Whitestone REIT: 4.1% Dividend Yield, Recent Hike And Sunbelt Focus (NYSE:WSR)

Whitestone REIT (NYSE:WSR) just hiked its monthly cash dividend by 3.2% after two years of keeping the payout constant. The sunbelt-focused retail REIT declared a cash dividend of $0.04125 per share, roughly $0.495 per share annualized, for a 4.1% dividend yield. The distribution is still a long way away from its pre-pandemic level, but future growth is promising with WSR set to benefit from its property portfolio’s concentration on fast-growing sunbelt markets, specifically Arizona and Texas, as double-digit leasing spreads and a prudent balance sheet look set to possibly drive a coming wave of dividend raises.

Hence, while WSR’s yield is lower than comparable high-quality retail REIT peers like Kite Realty (KRG) and Brixmor Property (BRX), its dividend is set for healthy recovery with fiscal 2023 fourth quarter occupancy at 94.2%, up 150 basis points sequentially as the REIT generated a remarkable 21.8% leasing spread during the quarter. WSR has seen a steady rise in leasing spreads and occupancy since 2021 with Texas and Arizona both seeing significant inbound migration of people, business, and capital since the pandemic.

WSR owned 55 properties spread across 5 million square feet with 1,453 tenants at the end of its fourth quarter. The REIT is forecasting occupancy of 93.8% to 94.8% by year-end 2024 as its largest markets continue to see remarkable growth. Asking rents for Phoenix, WSR’s largest market, jumped by 12.6% between 2022 and 2023 with WSR able to realize this jump due to its shorter-term weighted average leases of roughly four years. The REIT expects leasing spreads for the next three years to be material on the back of this as leases come up for renewal.

Arizona specifically has seen a mix of inbound migration, a manufacturing boom from the 2022 Inflation Reduction Act and the CHIPS and Science Act, and a shortage of retail centers aggregating to form one of the best markets in the US for retail REITs. The state had the largest increase in household incomes is the US in 2023 with a growth of $3,316 as a record high 3.14 million Arizonans were employed last year and 57,000 new jobs were created. Taiwan Semiconductor Manufacturing (TSM) just won a $5 billion grant to build a semiconductor manufacturing plant in the state, with a boom in EV and battery manufacturing set to drive continued economic growth.

FFO Growth And Dividend Coverage

WSR reported core FFO of $0.24 per share, up 1 cents versus its year-ago comp, with revenue of $37.52 million growing by 7.4% year-over-year to beat consensus estimates. Same-store net operating income at $24 million during the fourth quarter grew by 2.3% over its year-ago comp as WSR’s net effective annual base rental revenue per lease square foot grew to $23.35, 6.2% year-over-year growth. However, core FFO for the full year 2023 at $0.91 per share dipped from $1.03 per share in 2022 with higher interest expenses on total debt of $641 million at the end of the quarter driving the dip.

Core FFO for fiscal 2024 is guided to come in at $1.01 per share at the midpoint of its range, 10 cents per share growth over 2023. Critically, this would mean the current annualized dividend of $0.495 per share would be 204% covered by 2024 core FFO. This dramatically ramps up the possibility for further dividend hikes through 2024 with WSR expecting 2024 same-store NOI growth of 2.5% to 4% for the full year.

Litigation Update And Balance Sheet

WSR recently saw the wrongful dismissal suit brought against it by its former CEO James Mastandrea dismissed. This suit was for $25 million in damages and was filed in January of 2022. A separate suit brought by WSR against Pillarstone Capital REIT also ruled in WSR’s favor. WSR owns a substantial amount of units in Pillarstone, roughly 81.4% at a $31.7 million book value, whose CEO and shareholder James Mastandrea has subsequently placed Pillarstone in bankruptcy to prevent WSR from being able to redeem its stake.

WSR’s debt maturities are also very healthy, with just $50 million coming due this year and no maturities in 2025. The REIT held $4.6 million in cash and equivalents at the end of the fourth quarter, with its $250 million credit facility only set for expiry in September 2026. However, WSR is currently trading hands for 12x the midpoint of its 2024 core FFO guidance, higher than 10.9x from Brixmor and 10.5x from Kite Realty. The REIT forms a hold.