An Interview With Whitestone REIT’s CEO, Dave Holeman (WSR)

In my previous article about Whitestone REIT (NYSE:WSR), I had concluded that the corporate deserved your conditional help, given its clearly outlined steps in direction of correcting the errors of the previous. Regardless of shares having underperformed the S&P 500 since, I suppose we’re nonetheless on the identical web page. And the rationale why I believe that, is as a result of I managed to tug off an interview with Whitestone’s CEO, Mr. Dave Holeman. So, I used to be given the prospect to current him with a few of my ideas and skepticism in regards to the prospects of the corporate and, I’ve to say, the solutions left me in a profound state of optimism. Let’s have a look at why:

—–Begin of interview—–

Q: We all know that retail REITs are extra uncovered to market downturns and draw back income danger than different REIT varieties. Inside the retail REIT universe, grocery anchored – REITs are thought-about to be a extra resilient submarket. Quite the opposite, 24% of WSR’s lease income comes from companies working within the Restaurant and Meals Companies sector, which is positively correlated with a normal financial market downturn. Does the corporate have plans for regularly shifting into extra resilient retail submarkets, or, at the very least, decreasing a few of its focus in particular retail sectors? A: Whitestone’s non-grocery anchored facilities have carried out very well over the past a number of years. That is partly as a result of persons are staying nearer to dwelling and frequenting native facilities, particularly in high-income neighborhoods. We’re additionally seeing proof that eating places are major competitors for grocery shops. Covid-19, the most important stress check any REITs have confronted because the monetary disaster, Whitestone was close to the highest of the peer set for FFO/Share degradation. FFO/Share dropped from $0.90 in 2019 to $0.83 in 2020 or roughly 8%. This was close to the highest of the peer set and virtually half of the peer set had their FFO/Share drop in extra of 20%. Whereas a lot of our friends have been nonetheless catching up on collections in 2022, Whitestone had far much less of a collections challenge. The truth is, it was within the rear-view mirror half means by means of 2021. Quite a lot of friends put out adjusted SS NOI development numbers for 2023 as a result of the beginning 2022 quantity was nonetheless being boosted from collections catch up.

We carried out higher as a result of we consider there are different important components that present resiliency: A) Having a REIT constructed on thriving service-oriented companies. B) With the ability to work carefully with our tenants and never having enormous nationwide chains (the nationwide workplaces usually prevented rents from being paid throughout the board – which didn’t occur with native companies). C) Being positioned in TX and AZ that had minimal pandemic shutdowns. All of this isn’t to say that we don’t like grocery shops. They’re an vital a part of our combine. Nevertheless, latest cap charges are inserting too excessive a premium on grocery anchored.

Q: Because the FED is attempting to tame inflation, it has initiated a collection of rate of interest will increase, which goal to decelerate the economic system. Nevertheless, nobody is for certain about how a lot is an excessive amount of. WSR’s publicity within the monetary companies sector is 8% of the ABR. Any plans shifting ahead with that? A: We see our present publicity to monetary companies as a very good match with our facilities, partly due to the excessive ranges of development in our markets. Frost Financial institution represents ~25% of our monetary companies. Listed here are their feedback from their 4th quarter 2022 earnings name as they relate to their Houston enterprise: “As well as, our throughout wealth advisers has seen a document quantity of latest enterprise. Concerning our department growth efforts, the unique 25 Houston growth branches have surpassed $1 billion of deposits, and so they proceed to exceed professional formas. Loans totaled $727 million at year-end, together with the extra branches we have opened in what we name Houston Enlargement 2.0. At year-end, we stood at 114% of our family aim 170% of our mortgage aim and 104% of our deposit objectives, and we’ll proceed so as to add new places in robust areas across the area.”

Q: Within the firm’s FY 2022 report, it’s acknowledged that 14.6% of WSR’s ABR is expiring this yr and one other 16.7% is expiring in 2024. Do you suppose that the timing is nice, given the anticipated financial slowdown? Do you anticipate these lease renewals to extend your NOI and your common lease per sf? Have these tenants expressed any preliminary intention to resume their present leases? A: We proceed to see very robust leasing spreads, with renewals operating at 16.5% for 2022. As well as, Christine Mastandrea, our COO, commented on the surroundings remaining robust once we had our earnings name earlier this month. We actively work with our complete tenant base as renewals come up – so sure, we now have tenants intending and actively renewing leases.

Q: WSR’s debt profile, we will see that, regardless of the comparatively excessive leverage, many of the firm’s debt is in mounted charge, with the exemption of the corporate’s unsecured line of credit score. In your final earnings name, you acknowledged {that a} 100bp improve within the SOFR will lead to a $0.02 differential within the anticipated FFO/share. Are the latest rate of interest will increase in step with your 2023 FFO steerage formulating assumptions? A: The $0.023 FFO/Share variance related to a 100bp SOFR curve transfer was present as of March 1, 2023. The curve is modestly down since then, so you shouldn’t anticipate any affect to steerage because the name.

Q: Based mostly on month-to-month dividend funds per share of $0.04, and a FY 2023 FFO steerage midpoint of $0.97, WSR pays out virtually 50% of its annual FFO. Concerning the remaining 50%, what are WSR’s priorities? A: Our greatest precedence is to cut back leverage. That doesn’t essentially preclude buying properties. The Lake Woodlands acquisition was at a 7% cap charge with near-term leasing upside. So, it’s attainable to make acquisitions that concurrently are accretive to FFO/Share and enhance our leverage metrics on the similar time. We simply must be selective.

Q: Concerning WSR’s ongoing ATM program and Shelf providing, do you plan to boost money by executing these in 2023? And if sure, to what extent? A: The present share worth would make it extraordinarily troublesome to make use of the ATM and be FFO/Share accretive whereas decreasing leverage.

Q: There’s a clearly optimistic pattern as regards to occupancy charges. To date, within the first quarter of this yr, do you see this pattern proceed? A: We definitely anticipate we will preserve a excessive occupancy. We completed the yr at 93.7% and we’re forecasting 93.5% – 94.5% for 2023. Nevertheless, remerchandising will play a much bigger function in 2023. As Christine famous on the earnings name: “We consider we now have additional to go within the phrases of occupancy positive aspects, however there shall be a powerful give attention to remerchandising in 2023 and so same-store NOI turns into a much bigger development driver going ahead.”

Q: Concerning your annual lease bumps, are they nonetheless within the ballpark of three%? Do you think about greater lease bumps? A: The lease bumps have edged up over the past yr, so I’d say 3 – 4%. Nevertheless, the true key to rising rents is having thriving companies as tenants. Plus, we deliberately have shorter leases. In the event you populate a middle with the precise enterprise, the shorter lease phrases are an actual profit.

—-Finish of interview—-

Backside Line

Based mostly on the solutions displayed above, I proceed to contemplate Whitestone REIT as an fascinating potential funding within the retail actual property sector. We’re witnessing a turnaround story right here, as the corporate is shifting in direction of price and leverage discount, whereas on the similar time supporting its FFO. With a fairly cheap dividend yield, Whitestone is at present balancing between rewarding its shareholders within the quick and in the long run, when it comes to earnings and worth.