The Best Retail Landlords Realize Importance of Bricks and Clicks

NEW YORK ( TheStreet) -- Even before the opening bell on Black Friday, investors had a hint, in the form of long lines outside retailers nationwide, that holiday sales would be strong.

The holiday retail sales season is a critical period in the yearly economic cycle: It's when many retailers push into the black and seal their annual profits. This year, it's shaping up to be another record season. Thanksgiving hours and shopping in both stores and online spurred an estimated 12.8% increase in U.S. retailers' sales over the four-day holiday weekend, an industry trade group said on Sunday.

According to a survey from the National Retail Federation, an estimated 139.4 million adults visited U.S. stores and Web sites from Thanksgiving through Sunday, up from 131 million last year. Total spending for the weekend rose to $59.1 billion from $52.4 billion last year.

The average holiday shopper spent $423 this weekend, the National Retail Federation said. That is up from $398 last year.

So Are Shoppers Using Bricks or Clicks?

Some of the best retailers touch their customers seamlessly, whether through e-commerce, catalogs, direct mail or brick and mortar. Technology has improved the customer experience at all levels: the front of the house, the logistics chain, its efficiency and pricing, and customer knowledge and service. Social media will continue to enhance the connectivity of the customer and retailer, but in this omnichannel world the brand is more important than ever.

A bricks-and-mortar strategy enables retailers to holistically present and establish their brands, create an experience that inspires customers and allows them to socialize and interact with others.

Kimco Realty ( KIM), the largest shopping center landlord in the nation, is landlord to many "best in class" retailers including Home Depot ( HD), Wal-Mart ( WMT), Kohl's ( KSS) and TJ Maxx ( TJX). Dave Henry, Kimco's CEO and chairman, explains why "bricks and mortar" is a critical channel for retailers:
"It is increasing clear, with the striking success of Apple ( AAPL) Stores, that product manufacturers (even ( AMZN) in due course) need physical showroom space and stores in high-traffic retail centers. Combined with the growing demand for neighborhood goods and services of all kinds -- restaurants, health clubs, theaters, etc., -- together with an increasing population, very limited new supply, and the strong probability that e-commerce retailers will have to collect sales taxes, the future continues to be bright for brick-and-mortar stores."

Tanger Factory Outlet ( SKT), the only pure outlet-focused REIT in the nation, has also forged a strategic social network that integrates the brick model with the click model. Tanger's president and CEO, Steven B. Tanger, says the following:
"Obviously, the convenience and 24/7 availability of e-commerce resonates strongly with consumers, but while online and mobile sales continue to grow, I do not believe that it takes away from consumers' excitement over visiting brick and mortar shopping centers. At Tanger Outlets, we are continually bringing in more in-demand designer and brand-name tenants to provide in-season and on-trend merchandise for our shoppers. Outlet centers provide a one-stop shop that offers great brands at a value price, in one location, in contrast to shopping online where consumers have to search for deals for their favorite brands individually. We also understand that the shopping experience itself is as important as the products that our tenants sell, which is why we fill our centers with dining options and often host concerts or special events at our properties. We want to ensure that we provide those traveling to visit our centers a unique and exciting shopping experience that cannot be replicated online."

The Evolution of Retailing

It is clear that many of the best retailers and shopping center owners are focused on giving consumers more than just an outlet to purchase goods. Beyond the basics, they are focused on creating positive, exciting, interactive experiences by leveraging their physical presence and the convenience of technology ... and whatever inventions in the way humans live -- and shop -- develop in the coming decades.

Federal Realty ( FRT), 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), Simon Property Group ( SPG), 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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