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Whitestone REIT (NYSE: WSR) is a real estate investment trust (REIT) engaged in the ownership and operation of commercial retail properties in major metropolitan areas. Whitestone’s real estate portfolio includes community-focused shopping centers. It derives its revenue primarily from culturally diverse markets in five metropolitan statistical areas (MSAs) – Austin, Dallas, San Antonio, Houston and Phoenix. This REIT has 5.2 million gross sales area (GSAs) spread across 60 properties. The occupancy rate is 91 percent, which the company intends to increase to 93 percent by the end of this year.
Whitestone acquires, owns, manages, develops and refurbishes high quality open air neighborhood centers and generates revenue primarily in the form of rentals from over 1500 tenants. The weighted average rent per square foot is over $20, with a weighted average lease term of 3.9 years:
“Whitestone strives to build communities that thrive by creating local connections between consumers in surrounding communities and a well-crafted mix of national, regional and local tenants who provide everyday needs, essential services, entertainment and experiences.”
Ownership and Capital Structure
WSR’s capital to debt (D/E) ratio is 1.6. Total debt is about $645 million, while Whitestone has a market cap of $526 million. The stock trades at a price-to-book (P/B) ratio of 1.3. It is expected to improve its debt metrics and strengthen its balance sheet. The weighted average interest rate on its loans is 3.6 percent and the weighted average life is 2.6 years. The company also intends to sell assets that are less aligned with its core strategy, have little growth potential and/or would strengthen balance sheet metrics.
Whitestone’s ownership structure is very interesting. About 6 percent of common stock is owned by insiders, while two-thirds is owned by financial institutions. About a quarter is owned by the three largest investment management firms – BlackRock Inc., Vanguard Group Inc. and State Street Corporation. Whitestone has a strong value creation pipeline through which it has identified strategic, strategic and pad site developments.
Whitestone’s development plans
Whitestone has committed to reducing 2022 general and administrative (G&A) expenses by $3 million year over year to $3.5 million. The company aims to reduce management compensation and increase efficiency through regional realignment. Expense reimbursement is tied to triple-net leases, where the tenant agrees to pay real estate expenses such as property taxes, buildings insurance, and maintenance, in addition to rent and utilities.
In its 2022 guidance, Whitestone also expects same-business net operating income (NOI) growth of between 3 and 5 percent, non-performing loans 1.5 percent of sales and debt/EBITDA between 7.8 and 8.1.
Whitestone has benefited from its focus on high-quality, open-air neighborhood centers located in high disposable-income cities. Neighborhood properties cost less than those in central business districts (CBDs), but household incomes are not significantly different. Whitestone has the advantage of relatively little competition. Because Whitestone properties are in prime locations in MSA, the real estate supply is limited. Additionally, these areas offer many expansion efforts.
The company also has a well thought-out mix of tenants. The company believes that “work from home” policies will drive populations to MSAs located in desirable areas. These centers are also well located for millennial relocation. The company expects the average cold rent to increase by 7 percent. A large proportion of the leases already contain a clause with an annual rent increase of 3 percent. The company also claimed that it is reviewing its portfolio for monetization opportunities.
Dividend and share price development
Whitestone is a monthly dividend stock and has consistently paid dividends for the past 12 years. However, following the COVID-19 pandemic, WSR cut its dividend from $0.095 to $0.035. Currently, the monthly dividend is $0.04. Funds from operations (FFO) per share are expected to reach $1, which is strong enough to cover the payout. It was targeting a compound annual growth rate (CAGR) of 3.5 percent FFO per share over the period 2019-2022 and is on track to achieve that goal. REITs have generated an average return of over 8 percent over the past decade. However, returns in 2021 and 2022 are significantly lower in the 4 to 5 percent range.
Whitestone was a low volatility stock until the market crash due to the Covid-19 pandemic in mid-March 2020. It cost between $11 and $15 for almost a decade. The price fell below $5 and took almost 2 years to recover and surpass $11. The stock has traded at almost the same price for the last 3 months. The stock is expected to fully recover and trade steadily in the pre-pandemic price range again. The closing price on June 17th was $10.55. Therefore, there is more room for a price hike to get back into the pre-pandemic trading range.
Investment thesis and risk
Commercial real estate takes years to develop and operate. Therefore, with an increasing demand for such retail properties in a certain region, it is not possible to cover the supply in the short term. With increasing scarcity, rents for existing properties will inevitably rise. The properties should also be fully let. This is more common with hospitality and commercial retail properties due to their cyclical nature.
Given the relatively low level of competition among these five MSAs in high-quality open-air neighborhood centers, Whitestone can certainly win on these metrics. It is a high volatility, low volatility stock and the return is well supported by FFO. Triple-net lease and rent adjustment clauses reduce the risk of negative impacts on FFO. The forecast for 2022 looks promising and the company is on the right track. The share price is quite low, as is the market cap. Strong stock fundamentals definitely point to upside potential.
However, given macroeconomic conditions, there is scope for further downside in prices. As the US economy faces unprecedented inflation and the Federal Reserve System (FED) is expected to raise interest rates through a series of rate hikes, it will also increase borrowing rates, the cost of capital and unemployment. Led to lower disposable income and lower consumption. Economists polled by the Wall Street Journal predict an inevitable recession. There is a 44 percent chance of a recession in the next 12 months, a level typically seen only during or on the brink of an actual recession. All of this will most likely impact the 2022 guidance issued by Whitestone Management.