Whitestone REIT: From Turnaround Story to Undervalued Growth Play

Whitestone REIT (WSR) has been one of our best investments in recent years.

It is one of just a few REITs that have defied the bear market and kept rising in value, despite the poor market sentiment for REITs:

Data by YCharts

What made Whitestone so rewarding is that it gradually transformed into a higher-quality REIT, and the market then rewarded it with a higher valuation multiple, even as its cash flow surged at the same time.

First, it changed its previous management, which was perceived to be conflicted by most investors. They had a poor track record of growth “on a per share basis” and were taking unusually large salaries.

Second, it deleveraged its balance sheet, going from about 10x Debt-to-EBITDA down to 7.1x today.

Finally, its rent growth accelerated as its properties became undersupplied.

But what now? Is it still worth holding on to Whitestone REIT?

Or should we take our gain gain and consolidate our capital towards our other strip center REIT, Kite Realty Group (KRG)?

That’s what many of you have been asking me.

First things first, I want to clarify that while Whitestone and Kite Realty belong to the same property group, their underlying assets are actually quite different.

Both own service-oriented retail properties, but Whitestone focuses on smaller spaces, whereas Kite Realty has much greater exposure to big boxes. They attract different types of tenants and each has unique pros and cons. Therefore, we are not simply duplicating the same exposure by owning both REITs together as part of our Portfolio.

Beyond that, the investment theses are also very different. Whitestone is a small REIT with higher leverage that’s still in the midst of a transformation, and it has become a clear buyout target, regularly receiving offers from private equity companies. Kite Realty, on the other hand, is much more stable, owning a larger portfolio and having a stronger investment-grade rated balance sheet.

So one does not need to replace the other. They are highly complementary to each other and provide well-diversified retail exposure to our Core Portfolio.

With that out of the way, here is our updated investment thesis for Whitestone:

Whitestone REIT: A Very Unique REIT

Whitestone is different from its retail peers in many ways, but the most striking difference is that it focuses primarily on smaller properties with 1,500 - 3,000 square feet spaces rather than big boxes.

Here is an example of a property they own to give you an idea:

There are many advantages to this unique approach.

First, there is a much larger pool of potential tenants for these smaller shops, and as a result, there is greater demand and competition for this space, particularly if you own properties in highly desirable markets like Whitestone. This higher demand has historically resulted in faster rent growth than most of its peers:

Second, the lease terms are typically a lot shorter. This can be good or bad depending on the market conditions, but when retail space is undersupplied like today, it is a major advantage as it allows you to take advantage of more frequent renewals to hike rents and participate in the growing profits of your tenants. Whitestone’s rents are today still below market, and you can see that in its consistent 15-25% releasing spreads of recent years:

Third, these properties also do not require as much capex. The small shops are highly adaptable to a larger number of potential tenants with minimal required changes. Moreover, since these properties are in high demand but limited in supply, the landlord holds greater bargaining power, allowing it to put a greater share of the capex burden on the tenant. This explains why Whitestone has the lowest capex needs in its entire peer group:

What’s the downside of this approach, then?

The main one is that you are mostly dealing with a lot of smaller regional tenants with weaker credit, which could lead to more frequent lease defaults, especially in a downturn.

However, Whitestone does a great job at mitigating this risk by properly assessing the businesses of its tenants and making sure that they are profitable. During the pandemic, which was the worst possible crisis for such retail assets, Whitestone delivered top-quartile performance, proving that this approach is not necessarily riskier when executed correctly.

Besides, it of course helps that Whitestone owns highly desirable properties in supply-constrained markets with growing demand and significant traffic, giving its tenants every chance to make it work. According to Green Street Advisors, Whitestone’s properties rank number #1 in terms of their location quality among those retail REITs that focus on sunbelt markets. Federal Realty Trust (FRT) and Acadia Realty (AKR) only slightly edge Whitestone, but it is not a fair comparison since they focus on supply-constrained (but slower growing) coastal markets. It is impressive that, despite focusing on sunbelt markets, Whitestone is so little behind. It shows that Whitestone has picked some of the very best neighborhoods in its markets in terms of the supply and demand for such properties:

The REIT is today highly concentrated on a few sunbelt markets that are enjoying about 2x faster job and population growth than the national average.

It generates a very chunk of its revenue from the Texas Triangle, and in that sense, it is quite similar to BSR REIT (HOM.U:CA), except that its properties are undersupplied and enjoying steady rent growth:

Whitestone has guided for steady 3-5% same-property NOI growth through 2029. It is quite unusual for REITs to share such a long guidance for NOI growth, which shows how confident they are in the prospects of their properties. They even have slides on their investor deck, breaking down the math behind their guidance:

This strong organic growth should be enough to drive 4-6% FFO per share growth in a typical year.

Whitestone believes that they can increase that to 5-7% FFO per share by adding accretive acquisitions funded with retained cash flow and portfolio recycling, selling stabilized assets to buy new ones with greater short-term lease-up potential.

That’s a solid growth rate that would normally warrant a premium valuation, but because Whitestone’s transformation is not yet complete, it is still discounted.

More Upside Ahead

REITs that own high-quality assets that are capable of steadily growing their FFO per share at 5-7% per year typically trade at near their NAV and about 15-18x FFO in today’s market.

But Whitestone is still far off from that.

The REIT has guided to earn $1.05 FFO per share at the mid-point in 2025. These prices them at 11.5x.

This is cheap, but it does not fully picture how steep the discount really is, given that the REIT is subscale and a big chunk of its cash flow goes towards interest expense due to its higher leverage.

A price-to-NAV analysis is more revealing here.

The company is today generating about $100 million of NOI per year.

At a recent conference, the management noted that their acquisition cap rates have been in the 6.4% - 6.7% range lately, and this is consistent with what they are seeing in the market today. This is also in-line with their recent refinancing, which used a 6.75% cap rate to value the assets.

I would argue that Whitestone is being opportunistic with those acquisitions, and lenders, of course, also want to be conservative.

Using a 6.5% cap rate, the gross asset value would be $1.54 billion.

Deducting the $671 million of debt, we get $869 million of net asset value.

Dividing that with the total shares outstanding, we get $17 of NAV per share.

In comparison, its current share price is just $11.90, resulting in a 30% discount.

I would add that the latest buyout offer was for $15 per share, and the offer came from a private equity player that is, of course, trying to get a discount to their own fair value estimate. They must have done a considerable amount of due diligence and are likely seeking at least a 10-20% discount to their NAV estimate to make this potential privatization worthwhile for them. This would imply that they assessed the NAV to be about $18 per share.

Finally, the management refused the deal, noting that it would undervalue their portfolio, which further indicates that this discount is real.

Why is it so cheap then?

I think that there are two reasons.

First, it takes time for perceptions to change. Whitestone is today a much better REIT than it was just 5 years ago, but since the REIT was mismanaged and overleveraged for so long, many investors are still waiting to see more positive results before considering the stock.

Second, the transformation is not over yet. Even today, their Debt-to-EBITDA remains at the high end of their peer group at 7.1x, compared to 5-6x for most of its peers. The good news is that if you annualize their expected 4th quarter results, their Debt-to-EBITDA would drop to the mid-6s, and it is expected to drop further in 2026 as their cash flow continues to rise. Moreover, their average interest rates are already quite high at 5.1%, limiting the impact of rising interest expense from here, especially since interest rates are now declining. Some REITs in its peer group have already managed to access new debt at interest rates lower than that. They have stronger balance sheets, but it shows that this shouldn’t be as severe a headwind as the market is today pricing.

How much upside potential does it have?