Published by Bob Ciura on July 17th, 2017
Real Estate Investment Trusts are popular investments among income investors, for obvious reasons.
They are required to pass along the vast majority of their earnings in order to retain a favorable tax structure, which results in some eye-popping yields across the REIT asset class. You can see all 173 publicly-traded REITs here.
For example, Whitestone REIT (WSR) has a 9% dividend yield, which is more than four times the average dividend yield in the S&P 500 Index.
It is one of 405 stocks with a 5%+ dividend yield. You can see the full list of established 5%+ yielding stocks here.
Not only does it have a very high dividend yield, but it also makes its payments each month. You can see the entire list of all 34 monthly dividend stocks here.
Stocks with such extremely high yields can also carry significant risk. As a result, it is critical for investors to make sure the high dividend payouts are sustainable over the long term.
This article will discuss Whitestone’s business model, and whether its dividend is covered by sufficient cash flow.
Whitestone is a commercial REIT. Its properties are located primarily in the South:
- Phoenix (50% of operating profit)
- Houston (20% of operating profit)
- San Antonio/Austin (20% of operating profit)
- Dallas (9% of operating profit)
- Chicago (1% of operating profit)
Whitestone’s focused strategy is a competitive advantage. It primarily invests in destination centers, such as grocery stores, retail outlets, banks, restaurants, and many more.
As of March 31st, 2017, Whitestone’s portfolio consisted of 69 properties, with over 1,500 tenants. It has a solid occupancy rate of 89%.
Source: June 2017 Investor Presentation, page 17
Whitestone believes its investment properties are “e-commerce resistant”, because they are go-to destinations that provide needed or necessary centers. Moreover, the company believes these are products and services that are not readily available online.
And, these properties are located in densely-populated, high-income areas, which are experiencing strong growth.
Not only does Whitestone expect its properties to benefit from population growth, but from household income growth as well.
According to the company, household growth within a three-mile radius is likely to exceed 8% per year, over the next five years. Furthermore, households within a three-mile radius are expected to generate income growth of approximately 7.8% per year, over the same time.
The neighborhoods it invests in have an average household income of over $75,000, well above the industry average of approximately $62,000.
This focus has served the company, and its shareholders, very well. Whitestone has racked up very high growth rates for the past seven years.
Source: June 2017 Investor Presentation, page 23
Since Whitestone’s initial public offering in August 2010, its revenue and funds from operation have grown by 23% and 32% per year, respectively.
Going forward, the company will continue its acquisition strategy to fuel future growth.
Acquisitions are a key piece of Whitestone’s growth strategy. The company abides by several acquisition criteria before purchasing a property.
First, it seeks to find visible properties in well-established, high-income areas. The properties are typically 50,000-200,000 square feet.
And, the properties must have potential for increasing rents and renovation potential, and may also feature vacant land to build on.
It also will invest in distressed properties, whose maturity has passed with a high likelihood that it will not be refinanced. Purchasing non-performing assets allows Whitestone to buy valuable properties on the cheap, which it can redevelop and earn a sizable rate of return.
It completed two major acquisitions to start 2017, BLVD Place and Eldorado Plaza, both located in Texas.
Acquisitions have generated strong growth for Whitestone since its IPO, but growth has leveled off in recent years.
Source: June 2017 Investor Presentation, page 6
It finances these acquisitions with a mix of internally generated cash flow, as well as external equity and debt issuances.
In 2016, Whitestone grew revenue by 12%. Net profit rose 18%, and FFO increased 10%.
FFO, or Funds From Operation, is a non-GAAP measure typically utilized by REITs to express cash flow available for distributions.
FFO-per-share declined fractionally from the previous year, due to higher shares outstanding. But the company remained solidly profitable, with FFO-per-share of $1.34.
FFO-per-share declined again in the first quarter. Revenue increased 11%, but FFO-per-share declined 5.8% year over year.
Fortunately, Whitestone expects FFO-per-share in a range of $1.34-$1.39 per share for 2017, which would represent a return to growth on a per-share basis.
Whitestone has obvious appeal for income investors, because of its very high dividend yield.
That said, it is also important to assess a REIT’s ability to pay its dividend, especially with such high-yielding stocks like Whitestone.
For the first quarter of 2017, Whitestone had a debt-to-EBITDA ratio of 8.8, which is high.
The good news is, management intends to reduce the ratio to 7.0 over the next one to two years. The bad news is, this is still a fairly high debt level, which means further work needs to be done.
The company generates enough cash flow to pay its dividend for now, thanks to a sufficient coverage ratio.
Source: June 2017 Investor Presentation, page 28
Whitestone’s 2016 core FFO of $1.34 per share fully covers its annualized dividend of $1.14 per share. If the company can continue growing FFO moving forward, it will strengthen its dividend coverage.
Another piece of good news is that approximately 64% of Whitestone’s debt is fixed-rate, with a manageable weighted average interest rate of 4%. This will help blunt the impact of rising interest rates moving forward.
Its mortgage debt averages just $7.7 million in maturities over the next three years. It has ample short-term liquidity, with over $100 million in an unused credit revolver, along with $6.5 million in cash.
However, the longer-term picture is much cloudier.
Whitestone is facing approximately $278 million in total maturities in 2020. If the company can grow FFO-per-share, it could withstand its long-term maturities.
Still, investors should keep an eye on Whitestone’s financial results in subsequent quarters, to confirm its debt reduction strategy is still intact.
The old saying ‘high risk, high reward’ seems to apply to Whitestone. While the stock has a tantalizingly high dividend yield, it is not without risk.
The current dividend payout looks sustainable for now and over the next few years. Whether the dividend can be maintained over the long-term, remains to be seen.
If everything goes according to plan, Whitestone could be an attractive stock for investors looking for income right now, such as retirees.
Whitestone has not raised its dividend since its IPO in 2010, meaning it is not as attractive for dividend growth investors.
As a result, the decision whether to buy Whitestone stock, may come down to the investor’s time horizon and level of risk aversion.