Well, February is upon us and that means that most of the REITs will be posting fourth quarter and consolidated 2011 numbers. Despite the fact that 2011 REIT performance was modest at best, the overall health of commercial real estate appears to have improved. I anticipate that many REITs will continue to refine their focus on core growth with accelerated and accretive transactions driven by attractive financing.
Rising dividends should be a continued trend in 2012 as REIT cash flows have noticeably improved across most sectors. Consumer confidence has also improved and that has positively impacted the retail sector - especially the necessity and value oriented retailers. Big box leasing is likely to remain strong as key discount retailers continue to add stores. In particular, community shopping centers dominated by strong value retailers or the strongest grocery anchors are likely to perform best in 2012. Triple net REITs should also continue to benefit from a strategically risk-aligned model aimed at managing well-balanced risk-averse portfolios.
In the broader market, the vacancy and lease rates at U.S. retail centers have recently shown slight gains. Meanwhile, investors are starting to warm up to the stabilization trends. Over the last twelve months, Blackstone Group, LP has invested heavily in the retail sector with around $11 billion of the private equity firm's $158 billion of assets under management allocated to stable retail revenues. As explained by Dan Fasulo, managing director of Real Capital Analytics, "Blackstone is making a macro bet on the U.S. retail sector… and it's an educated judgment that we're either at or close to the bottom (of the cycle) and that the worst is over."
If we can't find things within our circle of competence, we don't expand the circle. We'll wait.
Warren Buffett took the idea of the circle of competence directly from Benjamin Graham who was Buffett's mentor and finance professor while Buffett was a student at Columbia University. Graham always talked about doing only what you know. If you are good at something, that's what you do, that's what you become the expert at.
Below I present a summarized list of seven retail REITs with superiorly managed portfolios. These skillfully balanced portfolios include REITs distinguished by sound risk-aligned fundamentals. These focused retail REITs are all expert managers differentiated by alternative risk control practices. As Buffett said, and which is applicable to identifying good companies based on their sound management practices, "If you don't know jewelry, know the jeweler."
Leverage is the only way a smart guy can go broke… You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero.
One distinguishable indicator of an enduring investment operation is a healthy balance sheet. These seven retail REITs are recognized as conservatively capitalized platforms. Note that Kimco (KIM) and Federal Realty (FRT) are the only BBB+ (S&P) rated REIT and two of just 11 (out of 124) equity REITs with a BBB+ or higher credit rating.
I've never swung at a ball while it's still in the pitcher's glove.
Warren Buffett's baseball analogy means that you should stay away from untested companies and buy companies that are already succeeding and that have been "real world" tested. In other words, invest in known brands with superb balance sheets. Arguably, the seven retail REITs here are "battle tested" and Realty Income (O), National Retail (NNN), Federal Realty (FRT), and Tanger (SKT) are simply battleship brands. Consistent dividend performance is an excellent benchmark for consistency and that is also a barometer for skillful management.
Federal Realty has 44 years of consistently increasing dividends, National Retail has 22 years, and Realty Income and Tanger have 18 years each. Kimco's dividend was scaled back in 2008 as the business model wasn't aligned with its core shopping center model; however, the REIT's repositioning efforts have turned the corner as Kimco has disposed of around $700 million of non-core assets - paving the way for solid recurring FFO performance and dividend growth. Retail Opportunity Investment Trust (ROIC) and Excel Trust (EXL) are less than two years old so the histories are not an accurate reflection of consistent dividend performance.
I can make a whole lot more money skillfully managing intangible assets than tangible assets .
Warren Buffett believes that brands are essential, and that an increasing number of shareholder and investors evaluate brands and the importance of the intangible asset makeup. Today, many REITs are becoming household names much like Vanguard or Fidelity are in the mutual fund space. Realty Income has carved out an identifiable brand as "The Monthly Dividend Company®", and Tanger has evolved as a "Best in Class" Outlet Center Landlord. Kimco has become "The Neighborhood Shopping Center Leader" due to their massive portfolio of 940 properties.
Someone is sitting in the shade today because someone planted a tree a long time ago.
This same concept was evoked nearly 300 years ago by Isaac Newton, one of history's greatest minds: "If I have seen further than others, it is by standing on the shoulders of giants." Buffett, who was fortunate to have been mentored by another great mind in Graham, believes in learning and benefiting from those who have laid the groundwork and who are experts in a particular area.
When shopping for a sound REIT stock, consideration must be made to skillful management practices and as Warren Buffett explains, one of the most important tests for brand value is sound management. Buffett wrote, "I can make a whole lot more money skillfully managing intangible assets than tangible assets." Arguably, REIT investors are interested in the metrics; however, the brand value is directly related to the leadership value. All seven of the retail REITs that I selected have exceptional leaders and I cannot pick one who is better than the other.
However, Milton Cooper, executive chairman at Kimco provides an insightful perspective on his business philosophy as he explained in an interview in Retail Traffic Magazine:
I'd say follow the Golden Rule. Treat everyone the way you want to be treated. And conduct yourself in a way that people want to do business with you - not that they have to - that they want to. They feel comfortable. They trust you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.