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by Bob Ciura, SureDividend.com
Whitestone REIT (WSR) has two 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.
#2: It pays dividends monthly instead of quarterly.
Whitestone REIT’s trifecta of favorable tax status as a REIT, a high yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Whitestone REIT.
Business Overview
Whitestone is a retail REIT that owns about 57 properties with about 5.1 million square feet of gross leasable area primarily in fast-growing U.S. markets such as Texas and Arizona. Its tenant base is very diversified consisting of 1,453 tenants with no single tenant exceeding 2.1% of annualized base rental revenue.
Its strategy is to prioritize renting to strong tenants and service-oriented businesses, including grocery, restaurant, health and fitness, financial services, logistics services, education, and entertainment, etc. in neighborhoods with high disposable income. Whitestone was founded in 1998 and is headquartered in Houston, Texas.
Whitestone reported its second quarter 2024 results on July 31st, 2024, during which it witnessed an occupancy rate of 93.5% versus 93.3% in Q2 2023. For the quarter, revenue growth was 3.0% to $37.6 million versus Q2 2023. Funds from operations (“FFO”) rose 6.5% year over year to $11.3 million, while FFO per share rose 4.8% to $0.22. Same-store net operating income (“SSNOI”) rose 6.6% to $24.1 million.
Also, rental rate growth was 17.5%, down from 18.7% a year ago, supported by a jump in rental rate growth in new leases of 33.3% vs. 32.2% a year ago. Renewal leases growth was 13.9% versus 16.2% a year ago. There were 30 new leases and 47 renewal leases in the quarter.
Year to date, revenue growth was 3.5% to $74.8 million, FFO growth was 1.7% to $23.1 million, and FFO per share was flat at $0.45. Whitestone’s latest 2024 guidance is as follows: SSNOI growth of 3.0%-4.5% and core FFOPS of $0.90-$1.04. It forecasts an ending occupancy of about 94.3%.
Growth Prospects
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
Since Whitestone began reporting FFO, it has seen minimal growth in its FFOPS. This is not a result of decreased FFO but instead an increase in shares outstanding. Since 2014, Whitestone has issued more than 25 million shares, effectively doubling its share count, primarily to fund acquisitions.
In part due to that share dilution, there was no dividend growth from 2016 to 2019, and a dividend cut occurred during the pandemic. In February 2021 and 2022, the REIT declared dividend increases. While it did not declare a dividend increase in 2023, it resumed increasing the dividend in March 2024.
That said, the REIT should have the capacity to improve its dividend in the long run. For now, we use an estimated dividend growth rate of 6% through 2029, which would lead to a sustainable payout ratio of ~51% for a REIT. Whitestone’s exposure to the high growth Sun Belt market, as well as its investments in acquisitions, re-development, and development projects will drive future growth.
The continuation of SSNOI growth since Q1 2021 is a good sign. We would like to see it stay that way. For now, we estimate a FFOPS growth rate of 5% through 2029.
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Dividend & Valuation Analysis
Whitestone cut its dividend by 63% in 2020. The company is now steadily increasing its dividend, but it’s a long way off from the pre-pandemic levels. Currently, the payout ratio of 49% is sustainable.
At the end of Q2 2024, Whitestone had a debt-to-asset ratio of 63% and debt-to-equity ratio of 1.7 times. At the end of the quarter, the REIT had $3.2 million in cash and cash equivalents. Moreover, its payout ratio is much more sustainable than pre-pandemic levels because of a lower dividend.
The distribution looks secure going forward. We expect Whitestone to maintain a dividend payout ratio of 49% for 2024, based on our projected FFO-per-share of $1.01 for the full year. A dividend payout ratio below 50% is highly unusual for REITs, and likely implies a high level of dividend safety.
With such a low payout ratio, we believe the distribution will almost certainly increase from its current low base over the next several years. Whitestone currently has a 3.7% yield. Additional distribution growth would only enhance investors’ yield on cost.
Final Thoughts
With a 3.7% distribution yield, positive EPS growth expectations, and monthly dividends, Whitestone offers investors an expected total annual return of 10.0% over the next five years.
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 the payout ratio of Whitestone is abnormally low for a REIT.
The monthly dividends are a bonus for investors looking for income.
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