Business Overview
Whitestone REIT (WSR) is a community-centered real estate investment trust (REIT) that acquires, owns, manages, develops, and redevelops open-air shopping centers primarily in high-growth Sunbelt markets. With a focus on creating neighborhood communities, Whitestone has established itself as a leading player in the retail REIT space, delivering robust financial performance and positioning itself for continued success.
Whitestone REIT was formed as a real estate investment trust pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, the company changed its state of organization from Texas to Maryland. Whitestone serves as the general partner of Whitestone REIT Operating Partnership, L.P., which was formed on December 31, 1998 as a Delaware limited partnership. The company currently conducts substantially all of its operations and activities through the Operating Partnership.
In October 2006, Whitestone adopted a strategic plan to acquire, redevelop, own and operate "Community Centered Properties" - visibly located properties in established or developing culturally diverse neighborhoods in its target markets. The company markets, leases and manages its centers to match tenants with the shared needs of the surrounding neighborhood, focusing on tenants that provide everyday necessities, services and entertainment.
As of September 30, 2024, Whitestone wholly owned 55 commercial properties consisting of 50 Consolidated Operating Portfolio properties that meet its Community Centered Properties strategy and 5 Redevelopment, New Acquisitions Portfolio parcels of land held for future development. The company's properties are located in and around Austin, Dallas-Fort Worth, Houston, Phoenix and San Antonio, with a total of 4.94 million square feet of gross leasable area.
The company's strategy is focused on acquiring, owning, and operating Community Centered Properties®, which are visibly located properties in established or developing culturally diverse neighborhoods. Whitestone's goal is for each property to become a Whitestone-branded retail community that serves the surrounding five-mile radius. The company employs a diverse group of associates who understand the needs of its multi-cultural communities and tenants.
Whitestone's portfolio is diversified across various tenant categories, with no single tenant accounting for more than 2.1% of annualized rental revenues as of September 30, 2024. The company's tenant base includes a mix of essential service providers, such as grocery stores, pharmacies, and medical services, as well as restaurants, fitness centers, and other community-focused businesses.
Financial Performance
Whitestone has demonstrated consistent financial growth in recent years, showcasing the resilience of its business model. For the nine months ended September 30, 2024, the company reported total revenues of $113.44 million, representing a 4.0% increase compared to the same period in 2023. This growth was driven by strong leasing activity, with the company delivering combined total straight-line leasing spreads of 25.3% in the third quarter of 2024.
The company's same-store net operating income (NOI) growth has also been impressive, reaching 4.6% in the third quarter of 2024. Whitestone has raised its full-year 2024 same-store NOI guidance range to 3.75% to 4.75%, reflecting the strength of its operational performance. The company expects continued good same-store NOI growth in Q4 2024 and 2025.
For the most recent fiscal year (2023), Whitestone reported revenue of $147.92 million, net income of $19.18 million, and operating cash flow (OCF) and free cash flow (FCF) of $47.60 million. In the most recent quarter (Q3 2024), the company achieved revenue of $38.63 million, net income of $7.72 million, and OCF and FCF of $16.37 million. This represents year-over-year growth of 4.0% in revenue, 206.3% in net income, and 45.5% in both OCF and FCF.
Financials
Whitestone's balance sheet remains in a strong position, with a debt-to-EBITDA ratio of 7.2x as of September 30, 2024. The company has taken steps to further strengthen its financial position, including the addition of $20 million in unsecured debt to its term loan, which was used to pay down its revolving credit facility. Whitestone aims to end 2024 with a debt-to-EBITDA ratio between 6.6x to 7x and looks to continue deleveraging in 2025 through earnings growth, free cash flow, and the Pillarstone settlement.
The company's debt-to-equity ratio stands at 1.51, with $2.53 million in cash on hand. Whitestone has access to $121 million under its 2022 Facility, which has a total capacity of $535 million, including a $250 million revolver and $265 million term loan. The company's current ratio and quick ratio are both 1.39, indicating a solid short-term liquidity position.
Liquidity
The company has maintained a disciplined approach to its asset recycling program, with an average disposition cap rate of 6.4% since late 2022. This approach has helped Whitestone maintain a healthy liquidity position.
Acquisitions and Dispositions
Whitestone has been actively managing its portfolio through strategic acquisitions and dispositions. In 2024, the company acquired several properties that align with its Community Centered Properties® strategy, including Scottsdale Commons in Scottsdale, Arizona, Garden Oaks Shopping Center in Houston, Texas, and Anderson Arbor Pad, for a total of $50.14 million.
On the disposition front, Whitestone completed the sale of Fountain Hills Plaza in Phoenix, Arizona, for $21.3 million, and Mercado at Scottsdale Ranch, for a combined total of $47.80 million. These sales resulted in a total net gain of $10.21 million for the nine-month period. The company has maintained a disciplined approach to its asset recycling program, with an average disposition cap rate of 6.4% since late 2022.
Segment Performance
Whitestone REIT operates primarily in the real estate industry, focusing on its core Rental segment. This segment generates the majority of the company's revenue, including rental revenues, recoveries, and tenant reimbursements from its portfolio of 55 wholly-owned commercial properties. In the third quarter of 2024, the Rental segment revenue increased 4% year-over-year to $36.59 million, driven by a 2% increase in same-store rental revenues due to higher average leased square feet and higher average rental rates per square foot.
The company's same-store rental properties had an occupancy rate of 94% as of September 30, 2024, up from 93% in the prior year period. This increase in occupancy and rental rates contributed to a 3% year-over-year increase in same-store property revenues.
In addition to rental income, Whitestone generates revenue from management, transaction, and other fees. This revenue stream decreased 42% year-over-year to $267,000 in the third quarter of 2024, primarily due to the termination of the management agreement with Pillarstone OP in August 2022.
Outlook and Risks
Whitestone remains optimistic about its future prospects, reiterating its target of 11% core FFO per share growth for 2024. The company's strong leasing activity, occupancy levels, and same-store NOI growth provide a solid foundation for continued performance. Whitestone expects FFO in Q4 2024 to benefit from continued leasing momentum and percent sales clauses kicking in more heavily, similar to the last three years.
However, the company is not without its risks. Whitestone's operations could be impacted by macroeconomic factors, such as rising interest rates, inflation, and potential changes in consumer spending patterns. Additionally, the company's geographic concentration in Texas, Arizona, and Florida exposes it to regional economic and weather-related risks.
Furthermore, Whitestone's ongoing litigation with Pillarstone Capital REIT regarding the redemption of its equity investment in Pillarstone OP presents a potential source of uncertainty. On December 26, 2021, Pillarstone REIT adopted a shareholder rights plan that prevented Whitestone from exercising its contractual redemption right. Whitestone filed suit against Pillarstone REIT in July 2022 challenging the rights plan. In January 2024, the Delaware Court of Chancery ruled in Whitestone's favor, allowing it to exercise the redemption right.
On March 4, 2024, Pillarstone REIT and its subsidiaries filed for Chapter 11 bankruptcy. Whitestone has filed a claim in the bankruptcy proceedings for the value of its redemption claim plus interest and other costs. The company has maintained a wide core FFO guidance range for 2024 due to uncertainty around the timing of monetizing its Pillarstone investment.
Conclusion
Whitestone REIT has demonstrated its ability to navigate the evolving retail landscape, delivering consistent financial and operational performance. The company's focus on community-centered properties, diversified tenant base, and balance sheet management have positioned it well for continued growth. While risks remain, Whitestone's resilient business model and experienced management team suggest the company is well-equipped to capitalize on opportunities in the retail REIT sector.