- Whitestone REIT's shares were kicked to the curb in March when the company issued its 2018 FFO guidance.
- Whitestone REIT's dividend yield has spiked to ~11 percent, suggesting that the market is increasingly concerned about the REIT's dividend sustainability.
- However, Whitestone REIT has not slashed its dividend before, and the REIT continues to cover its dividend with cash flow.
- An investment in WSR is only suitable for investors with a very high risk tolerance. Investors that rely on safe dividend income should give WSR a pass for now.
Whitestone REIT's (NYSE:WSR) shares plunged after the company released a soft FFO guidance for 2018 and missed FFO estimates for the fourth quarter. As a result, Whitestone REIT's dividend yield has spiked, reflecting increasing investor concerns that the dividend might be at risk. What should income investors do now?
A company that reports lower funds from operations or that guides for a decline in FFO puts shareholders in a tricky situation. When a company guides for lower FFO and/or misses FFO estimates, it typically triggers a sell-off in the stock. And this is exactly what happened with Whitestone REIT in March.
See for yourself.
A soft FFO guidance is concerning because it could foreshadow a dividend cut. And that makes sense: Declining funds from operations will almost certainly lead to a deterioration of a REIT's dividend coverage, which in turn could yield a dividend adjustment if the company starts to underearn its dividend.
Since income investors don't hate anything more than a dividend cut, a spiking dividend yield is often a major red flag. In other words, if the yield explodes, investors are increasingly concerned about dividend sustainability and are pricing in a dividend cut.
Whitestone REIT's dividend yield has risen to 11.1 percent after the price drop in March, meaning that the market views Whitestone REIT's dividend as increasingly risky.
That said, though, I don't expect the real estate investment trust to slash its monthly dividend of $0.095/share over the short haul. For one thing, Whitestone REIT declared three more stable monthly cash dividends for the second quarter in March. Further, Whitestone REIT has not cut its dividend before, it has paid a stable $0.095/share monthly dividend since 2010, the REIT's IPO year. Lastly, Whitestone REIT, at least for now, still covers its dividend payout with core FFO.
Whitestone REIT's core FFO payout ratio averaged 87 percent in the last ten quarters, but has risen above average lately. The Q4-2017 core FFO payout ratio was 95 percent, indicating a thinner margin of dividend safety.
Source: Achilles Research
The REIT further expects to pull in core funds from operations of $1.19-1.24/share in 2018 (versus $1.25/share in core FFO in 2017). The guidance implies a 3 percent year-over-year decrease in core FFO. While the lower guidance is obviously not a good thing, the REIT, however, would still be able to cover its projected annual dividend payout of $1.14. Obviously, the margin of dividend safety would decrease, but that doesn't mean that a dividend cut is imminent.
How Much For Whitestone REIT's Dividend?
Whitestone REIT's dividend stream sells for ~8.6x Q4-2017 run-rate core FFO and for ~8.5x 2018e core FFO.
What Should Investors Do Now?
If you already own Whitestone REIT, I'd stick with it for now. There is a good chance that Whitestone REIT's shares recover from the March sell-off, and close the gap in the share chart.
If you don't own Whitestone REIT and you have a high risk tolerance, this may be an attractive entry point into the stock.
If you don't own Whitestone REIT and you have a low risk tolerance, give it a pass and consider a REIT with a more conservative FFO payout ratio, like this one.
Whitestone REIT's dividend risk has increased, yes, but that doesn't mean that a dividend cut is imminent. Whitestone REIT has paid its monthly dividend since its 2010 IPO, and never cut its dividend before. The lower FFO guidance is a negative, sure, but the company should still be able to cover its dividend with core funds from operations in 2018. Because investors have bailed on the REIT, the dividend yield has spiked, offering new investors an entry yield of 11.1 percent. Whitestone REIT is only suitable as an income investment for investors with an above-average risk tolerance. Speculative Buy.
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