overview In total, the real estate projects were 88.6% leased at June 30, 2008. In total, the joint venture properties in which we own an interest were 95.8% leased at June 30, 2008. REG’s market is not quite diversified. It concentrates on a couple of areas. The top 3 markets account for more than 50% of its total rents. Its top 10 markets account for of total rents.

REG – top 10 markets by 2Q08 (Based on same stores and cash)

State Annualized Base Rent % of Ann. Base Rent California 115,408,210 27.1% Texas 55,663,492 13.1% Florida 54,284,370 12.7% Virginia 25,520,024 6.0% Georgia 24,288,017 5.7% Ohio 19,937,467 4.7% North Carolina 16,304,614 3.8% Colorado 15,523,821 3.6% Oregon 13,895,874 3.3% Washington 13,736,825 3.2%

Total 83.2% Source: company data

Internal Growth from same-centers

Statement (based on same centers, consolidated properties)

Quarters NOI growth % leased Rent growth

2Q08 (2Q07) (2Q06) 2.2% (4.5%) (3.4%) 94.6 (95.2) (95.4) 9.3% (14.4%) (13.1%)

1Q08 3.1% 94.9 12.6%

4Q07 3.3% 95 11.3%

source: company

For the quarter ended June 30, 2008, same property NOI growth was 2.2%. Operating properties were 94.6% leased. Rent growth was 9.3%. This presents a decrease of 230 bps in NOI growth rate from 2007 and 120 bps from 2006. Occupancy decreased by 60 bps and 80 bps from 2007 and 2006, respectively and 30 bps from last quarter. Rent growth decreased by 5.1% and 3.8% from 2007 and 2006, respectively. Rent expense increase faster than rent. This means that REG is experiencing difficulties to find high quality property. According annual-based increase for rental income and rental expense is 12.9% and 18.4% for 2007 and 2006 separately. For quarter of 1Q08, rental income increase by $10,958,000 to 122,721,000 from prior year, presenting an about 10% increase. For the same quarter, rental expense increased by 12% from prior year. Therefore, there is a reason to concern on REG’s growth in 2008.

In fact, even ruling out the income from discontinued operatin the net income from operating activities still keep same increase from prior year. However, an large decrease in account payable and accrued expense cause an decrease in cash inflow. Although we did not know yet what caused this it make us to worry about the REG’s ability to continue its high dividends rate.

Capitalization cost plays a role in cash flow. In 2007, REG spend a large expenditure on the development and redevelopment and capitalized most of the cost involved in the development, including the interest cost. Therefore, we must realize that net income only does not reflect the real cash flow.

External Growth from acquisitions and Dispositions

Acquisitions Data (including co-investment partnership, only from the third part)

GLA Value Yield

08- To date 390 (thousand) $18 million 6.43%07 444 $194 6.19%06 281 $135 6.49%05 12874 $939 6.19%

Dispositions: Data ( including co-investment partnership)

GLA Value Cap rate

2Q08 956 $32 million 7.43%

07 335 $41 7.72%06 1,068 $148 6.8%05 1,872 $138 7.54%

Source: company data

We can see 2005 is the most active year for REG in terms of acquisition activities. It has still been active in the past two years. However, REG may not go to be active in acquisitions in the remaining year and next. This may be a reflection of lack of high quality property available in the market and also of its pursuing this type of target. This may be a reflection of price volatility. (six months ended 2008: $32million dispositions with only gains from sales of $7.8 million). This may mean the demand of market is decreasing.

Growth through Development and Development sales

It looks REG has not invested a large money in new development in the recent 2-3 years. Most of in-process development projects are not new ones. Development starts has been decreasing from $503,319, $378,831, $300,000, $29,387 to $23,405 in the past years. Since REG’s development principle is tenants-driven this also reflects retailers are cautious of the uncertain economic situation. As 2Q, 2008 Regency had 48 projects in process with an estimated net development cost of$1.1 billion and an expected return of 8.8%. As 2Q07 Regency had 50 projects in process for an estimated net development cost of $1.1billion and an expected return of 8.96%. As 2Q06, Regency had 52 projects in process for an estimated net development cost of $1.1 billion and an expected return of 9.1%. As 2Q05, Regency had 39 properties in process for an estimated net development cost of $735 million and an expected return of 9.5%.

Development sales:

Data of development sales (REG’s share including co-investment)Year GLA Value Cap rate

08 192 $20 million 6.44%07 845 $197 6.13%06 971 $130 6.51%05 831 $165 7.24%Source: company data

Joints venture REG’s investment in real estate partnerships was $423.1 million as of June 30, 2008. The major purpose for REG to invest into co-investment partnership is to earn management fees from those real estates. Compared with the pro-rata share of net income REG earns from each of the partnerships, which is $1.2 million in the 2Q08, most of REG’s earnings from those joints venture is the fees that JRs pay for asset management, property management, leasing, investing,

and financing services. During the three months ended June 30, REG recorded fees from these joint ventures of $11.8 million, which accounts for 13% of REG’s net operating income. REG has joint ventures with three unrelated co-investment partners and an open-end real estate fund ("Regency Retail Partners" or the "Fund"). Those three co-investment partners are Columbia, Regcal, and MCWR. The fund is an open-ended, infinite life investment fund.

Ownership 2008

Macquarie CountryWide-Regency (MCWR I) 25.00% $ 39,409 Macquarie CountryWide Direct (MCWR I) 25.00% 6,475 Macquarie CountryWide-Regency II (MCWR II) 24.95% 201,268 Macquarie CountryWide-Regency III (MCWR II) 24.95% 699 Macquarie CountryWide-Regency-DESCO (MCWR-DESCO) 16.35% 27,568 Columbia Regency Retail Partners (Columbia) 20.00% 33,153 Cameron Village LLC (Columbia) 30.00% 19,789 Columbia Regency Partners II (Columbia) 20.00% 18,759 RegCal, LLC (RegCal) 25.00% 15,242 Regency Retail Partners (the Fund) 20.00% 18,466 Other investments in real estate partnerships 50.00% 42,310 Total $423,138 surce: company

Shopping Center Industry Analysis Report

General Summary

A shopping center is a group of retail and other commercial establishments that is planned, developed, owned and managed as a single property, with on-site parking provided. The center’s size and orientation are generally determined by the market characteristics of the trade area served by the center. The three main physical configurations of shopping centers are malls, open-air centers, and hybrid centers. It has four main types:

1. Regional Mall: This center type provides general merchandise (a large percentage of which is apparel) and services in full depth and variety. Its main attraction is the combination of anchors. 2. Power Center: A center dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs, or "category killers," i.e., stores that offer a vast selection in related merchandise categories at very competitive retail prices. 3. Lifestyle Center: Most often located near affluent residential neighborhoods, this center type caters to the retail needs and “lifestyle” pursuits of consumers in its trading area. These centers may be anchored by one or more conventional or fashion specialty department stores. 4. Community Center: A community center typically offers a wider range of apparel and other soft goods than the neighborhood center. Among the more common anchors are supermarkets, super drugstores, and discount department stores.

Historical Role:

Shopping centers play a crucial role in a regional economy as they provide high visibility for commercial exchanges and sustain a number of jobs directly and indirectly in regional economies. In facilitating the transaction between consumer demands and industry production, the shopping center is a cornerstone of the modern service and goods-focused United States economy.

New Trends:

As suggested earlier, shopping center industry and the capital markets have become closely aligned over the past decade. This convergence has been healthy for the shopping centers and has provided access to greater capital flows than would have been possible in a more segregated market setting. The retail sector has fared better on this front as the consumer-lead economy has translated to strong performance.

Retail REITs’ appearance allows investors of shopping centers to explore finance resource from public and produce a huge impact on this industry. It changed this industry’s structure and even the definitions and classifications. Even though there are number of variations in how individual REITs describe their shopping centers REITs can usually position themselves with their holding of retail. In fact, this report is written just to analyze retail REITs by putting them into some certain industrial environment. The classifications of retail REITs based on their major anchors provide a particular way to analyze. Potential issues:

This dramatic influx of capital may not be sustainable over the long term. Indeed, as the allocation of capital migrates back toward long-term averages, especially as real estate market crash, capital flows are likely to regress to more sustainable levels. Another challenging is the underlying argument for a fundamental shift toward non-auto dependent “urban retail” formats and away from more traditional shopping centers. While the development of “urban retail” solutions is an opportunity for the retail industry, if efforts to contain sprawl and create more compact cities are not tempered with an understanding of retail market fundamentals, the end result could have far-reaching consequences for the sector. It could create tremendous inefficiencies and skew development toward non-sustainable retail options. Increasing pressure to embrace such retail solutions could also make it even more difficult to develop traditional shopping center formats that have proven track records in their ability to satisfy consumer demand. Structure and Approach of the Report:

This is not a general analysis of shopping centers industry. It has a focus on those changes in this industry which have close relationships with the performance of REITs. It tests the changes from the following three aspects: 1. Macroeconomic impact; 2 geographic and demographic factors; 3. Tenants-retail industry.

1. Macroeconomic impact and financial crisis

The crisis of the Wall Street will bring impact on every aspect of this industry from capital cost, new development plan to revenue of tenants. The tightened debt market and the weak stock market make financing more difficult. The uncertainty of economy also causes increasing caution in development and acquisition activities. Moreover, the decreasing consumers’ confidence will cause declining of consumers spending. The retailers may also encounter the financial problems. It thus causes concerns on firms’ ability to charge higher rental rate, receive more rents from cost reimbursements and keep occupancy rate. High energy costs may cause consumers to reduce visits to shopping centers. The effect of changes in interest rates may mainly include required return rate, the interest expense for variable rate debt, and the fair value of the outstanding debt.

2. Geographic and demographic factors.

Except for the traditional geographic and demographic advantage in coastal areas, the demographic characteristics of the Hispanic population in the U.S should be more considered in analyzing performance of shopping centers industry. Boosted by steady income gains and high population growth, Hispanics’ consumer spending will continue to significantly outpace that of the non-Hispanic population. It is estimated that the average annual growth rate of spending (in nominal dollars) over the next 20 years of 7.6%—compared to a 4.9% average for the non- Hispanic population. This means that Hispanic consumer spending will grow to $3.1 trillion or 13.7% of the U.S. total in 2025, given the historical concentration of the Hispanic population in the California, Texas, Florida and New York. But in recent years the Hispanic population has been growing rapidly in other regions of the country, and these areas represent new growth opportunities for selling to the Hispanic population. For Georgia and North Carolina double-digit growth rates of consumer spending is expected through 2010.

3. Tenants-retail industry

In shopping centers industry the indicators that measure the performance of shopping centers are sales, traffic, rents, and occupancy and capitalization rates of the centers. It is not easy to directly analyze every indictor for every single shopping center or some type of shopping centers. However, analyzing retail industry may be a right way to do this because a shopping center‘s performance, as measured by the indictors mentioned above, relies only on its tenants’ performance. For example, the sales and traffic will be reflected directly by sales and traffic of their tenants; rents and occupancy are determined by the demands for space, which is also reflected by the margins of its tenants; Cap rate is reflected by all other four indicators. While this approach may be too narrowed and thus overestimate the performance of shopping centers because we shouldn’t ignore that synergistic efficiency can cause a better performance for retailers in malls than single retailer, we think it is efficient way to capture the macro trend.

Introduction to the Retail Industry

Retail is the second-largest industry in the U.S. by number of businesses and number of employees. Retail sales in the U.S. (total retail sales include the categories of gasoline, automobiles, and food service) were up about 3.8% in 2007, to $4.49 trillion (Plunkett Research estimate). However, the 2007 growth was driven partly by higher gasoline costs as well as by deep price discounting during the Christmas season by mass merchandisers and year-long discounting by automobile dealers.

The factors influence this industry may include: general economic situation, the potential labor force, disposable income, consumption, housing prices, household expenditures, retailers’ cost of goods and labor costs, government spending and Tax and local government policies. Classification: Apparel, Department & Discount, Grocery, Home Improvement, Specialty, Technology.

Retail (Apparel)

The unsatisfied performance in this sector is mainly driven by a challenging economic environment and less promotional activity and insufficient innovation in the product. Typical retailers:

GAP: The comparable store sales decreased 10% in the second quarter of 2008 compared with a decrease of 5% last year.

Limited Brand: The net sales in US experienced a decrease of 17% in the first half of 2008. In the same period, comparable store sales decreased 7%

Retail (Department & Discount)

Business in this section seems being affected negatively by economic situation, especially from housing market and consumer income. The indicators are the decreasing same store sales. In addition the increasing e-commerce also impacts the store sales. Some typical retailers:

KOHLS: Same store sales decreased by 4.6% compared with the same period in the first half year of 2008. The number last year is +2.5%. All regions and all lines of business reported negative same stores sales. KOHLS report the struggling as sales in states including CA, Arizona, Nevada and Florida. E-commerce increased by 31% for six month period.

Wal-Mart: Same store sales in US increased by 5% compared with the same period in the first half year of 2008. However, fuel sales contribute a large percentage in the sales growth. The number last year is 2%, 3%, 3%.

Retail (Grocery)

Business in this sector perceived less impact from economy. Most of stores still keep continuing good performance in the first half year of 2008. Some typical retailers:

Kroger: First quarter 2008 total sales increased 11.5% to $23.1 billion as compared to the first quarter of 2007. Identical supermarket sales increased 9.2% with fuel and 5.8% without fuel. This growth was broad-based across all of the Company’s regional divisions and most departments with particular strength in Grocery, Nutrition, Deli and Bakery.

Safeway: The total revenue increased 3% in the second quarter of 2008 compared with last year. Non-fuel, identical store sales increased 1% compared with the same period last year.

Retail (Home Improvement)

This sector was affected most from the slowdown in the residential construction and home improvement markets. The serious situation not only was reflected on the decreasing sales number but also on the firm’s re-development plan. The comparable store sales performance was heavily affected by a geographic market in the western U.S., Florida, and the Gulf Coast. The typical retailer:

Home depot: The comparable store sales declined 7.9% in the second quarter of fiscal 2008 driven by a 6.6% decline in comparable store customer transactions, as well as a 1.2% decline in our average ticket to $57.58. It will no longer pursue the opening of approximately 50 U.S. stores that had been in its new store pipeline.

Lowe’s: Comparable store sales declined 6.7% for the first half of 2008.  Comparable store customer transactions decreased 2.7% compared to the second quarter of 2007 and comparable store average ticket decreased 2.6%. Markets and certain areas of the Northeast experienced double-digit declines in comparable store sales during the second quarter.  

Retail (Technology)

Appliance products sales number was negatively affected by the suffering in housing market. However, benefiting from strong increase online sales the same store sales in this sector is still keeping positive. Typical retailer:

Best buy: 3.5% same store sales increase in the quarter of 2009, reflecting a higher transaction. However, 30% of those increases are from online sales. Consumer electronics decrease (0.6%) compared with last

year, compared with the number of 0.4% last year same period. Appliance decrease 10.6% compared with last year, the number last year is 2.0% increase.

Future Outlook

1. The slowdown of housing market.

The buyers of these homes are a significant force at retail stores where they purchase furniture, appliances, linens, consumer electronics and garden supplies to fill up their new residences. Likewise, builders and remodelers are a strong factor in retail sales, when they purchase supplies, materials, appliances, etc. at retail outlets.

2. Higher life cost and debt level

In the current economic trends, consumers will have fewer discretionary dollars left in their budgets after they face the challenges of high prices for energy, health care, food, insurance and mortgage interest rates.

3. Slowing employment market. Layoffs and falling profits in certain banking and financial services fields

4. Tightened lending standards that will make it more difficult for consumers to obtain credit. This will cause less money borrowed to go into retail store. Many of foreclosed homes caused borrowers poor credit or inadequate income.

5. Low consumer confidence.

6. Competition among retailers has never been tougher. Online selling at deep discounts is even making immense inroads into major consumer purchases such as jewelry. Direct selling through online retailers, catalog companies and home-shopping television channels continues to increase.

We will continue to see that retailers in Home Improvement and Apparel sectors suffer from the influence of the subprime mortgage crisis. The retailer in technology and department & discount sectors will also have to struggle to offset the impact from those factors discussed above. Grocery may be the only one that is still able to keep its positive growth rate.