Whitestone (NYSE:WSR; Diversified) has outperformed competitors with an impressive dividend yield of 9.8 percent. The company, with $314 million market capitalization, has definitely made the top 10 Dividend Yield REITs we track. A look at Whitestone’s year-to-date share performance tells a different story, however. That performance indicator shows a 23 percent downfall. Such a contradiction begs the question: Is this a great buy opportunity or is this company’s shares accurately priced?
Although Whitestone has a portfolio resembling and performing like a regional mall company with a grocer anchor model of shopping centers, this REIT is categorized as Diversified. Whitestone considers itself to be a developer of community centers. Seventy percent of the tenants occupy small spaces of less than 3,000 square feet, which matches the surrounding neighborhoods’ shared needs.
Despite having a diverse foundation of over 1,380 tenants, targeting these smaller retailers as a community center strategy carries more risk. These current properties are located in the two growing metropolitan areas of Houston, TX, and Phoenix, AZ. Eighty-four percent of the company’s gross leasable areas are located in those two cities. Unemployment in these areas has been under 5 percent.
Whitestone must be very active in its asset management in order to attract their target tenants and create the right combination for the needs of each neighborhood. Close attention must be dedicated to watch vacancy since lease terms are shorter. With an occupancy rate of 86 percent, the company’s performance is lower than comparable retail REITs.
Other metrics, however, show evidence for boisterous growth. Whitestone just celebrated its five-year anniversary as a public company. The second quarter of 2015 showed exuberant results. Total year-over-year revenue has escalated 27.3 percent. Just as impressive is the 33.2 percent property net operating income growth. Same store NOI raised 6.9 percent while core fund from operations rose 27.3 percent. Core FFO per diluted share jumped 20.7 percent. This great performance hasn’t translated in an increased dividend, though. The dividend has remained at a $0.095 per month since its IPO launch in 2010.
Whitestone’s price-to FFO of 9.1x is in line with that of a riskier smaller company. But, this is down from its historic norm. The dividend yield has generally been high and at the current upper 9 percent yield range makes the company an attractive investment. However, this investment has a downside given that the dividends haven’t been raised in the past 5 years. The price per share of just under $12 hasn’t raised significantly from the IPO share price of $12. The shareholders carried the burden of the company’s growth because of share dilution.
Whitestone has a unique business model, setting it apart from other retail REITs. However, the company relies heavily on management to make the model work well. My initial excitement has been tempered by realizing the risk level involved. As a result, this is an investment that I won’t make.
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.