Solid as a rock

Known for its conservative philosophy, Weingarten Realty Investors navigates the REIT market to produce healthy returns.

About a year ago, one of the largest shopping center developers in the Southwest was offered the chance to buy a number of retail properties containing multiplex theaters.

But Weingarten Realty Investors (WRI), a Houston-based REIT, passed on many of the centers, which were located throughout the country, even though the economics of the deal were compelling, at least on paper. Buying a retail property with a multiplex component simply wasn't worth the risk, recalls Drew Alexander, president of WRI and the company's soon-to-be CEO.

"We have, over the years, purchased a few centers with theaters, but we bought them thinking that if the theater went out of business, it could be torn down and retrofitted," says Alexander. "In the last few years, in our opinion, theaters were getting drastically overbuilt all across the United States. There was bound to be a shakeout, and if a theater goes out of business it can result in a big problem. You have a huge empty building and often few options as to converting the space for a different use. WRI has a policy to always analyze potential acquisitions based on risk and reward. Many times, when the property has a theater, we find that the center is not worth the risk," adds Alexander.

Such a conservative outlook has served WRI well over the past 50 years. Like clockwork, the company has continued to produce results, despite the overall ups and downs of the REIT sector. Over the past five years, the firm has invested more than $750 million in projects, from which it is generating an average 11% return. Accordingly, WRI has one of the strongest balance sheets in the real estate industry, with low debt and high property values.

"Weingarten Realty Investors has performed well through good times and bad," notes David Fick, managing director at Baltimore-based Legg Mason Inc. "It has continued to act conservatively, and it has paid off. WRI has one of the longest stretches of earnings growth and dividend increases in the industry. The company also has one of the few pure A ratings from Standard & Poor's and Moody's Investors Service, which keeps its cost of capital down."

Fick has a reputation as one of the most critical analysts in real estate, but he regards WRI highly. "WRI is one of my favorite stocks," he says. "These guys just don't make mistakes, and for that they have gotten one of the premium valuations in the business, although they deserve to be trading higher than they are."

WRI has operated the same way year in and year out. It buys or builds well-located neighborhood and community centers because it believes such properties will be the least vulnerable in a real estate downturn and the least susceptible to the Internet shopping trend.

"With supermarket and drug sales expected to be minimally affected by Internet shopping, our convenient locations will continue to attract the price-sensitive shopper and, as such, I believe customer traffic will be maintained," says Stanford Alexander, who has served as the company's CEO for more than 30 years.

The company believes in holding its centers. It has owned some of its properties for years and continually seeks to maximize the value of its portfolio by increasing the cash flow of each asset every year. WRI also believes in disciplined growth through selective acquisitions and new development. It neither builds nor acquires for the sake of growth. WRI also believes in a conservative capital structure. Few other REITs can claim such impressive ratings.

In addition, WRI's management team is one of the most stable in the industry. Alexander's longevity is one of the strengths of the company, adds Kevin R. Lampo, a research analyst at St. Louis-based Edward Jones Investments, who adds that the company's corporate culture is deeply ingrained. "Stanford Alexander helped build the corporate culture and he's kept it together," says Lampo. "He has helped mold the company, kept management focused and saw to it that it didn't get carried away by the latest buzzword, whether it was `Internet strategy' or whatever."

A change in leadership The company's strong management and corporate culture was one reason that Wall Street merely yawned when Stanford Alexander - considered a legend in the retail real estate business - announced that he will turn his CEO duties over to his son, Drew, in January. "WRI has a deep bench in every position, including Stanford's," says Lampo. "It has someone well-positioned to step into nearly every role. When CFO Bill Robertson decided to retire, WRI looked to its bench and had Steve Richter ready to take over Bill's duties immediately. Steve has strong people under him. WRI is that kind of company."

WRI's strengths come from a variety of sources refined over 50 years. "We're good at developing from the ground up, but we're also good at taking care of our existing assets," explains Drew Alexander. "Renovations can tend to look easy, but there is a lot of risk. It's a very challenging thing, where all the stars have to line up perfectly. A lot of companies think renovation is easy until they do it."

The younger Alexander, 44, should know. He has spent his entire career at Weingarten, starting as a leasing agent in 1978 and holding such key positions as director of the industrial division, vice president of leasing, and senior vice president.

Looking at expansion Drew Alexander says the company selectively looks at development and acquisition opportunities and is expanding in such cities as Phoenix, Las Vegas, Dallas and Denver. Typically, WRI tries to cluster its assets so new projects will have the hands-on management and leasing savvy that are two of the hallmarks of this company.

"Right now Florida is an expansion market for us. We have two centers in Florida today and hope to have several more later on," says Drew Alexander. "We don't just buy one center and move on. Our goal is to have several properties within a major geographic region, although it may take us a few years to build up market share. In Phoenix we went from one center three years ago to 11 today. The same is true for Las Vegas, where we now have eight properties, and we hope to add more in both of these major cities."

WRI believes in growth, as long as it's disciplined. "Every company believes it has a good understanding of disciplined growth. But the devil is in the details," says Drew Alexander. "We have always taken a long-term approach. Before we acquire properties we take into account that roofs and parking areas wear out, that neither every tenant is financially strong nor is every location at Main and Main streets. We also understand we will not always be in a bull market with rents always projected to be going up."

It is this inbred business ethic that separates WRI from most other real estate companies. "I'm sure there are times when we have been too conservative, but you can make mistakes by being too aggressive," says Drew Alexander. "We will always err on the conservative side because being conservative has served us well."

A tortoise among hares The company has been trying to do a better job of articulating its conservative strategy, aligning itself with shareholders who prefer that investment approach, adds Drew Alexander. "WRI is almost an alternative to bonds. Our shareholder base is interested in a conservative strategy and is willing to invest in a company that lets them sleep a little better at night," he says.

While other retail real estate companies may have more flash, are larger, or capture the fancy of Wall Street investors, those in the industry say WRI will continue to do what it has always done: operate conservatively and profitably.

"There are very few companies I admire, but I have the utmost confidence in these guys' ability to continue hitting singles and doubles," says Fick of Legg Mason Inc. "They are sort of the tortoise in a business where lots of hares look flashy but don't perform. It's the tortoise that wins the day."

How does Houston-based Weingarten Realty Investors (WRI) continually generate value for its shareholders? By renovating its shopping centers promptly, filling them with national, regional and local credit-worthy tenants, and continually improving the centers. Consider WRI's Telephone Road Shopping Center in Houston. WRI acquired the 30-year-old property in 1999 with plans to renovate.

"We bought the 134,000 sq. ft. center, which was anchored by Kmart, at a 10% cap rate," says Drew Alexander, president of WRI. "Then we sought to maximize our investment."

WRI decided to expand the existing 80,000 sq. ft. Kmart to a new 125,000 sq. ft. store. In addition, WRI earmarked 35,000 sq. ft. for a Sellers Brothers Supermarket and 15,000 sq. ft. for specialty retailers.

WRI also upgraded the parking lot, added additional lighting and abundant landscaping. The center is now 100% leased with national, regional and local retailers.

"We took the return on the center from a 10% cap to a more than 11% cap and better positioned it for the future," says Alexander. "It's a much better center now. Cash flow will continue to grow with the improved center and the enriched tenant mix."

Another example of how WRI generates value is the River Oaks Center, also in Houston. A mere five minutes from downtown, the center was developed in 1937 and is reportedly the second oldest shopping center in the United States. WRI acquired the project in the mid-1970s and began to renovate the decrepit property that bordered River Oaks, Houston's most affluent neighborhood.

WRI gave the 307,000 sq. ft. center an immediate facelift, including resurfaced parking lots and new signage. But the company decided one renovation wasn't enough. While other companies might have left the center alone until the next time it showed its age, WRI carefully nurtured River Oaks, continually updating and improving it either through physical renovations or by adding unique new tenants, all the while leaving its original art deco architectural style intact.

Eckerd Drugs, which had been a 20-year tenant at the center, recently opted to move due to the lack of expansion room. Eckerd's space was quickly turned into a Sur La Table, a successful West Coast upscale kitchen outlet featuring more than 14,000 items.

"Our River Oaks renovation has been in process for 30 years, and it's still not finished," says Alexander. "We took a run-down, empty and neglected piece of property at the edge of one of Houston's most exclusive suburbs and turned it around. We haven't stopped trying to improve it."

Now, he adds, River Oaks Center is in an explosion of mid-rise residential construction near downtown Houston. "The River Oaks Center is now positioned for the best time in its history," says Alexander. "We're going to see rent and sales increases. We will continue to tweak and remodel the center. It's all part of our strategy to maximize our portfolio."

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