2 Strong REITs With Wal-Mart as Tenant

NEW YORK (TheStreet) -- Wal-Mart (WMT) is the world's largest retailer, operating 3,029 supercenters (includes sizable grocery departments), 629 discount stores, 611 Sam's Clubs and 210 Neighborhood Markets in the U.S., plus 5,651 foreign stores, mainly in Latin America, with the balance in Asia, Canada and the U.K.

With a total store space of around 1.037 billion square feet, Wal-Mart continues to dominate the retail category and even with the threat of Amazon, the "brick and mortar" giant continues to dominate the sector. When Wal-Mart makes a decision to open new stores at a higher growth rate than the year before, investors should take note.

The success of Wal-Mart's platform is attributed to the mere number of transactions -- around 200 million transactions a week or 10.4 billion a year. When Wal-Mart decides to open new stores, at a higher growth rate than the year before, investors should pay close attention to the trends -- especially when there are two years of sustained and increased growth.

As a REIT investor, I also pay attention to store growth and closer attention to the landlords that lease to the retail giants. It is no coincidence that the shopping center sector is one of the top performing sectors. So far this year the shopping center sector has produced average total returns of 22.01%. That is second only to the regional mall sector that has returned around 25.11% this year (source: NAREIT as of July 31).

Having strong anchor tenants in a shopping center is critical. By leasing to a recognizable anchor like Wal-Mart, REITs are often able to attract other strong tenants and build a repeatable source of income for investors. I have identified two REITs that have shown strong performance this year and have considerable property leased to Wal-Mart.

DDR ( DDR), based in Beachwood, Ohio, has a market cap of $4.562 billion and a current dividend yield of 3.2 percent. The company has more debt than many of its peers; however, the REIT has been focusing on non-core assets and recycling into higher-quality properties. The debt to market cap is 45.95% (was 55.24% in the third quarter of 2011) and the company has reduced overall debt from $5.54 billion (in 2007) to around $4.095 billion (second quarter of 2012).

Wal-Mart is DDR's largest tenant with around 80 leases representing around 5.1 million square feet of space. Based on annual base rent, Wal-Mart pays DDR around 3.1% of DDR's overall revenue (based onthe second quarter of 2012).

Kimco Realty ( KIM), based in New Hyde Park, N.Y., has a market cap of $ 8.269 billion and a current dividend yield of 3.74%. The company is extremely well capitalized and like many other shopping center REITs, Kimco has been focusing on recycling assets. Kimco also operates internationally with 926 properties in 44 states, Canada, Mexico, Brazil, Chile and Puerto Rico.

Last November Kimco celebrated its 20th anniversary as a public company and since its founding in 1958, the retail REIT has evolved into a diversely risk-aligned investment platform. Kimco has a well-balanced tenant portfolio that includes many leading retailers such as Home Depot, TJ Maxx, Wal-Mart, Kohl's, PetSmart and Costco.

Wal-Mart is Kimco's third-largest tenant (based on revenue) with around 60 leases in the Kimco portfolio. This translates into around 4.045 million square feet of space (leased to Wal-Mart) and around 2.5% of Kimco's annual base rental income.

The power of a repeatable model lies in the way it turns the sources of differentiation into routines that everyone can understand. In the case of Wal-Mart, the prime source of the company's competitive advantage is being able to maintain that differentiation that led to the company's initial success.

In the case of DDR Corporation and Kimco Realty, the same diversification that produces healthy dividends provides the differentiation.

By building their existing investment strategies, DDR and Kimco should be able to maintain and grow revenue and provide investors with sound income and dividends.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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