SWOT Analysis: Whitestone REIT

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I'm a dividend investor, so I want to own a stock for a long time. I'm not looking for a one-hit wonder. I want to own a company that can find long-term and repeatable success, so I need to have a well rounded picture of a company if I'm considering it for purchase. One tool that really helps round things out is a SWOT analysis. This simple tool requires nothing more than making a thoughtful list of a company's Strengths, Weaknesses, Opportunities, and Threats. It's not hard and its a step well worth your effort.

A company's strengths and weaknesses are both internal factors, while its opportunities and threats are both external factors. This is an important distinction that should help drive your thought process.

I was recently reviewing the monthly dividend payer Whitestone REIT (NYSE: WSR). Whitestone REIT is a real estate investment trust (REIT) that owns, operates, and re-develops shopping centers and office builders. It focuses on what it calls Community Centered Properties, which it defines as “visibly located properties in established or developing culturally diverse neighborhoods.” It generally buys properties that have been neglected in some way and then strives to re-develop them to increase their value. Management pays particular attention to the local communities in its re-development efforts, often focusing on smaller, service-oriented tenants. Its primary markets are Arizona and Texas, though it also has a small presence in Illinois.

Its unique business model and small size really made a SWOT analysis a valuable tool because it highlighted some risks that I wouldn't have thought about otherwise. Below is the SWOT I created.

Strengths (Internal)

  • Small size allows the company to benefit from deals with which larger companies wouldn't bother.
  • Market concentration allows the company to understand its markets better than more diversified companies, and potentially to find diamonds in the rough that others would miss.
  • Market knowledge and small business focus can aid in the tenant selection process, increasing rent roll stability.

Weaknesses (Internal)

  • Small size increases the impact of each property on performance for better or worse.
  • Re-development is often an expensive and risky process.
  • Illinois exposure is a potential distraction to management and misuse of resources.
  • Having a large number of small tenants increases leasing activity.

Opportunities (External)

  • Economic downturn has increased the number of potential acquisitions and looks likely to continue doing so.
  • Aging of the Baby Boomer generation likely to lead to population growth in the markets on which the company focuses.

Threats (External)

  • Economic downturn could adversely impact the company's base of smaller tenants.
  • Social and economic changes around the company's properties could leave them undesirable.
  • Material economic improvement could reduce investment opportunities.

While I think Whitestone REIT has potential as an investment, I also believe that it is appropriate to demand a relatively high yield, say 10% or so, to compensate for the risks inherent to its size and business focus, especially since the dividend hasn't been increased in a while despite management's goal to do so.

While I was working on the Whitestone SWOT, I couldn't help but think about the other end of the spectrum. For example, KIMCO Realty Corp. (NYSE: KIM) operates in roughly the same segment of the REIT industry, but doesn't have the same market focus. Indeed, with almost 1,000 shopping centers across the country, it would be hard for KIMCO to have the same market-level of expertise as Whitestone. This allows Whitestone to purchase properties that larger rivals like KIMCO might not even bother looking at. Whitestone takes these often unloved properties and renovates them to increase their value and desirability using its locally centered approach.

That said, there are benefits to scale, like the ability to spread costs over a larger base of properties and reduced market risk because of the broad diversification. So there are trade offs and it is understandable why someone would go with the big guys instead of the small fry. However, those differences appear well recognized by the market, leading to a premium valuation for KIMCO (and a much lower yield).

Of course a small property portfolio doesn't always lead to a discounted valuation. Federal Realty (NYSE: FRT), for example, owns a little over twice as many properties as Whitestone, but has been afforded a premium valuation and, thus, a low yield. In fact, its yield is even lower than KIMCO, which owns hundreds more properties than Federal Realty. Of course Federal Realty focuses on higher-end properties than Whitestone, so it isn't surprising to see the pricing discrepancy. In fact, for a conservative investor, Federal Realty would make a lot more sense as an investment candidate, if its dividend were higher.

If you can think of anything I might have missed, please comment below and tell me. I'm continuing to examine Whitestone, however, and hope to post a more in-depth review of some of the biggest risks I see the company facing soon.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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