Interview With Whitestone REIT (Strong Buy Reaffirmed)

Important Note

Before going into today's article, I wanted to let you know that we will soon conduct interviews with the management teams of the following REITs:

• Farmland Partners (FPI)

• Easterly Government Properties (DEA)

• NewLake Capital Partners (OTCQX:NLCP)

• BSR REIT (HOM.U:CA / OTCPK:BSRTF)

• Safehold (SAFE)

• Canadian Net REIT (NET.UN:CA)

Let me know if you have any questions for them and I will make sure to ask them for you. You can put your questions in the comment section below.

Thanks!

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Interview With Whitestone REIT (Strong Buy Reaffirmed)

Today, Whitestone (WSR) is our largest retail REIT investment. We like it so much because:

• (1) It owns service-oriented strip centers in some of the fastest-growing sunbelt markets. Its two biggest markets are Phoenix and Austin, which have been some of the best-performing markets in terms of retail rent growth and property price appreciation in recent years.

• (2) These properties are typically anchored by grocery and/or some other essential services, and as a result, they are resilient to recessions and the growth of e-commerce.

• (3) Its leases are relatively short at less than 4 years on average and its rents are below market, providing it an opportunity to hike rents as leases expire. In the past many quarters, it has managed to hike the rents of its expiring leases by ~15-20% - resulting in sector-leading same-property NOI growth. Moreover, its leases are typically triple-net, meaning that property expenses are covered by the tenant, and include 3% annual rent escalations.

• (4) Despite owning such desirable assets, the company still trades at a 20%+ discount to our estimate of its NAV. We think that this is because of two fixable issues. The first one is its management. The second one is the balance sheet.

• (5) The REIT had management problems in the past, but these have been mostly resolved. The former CEO was fired for cause, a new shareholder-friendly CEO was hired, and the company's governance has been greatly improved. But this problem has dragged on because the former CEO then sued the REIT for wrongful termination. This led to significant legal fees and also prevented the REIT from exiting a partnership. Fortunately, there are good reasons to believe that this drama is now coming to an end.

• (6) The balance sheet is a bit more leveraged than that of its peers, but it has no major maturities until 2026 and the management is rapidly deleveraging to fix this issue.

• (7) We believe that as the new management builds a track record of good shareholder alignment and further deleverages its balance sheet, the market will reprice the stock at closer to its NAV, unlocking up to 30% upside potential. While you wait, you earn a near 8% cash flow yield, out of which it pays out 4% in dividends, and uses the rest to pay off debt and/or acquire new properties.

• (8) Finally, strip center REITs have recently become the target of M&A with Regency Centers (REG) buying out Urstadt Biddle Properties (UBA) and Blackstone (BX) attempting to buy out Retail Opportunity Investments (ROIC).  it wouldn't surprise us if Whitestone REIT (WSR) was next in line.

Recently, I had the opportunity to speak with the management team about their recent performance and their strategies for unlocking value for shareholders.

Below, I first share my main takeaways from the conversation and I then share the transcript of the interview as well.

Dave Holeman - CEO - Whitestone REIT

My Takeaways From The Interview: