Updated July 13, 2021 by Bob Ciura
Whitestone REIT (WSR) has three attractive investment characteristics:
# 1: It’s a REIT It therefore has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of Publicly Traded REITs
# 2: It’s a high-yield stock based on a dividend yield of 5.1%.
Related: List of stocks with a yield greater than 5%
# 3: It pays off monthly instead of quarterly.
Related: List of Monthly Dividend Stocks
You can download our full Excel spreadsheet of all monthly dividend stocks (along with key metrics like dividend yield and payout ratio) by clicking the link below:
Whitestone REIT’s Trifecta, with its favorable tax status as a REIT, high yield and monthly dividend, makes it attractive to private investors.
But the company has more to offer than just these factors. Keep reading this article to learn more about the Whitestone REIT.
Whitestone is a commercial REIT that purchases, owns, manages, develops, and redevelops real estate in high-growth metropolitan areas that it believes are e-commerce-resistant.
The properties are primarily located in the southern United States in areas they believe have favorable demographics, such as income and economic growth. The trust’s properties are primarily in Phoenix and Houston, with minor assignments to other major cities in Texas.
The company’s purchase criteria include community-based properties that are visibly located in development and diversity areas.
Source: Investor Presentation
Real estate typically ranges from 50,000 to 200,000 square feet and costs between $ 5 million and $ 180 million.
Whitestone believes its investment properties are “e-commerce resistant” as they are destinations that provide the necessary goods. Additionally, the company believes that they are products and services that are not readily available online. In fact, Whitestone sees itself as the least vulnerable to online replacement among its peer group.
These properties are located in densely populated, high income areas that are experiencing strong growth. The image below would probably look even more impressive if the cost of living was factored in, as the company’s real estate tends to be in lower cost of living compared to well known metropolitan areas on the east and west coasts.
The portfolio is very diversified with around 1,400 tenants. The top 5 sectors are gastronomy and gastronomy (23% of the annual basic rent (ABR)), groceries (9%), financial services (9%), salons (8%) and medicine and dentistry (8%).
Source: Investor Presentation
Whitestone announced its results for the first quarter of 2021 on 04/05/21. Funds from Operations (“FFO”) decreased 5% to $ 8.8 million for the quarter. Funds from Operations per share were also down ~ 5% year over year to $ 0.20. Occupancy was 88.7% (down from 89.7% a year ago) while net operating income (SSNOI) of properties in the same store decreased 4.3%.
Notably, WSR’s NOI growth rate of 3.3% since 2018 was better than the peer average of 1.8%. In February 2021, the company increased its quarterly dividend 2.4% to $ 0.11075, which translates to a monthly dividend of $ 0.035833 per share, or an annualized distribution of $ 0.43 per share. We estimate a normalized FFOPS 2021 of $ 0.90.
The company will continue its acquisition strategy in the future in order to drive future growth.
Whitestone’s growth strategy is focused on:
- Investing in locations with solid population growth
- Acquisition of real estate that is poorly managed, overindebted, or in foreclosure or administration
- Increase value characteristics
From 2012 to 2015, Whitestone acquired 2,465 million square feet of gross lettable space. From 2016 to 2019, Whitestone acquired 0.778 million square feet of gross leasable space.
The decline in acquisitions is partly due to the focus on deleveraging. The figure below shows the company’s goals and progress in reducing debt.
Source: Investor Presentation
With further deleveraging expected, Whitestone REIT is likely to continue its modest acquisition pace. Management believes that investments in acquisitions, new developments and development projects can generate returns of at least 10% after a pandemic. We’d like the SSNOI to go positive first, which is likely to be aided by a more supportive post-pandemic macro environment.
For now, we estimate an FFOPS growth rate of 2% through 2026 with a steady recovery. Whitestone’s current focus on deleveraging coupled with a distributional growth trajectory that has been stagnant for nearly a decade (before COVID-19) means that growth expectations for Whitestone are low.
Dividend and valuation analysis
As a retail REIT, Whitestone has not been spared the 2020 coronavirus pandemic. Due to the strong economic impact of the pandemic, Whitestone REIT reduced its monthly dividend from $ 0.095 to $ 0.035 in April 2020.
The reduction was expected. Whitestone’s distribution has long been higher than the FFO. A reduction during COVID-19 was both sensible and necessary. As the pandemic subsided, Whitestone’s financial condition has improved, allowing the company to modestly increase its monthly dividend to $ 0.0358 where it currently stands.
The distribution looks safe in the future. We expect Whitestone to maintain a dividend payout ratio of 48% for 2021 based on our forecast FFO per share of $ 0.90 for the full year. A payout ratio of less than 50% is highly unusual for REITs and implies a high dividend security.
With such a low payout ratio, we assume that the payout will very likely rise in the next few years from its current low. Whitestone REIT currently has a yield of 5.4%. Additional growth in dividends would only increase the investor’s return on costs.
Another attractive factor is valuation. The REIT is currently only trading at 8.9 times its expected FFO per share for the 2021 financial year. The company’s historical 5-year multiple was slightly less than 14 times.
But with years of stagnation per unit and a recent cut in payout, we’re conservatively forecasting a fair price for the FFO of 11x for Whitestone. Should the valuation multiple increase from 8.9 to 11 over the next five years, it would increase shareholder returns by 4.3% annually.
Coupled with the annual FFO growth of 2% per share, the potential shareholder returns could be over 11% per year through 2026. This is an attractive expected return that makes Whitestone an attractive stock for value and income investors, albeit with an elevated risk level.
With a dividend yield of 5.4%, positive EPS growth expectations and potential valuation multiple returns, Whitestone REIT offers investors an expected total return greater than 10%.
And this is without an increase in the distribution over the next five years. We believe that payout increases are likely in the medium term, given that the Whitestone REIT’s payout ratio is currently so low for a REIT.
The security has shown that it can continue to pay shareholders at this new lower payout rate even during COVID-19. The monthly dividends are a bonus for income-oriented investors. And the low valuation should appeal to value investors.
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