Whitestone REIT (WSR -1.41%) is a real estate investment trust, or REIT, specializing in "community-centered" properties. The company looks like a pretty attractive income play, with a dividend yield of nearly 8% paid out monthly.
So what exactly is a "community-centered" property, and how does Whitestone expect to make money from them? And most importantly, are shares of the REIT a good value?
A little about Whitestone REIT
Whitestone owns, operates, and redevelops what it refers to as "Community Centered Properties," which are basically shopping centers targeted at a specific type of tenant. Specifically, Whitestone targets "entrepreneurial" tenants that provide services to the surrounding community.
According to the company, the type of tenant it targets occupies a space of 3,000 square feet or less, and pays about 47% more in rent versus the company's larger tenants. These are local service-oriented businesses, and they make up approximately 70% of the company's tenants.
As of the end of the second quarter, the company had 60 properties totaling five million square feet of space, all located in Texas, Arizona, and Illinois. A good example of what Whitestone is all about for can be found in its recently acquired "Market Street at DC Ranch" property in Scottsdale, Arizona. Most of the tenants are boutique shops, local restaurants, and service businesses. Very few chains or national brands are anywhere to be found.
This helps the company in a few ways. First, the rent premium paid by these smaller tenants obviously boosts income. And the fact that the company would rather depend on many smaller tenants for income as opposed to a few larger ones provides a certain degree of safety. In fact, no single tenant accounts for more than 2% of Whitestone's annual rent revenue.
Several strategies to grow and make money
Whitestone REIT's strategy has a few different elements. The most obvious one is renting out their properties to produce income for shareholders.
The company also seeks to acquire and turn around distressed properties, redevelop existing properties, and to build new community-centered properties to lease.
In other words, the company is not simply developing properties and collecting rental income. Rather, Whitestone's management is actively seeking ways to add value to its existing properties and to increase shareholder value by adding new properties at attractive prices, as well as selling certain properties and redeploying that capital for better returns.
About that monthly dividend...
There are two main benefits that come with monthly dividend payments, the most obvious of which is the more frequent "paydays" for those who depend on their investments for income.
However, what many investors don't realize is that monthly dividend payments can actually produce higher returns over a long period of time than the exact same amount of money paid out quarterly.
Let's look at how this could affect Whitestone's investors. As of this writing, Whitestone REIT pays an annual dividend yield of about 7.9%. Well, if you reinvest all of your dividends, this actually works out to about 8.1% annually when compounded quarterly. And when you increase the payment frequency to monthly, it actually bumps the effective annualized return slightly to 8.2%.
Now, this may not sound like much of a difference, but it can certainly matter over long time periods. In fact, a $10,000 investment compounded at a 7.9% yield paid monthly will actually result in over $1,800 more in returns after 30 years than the same dividend compounded quarterly. That's why monthly dividends are so nice, even to those of us who don't rely on out investments for current income.
Cheap or expensive?
Well, if you look at Whitestone's earnings per share, the stock may seem very expensive indeed. During the second quarter, the company only reported $0.05 per share in earnings, and the consensus is expecting $0.31 for all of 2014. So, it appears that Whitestone trades for more than 45 times the current year's earnings.
However, a better measure of an REIT's ability to distribute income to its shareholders is its Funds From Operations, or FFO, which is basically earnings plus depreciation and amortization expenses. This is the most generally accepted measure of the actual performance of an REIT.
And this paints a better picture of Whitestone's true profitability. The REIT reported FFO of $0.28 for the second quarter, and is expected to report a total of $1.16 for the year. This makes a lot more sense, since REITs are required to pay out at least 90% of their income to shareholders, and Whitestone currently pays out $1.14 annually.
Plus, when using the FFO number, shares trade for just 12.4 times the current year's earnings, which is much more attractive.
So, if you have a positive outlook for commercial real estate over the next several years, you may want to take a closer look at Whitestone REIT for your income portfolio.