Real estate investment trusts (more commonly known as REITs) have long been a favored destination for income-seeking investors, as the entire legal framework under which REITs are organized is designed to funnel cash out of the business in the form of distributions. There is a huge array of choices in the REIT world, though, and Weingarten Realty (NYSE:WRI) stands out for its focus on neighborhood and community shopping centers – often anchored by supermarkets and located in attractive locations like the Mid-Atlantic, Southeast, Texas, and West Coast.
SEE: The REIT Way
A More Focused Business
Weingarten doesn't exactly pursue a unique model. Other relatively large REITs like Regency Centers (NYSE:REG), Kimco (NYSE:KIM), and DDR (NYSE: DDR) pursue broadly similar strategies of developing neighborhood shopping centers with tenant lists shaped towards frequent purchases (groceries, home goods, etc.). What distinguishes these companies, though, is how they manage their assets and and balance sheet.
To that end, Weingarten has been getting more focused. Last year the company focused on selling off non-core industrial properties and JVs, putting the money towards the acquisition of some additional shopping properties and net debt reduction. While the company is now a pure-play on shopping centers, I wouldn't necessarily assuming the restructuring is done, as I could easily see the company selling properties in states where it has a “non-core” level of exposure and operations. This could be a mixed blessing, though, as not all investors will like that the company has so much of its business concentrated in Texas (about 30%).
Attractive Demographics And Clients Should Support The Business
The importance of location in real estate may be cliché, but it's also relevant and I believe Weingarten scores relatively well here. The company's assets are, by and large, concentrated in the areas of this country that are seeing the most population growth and likely to see that growth continue in the coming years.
I think it's also relevant that Weingarten looks for tenants that bring shoppers back to the properties on a regular basis. Two of the company's largest tenants are Kroger (NYSE:KR), Target (NYSE:TGT), and Safeway (NYSE:SWY) and unlike REITs that operate malls or shopping centers built around big-box retailers, Weingarten's properties seem less vulnerable to economic cycles and the transition away from store-based retail to the internet.
First quarter results earlier this year were likewise encouraging in that regard. Nearly 94% of the portfolio was leased, and same-store NOI rose almost 4% for the quarter – at the high end of both analyst and management expectations.
SEE: How To Assess A Real Estate Investment Trust (REIT)
Valuation Always Matters
Although I like the basic operating philosophy of Weingarten, there are still reasons for investors to be cautious. For starters, there's a larger than normal insider position here and there's a father-son team as Chairman and CEO of the company. While the two aren't necessarily linked, I'd also point out that the company's internal financial returns relative to the cost of capital haven't been that strong in recent years.
It's also important to note that valuation in the sector is looking a little rich. Cap rates have shrunk across the sector, and Weingarten's is flirting around the 6% level. Assuming rates head back up, these shares may struggle as investors find other options to meet their yield requirements.
The Bottom Line
Looking at the company's projected funds from operation, cap rates, and various price ratios (Price/AFFO and so on), these units don't look like much of a bargain today. I like the company's restructuring efforts, and I think a return to organic development in 2014/2015 will be a positive. Likewise, I don't think Weingarten is any more overpriced than its shopping REIT peers. Nevertheless, I just don't see the yield or distribution growth potential to want to make a big commitment to this name.