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The Best Retail Landlords Realize Importance of Bricks and Clicks

Federal Realty (FRT - Get Report), the oldest REIT in the nation (and celebrating its 50th anniversary) this year, has witnessed five decades of retailing and the success of the "best in class" REIT has been its ability to provide innovative opportunities for its tenants. As Don Wood, Federal Realty's president and CEO explains:
"Online shopping is here to stay and will continue to get better and evolve in terms of another attractive and convenient way for consumers to consume. As I see it, the effect is to effectively 'raise the bar' for retail landlords to provide a brick-and-mortar product that is complementary to online alternatives. A shopping center that is well-maintained and safe with convenient parking in a good location isn't nearly enough to ensure success any more. The mix of retailers in that center -- We call that the process of 'merchandising the center' -- is more important than ever and needs to be far more 'experiential' to consumers than in the past. Unique and well-run food uses are playing a bigger and bigger part in the mix as are tenants serving changing consumer habits in a faster-paced and highly technology-driven world. Further, more flexible shopping center configurations, such as fewer deep spaces that can only house one type and size retailer, allow for today's, and tomorrow's, more efficient retailer. This is extremely important to ensuring a center's long term success."

Retail REITs That Outperform

According to NAREIT, the retail REIT's own more than $137 billion in properties (based on market cap as of Oct. 31, 2012), and the average dividend yield for the sector is 3.27%. The mall subsector has a market capitalization of $84 billion and the shopping center subsector market capitalization is around $41 billion (free-standing REITs total around $11 billion).

Some of my mall REIT picks include Taubman Centers (TCO - Get Report), Simon Property Group (SPG - Get Report), and Tanger Factory Outlet.

My large-cap shopping center REIT picks include Kimco Realty, Weingarten Retail Investors (WRI), Regency Centers (REG) and Federal Realty. Some of the small-cap retail REITs, including Excel Trust (EXL), Retail Opportunity Investment Corp. (ROIC) and Whitestone REIT (WSR), all provide a higher risk-adjusted dividend yield.

REITs Will Enjoy a Level Playing Field for Investors

The Bush tax cuts will likely expire at the end of the year and all current "qualified dividends" (i.e., on non-REITs) will once again be taxed as ordinary income. REITs have always been taxed that way, so they will once again be on a level playing field.

In addition, interest rates are expected to stay low, which will make the REIT dividend that much more attractive vs. the 10-year (already lower) Treasury and corporate bonds and continue to provide a low-cost-of-debt tailwind for commercial real estate and REITs.

Make sure to stock your shelves with some REITs this year and Santa will be surely reward you with some dividends that will help you sleep well at night. Happy Holidays!

At the time of publication, Thomas had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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FRT $153.58 -0.63%
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TCO $69.85 -0.13%


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