This High-Yield Shopping Center REIT Is Trading At A Huge Discount

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

While the largest players in the retail real estate space, like Simon Property Group SPG and Realty Income O, get most of the attention, there are some big opportunities lurking among the smaller retail REITs. 

One such opportunity is with Whitestone REIT WSR, a shopping center REIT with 59 properties in some of the fastest growing markets in the United States including Phoenix, Arizona and Dallas-Fort Worth, Texas.

Whitestone’s Value: Whitestone has one of the lowest price to FFO multiples in the retail REIT industry, at only 8.8x compared to the sector average of 16.1x. The REIT’s shares are also trading at a steep discount of roughly 50% of its estimated net asset value. 

See also: How to Analyze a REIT

The company’s strategy involves acquiring undervalued properties and using its resources to increase occupancy and cash flow. This value-add business model creates higher returns over time and increased value for shareholders. 

Whitestone’s Portfolio: The company is focused on markets with high population growth and neighborhoods with high household incomes. All but one of the REIT’s properties are in Arizona and Texas, with plans to acquire properties in other high-growth areas such as Florida, Georgia, Tennessee and Colorado. 

While several retail real estate investors have been struggling with high vacancy due to the growth in e-commerce, Whitestone’s tenant mix includes a high concentration of internet-resistant businesses such as restaurants, grocery stores, financial services, and medical and dental. 

Company Outlook: There are two main fundamental factors contributing to the REIT’s low share price. 

The first is the company’s high leverage compared to its peers, with a debt to EBITDA ratio of 9.2x. A lot of this debt is due to costs associated with property renovations and lease ups, so the leverage ratios should improve as cash flow and property values increase. 

Another factor is the high general and administrative (G&A) expense ratio compared to its peers at 16.9%. For its size, Whitestone has a large staff and high salaries. As the REIT continues to grow its portfolio, this expense ratio should balance itself out. 

The company recognized and addressed both of these issues in its first-quarter 2021 investor presentation. Management expects to lower its debt to EBITDA ratio to 6x to 7x and its G&A expense ratio to 8%-10% by the end of 2023. 

If the company is successful in these improvements, its FFO should increase considerably. Even without the improvements, the company is a solid performer with consistent growth in its portfolio, occupancy and lease rates. The REIT’s FFO per share is already expected to increase significantly by the end of 2021 and dividend increases are likely considering the FFO payout ratio is only 45%. 

The Final Word: Whitestone REIT is definitely a value play worth looking at. There are some additional risks with its smaller portfolio size and high leverage, but the potential reward is high with this REIT.

Photo: Markus Spiske on Unsplash.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.