All I Want for Christmas Is a Few Good REITs

NEW YORK ( TheStreet) -- It's clear that the battle for retail supremacy can be best viewed by the vast number of Black Friday promotions being offered across the planet. With an emphasis on bolstering both online and in-store promotions, the brick-and-mortar players are lining up this year earlier to take advantage of the limited days until Christmas.

It appears that consumers are gaining some confidence this year due to better employment, lower gas prices and somewhat better economic conditions. The real test comes in four more days when the real party gets started.

A good indication of that confidence so far has been the third-quarter results of the major retailers, many of which are doing well or better than expected. For example, Macy's ( M) sailed past estimates as it reported third-quarter earnings per share rose by 31% to 47 cents in the third quarter, compared with 36 cents per share in last year's third quarter.

Other retailers that cater to the upper-income crowd such as Michael Kors ( KORS) and upscale jeweler Tiffany & Co. ( TIF) are also seeing demand increase.

Other bright spots this year include the retail players that are benefiting from the housing recovery. Spurred by consumers looking to spend on their homes and spruce up the decor, the two major home improvement chains, Home Depot ( HD) and Lowe's ( LOW) are luring in more holiday shoppers.

Many consumers will be flocking to area malls this week and with limited construction reported since the Great Recession, the mall REITs have been actively focused on internal growth. As the largest retail subsector, the mall REITs are comprised of eight companies with a combined market capitalization of around $87 billion, according to the National Association of Real Estate Investment Trusts, or NAREIT.

In addition, many of the mall REITs have been expanding into the outlet sector as a means to provide new growth opportunities for the bargain priced retailers.

Simon Property Group ( SPG), with a portfolio value of around $57 billion, is the largest retail REIT and the only real estate company in the S&P 100. REITs make up just around 2% of the S&P sector constituents percentage based on market cap and Simon has a 1.9% S&P 500 weighting.

My favorite mall REIT is Tanger Factory Outlets ( SKT), the only "pure play" outlet REIT that has an enviable track record of paying and increasing dividends for 20 years in a row.

The Shopping Center REITs now number nineteen as Brixmor Property Group ( BRX) listed shares on the NYSE on Oct. 30. Brixmor raised over $800 million in equity by monetizing 522 shopping centers and 87 million square feet.

For the year to date, the shopping center REITs have returned 11.87% and the average dividend yield for the sub-sector is 3.61%, according to NAREIT. The shopping center REITs with a combined market capitalization of around $48 billion is around half the size of the mall sector at $87 billion.

Two of the best values in the shopping center sector are both San Diego-based REITs: Excel Trust ( EXL) and Retail Opportunity Investment Trust ( ROIC). Excel operates from California to Virginia and has a necessity-based strategy of renting to major retailers like Lowe's and TJ Maxx ( TJX) while ROIC focuses on the west coast and pursues a value add strategy of acquiring high-quality assets at distressed prices.

The triple net REITs (also referred to as freestanding) have ballooned into a core sector that now includes companies that represent more than 21% of the FTSE NAREIT All Equity REITs Index based on equity market cap (up from 15.5% in 2010). Given the volume of capital entering the space, the triple net REITs have mushroomed in size to around $26 billion based on market cap.

One of the best values today in the triple net sector is Realty Income ( O), better known and the "Monthly Dividend Company." The Escondido-based REIT has paid and increased dividends for 19 years in a row and the current share price ($38.78) is most attractive (the P/FFO multiple is 16.2x). Two other holiday picks include Chambers Street Group ( CSG) and Monmouth Real Estate ( MNR).

Chambers Street should benefit from the five large box facilities that it leases to Amazon ( AMZN) and Monmouth should prosper with its roughly 50 percent concentration with major transportation company, FedEx ( FDX). Another interesting tidbit, Monmouth leases a facility in New Jersey that houses the Christmas parade for Macy's.

One of the best ways for a value investor to sleep well at night is to focus on fundamentals. That means that you must ignore the drama associated with the crowd and maintain a laser-focus on earnings - or in REIT-dom we define that as funds from operations (or FFO). Most importantly, an intelligent investor should study the safety of the dividend stream and determine whether there is a buffer in price to protect against market fluctuations.

Happy Holidays, and remember that I only have two requests. One is to protect your principal at all costs and the second is all I want for Christmas is a few good REITS. Good luck.

At the time of publication the author had a position in ARCP, CSG, CBL and O.

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

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