Although hardly alone, Whitestone REIT (NYSE: WSR) cut its dividend by 63% in 2020. However, the real estate investment trust (REIT) increased the monthly-pay dividend in April. While that's a positive sign, it is not an "all clear" signal. There are still some pretty important things investors need to monitor here before jumping aboard.
The pandemic made me do it
Whitestone REIT's 2020 dividend cut came in April, about the time that the coronavirus pandemic was hitting full force. Government-ordered shutdowns of nonessential businesses, people working from home, and social distancing had everyone worried. You can easily blame the novel illness for the company's decision. However, if you look at 2019, there's more to the story.
In the fourth quarter of 2019, the REIT's core funds from operations (FFO) was $0.26 per share, down a penny from the same period in the prior year. However, the monthly dividend during the quarter was $0.095 per share, totalling $0.285 for the full quarter. It doesn't take much math to see that even before the pandemic, Whitestone REIT was playing things very tight on the dividend front. A dividend cut was almost baked into the cake.
It's now 2021, the pandemic appears to be ebbing, and the dividend was increased roughly 2% in April. In the first quarter of 2021, Whitestone's core FFO was $0.23 per share, more than enough to cover the quarterly dividend of 0.1075 per share. In fact, there's ample room for dividend increases in that number, given that it represents a core FFO payout ratio of just 47%. Indeed, in some ways, Whitestone REIT is in much better shape than it had been leading up to the pandemic. The question, then, is this: Is Whitestone REIT's 4.7% dividend yield worth buying given that it's notably higher than the REIT average of 3.2%, using Vanguard Real Estate Index ETF as a proxy?
A few problems to consider
For most investors, the answer is likely to be no. First, Whitestone REIT is pretty tiny, with a market cap of less than $400 million. This, in and of itself, isn't the worst thing in the world, but it simply doesn't stand toe to toe with larger names in the shopping center space, like Dividend King Federal Realty (NYSE: FRT), which owns just 100 or shopping centers but has a market cap of nearly $9 billion. Simply put, with size comes greater access to capital on both the equity and debt fronts. And that can be a huge difference when the chips are down (Federal Realty increased its dividend in 2020) and when times are flush.
So Federal Realty has a relatively small portfolio, but Whitestone REIT's is actually even smaller. The REIT owns just 58 shopping centers. So problems at any one property could cause a large problem for Whitestone, noting that its locations aren't nearly as productive as Federal Realty's assets. To put a rough number on that, Whitestone REIT generated roughly $500,000 on average in rent per property in the first quarter. Federal Realty's assets generated, on average, $2.15 million in rent. In other words, Whitestone's properties are pretty small. That's not bad in and of itself, but a small portfolio of small properties isn't necessarily the best option for investors.
That's particularly true when you look at the REIT's diversification. It operates in just three states, with virtually all of its rent coming from just two, Arizona (43% of rents) and Texas (56%). In Arizona, the only region in which it operates is Phoenix. In Texas, it has just three main submarkets: Dallas, Houston, and San Antonio/Austin. It's looking to expand into new regions, and perhaps has the financial leeway to do so given the dividend cut, but until it has a broader portfolio, there are material concentration risks here. For reference, Federal Realty has exposure to eight major markets, including New York, Miami, Boston, Washington, D.C., and Los Angeles, among others of similar importance.
Trouble? No, but...
When all is said and done, Whitestone REIT doesn't appear to be in "trouble" today since the dividend cut gave it some valuable breathing room. However, that doesn't mean it's worth buying. The yield is above the industry average, but it also comes with some notable risks, largely related to the REIT's small size and lack of diversification. Most investors, and particularly conservative ones, will probably want to avoid Whitestone REIT.