When we reviewed Whitestone REIT last September, the share price was very attractive. It was yielding 10% and FFO multiple was about 9x. Since then, the share price saw an increase of 22%. It is now trading at 9.7 times FFO and has a dividend yield of 8.5%. If you take as reference its most recent peak in April 2015, the stock still has room for growth, but the question is whether it can build up enough muscle to fly high.
Although Whitestone is part of the diversified category, most peers are shopping centers. In fact, its properties are business centers and retail communities that serve entire neighborhoods. The company invests in retail properties that are more resistant to the internet and less vulnerable to economic cycles. They include specialty retail, supermarket, restaurants and medical, educational and financial services.
Unfortunately, the company has a number of risks that potentially outweigh any reward.
- Small capitalization – Despite its fast pace to grow, accumulating more than $600 million in acquisitions over the years since its IPO in 2010, the market value remains below $500 million.
- Geographical concentration – Although the properties are located in high growth areas, the portfolio is concentrated in Houston and Phoenix.
- Occupation below the peer average – The portfolio occupation has not matched its peers and remains below 90%.
- Bad debt – Because the company leases small spaces, many of its tenants are small businesses and bad debt can be a challenge. The management believes it is in a downward trend, remaining below 2% of revenues.
- High leverage – Some of its debt metrics have been really high. For instance, debt to EBITDA ratio is 8.7x, but the management believes it can go down to 7.0x.
Source: Whitestone REIT(NYSE:WSR)
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