Updated on July 13th, 2021 by Bob Ciura
Whitestone REIT (WSR) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It is a high yield stock based on its 5.1% dividend yield.
Related: List of 5%+ yielding stocks
#3: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:
Whitestone REIT’s trifecta of favorable tax status as a REIT, a high yield, and a monthly dividend make it appealing for individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Whitestone REIT.
Whitestone is a commercial REIT that acquires, owns, manages, develops and redevelops properties it believes to be e-commerce resistant in metropolitan areas with high rates of population growth.
Its properties are located primarily in the southern United States in areas it sees as having favorable demographics, such as income and economic growth. The trust’s properties are mostly in Phoenix and Houston, with smaller allocations to other major cities in Texas.
The company’s acquisition criteria includes community-centered properties that are visibly located in developing and diverse areas.
Source: Investor Presentation
Properties are typically in the 50,000-200,000 square foot range, and from $5 million to $180 million in cost.
Whitestone believes its investment properties are “e-commerce resistant” because they are go-to destinations that provide necessary goods. Moreover, the company believes these are products and services that are not readily available online. In fact, Whitestone sees itself as the least susceptible to online replacement among its peer group.
These properties are located in densely-populated, high-income areas, which are experiencing strong growth. The image below would likely look even more impressive if cost of living were factored in as the company’s properties tend to be in lower cost of living areas relative to prominent East and West coast metropolitan areas.
Its portfolio is very diversified with about 1,400 tenants. The top 5 industries are restaurant & food service (23% of annual base rent (ABR)), grocery (9%), financial services (9%), salons (8%), and medical & dental (8%).
Source: Investor Presentation
Whitestone reported its first-quarter 2021 results on 05/04/21. For the quarter, the funds from operations (“FFO”) fell 5% to $8.8 million. The funds from operations per share also fell ~5% to $0.20 compared to the same quarter a year ago. Occupancy was 88.7% (vs. 89.7% a year ago), while same-store property net operating income (SSNOI) declined 4.3%.
Notably, WSR’s same-store NOI growth rate of 3.3% since 2018 was better than the peer average of 1.8%. In February 2021, the company raised its quarterly dividend by 2.4% to $0.1075, which translates to a monthly dividend of $0.035833 per share, or an annualized payout of $0.43 per share. We estimate a normalized 2021 FFOPS of $0.90.
Going forward, the company will continue its acquisition strategy to fuel future growth.
Whitestone’s growth strategy is centered around:
- Investing in locations with solid population growth
- Acquiring properties that are mismanaged, overleveraged, or in foreclosure or receivership
- Enhancing value property
From 2012 through 2015 Whitestone acquired 2.465 million square feet of gross leaseable area. From 2016 through 2019 Whitestone acquired 0.778 million square feet of gross leasable area.
The decline in acquisitions is due in part to a focus on deleveraging. The image below shows the company’s deleveraging goals and progress.
Source: Investor Presentation
With further deleveraging anticipated it’s likely that Whitestone REIT continues with its modest acquisition pace. Management believes, post-pandemic, investments in acquisitions, re-development, and development projects can drive returns of at least 10%. We would first like to see the SSNOI turn positive, which will likely be helped by a more supportive macro environment post-pandemic.
For now, we estimate a FFOPS growth rate of 2% through 2026 on a steady recovery. Whitestone’s current focus on deleveraging coupled with a distribution growth history that was flat for nearly a decade (before COVID-19 hit) means growth expectations are low for Whitestone.
Dividend & Valuation Analysis
As a retail REIT, Whitestone was not spared from the coronavirus pandemic of 2020. As a result of the steep 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 its FFO. A reduction during COVID-19 was both prudent and necessary. As the pandemic has subsided, Whitestone’s financial position has improved, which allowed the company to raise its monthly dividend modestly to $0.0358, where it currently stands.
The distribution looks secure going forward. We expect Whitestone to maintain a dividend payout ratio of 48% for 2021, based on our projected FFO-per-share of $0.90 for the full year. A dividend payout ratio below 50% is highly unusual for REITs, and implies a high level of dividend safety.
With such a low payout ratio, we believe the distribution will very likely increase from its current low based over the next several years. Whitestone REIT currently has a 5.4% yield. Additional distribution growth would only enhance investor’s yield on cost.
Another appealing factor is valuation. The REIT is currently trading for just 8.9x its fiscal 2021 expected FFO-per-share. The company’s 5 year historical multiple was a bit below 14x.
But with years of stagnation on a per unit basis and a recent distribution reduction, we conservatively forecast a fair value price to FFO of 11x for Whitestone. Therefore, if the valuation multiple were to expand from 8.9 to 11 over the next five years, this would lift shareholder returns by 4.3% annually.
Adding in the 2% annual FFO-per-share growth, potential shareholder returns could exceed 11% per year through 2026. This is an attractive expected rate of return, which makes Whitestone an appealing stock for value and income investors, albeit with an elevated level of risk.
With a 5.4% distribution yield, positive EPS growth expectations and potential valuation multiple returns, Whitestone REIT offers investors 10%+ expected total returns.
And this is without any increase in the distribution over the next five years. We believe distribution increases are likely in the medium term because Whitestone REIT’s payout ratio is so low for a REIT currently.
The security has shown it can continue to pay shareholders at this new lower distribution rate even during COVID-19. The monthly dividends are a bonus for investors looking for income. And, the low valuation should appeal to value investors.