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Simon Property Group and General Growth Properties both command regional mall portfolios in the neighborhood of 200 million square feet. In the strip center world, Kimco Realty Corp. is rapidly closing in on 100 million square feet. Several other would-be behemoths have crested 50 million square feet and seem hungry for more acquisitions.

But flying under the radar are a number of smaller players, ones that have been around for years and are not getting caught up in the merger mania. What they are proving is that while everyone has to live with the impact of consolidation, not everyone has to consolidate.

By developing niches — such as focusing on certain geographic areas or specialty products — small REITs can create their own identities. The growing giants may be willing to throw their weight around in attempts to isolate tenants from smaller players. But by making themselves indispensable, like by, say, cornering the market in one city, some REITs have been able to protect themselves for now. And while big REITs increasingly hunt for portfolio deals to fill their plates, smaller REITs are happy to grab the crumbs of one-off deals to increase their own reach.

Federal Realty Investment Trust of Rockville, Md., for one, claims it's not interested in comingling its shares with another real estate investment trust. Federal buys individual properties to add to its $4 billion portfolio, but it doesn't want to buy another REIT for fear of diluting the value of its shares.

A relatively rare opportunity to grow internally falls to Federal by virtue of its longtime presence in parts of the Northeast that have turned out to be affluent. Its strip centers in high-income areas are successful enough that rent on lease rollovers rose 18 percent for the fiscal year ended in February. Federal's strategy, says Larry Finger, chief financial officer, is “do nothing that messes that up.”

Federal might be an attractive takeover target itself, except its price-earnings ratio — a towering 43 in early April — is likely too high for any prospective buyer. “We're not smarter than those guys,” says Finger. “We are just in a better position. Every one of our peers would trade places with us and adopt our strategy. If they had our assets, they would not be consolidating.”

That's one small-REIT formula for success in the consolidation frenzy: Find your niche and milk it.

Indeed, Finger thinks his company's internal-growth strategy looks better every time somebody buys somebody else in the sector. “Because the bigger you are,” says Finger, “the harder it is to grow, and the harder it is to be entrepreneurial, and the more acquisitions you need to make in order to grow.”

Size Matters

If Joseph French were running a REIT, would he prefer small or big? “I think I've got more potential of appreciation in a small REIT,” muses French, senior investment adviser with real estate consultant Sperry Van Ness in White Plains, N.Y. “The small REITs just have so much more flexibility. Tomorrow morning they can go to their board and come up with a different acquisition program and change directions.”

That doesn't mean running a small REIT is a ticket to get rich. You need the right strategy. “Smaller REITs have to stick to a well-defined niche and not compete across the board with larger competitors,” says Paul Morgan, senior research analyst with Friedman, Billings, Ramsey Group Inc. in Arlington, Va. The niche “can be geographic or it can be with a narrowly defined subset of properties,” says Morgan, “but it's unlikely to be national or even multi-regional in scope.”

Yet “nichemanship” cuts both ways. For example, Equity One Inc.'s core area is Florida, where a fast-growing population and real estate that's still cheap boosts its results. Equity One's tight focus on supermarket-anchored strip malls in the Southeast, however, also leaves it vulnerable to economic vagaries. A regional downturn would hurt it worse than a bigger REIT with properties nationwide. And the bankruptcy of Winn-Dixie Stores Inc. in February fretted Equity One ($2.5 billion in assets) and other REITs whose centers had Winn-Dixie anchors. Winn-Dixie says all its stores are operating normally, and Equity One expects minimal impact.

Finding the Funds

Other challenges for small REITs include higher cost of capital compared with big REITs and greater proportionate burden of meeting public-company costs, such as complying with the corporate governance and accounting requirements of the 2002 Sarbanes-Oxley Act. Small REITs may also find access to big national tenants limited because larger REITs get in first.

And branding has its challenges. Equity One bills itself as “the supermarket REIT” — but chairman and CEO Chaim Katzman thinks branding is easier for the big guys. “At least you can brand yourself with tenants and with capital markets if you're bigger,” says Katzman. “It's harder if you're small. There's less interest from investors, and less interest from tenants.”

Ramco-Gershenson Properties Trust of Farmington Hills, Mich., ($1 billion in assets) is “adding anchors and expanding anchors and churning the mix to improve the quality of the asset,” says Dennis Gershenson, president and CEO. “That may not be as easily done once you reach a certain size.”

Indeed, smaller REITs risk losing their place at the table with top national chains. “Retailers live and die by their store-opening plans,” warns Morgan. “Each year when they bring out new concepts, they need to get space. When they're only sitting down with six or seven landlords, it's much more of partnership.”

Smaller operators fear such partnerships box them out. The big guys, claims Gershenson, can “parlay a tenant interested in getting into one mall to take several other shopping centers.”

Growing Pains

No one knows better than small REITs that growth is vital because scale creates several advantages. One of those is in leasing. “The bigger you are, the greater access you have,” explains Jonathan Weller, vice chairman at Pennsylvania REIT, which in recent years has opted to beef up its portfolio considerably. PREIT exploited regional strength — it owns eight of the 20 malls in the Philadelphia metropolitan area — and parlayed that strength into further growth.

Now it has $2.7 billion in assets and it has turned itself from a regional player to one with national aspirations. But it is has also looked to grow through creativity. The REIT redesigned a standard anchor space at its 829,000-square-foot Mall at Prince Georges in Hydesville, Md., to hold a pioneering 130,000-square-foot Target store that opens both to the outside and into the mall. Mall traffic rose nearly 15 percent when the store opened in November 2004, and mall sales are now pushing $400 per square foot.

PREIT owns as much as half of the metropolitan Philadelphia retail market. “Tenants looking for store venues in the mid-Atlantic, I think, really have to talk to us,” says Weller, “even if they're talking to some other owners who might be larger in scale nationally, but perhaps not as large as we are regionally.”

Where do small REITs have to grow from this point?

All REITs have been able to raise money readily with real estate booming. But what do they do with the money? That's where smaller REITs may actually have an advantage.

Big REITs, says French, face a dearth of property in big enough bundles. For the big guys, one-off deals are “really almost not worth their time,” he says. “If you've got $300 million you've got to spend for the year, you can't be buying $5 million shopping centers. You just don't have the manpower.”

Smaller REITs may find more properties suited to their size — but there are still only so many promising centers and high-income neighborhoods. “The market is still very, very tight,” says French, “and I think it's actually getting tighter.”

If that makes everybody either prey or predator in the consolidation craze, REIT executives still try to focus on building shareholder value. “I don't think you can run your business being afraid of what you might find out when you answer the telephone or open the mail,” says PREIT's Weller.

But does it change the way you do business to have a prospective buyer or merger partner watching? “The answer should be no,” says Gershenson. “You've got to mind your business in the best interests of your company and the best interests of your shareholders.”

Small, But Satisfying

Some small REITs may operate outside the headlines, but a few still stand out for Sheila McGrath, analyst with Ryan Beck & Co. Inc. of Florham Park, N.J. McGrath recently initiated coverage of several small players that most other analysts traditionally haven't followed. Here's a rundown of some companies she's watching and what they have going for them:

Urstadt Biddle Properties, Inc. of Greenwich, Conn., is “concentrated in compelling markets” including Fairfield County, Conn., and Westchester and Putnam counties in New York, wrote McGrath in a recent industry report. Its markets have high population counts and income levels 50 percent higher than the U.S. household average. Biddle, with two-thirds of 34 properties in retail, tracks every shopping center in its core area in an ongoing hunt for acquisitions.

Acadia Realty Trust of White Plains, N.Y., with 69 strip centers, brings a “disciplined acquisition strategy” to the prevailing acquisition frenzy, according to McGrath. Acadia wants only higher-yielding, value-creating urban retail properties like its Fordham Place in the Bronx. Acadia, McGrath indicates, is “managing for the longer term — which should ultimately create more value for shareholders.” Its veteran management team is pursuing acquisitions via joint ventures. Acadia's stock price rose 88 percent in the past two years.

Saul Centers Inc. of Bethesda, Md., has “well-located shopping centers in densely populated areas” of Washington, D.C., and Baltimore with population counts of more than 300,000 residents within five miles and 60 percent of households with income higher than average. Saul Centers has a “significant track record” in developing and redeveloping, wrote McGrath. Anchors at its 36 neighborhood shopping centers are mainly grocery stores.

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