2 weeks Ago
halbergman In hope of making timely identification of real estate opportunities, we closely monitor national and regional demographic trends. The employment and migration related trends of the last few years let investors anticipate significant demand growth for housing in the sunbelt. The response to that obvious trend, coupled with abundant availability of low-cost capital, allowed developers to create temporary apartment oversupply in certain markets.
An August 26 th Wall Street Journal article describes that, beyond housing supply, surging populations can lead to other problems like water shortages and congested highway commutes. In addition to unmet needs in transportation and water infrastructure, the rising population creates more demand for groceries and essential goods and services. While multifamily builders eagerly jumped on surging housing demand, very little new supply of retail real estate has been delivered over the last decade.
The surging migration to the sunbelt has created strong demand for shop space, and today we identify the retail landlords in some of these hot growth markets. Supplementing that information with fundamental analysis, we conclude that Whitestone REIT ( NYSE: WSR ) remains an attractive choice within the shopping center sector. The Markets and the Retail Landlords The WSJ article cited above referenced 2023’s 10 fastest-growing cities.
US Census Bureau These are not really the 10 fastest growing cities because the growth is simply calculated as the population change from the prior year. They are, however, proximal to or within some of the nation’s fastest growing MSAs and 9 of the 10 are in Arizona and Texas. We used Portfolio Income Solutions’ Property Directory to identify which REITs owned shopping centers in these markets.
In each market, the ownership is tallied by the number of properties of each type. In alphabetical order: Austin S&P Global Dallas S&P Global Houston S&P Global Phoenix S&P Global San Antonio S&P Global In the tables above we have yellow highlighted InvenTrust ( IVT ), Kimco Realty ( KIM ), and Kite Realty Group ( KRG ) because they each have some property portfolio exposure in each of the five MSAs. We have highlighted Whitestone in amber because it not only has property portfolio exposure in each of the five MSAs, WSR’s entire portfolio is in these five MSAs.
Smart REIT management uses demographic metrics to steer the geographic of their property acquisitions. They want to invest in growing markets that will produce sustaining demand within available supply. The heavy presence of REITs in these markets leads us to believe that great minds think alike and that, maybe, Whitestone’s mind has been the greatest.
Risks These high-growth markets pose similar risks for retail real estate that they do for any type of investment. A stalled economy or severe recession could significantly harm operating results. In consideration of the ever-present risks, we rely on fundamental analysis to mitigate the potentially negative results.
Measure of Value We have been bullish on retail real estate for a couple of years now. We see an enduring supply/demand imbalance that favors retail landlords, but opportunity only exists below a certain price. Comparing the shopping center peer set we can see some disparity in market valuations.
Price to FFO 2MCAC from S&P Global Data Recent macroeconomic reporting has raised hopes that the Fed can soon begin cutting interest rates. Lower interest rates are considered a boon to real estate operations and valuations, and that has translated to higher REIT share prices. For shopping center REITs, this has generated some multiple expansion and the median Price/FFO multiple now sits at 15.
9x, up about two turns over the last few months. Relative to the group, WSR is priced at the lower end. Price to AFFO 2MCAC from S&P Global data Many analysts believe that Price to AFFO can sometimes provide a better measure of valuation against operations.
P/AFFO is also up, and here Whitestone is priced the lowest of the set. Price to Net Asset Value 2MCAC from S&P Global data Net asset values are measures that move with cap rate assumptions, but those cap rate assumptions should move in the same direction within consensus estimates. Though REIT share prices have moved up recently, the median shopping center REIT still trades at about a 4% discount to estimated NAV.
WSR is trading at about an 18% discount to consensus estimated NAV. Considering dividend yield, Whitestone's paid monthly dividend yield of 3.68% is a little lower than the retail sector average yield of 4.
18%. Like other REITs, WSR slashed its dividend in the early days of the pandemic and has been slowly rebuilding the payout since. Whitestone could raise the dividend faster than it has, but management is serving a dual mandate of also trying to pay down WSR's debt.
We think debt reduction is the prudent path. These metrics imply that WSR is cheap relative to peers, but there is an additional factor that makes Whitestone a possibly more compelling opportunity, Mergers and Acquisitions. M&A Runs Hot and Cold Despite the 500-basis point increase in the Fed Funds rate, retail REIT mergers and acquisitions activity has been strong over the last couple of years.
Kimco Realty acquired RPT Realty in an all-stock transaction. Regency Centers acquired Urstadt Biddle Properties. More recently, it was rumored that Blackstone ( BX ) was in talks to acquire Retail Opportunity Investments Corp.
( ROIC ). That rumor really got investors thinking about M&A, and it rippled through the markets in the form of higher share prices. S&P Global IQ Source: S&P Capital IQ – 1 month share price performance ending 08/28/2024 The prospect of lower interest rates has lately contributed to higher REIT share prices.
Higher share prices create a stronger currency in the realm of stock for stock mergers and acquisitions. The possibility of stock for stock mergers allows sector peers to join venture capital as potential bidders for desirable property portfolios. We like the retail sector.
Within a sector we try to select issues at prices that, we feel, will deliver the best combination of value and growth. We are not trying to find the next takeover target, it's just that value and growth align with M&A activity. Whitestone Remains a Potential Acquisition Target For almost a year now, Whitestone REIT ( WSR ) has been the subject of takeover talk, both rumored and real.
Last October Bloomberg described that Fortress Investment Group approached WSR about a takeover and was quickly rebuffed. In March, Erez Asset Management, an activist group lead by Bruce Schanzer, launched what became a rather ugly proxy fight in an effort to shake up WSR’s Board of Trustees. WSR management successfully thwarted the effort and the issue of a takeover seemed to calm down again.
In June, MCB Real Estate made a $14.00/share cash offer to Whitestone private; WSR management declined the offer effectively saying it didn’t fully value the company. It is broadly anticipated that lower interest rates will prompt would-be real estate acquirers to step from the sidelines and move to action.
The acquirers will target desirable assets in the high growth markets described in this article. WSR’s peers know and are already active in those markets; maybe the combination of their appreciated shares and lower interest rates will allow them to make an accretive acquisition offer that satisfies Whitestone management. In Conclusion We are optimistic about investment in retail real estate.
Whitestone REIT’s entire retail portfolio is located in some of the strongest markets in the nation. Whitestone shares are demonstrably cheap. Owning an acquisition target can be very profitable.
We are happily long WSR. For a full toolkit on building a growing stream of dividend income, please consider joining Portfolio Income Solutions . As a member you will get: Access to a curated Real Money REIT Portfolio Continuous market commentary Data sets on every REIT You will benefit from our team’s decades of collective experience in REIT investing.
On Portfolio Income Solutions, we don’t only share our ideas, we also discuss best trading practices and help you become a better investor. We welcome you to test it out with a free 14-day trial . Lock in our founding member rate of $33.
25/month (paid annually) before it expires! Ross Bowler is the founder and CEO of 2nd Market Capital Advisory Corporation, a specialized securities analysis and investment advisory firm focused exclusively on the 200+ companies structured as publicly traded REITs, with over 30 years of experience trading and analyzing real estate securities. He designs and manages REIT and REIT-adjacent portfolios tailored to advisory clients’ investment goals. With a pre-existing knowledge of each REIT and relationships with REIT management teams, he has an advantage in knowing which REITs to buy and which to avoid.
Ross helps lead the investing group Portfolio Income Solutions along with Dane and Simon Bowler. Features of the service include: a diversified high-yield REIT portfolio, data tables on every REIT, tax guidance, macro analysis, fair value estimates, and quick updates via chat on breaking news. Learn More .
Analyst’s Disclosure: I/we have a beneficial long position in the shares of WSR, KIM, KRG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
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It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal.
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