Whitestone REIT’s (WSR) share price appreciation of 30% this year generated talk about the possibility that the stock has been hyped. For a shopping center REIT (primarily community and neighborhood shopping centers), their storyline about being e-commerce resistant is very appropriate. However, it is a small cap, geographically concentrated, highly leveraged REIT that is dependent solely on its operations to improve its debt metrics. The management says that they have room to rally from $14 to $20-23 a share, which leads us to a big question. Is that actually possible or is it just hype?
WSR’s strategy of attracting tenants that have little online competition stands out in retail today. This works well as investors have been leery of some types of retail stocks. Big name franchises, such as Macy’s, JCPenney’s, and Kohl’s, have reported store closures due to increasing online competitors. Also, since the portfolio is sector diverse and tenant fragmented (largest tenant represents less than 3% of annualized base rental revenue), it offsets any potential issues they may have with delinquent, small business tenants.
Relative to its peers, WSR multiples have migrated from very cheap at the start of the year to cheap. This January the stock was trading 10 times AFFO. After the recent rally, WSR remains cheap, trading at about 14 times AFFO, as opposed to 24 times AFFO for the shopping center sector. If the share price manages to soar up to management’s target of $20, the stock will be trading at 17 times AFFO, which is still below its peers. As a result, it’s not too farfetched to think they can get there.
However, the problem with WSR is its high risk nature. Geographically speaking, the company relies on the Houston and Phoenix metropolitan area for more than three-fourths of their gross leasable area. It relies on development and redevelopment to grow, is high levered, and its dividend has been barely covered.
In summary, WSR might still be offering a good opportunity, at least this is what is believed by Dirk Leach (click here). However, due to its risks, I’d only consider it as part of a REIT portfolio strategy rather than a standalone stock pick.
Source: Whitestone REIT(NYSE:WSR)
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