HOUSTON—Stunted on the acquisition front, Weingarten Realty Investors is building for the future the same way as in the past—by building.

Exemplified in the first-quarter purchase of nine shopping centers and another asset for $210 million, plus a 10-building warehouse portfolio consumed last month for $136 million, WRI is not averse to buying outright for its two favorite food groups, retail and industrial. During a financial conference call on Friday, management stressed that WRI covets existing opportunities in markets offering barriers to entry and solid demographics.

The problem is a lack of suitable real estate. Retail inventory was picked clean in 2006, says CFO Stephen Richter, and remaining properties either don’t fit the core-profile embraced by WRI or lack sufficient yield, making construction the best path to returns. Some projects will be owned outright, others put in partnerships, while a third—and expanding— “bucket” is merchant building; methodically spinning projects off to investors and/or operators.Seventeen of the 32 initiatives under construction fit the merchant build mold, says SVP Robert Smith, who oversees WRI’s development team.

Total investment there is $416 million, he estimates, underscoring a view that the program “will be a significant component” of WRI’s financial success. Even as a blip in the first quarter results, merchant building income is expected to account for 13 to 18 cents per share in FFO this year, officials reiterated.

WRI evolved from a Texas grocery chain into a commercial real estate powerhouse by building its way throughout the southern United States, but Richter says the REIT had become “corporately lazy” on that front. “We focused probably in hindsight more than we should have on acquisitions and not as much as we should have on development,” he says, stressing that “we have fixed that” thanks to a strategy shift launched 15 months ago to shift the portfolio over a three-year process.

The value of properties under construction has ballooned to $1.2 billion from $550 million a year ago when just 13 developments were on the books. Another 17 sites are under contract that would have an investment of $543 million, and 21 sites are being eyed as prospective locations. By 2009, WRI hopes to be delivering $300 million of new product annually. The timetable for completion of the existing block is three to four years, and WRI is anticipating an average return on investment of about 9%, Smith says.

In the conference call, Smith outlined Raintree Ranch Center in suburban Phoenix to demonstrate the sort of retail WRI is developing to hold long-term. Slated to open in October, the 140,000-sf lifestyle complex is anchored by a 60,000-sf Whole Foods Markets prototype located “in a mature, supply constrained trade area at an infill location, which provides the opportunity for strong future rental income growth.” Citing “outstanding retailers” such as Golf Galaxy, Shoe Pavilion and Starbucks, Raintree Ranch Center should ultimately yield ROI of 9% to 9.5%, Smith said.

Beyond the pension funds and private money desperate for both retail and industrial real estate, users are driving demand for new space, according to EVP Johnny Hendrix, who provided the first quarter asset management report. WRI completed 304 new leases and renewals totaling 2.1 million sf, with an average rental rate increase of 11.1% on a GAAP basis and 9% on a cash basis. Retail occupancy “continues to improve,” Hendrix said, with retail at 95.4%, up from 94.9% at the end of the first quarter 2006.

In a deal-making mode, WRI already has more than 1,000 meetings set up for this month’s International Council of Shopping Centers program in Las Vegas, says Hendrix, adding the firm has already conferred with nearly three-dozen top brands such as J.C. Penney’s, Staple, Target and TJ Maxx as part of a plan to conduct advance portfolio reviews. “The continuing strong demand from retailers for good quality space is continuing to push rents higher,” says Hendrix, who adds that 3.3% growth in same-store net operating income during the first quarter reflects that ardor, as well as the pruning of non-core assets in keeping with the three-year plan. WRI plans to have its portfolio weighted heavily on high-end properties, and Hendrix says that preference is beginning to boost numbers now that under-performers are being weeded out.

That non-core divestment trend will continue forward in 2007, says CEO Andrew Alexander, who reported that $124 million of properties have already been sold in 2007, with the disposition target set at $650 million to $800 million for the year. Those already sold did so at an average capitalization rate of 6.7%, but their removal from the portfolio contributed to a decrease in net income per share on a fully diluted basis of 53 cents, down from 57 cents one year ago.

On the plus side, Funds From Operations was at 74 cents per share for the first quarter versus 72 cents per share at end of the first quarter in 2006. Meanwhile, the company declared a dividend of $0.495 per common share for the first quarter, up from $0.465. That equates to an annual growth rate of 6.5%, from $1.86 to $1.98 per common share. The repositioning of WRI’s portfolio is seen as a positive, but officials warned that implementation of the three-year strategy will have its bumps.

“Our new strategy has many moving parts … that will result in quarterly earnings being anything but smooth,” says Richter. Even so, WRI remains confident in earlier guidance of FFO growth from $2.98 to $3.04 per share in 2007. “I am pleased with our execution in the first quarter, and I am very optimistic,” says Alexander.

Listed on the New York Stock Exchange under the WRI symbol, the company closed trading on Friday at $48.50 per share. As one of the country’s largest equity REITs, WRI owns 405 properties and 48.6 million sf in 22 states, mostly in the south, but with exceptions in Maine, Oregon and Washington. Of those, 336 are neighborhood or community shopping centers often with a grocery anchor, while 69 are industrial buildings. The latter class is located in California, Florida, Georgia, Tennessee and Texas.

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