This Retail REIT Migrated From Very Cheap to Cheap

chart01.pngWhitestone 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)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Whitestone REIT: Risks that Potentially Outweigh Rewards

chart01When 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.

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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)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

This Office REIT’s Entry Point

 

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I have had an overwhelming feeling that healthcare and hotels reits are the only good entries left. Over the last few months many companies, with good fundamentals have reached high multiples. This has left fewer options on the table, and one of the last groups left has been net lease retail. Since this list has begun to slowly decline, I have found myself starting to weigh the risks over rewards more often and reviewing less popular picks. For example, just last week I picked Spirit Realty Capital, from the net lease group. I picked Spirit Realty because it showed a chance of potentially having a turnaround in the market.

This week, we’ll feature Whitestone, which is another option to the overcrowded shopping center sector. This company displayed some risks that could have some potential negative impact on their stock performance. But, today, I will look at Government Properties Income, an office REIT that is part of our second tier group. That is, for over five years, this company has been distributing the same or increasing stocks without interruption.

chart02During the last twelve months, the Government share price was down, and more recently up. It has an AFFO multiple that has been around 10 while its dividend yield is at 9% making it one of the highest yields. Despite the recent appreciation, this stock still has a 20% upside just from looking at its past performance.

Government Properties, which has been externally managed by the Portnoy family, is currently faced with two main concerns. The most compelling is that a portion of their portfolio is currently expiring in the short and mid-terms. Meaning that over the next two years 26% of this company’s portfolio will expire. In addition, since this is an election year, there will be a certain degree of uncertainty over the projected federal government expenses.

One of the management’s main goals has been to renew as many of their leases as possible, which they accomplished in the Q1. With their new leasing, the profile has improved, as opposed to the same time frame of last year. The occupancy levels have also been steady over the last year.

At the same, though, we are not sure about their debt profile, since those metrics have deteriorated. The ratios between debt to adjusted EBITDA and the total debt to total gross assets have increased. But the deterioration, so far, has been in small increments and has not yet threatened its public debt covenants. The company hold an investment grade rating.

chart03In regards to the elections, the management has yet been able to tell which direction the market will go. As of right now, they have also decided to not outline possible scenarios. With a potential change of party on the horizon, this will certainly cause a splash in the federal government. As a result of this, it will add more uncertainty to the expiring leases.

In conclusion, with so many declining opportunities that are outside the healthcare and hotel realms, Government Properties, with their high dividend yield and decent record, seems to be a good entry point into the market.

Check our previous post on Government Properties.

Source: Government Properties Income T(NYSE:GOV), Spirit Realty Capital, Inc.(NYSE:SRC), Whitestone REIT(NYSE:WSR)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.