Travis and Prairie 1928 Houston Texas

Drew Alexander and the Weingarten team show that persistence pays off

By Lynn Novelli

Shopping center REIT Weingarten Realty Investors (NYSE: WRI) has been perfecting its formula for success for more than 100 years. When Polish immigrant Harris Weingarten opened his first grocery store in Houston in 1901, he laid the groundwork for a business model that would carry forward into the next century.

In the ensuing decades, Weingarten Markets shifted from grocery store to property owner and turned into a steady stream of profitability. Today, Weingarten's holdings focus on supermarket and discount-anchored shopping centers located in Sunbelt states.

		Weingarten's Little-Known Industrial Side Although Weingarten is best known for its retail holdings, its portfolio also includes 64 industrial properties.

In 2005, Weingarten, still based in Houston, celebrated 20 years as a publicly traded REIT by posting its 20th consecutive annual dividend increase.

Since the beginning of 2006, the merchant development program has recorded gains of $2.8 million.

Weingarten's portfolio of 360 shopping centers in 20 states features retail properties populated by stores that sell necessity-type goods and services. You won't find high-end clothing boutiques or luxury home electronics stores in a Weingarten center. Instead, these are shopping centers where people go every day for groceries, to rent videos or buy greeting cards.

Sunbelt Success

Weingarten knows its market, its product and its corporate identity as it single-mindedly pursues its core business. That consistency in mission and goals has nurtured the company's growth from humble beginnings as a small grocery store in Houston to one of the largest publicly held REITs on the New York Stock Exchange.

Store No. 2 Texas Avenue between Main and Fannin Houston, Texas

"Our business model hasn't changed much in 50 years," says president and CEO Andrew (Drew) Alexander, Harris Weingarten's grandson. The company's current business model has its roots in 1956, when the family grocery business expanded into a shopping center development as Weingarten Realty Company.

In 1980, the company sold its supermarket division—which had grown to a chain of 104 stores in five states—to concentrate on real estate development for retail shopping centers. Weingarten became a publicly traded REIT in 1985 with an initial public offering (IPO) of 3.75 million shares at $19.50 per share. The company is currently trading at $39 per share.

The properties that make up Weingarten's portfolio include most of the high-growth regions of the country from California to North Carolina, a fact that Alexander is quick to point out. "The geography of our investments is one of our competitive advantages," he notes. "Our properties are situated in desirable metropolitan areas with strong demographics and high barriers to entry, spanning the United States from coast to coast."

With its heavy concentration in southern-tier states, Weingarten is best known for the geography of its portfolio, notes Jeff Donnelly, an equity research analyst with Wachovia Securities. "There is no doubt that Weingarten is dominant in the Sunbelt," he says. "When people think of shopping centers in Texas, they think of Weingarten."

Store No.9 Richmond and Loretto 1932 Houston Texas

The company manages its interests through six regional offices, Alexander explains. "We cluster our properties and manage them collectively through these offices," he says. "We don't actually execute all functions, but we're vertically integrated in the sense that Weingarten employees oversee all the functions and activities that relate to the real estate."

The regional offices subcontract with expert vendors and suppliers for services such as leasing, property management, promotions, security and accounting, and the providers report upwards through the Weingarten structure.

This structure allows Weingarten to deliver (in a highly efficient and effective manner) all the functions that make a successful shopping center. The result is high tenant satisfaction, which translates into very stable relationships with major anchor tenants, Alexander says. Add a good retail mix, high consumer appeal and stylish, clean, well-maintained facilities, and Weingarten has all the ingredients for success.

WEINGARTEN REALTY INVESTORS 2600 Citadel Plaza Dr., Suite 300 Houston, TX 77008 713-866-6000 www.weingarten.com MANAGEMENT: Stanford J. Alexander, chairman; Andrew M. Alexander, president & CEO; Stephen C. Richter, CFO; Martin Debrovner, vice chair of COO. TICKER SYMBOL: WRI, listed on the New York Stock Exchange • 52-Week High: $41.95 • 52-Week Low: $33.81

Weingarten consistently has achieved that success. The numbers tell the story: a compound annual total return of 14.4 percent since the 1985 IPO; steady dividend increases every year, including a 5.7 percent increase in 2005; a 12.1 percent year-over-year increase in funds from operations (FFO) for 2005.

Those numbers are the reason that investors are attracted to Weingarten, notes Kevin Lampo, an analyst with Edward Jones. "From an investor's standpoint, Weingarten is a proven entity, so people know what they are buying," he says. "They buy Weingarten for the dividend income and dividend growth over time."

The eastern and western regions have been Weingarten's strongest markets for the past few years, accounting for a combined 55 percent of net operating income (NOI). Texas—the second fastest growing state in the country—accounts for 36 percent of NOI. Fueled by strong leasing demand and occupancy rates exceeding 94 percent, Weingarten posted gains of more than 4 percent in same-property NOI for 2005.

Growth in same-property NOI is significant, Lampo adds, because it reflects not only increases in rent and occupancy, but also Weingarten's skill in attracting the right tenants. "Being able to put the right tenants into the right property adds value to all the tenants," he notes. "And Weingarten is in the business of maximizing value of real estate."

Winds of Change

Nevertheless, Weingarten's chosen niche is a crowded one, and competition is intensifying from heavy-hitters such as Kimco Realty Corporation (NYSE: KIM) and Regency Centers Corporation (NYSE: REG). Competition, plus the shift in real estate dynamics over the past several years, has forced Weingarten to rethink its approach to the market, Donnelly says.

Weingarten's modern-day properties include Fry's Food & Drug, Barnes & Noble and Marshalls.

"Ten years ago, Weingarten was head and shoulders above its peers. Management made a conscious decision at that time not to participate in much development, while other companies went ahead," he says. "Today, Weingarten's competitors have become nearly its equals, and Weingarten must now step up."

As a result, Weingarten has created what Alexander describes as "a mild evolution in strategy." Starting in 2005 and continuing through 2006, Weingarten will focus on "development, joint ventures for acquisition and disposition of certain properties while maintaining superior asset quality," he says.

This redirection is not a decision that Alexander and his management team reached quickly. Known in the industry as savvy, thorough and conservative to the core, the Weingarten team takes time to make major decisions, carefully evaluating all the possible influences and outcomes.

Observing a steady and sustained rise in demand for retail commercial real estate, an oversupply of capital and rising interest rates, coupled with higher prices for existing properties, Weingarten's board determined last year that the time was right to ramp up the company's development program. In doing so, Weingarten revisited the growth strategy the company employed for the first 25 years of its existence, starting in the late 1950s until the early 1980s when acquisitions became its focus.

Under current market conditions, Alexander is convinced that the company can achieve better spreads with development than with acquisitions and has set a goal of $250 million in new projects annually by 2008. To achieve this, Weingarten will have to maintain a pipeline in the range of $1 billion in projects, he adds. Currently, Weingarten has 10 projects under construction with a total investment of $128 million.

As ambitious as this sounds, investors should not expect any sudden additions to Weingarten's portfolio in the form of new shopping centers, analysts caution. "The challenge is the time it takes to develop a property," Donnelly explains. "It will take them a few years to get there, but eventually Weingarten will be able to deliver one or two new centers a year." Analysts predict that it will be 2008 before Weingarten's development plans start to impact earnings.

In a new twist on its redeployed development strategy, Weingarten plans to follow in the footsteps of its shopping center REIT peers, such as Regency and Kimco, and test the waters as a merchant developer. "The sale of the completed development project will produce gains, and we also have the opportunity to generate gains by selling land to some of our anchor tenants," Alexander explains. He anticipates the merchant development strategy could contribute as much as 5 cents to 10 cents per share to funds from operations (FFO) for the year. This is made possible through a combination of fees collected for merchant developer activities and the reduction in cost basis that occurs at the time a property is sold.

That, Alexander stresses, is the heart of Weingarten's mission. "Our goal is not to just get bigger but to increase FFO per share," he says. "We are serving our shareholders far better when we have fewer shares and a higher FFO per share."

Joint Venture Avenue for Acquisitions

All of this talk about development doesn't mean that Weingarten has abandoned acquisition as a viable vehicle for growth. The difference is that, instead of going it alone as it has in the past, Weingarten now plans to pursue joint venture opportunities with institutions and private parties.

The company will scout appropriate opportunities, primarily in major metropolitan markets with high barriers to entry and strong upside potential, and approach possible joint venture partners. By partnering with other investors, Alexander says he believes his company can position itself more competitively in these markets and leverage its experience and expertise to collect acquisition, leasing and management fees that will contribute to FFO.

UPSIDE-DOWNSIDE Samplings of what analysts are saying about Weingarten Realty Investors. Merrill Lynch Rating: NEUTRAL (5/2/06) Target Price: $38.60 "Weingarten is making a strong push with its development pipeline. The pipeline, which has increased over 50 percent since the previous quarter, now stands at nearly $200 million. The company is also looking at an additional $350 million to $400 million of development opportunities to add to the pipeline over the next year. Weingarten is actively using its newly created merchant development program. Since its inception in the beginning of the year, the program has recorded gains of $2.8 million." Deutsche Bank Rating: HOLD (5/2/06) Target Price: $39 "The primary risk to Weingarten is rising interest rates, which would inflate cap rates, driving down NAV. In addition, our estimates are sensitive to the success and delivery of merchant development projects, which is a new business segment for Weingarten. In addition, Weingarten is at risk to leasing volumes, retailer strength, and demographic changes in its markets." Citigroup Rating: HOLD (5/4/06) Target Price: $38 "Weingarten maintained guidance at $2.77 to $2.87 but ultimately, 2006 numbers will be entirely dependent on level of net investment. Weingarten maintained merchant development and land sale gains of $0.05 to $0.10 per share for 2006. We are increasing our 2006 estimate by 1c to $2.83 and 2007 estimate by 2c to $2.96, on first quarter results and marginally higher net investment volumes." Bank of America Rating: Neutral (5/2/06) Target Price: $39 "WRI could regain a premium valuation if the new self-funding, higher ROI strategy is executed properly, but given that substantially higher growth won't likely materialize for a few years, we believe that investors will remain in a wait-and-see mode in the near term. Weingarten could potentially become a 2008–2009 growth story, but 2006–2007 cash flow growth potential will likely drive the stock price in the near term."

For 2006, Weingarten has earmarked $50 million to $75 million in initial equity investment for joint ventures, which will translate into $200 million to $300 million in acquisitions. With its solid reputation and conservative financial management, Weingarten has attracted a number of regional joint venture partners, including AEW Capital Management, Bob Hughes Ventures, The Alliance Group, Rioco and the Miller Weingarten Realty, LLC, which is a joint venture between Miller Development and Weingarten Realty Investors.

"Acquisition and disposition joint ventures are still being contemplated, but Weingarten is now likely to simply sell assets into discrete joint ventures, rather than seeding a joint venture with assets that it then would go out and acquire," says Michael Bilerman, analyst with Citigroup. "Regardless of the type, we believe Weingarten should look to continue to ramp up its disposition program, taking advantage of the liquidity in the marketplace."

Out with the Old

Meanwhile, to maintain a strong balance sheet, Weingarten has pledged to accelerate its disposal of properties that no longer contribute to the company's long-term goals. Although selective dispositions are always part of the company's strategy, 2005's rise in demand for commercial real estate prompted Weingarten to ratchet up its disposition program a notch or two. The result was sales of $191 million in non-core assets in 2005.

"It's a changing world, and our accelerated disposition program is part of our plan to manage our portfolio more aggressively," Alexander explains. Top on the list of assets to sell are shopping centers in smaller towns where the company has minimal investment or those in markets with lower barriers to entry that have displayed slower growth rates.

Barring dramatic changes in the market, the company plans to sell $250 million to $260 million in assets in 2006 and reinvest the proceeds in development projects, he says, adding that this strategy will contribute to continued upward trends in occupancy and revenue.

Smooth Operators

As CEO, Alexander heads up a disciplined team that includes his father, Stanford Alexander, as chairman of the board. The elder Alexander has been in the business his whole adult life and brings a wealth of relationships to the company, his son notes.

"My dad is a rental agent at heart," he quips. "He knows everyone and thrives on talking to people. He is still very much involved in the business."

In fact, Lampo says, Weingarten and the Alexander family are inextricably mixed, a fact that he believes strengthens the company. "They have what Warren Buffet calls 'skin in the game,'?" he says. "Beyond that, the Alexanders also have a reputation in the game—they are known for being very good operators."

Drew Alexander continues his father's and grandfather's essentially conservative approach to the business, and the company's balance sheet reflects this long-standing tradition of careful, prudent financial management. Outstanding debt accounts for less than 39 percent of Weingarten's total capitalization of $3.5 billion, and less than 14 percent of debt has a floating rate.

That conservatism appeals to many investors, Lampo says. "From the investor perspective, we like the fact that Weingarten is more conservative than some of its peers. We trust its judgment on how fast to drive the company's growth."

Some analysts, however, would like to see Weingarten take a few more calculated risks and increase the pace of growth. "In the investment world, they are seen as perhaps too cautious," says Donnelly. "I'd like to see management step on the accelerator a little more."

Alexander, who likes to describe Weingarten as a professional company with a caring, family spirit, says he ignores detractors who think the company is too conservative. He prefers Weingarten to act more slowly than some of its peers because he is secure in the knowledge that his company always has the best interests of shareholders and tenants at heart. "We still believe in integrity and doing the right thing," he says. "To us, this means giving your word to a tenant, vendor, employee or shareholder and living up to it, every day."

When you're looking at a company that has weathered any number of economic cycles in its long history and come out a winner, it's hard to argue with that philosophy. "The best companies are those that think about their constituencies and continually strive to answer their needs," Lampo says. "That's an area where Alexander and his team excel."