I'm sure you have heard the saying "Don't Mess With Texas" and this certainly applies to this Houston-based sharp shooter, Whitestone REIT (NYSE:WSR). A few weeks ago I wrote an article (This Big 7% Dividend Yield Comes In A Small REIT Package) on the small-cap shopping center REIT and I spelled out the key differentiator of the high divided paying stock:
Whitestone has been successful because the company has a core of competence in certain key strategic markets as well as a track record for filling up centers. In a recovery market (like today), there is tremendous opportunity in acquiring and repositioning assets that in turn generate substantial returns.
With a dividend yield of 7.3%, Whitestone is the highest paying shopping center REIT and is also one of the highest paying equity REITs. Even over the last few weeks since I wrote on Whitestone, the dividend yield has climbed from 7.06% to 7.3%. With a current share price of $15.62 (and a market cap of $266 million), Whitestone seems to be a sweet little REIT that deserves more attention.
As a follow up to my research and ordinary due diligence practices, I recently caught up with Whitestone's CEO, James C. "Jim" Mastandrea. I had a few questions that I wanted to ask him and he was kind enough to provide me with the answers. Conducting interviews with REIT management teams is a necessary part of my analysis and the point of this article (as well as all of the others) is to provide information. I have no knowledge of any individual circumstances, goals, and/or portfolio concentrations and readers should conduct their own due diligence before purchasing any stocks I recommend.
Thomas: I understand that Whitestone owns and re‐develops shopping centers in certain key markets. What differentiates your company for the other shopping center REITs?
Mastandrea: We are a community center operating REIT and we strive to meet the needs of communities unlike a shopping center REIT which provides ways for people to shop. We have 70% service tenants, we have service goods, we have tenants in small spaces which are entrepreneur type tenants and we drive our business by helping our tenants dive and grow their businesses.
Thomas: Somewhat unique to Whitestone is the large non‐anchored tenants in your portfolio. How does Whitestone manage its "mom and pop" tenant base and how does Whitestone manage the credit risk (of its non investment grade tenants) when interest rates begin to notch up?
Mastandrea: We really don't have any large non anchor tenants in our portfolio; the anchor tenants we have, including Safeway, Albertsons, Walgreens, AJ's Fine Foods etc., are not our central focus. Whitestone has been successful at buying weaker performing assets and redeveloping them.
Thomas: What is your secret?
Mastandrea: In essence our business model is a clone of an apartment business model. We lease spaces on absolute numbers as opposed to square foot and we usually receive 3 year leases and the entre tenants will sign them personally or put up guarantees or letters of credit because it's their primary business; it's always the first thing they pay to make sure they keep their doors open.
Thomas: Also, is the market sustainable? In other words, is the market for distressed retail slowing down?
Mastandrea: No, the market for distressed retail is not slowing down.
Thomas: In regards to your balance sheet, how is your company managing risks of rising interest rates? How much variable‐rate debt do you have in your portfolio?
Mastandrea: We have been very busy on the debt refinance front. We are looking at our loans that mature this year and going out and heavily marketing those loans to make sure we get the best terms and largest possible rate reduction. While rates have moved up a bit, the good news is that the majority of those loans maturing were done in the 2008 time frame when financing was really tough. Most of the fixed rates were at 6 ½ % and one variable was at LIBOR and 286 bps. So, we should see some considerable improvement in rates. We're going to push to get these refinancings in place.
Thomas: It seems that Whitestone has a larger FFO payout ratio (as compared with the peer group). In looking back, it also appears that the payout ratio was higher in 2011 and 2012. What are your thoughts on the payout ratio?
Mastandrea: We're a value‐add REIT and our payout ratio should be considered not just in light of the NAV but also intrinsic value as well and we give a portion of the value add component back.
Thomas: Whitestone's primary markets are Dallas, Houston, San Antonio, and Phoenix. Do you intend to look at other markets?
Mastandrea: Yes. We haven't disclosed those markets yet, but we have had high level discussions in that regard.
Thomas: Whitestone's occupancy is around 86% and fairly consistent since 2010. Do you expect to grow occupancy to 90%?
Mastandrea: As we make forward progress in occupancy we tend to buy more properties which are value‐added which have lower occupancy with upside potential and this drags the number down. So, on a property to property basis we are making progress. Overall, the portfolio is slower to move because we continue to add new properties that have vacancies.
Thomas: Whitestone commenced as a non‐traded REIT with significant retail investors. Does the company plan to extend into the institutional markets or perhaps JV with larger partners?
Mastandrea: We are 40 % institutional now. We like having just one class of stock and no joint ventures. It keeps it much easier for analysts to evaluate the company and write about us.
Summary: As I suggested in my previous article (on Whitestone), I recommend the shares and the price has dropped below my target price of $16.00. The latest price for Whitestone is $15.62 and the strong dividend yield of 7.3% is seemingly attractive. Also, since I reported last, Whitestone has announced the acquisition of Anthem Marketplace, a 113,293 square foot shopping center in Phoenix.
The center is anchored by Safeway and includes a broad tenant mix of dining establishments and personal care services and retailers. Whitestone purchased Anthem Marketplace with $23.3 million of cash drawn on Whitestone's unsecured revolving credit facility. Anthem Marketplace has in-place net operating income of approximately $1.8 million, or 8% of the purchase price, and, based on Whitestone's current number of shares of common stock outstanding, is expected to add approximately $0.06 per share in annual Funds From Operations (or FFO).