## Whitestone’s Ideal Property Locations
WSR owns properties in five high-growth markets: Phoenix, Dallas, Austin, Houston, and San Antonio. These markets experience robust population and job growth, but shopping center supply remains limited.
As a result, existing shopping centers benefit from increased demand without new competition. Occupancy rates are near long-term highs, providing landlords with strong negotiation power.
## Leasing Upside and Schedule
As shopping center leases are long-term, it takes time for all rents to adjust to the higher market rates. WSR’s lease expiry schedule shows a substantial chunk of leases rolling in 2024-2028, creating significant organic growth opportunities.
Rental rates are increasing materially as leases re-expire, with recent new leases signed at rates 37% higher than expiring ones.
## Future Growth
Recent interest expense increases have masked WSR’s organic revenue growth. However, interest expense has stabilized, allowing the company’s revenue growth to flow through to the bottom line.
Consensus estimates project FFO/share growth from $0.91 in 2023 to $1.24 in 2026, and AFFO/share growth from $0.65 in 2023 to $0.99 in 2026.
## Asset Value and Potential Realization
WSR’s properties are significantly undervalued compared to their stabilized rental rates. Using a 6% cap rate on current NOI, their value is estimated at $20.08 per share.
Shareholders face a choice between continuing operations to collect mark-to-market upside or liquidating the company through a potential sale.
Sale Option:
Selling the company could quickly realize the asset value, but it would leave potential upside on the table. A buyout at $15 per share would be FFO/share neutral for potential buyers like Federal Realty or InvenTrust Properties, but it would significantly increase their forward growth potential.Continued Operations:
Operating the assets and marking rental rates to market over time would be a slower but potentially more rewarding path. This option allows WSR to retain the best shopping center assets in the industry.## Proxy Battle and Management Trust
Erez Asset Management is seeking to liquidate WSR, while the company’s management wants to continue operating and capturing the mark-to-market upside.
The winner of the proxy vote will determine the future path of WSR.
## Risks
WSR carries slightly above-average leverage for a REIT and concentration risk in both property type and location. Additionally, proxy battles often involve mudslinging, which can impact a company’s reputation.
## Conclusion
WSR trades at a substantial discount to the value of its assets. The company’s combination of property quality, growth potential, and discounted valuation presents a compelling opportunity for investors with a patient investment horizon.
