Strip Mall REITs Emerging From Wal Mart Shadow?

Includes: WMT, WRI
by: Marc Gerstein

Wal-Mart Stores Inc. (NYSE:WMT) phobia has been an enduring aspect of everyday retailing and among investors who fear the competitive shadow of the Bentonville titan. Case in point: Shares of CVS Corp. (NYSE:CVS) and Walgreen Co. (WAG), whose customers are mostly insured and likely would be little inclined to switch allegiance, fell after the retailing titan announced generic-drug price cuts. But internal issues such as badly-needed remodeling and so-far unsuccessful efforts to sell trendy clothing are causing Wal-Mart to struggle even while other merchants prosper, Reuters reported Monday. As the giant's competitive stature diminishes, shares of other retailers that have been stuck in Wal-Mart's shadow may be ripe for a fresh look. Good-yielding retail-property real estate investment trusts (REITs) are a good place to start.

Shares of retail companies are one obvious way to participate in consumer spending trends. Another often under-appreciated approach is to invest in companies that lease space to the well-known retail chains. They usually operate as REITs and pay virtually all their income to shareholders as dividends. They have some upside participation in retail spending since commercial rents usually include a percent of store sales, but REITs don't experience the month-to-month volatility we often see in shares of individual retailers that report favorable or unfavorable short-term comparable-store sales growth trends.

Among retail-oriented REITs, much of Wall Street's attention falls on the mall operators, big names like Simon Property Group, Inc. (NYSE:SPG) that often operate upscale malls featuring the best-known specialty chains and quality department stores. These properties tend to emphasize full-price retailers and cater to customers who cherish the shopping "experience." Wal-Mart competition is not something that keeps them awake at night.

But there's another category, strip malls, that is competitive with Wal-Mart. These are small neighborhood shopping centers containing convenience-oriented stores and often anchored by drugstores or supermarkets. They feature everyday items, many of which can also be purchased, often at lower prices, at Wal-Mart. The case for local merchants is based on convenience.

For many consumers, that argument carries the day. But Wal-Mart's success with its own everyday consumables, such as groceries, shows there are plenty who are willing to bear the hassle of getting to Wal-Mart in order to save some money, or at least enough so to induce Morningstar analyst Jeremy Glasser to be cautious on strip mall REIT Weingarten Realty Investors (NYSE:WRI) noting, as a concern, that "almost 70% of the company's centers are in the same market as a Wal-Mart WMT Supercenter."

Being so heavily exposed to Wal-Mart hasn't exactly crippled Weingarten. Funds from operations [FFO] - net income plus depreciation and amortization minus gains or losses from property sales and after adjustments for unconsolidated partnerships and joint ventures, this being the pool of funds from which REITs pay dividends - grew at a healthy 8.5 percent annual rate over the past five years, and historically, the company has paid as dividends only 76 percent of FFO. Yet fear of Wal-Mart may have been holding back Weingarten shares. It yields about 4 percent. Compare that with a non-retail outfit like Boston Properties, Inc. (NYSE:BXP), an office REIT with a slightly lower FFO growth rate (5.9 percent) and a comparable Dividend-to-FFO payout ratio (74 percent), but a significantly lower 2.6 percent yield.

Wal-Mart, with its ability and demonstrated willingness to cut prices, can never be taken lightly. But with the company now looking somewhat less invincible, investors may become less skittish on Weingarten and other strip-mall REITs.

Table A lists strip-mall REITs with historical FFO coverage ratios below 80 percent. We also exclude REITs that lack analyst estimates for future FFO coverage, and for future dividend and FFO growth rates.

Table A

WMI investment

Estimated dividend growth rate is for the next three years.
Estimated FFO coverage is the average estimate of dividends as a percent of FFO for the current years and the next three years.
Estimated FFO growth rate is for the next three years.

Disclosure: At the time of publication, Marc H. Gerstein did not own shares of any of the aforementioned companies. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by

WRI 1-yr. chart

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