This Fast Growing Small Cap Monthly Dividend REIT Has A 7.3% Dividend Yield by Dirk S. Leach, Sure Dividend

Today’s market is tough.

Bond yields were already at historic lows which pushed traditional utility stock valuations to historic highs.

Other income oriented equities like preferred shares and large REITs have also seen their share prices pushed up by lower for longer interest rates.

In today’s market, it is getting very difficult to find high quality conservative investments with a yield above 4% and even more difficult to find a monthly dividend paying investment above 4%.  What is an income investor to do?

One answer is to look for smaller, well managed, fast growing companies that are focused on returning a healthy share of their earnings to their shareholders.  This article highlights one such company, Whitestone REIT (WSR).

Readers of some of my earlier articles will note that I published on Sure Dividend a series of articles on monthly dividend paying REITs that started with “The Best Monthly Dividend Stocks“.  I didn’t cover WSR in that article because this small cap retail REIT had been flying under my radar.  Now that I’m aware of WSR, it is time to take a long hard look at this relative newcomer to the group.

When selecting a REIT for investment, it is important to look at the dividend yield through a qualitative (versus strictly quantitative) lens looking at the underlying risk adjusted performance to ensure the overall metrics such as the balance sheet, diversification, earnings growth, and payout ratios support continued growth of the REIT and its dividend.

Consistent with this approach, the investment thesis for WSR is presented in the following paragraphs and charts.

Whitestone REIT (WSR) In Focus

WSR is a fully integrated real estate investment trust that owns, operates and redevelops community centered properties. The company focuses on value creation in its community centers, concentrating on local service-oriented tenants.

Its diversified tenant base provides service offerings including medical, education, casual dining, and convenience services. The company was founded on August 20, 1998 as a non-publicly traded REIT headquartered in Houston, TX.  WSR went public on August 25, 2010 and is approaching 6 years of successful operation as a publicly traded REIT.

As of the end of June 2016, WSR had a market capitalization of $420 million and owned 69 properties encompassing 5.9M square feet with an average annualized base rent (ABR) of $16.05 serving 1470 tenants.

WSR maintains a strong shareholder focus with the intent to manage their properties in the best interest of the company and its shareholders.  WSR has focused its growth in the fast growing sunbelt cities of Phoenix, Houston, Dallas-Fort Worth, Austin, and San Antonio.  The figure below shows the population growth in the areas where WSR maintains its focus.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

Not only does WSR focus on fast growing regions, they also focus their investments towards fast growing communities and neighborhoods within those regions.

The charts below show the local growth and income metrics for the local areas and neighborhoods where WSR focuses its property investments compared to its peers.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

In addition to focusing on higher per capita locales with higher forecasted growth in household income, WSR is selective in the properties it acquires.  The chart below summarizes the property acquisition and review process that WSR utilizes.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

The four charts above show, in summary, that WSR is targeting the sweet spots in the faster growing regions of the country and has a disciplined approach to property acquisition.

This approach should provide WSR with continued growth in rents, occupancy rates, and acquired properties which should result in continued growth in funds from operations (FFO) and dividend payments.

WSR & Retail REIT Risk

I’ve written and commented previously that I don’t invest in mall REITs or in general retail anchored REITs because of the general headwinds from e-commerce.  It is becoming easier every day to simply pop open your favorite search engine and find whatever it is you want at very competitive prices on the internet.  I find myself shopping on the internet more and more and I’m one of the older generation.  I can imagine that younger generations use the internet even more than I do.

As a result of my dislike for traditional brick and mortar retail as investments, I have a high bar set for investing in retail based REITs.  WSR’s management has recognized the risk that e-commerce poses to traditional brick and mortar retail and they have developed and implemented a strategy to minimize that risk.

WRS is selective in the tenants it chooses for its properties.  Those tenants are heavily weighted with service providers like UPS, banks, insurance, and medicine, as well as restaurants and specialty retail (drug stores, auto parts, coffee shops).

While this approach will not completely insulate WSR tenants from the e-commerce headwinds, it definitely mitigates the impact.  When was the last time you ordered a double shot latte over the internet?

The graphics below show WSR’s approach to tenant selection.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

As shown in the two figures above, WSR focuses on service providers to reduce the risk of losing tenants due to competition from e-commerce firms.

To a lesser extent, WSR’s strategy will also serve to mitigate the impact that a recession would have on its tenant base.  While reduction in discretionary spending during recessions typically impacts restaurant revenue, the impacts on bank, insurance, health care, and drug store revenue is significantly less. This makes the company fairly recession resistant.

I am impressed with WSR’s recognition of the e-commerce threat and their strategy to mitigate that threat.  Let’s take a look at WSR’s recent performance.

How Has Whitestone REIT Performed?

Since it went public in 2010, WSR has performed well growing its revenue, net operating income (NOI), and funds from operations (FFO).

The chart below shows WSR has grown its financial metrics by 30% or more per year since 2010.  Readers will note that the FFO/share has only grown 10% per year due to the dilutive effective of issuing more shares to fund property acquisitions.

For those readers not familiar with how REITs operate, issuing additional shares is a common practice to raise additional growth capital.  As long as the REIT deploys that capital smartly and the acquisitions are accretive, the REIT also grows its FFO/share after dilution as is the case with WSR.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

WSR’s early performance is impressive.  Not many companies can grow NOI and FFO at 30%+ per year.  We can take a closer look at the growth in WSR’s financial metrics in the chart below.

Whitestone REIT, Dividend Yield, Dividend REIT

Source: WSR Website

The above charts shows that WSR has successfully grown its key financial metrics every year since

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