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Christine Mastandrea, COO of Whitestone REIT, talks retail, interest rates and how it’s affected the REIT sector (1:20). The death of retail has been greatly exaggerated (3:00). Geographic trends and gateway cities (6:00). Laddering out maturities, flexibility in navigating macro environment (13:40). Contextualizing WSR’s dividend strength and growth (16:50). Strategizing for 2025 (19:05). The right REIT Metrics (23:00).
Transcript
Rena Sherbill: Christine Mastandrea, COO of Whitestone REIT (NYSE:WSR). It’s great to have you on Seeking Alpha. Thanks for joining us.
Christine Mastandrea: Thanks. It’s a pleasure to be here today.
RS: It’s great to have you. We just had a Fed meeting. There’s a lot of talk of interest rates, and a lot that’s aligned with that conversation tends to be on the REIT side of things.
So I think maybe a great place to start, if you could contextualize for our audience, and for those that may not know Whitestone, where you sit in the REIT space.
CM: I think, first of all, talking about interest rates and how it’s affected us as a sector and of course, being public as a company as well, it’s been a tough couple of years, the last couple of years, ever since the fed put on the brakes and increased rates.
And now we’re starting to see those relax. And it is helping us greatly to position for opportunity in the future. We in particular are focused on the retail space. And as retail goes, we are focused on what we’d consider smaller format centers.
With the smaller format center, maybe more of a neighborhood center or a center that’s based on convenience to that neighborhood. A little bit different when you think about retail. In particular, most people, when they think about retail, they think about malls, they think about big boxes, they think about stuff being sold in those locations.
And we are a little different. We approach things differently, more or less from instead of focusing on that same space that they do, because that’s actually a small part of the total addressable market.
We focus more on services and convenience in our locations. And that has benefited us greatly with this demographic change that has been happening, but also in the space that we are as well, because retail has finally right sized now. After being a very challenging type of property type, people considered that retail was dead. Well, I’d like to say that’s not dead. In fact, it’s very lively in our space right now, and there are a lot of opportunities.
RS: Yeah. It’s so interesting. I mean, I remember the conversation, I guess the death of retail has been greatly exaggerated. The death of brick and mortar, the death of the mall. And just recently, I was in Southern California with my daughter, and we had like three different things to do, and they all took place at the mall, and I’m walking around. And it’s so busy, and it’s been renovated, and it looks great, and we saw these Black Friday numbers, and they’re very encouraging.
How are you guys thinking about the retail picture? What’s encouraging you, and what may be are points of concern that you’re trying to keep in, in the front or the back of your minds?
CM: So the thing that always I always think about retail is it tracks consumer spend. So, we basically house the brands or the services that people want to buy. And so with that, in particular, I’d say in the mall space, what has changed is that in the eighties, there were about almost 2,000 malls.
Now, again, right sizing the right amount of malls and scale and the repositioning of those for different types of goods has greatly changed. So, it’s about now between 700 to 800 malls in which you’ve had as store sizes have changed significantly. You’ve seen certain brands actually shift their footprints to a smaller size.
And so, what we’ve looked at is that we’ve focused on that small size, right? And so, when we’re in smaller formats, when you think about, for example, IKEA now. IKEA used to have a very, very large footprint store. You could get lost in the store, right?
In some ways that was actually even a deterrent to people visiting. It was so big, it was so massive, it was such a destination trip. They are now doing smaller footprints in centers that are closer to home. In retail, in particular, that is more like a showroom shopping experience.
So not only have you seen a change and a shift in the footprint of retail, you’ve seen the type of space size also shrink as well and also be a little bit more closer to home. So, that’s been a significant change that we’ve seen. So, big is not always better. In fact, sometimes big has a lot of risk.
And I think that’s where things got a little lost over the years is that building big, building bigger spaces, building bigger boxes, that means that you have less opportunity to reposition those because it’s very costly to do so, and there’s a limited amount of tenants that can fit in those big spaces.
What we did at Whitestone is, we focused on smaller spaces. So, our typical size space that we have on average is around 2,700 square feet, which is the small footprint that fits a wide variety of uses. So, we can flex to the change of times, to the neighborhood, and to demographics.
RS: And what are you seeing from a geographic perspective? Are you focusing more on different areas? What are some of the trends that you’re seeing that are geographic dependent?
CM: This has been an interesting thing to watch over the years. I think that in the past, the tendency from geography was that the two coasts were the most attractive place to be, right? You would want to be in the Northeast Coast, you’d want to be in New York, or you wanted to be and consider these, they call them gateway cities, or you’d want to be in San Francisco, LA. And those were the hot markets that people used to look to invest.
And again, in those gateway cities, one reason why is because the job markets were so hot in those areas for so long. What we’ve seen is this big shift in demography more towards the Southern states, in those cities, in those states. So, when we built the company in 2006, we focused on Texas in particular. There was a real shift in what was happening in Texas. It was a pro-growth state.
They had made a change in their governance in the sense of, being pro-growth and a pro-growth mindset, which meant changing the court system, investing in the school systems and a number of initiatives that really promoted the growth in those cities.
So the first place that we really set our footprint was in Dallas, San Antonio, Austin, and also in Houston. And then along with that, we did a study and noticed also that Arizona had a significant change in particular with Phoenix.
And that is that, Scottsdale in particular, we’re looking along the east corridor and we were seeing that the area was getting younger. And the reason why it was getting younger is because ASU had really picked up their student population from around 35,000 to about 75,000. So, with that, we started studying also and looking at the university systems and seeing that the student population was growing in these areas as well.
So, we continue to dive into those markets and build out an infrastructure for our company. And it has proved to be very rewarding for us and our shareholders primarily because that’s where we’ve seen the demographic shift to. We’ve had a younger population moving in. There’s high drive job growth in those areas.
There’s the opportunity to be upwardly mobile on the sense that there’s a lower cost of living. And with that job growth, you’re able to have a much higher affordability factor for families, young people, and that’s been a big driver. And we’re seeing other states that are also following that same type of thinking and footprint along the Southeast.
And then, other states as well, they’ve had followed along with us. So that being said, you think now, especially during COVID, you saw it in advance of those moves, to those cities and that growth. And that has done wonders for a shift and change in demography and opportunity for people.
RS: And as you’re looking, we’re ending one-year, we’re beginning another. So, there’s lots of conversations about the year ahead.
How do you plan for, how do you strategize for the coming year, for the coming two years in terms of having a good sense like let’s say the COVID trends, like where do you see the trajectory bend? When do you change strategy based on how the data is telling you to move?
CM: Yeah, it’s a very good question. I think there’s a couple of things that, I’ve always looked out and I’ve been in this business for 25 years. So, one of the benefits that I’ve received in learning from watching this business is that it has a very long lead time. So, you can think out further ahead and it also has a tendency to be a little bit slower than businesses such as food, fashion, tech, so on and so forth. So, you can see things coming now. And you could see shifts changing and so on and so forth.
Now that doesn’t necessarily mean something like COVID that you could see that. But I’m talking about, you could see the shift in demography and how they spend. You can evaluate how to position yourself with knowing those things.
I always think about not just really thinking a year-out. I’m really looking from 3 to 5 years out. And much about that is where is, where do I see growth? Where are the locations of growth? And much of that is, again, why we focused on our locations. We look and say, where is the spend going?
Well, watching universities and the growth of universities because that’s producing the future workforce. And there’s a, no doubt, one of the things that businesses look for is they look for talent. Getting finding good talent comes from the university system. So there’s a tendency to engage in those locations with strong university systems. This has been, I think, even more, you’re seeing now that that’s even a stronger trend. So, I always looked for it in the beginning.
Now, I think, especially some of the state universities that are so strong with the student population coming in, it’s getting even more and more competitive now for those positions there as well, but I think that bodes well.
So, again, we’re seeing Southern Universities growing very quickly, and being optimized. Along with that, then we look and say, where is the opportunity with that growth, with job growth? And so now we look where there’s the talent coming in, and then we look for where businesses are being built.
And usually, it takes some time before something gets announced and actually the delivery of that product.
An example of this was, Taiwan Semiconductor (TSM) when it announced that it was coming into the Arizona market. It took 5 years to really identify and then continuing to maximize that location.
So when you have that, you know that you’re going to see job growth come into that area, which then allows you to position appropriately, for real estate that services that area and the population that’s moving there.
Again, there’s a time lag with this. So, along with this, then we look and say, well, what type of jobs are being produced and what type of personnel for those jobs? Well, again, looking at those education factors, but also there’s something that we can study that we use.
It’s psychographics, and we get to understand aspirationally what people, what their wants or needs or desires are. So, we just don’t go into demography. We go even deeper to understand how these people think.
And we use a platform called Esri, and we also use another one, Placer.ai. And with connecting those two, we could find out, by tracking, basically, Placer is tracking phone traffic, right? It manages to follow what a person does through the day, and it is held behind a wall.
You don’t know exactly who that person is, but if you can track it back to where they live, you can then research the psychographics in that area and understand, again, how they may think, what their desires are, so on and so forth. And with that, we then look to buy centers in those areas, and we then merchandise for those people.
At Whitestone, we want to successfully serve the community. And in doing so, it means understanding and knowing the community and learning about them, and then we then merchandise accordingly for those communities.
RS: And in addition to that, in terms of looking at a broader scope of things or taking a broader perspective on things, as I mentioned, the Federal Reserve meeting, it was expected that they would cut rates at this meeting. They did. They’re saying that there’s probably going to be fewer cuts in the coming year.
How much do you pay attention to the interest rate conversation? There’s the notion that when rates go up, REITs go down. How much does that affect your thinking and strategizing and what you’re paying attention to?
CM: Well, as being a co-founder in the business, you’ve got to always be able to flex to your environment. And part of it flexing to your environment is just always being prepared to be able to adjust to what may come your way.
I always looked at, being in the space that interest rates are always going to play a bit what you do. So, you always have to think about laddering out your maturities, really maintaining your banking relationships to prepare for changes that occur.
And then also the flexibility that we need to have in the real estate. And so, real estate, the space itself is very challenging to be flexible with, right? You’re building a building. You’re looking to build it for the long-term.
And so one of the things that we’ve always done is to make sure, again, focusing on the right locations and then building real estate that is flexible for that location. So, that’s why I refer to the small space size.
Also, when I think about taking risk, I like thinking about dispersing. So, rather than concentrating my risk in certain types of product, that’s why we were very careful to avoid the soft goods and the hard goods space.
With the Amazon (AMZN) effect, saw the opportunity to say, let’s look for dispersion of risk. Let’s look at smaller or flexible spaces, spaces that meet a number of different variety of needs. And in addition to that, the service sector was being overlooked back when we started building this company.
And, in particular restaurants, we saw also that there is a competitive space in the restaurant. When you think about the world of grocery, their biggest competitor is a restaurant, right? And because the consumer is much more time crunched than they were in the past, you always have to look and say, where is it that I can save somebody time? Well, your local restaurant, in many cases, is becoming that hub of activity of bringing people together, right? And so, we dialed into that very early on and understood how to underwrite restaurants.
The other thing that we did is, we kept our maturities a lot shorter. So, when you do work with the service industry, the investment is a lot less, which does provide the opportunity to shorter lease terms.
So, when you have this inflationary moment and there’s shift in interest rates, you have the opportunity to reprice those leases when you have a 5, in our case, we have a 4-year term, average term, weighted average, like the term. And that allows you to reprice the asset to reflect the market conditions as well.
RS: Interesting. I’m curious, a lot of people look at the dividend as a marker of growth ahead and how well you’ve done. Whitestone just upped its yield.
And you also recently had, this week, a letter to shareholders where you talked about the strength of that strategy and how based on earnings growth that that dividend will be strong in the months and the years to come. How do you think about the dividend? How do you contextualize that for the investor base?
CM: So, again, a really great question. I think that in the past, and this is more probably going more towards 15, 20 years ago when REITs were becoming a bigger and larger investable asset class, there was much more leverage in the REIT space. So, people were taking on 60% to 70% on leverage.
Again, interest rates were lower back then. Remember climbing out of a very difficult time in the 1980s, which a lot of real estate people that came into the 1990s remember is that, you had those lower interest rates. So, there was a tendency to leverage up and there was also a tendency to have a higher payout ratio.
Well, ever since, the changes, especially with 2008, and during that cycle, the REIT space dialed back quite a bit of their leverage and their leverage expectations. So, the more conservative range is now in the 50%. And at the same time, people are looking for growth and growth opportunities.
And so, the payout ratios have pulled back quite a bit since really COVID. So, I think that’s when you saw the biggest change in our space, in particular in retail, that everybody dialed back their dividend payout ratio quite a bit, and that allowed for the opportunity for growth.
So I think for us, and I could say probably for others in the space as well, that dividend growth does indicate the health, but you also want to make sure that you have enough to continue to reinvest into opportunities for growth as well in this space.
RS: How are you thinking about the year ahead specifically? What are the things that you’re most focused on and have in your immediate purview?
CM: Well, I think that it’s finally, retail again is getting recognized as a place of opportunity to invest in. And most of that comes from, just that, most of us are starting to be at 90%, 95%, 90% to 95% occupancy in some of our markets. So that demand for space continues.
In particular, everybody’s recognizing that you not only have to have clicks, you have to have bricks. It’s very costly now to actually acquire a customer base online. You have to have both, right?
And so, what I look to is, first of all, I look towards operators that are efficiently growing. Because if we’re going to successfully, again, serve our communities, one of the things that we have to do is make sure that we find the best-in-class operators to do that.
What we’ve been doing over the years and in particular coming into next year, again, because you’re seeing a shift in spend is that we’re looking for the best operators in the space that are growing.
And we’re finding that there’s new trends in particular. We’ve been watching those new trends because we’re again, as we merchandise and remerchandise our properties, we want to make sure that we shift into those trends.
So I always think out to this year, what is the opportunities? And what I’m seeing is that there is a lot of focus again on health, wellness, beauty, and fitness. Restaurants have had, quite the run for quite some time.
What I’m seeing is to make sure that the restaurants that are in the space have affordability as being a very important component to continuing to have that stickiness of traffic.
Staying within an affordability range. Healthy food is still important. I see people eating a lot out of cups and bowls now. There’s been this big shift in food coming through in cups and bowls, and part of that is just about being transportable. So we will keep leaning into that with specific users in that space.
In addition, we’re seeing that this health, wellness, and beauty trend is continuing. And so, we’ve been testing out working with several concepts to see and evaluate how much traffic.
Again, we can measure this now using Placer, how much traffic certain types of businesses drive. And we found that in particular, fitness, has a high degree of stickiness.
So, an example of this is that we have worked recently with a new operator called the Pickler, they’re in pickleball. And we thought, well, why would you want to have a pickleball location at one of your centers? Well, the reason why is because that the sport is growing so quickly.
The demography and the people that play the sport is actually getting younger, and they play often. And they’re very sticky traffic. So, we found when we opened our first one, the franchise group that we worked with we were very impressed with their operations. We’re very impressed with their team. And right away, the day 1 that they opened, they had sold out of their memberships, number 1.
Number 2, we’ve continued to monitor the traffic that came in there and found that people don’t just play once a week, they play several times a week. Why? Because it’s got a great sense of community. It’s a great place to meet others. It’s a very social game. So, we’re constantly looking for trends to position for those opportunities going out into the next year. And I’m seeing a lot of really great businesses, coming to the market that we want to work with.
RS: Yeah. It’s certainly interesting. That pickleball, that is a trend. I feel like next stop Olympic sport. It’s certainly sticky.
CM: Good point.
RS: As COO, what would you say are the 1 or 2 or 3 metrics that you are most focused on? And then for retail investors specifically, what would you say is the most important 1 or 2 or 3 metrics to focus on as investors?
CM: So, I always think about sales per square foot. I look at the health of the business of how well that tenant is doing with their sales. So, that’s number 1, is to measure in the industry the occupancy cost for that space, for that type of tenant is very, very important to make sure that they’re profitably growing in our location. Alright. So, that’s the number one thing I look for.
The second is, is then we also measure again, this customer stickiness. So, we’re consistently looking as to in our centers, can we optimize that location for 18 hours? And that means a lot of times, because parking is really, can be limited or especially at our more successful centers is very limited.
You have to balance the parking use, which is when we look at the things we look at over 18 hours. How do you properly merchandise with that? So, you optimize that location, number 1.
And number 2, how often are we bringing back that repeat visitor and that dwell time? So that’s the other thing that I look for, and we consistently measure.
And then I think the next to look at too is, we are consistently always touching base with our, we consider the boots on the ground and kicking the bricks or team members that engage with our locations. And part of that means understanding who are your customers? Who’s coming in?
Now, we can measure that, but a lot of times, there may be a new client coming in, and there are new customer coming into the market that we weren’t aware of. A neighborhood might be shifting or changing. And so that means just being aware of the trends and where, again, where do you lean into that shift and that change in the trend, is very, very important.
I always take that and I want to drop it down to the opportunity for profitability. And so, that’s always coming down. We always look for, are we improving our net operating income?
Are we successfully developing the right store footprints in the right location with the right merchandising that we can profitably operate and show this growth that we have. And we want to continue that.
We’re one of the best-in-class the last couple of years in growth, and we want to continue that. So, in doing so, NOI is where I always look. Now, we got to drop that down to a value proposition for shareholders as well.
RS: Thank you. Appreciate that color. For anyone who knows your path to your current role as COO knows you’ve had a very robust and varied path to get here.
You’re also a Professor at Rice University. I’m curious what you think is the most salient piece of information for young people or students to know as they navigate their way into the business world?
As we’ve spoken about, there are so many shifting trends and things to be aware of. What do you think is the most important thing for them to keep in mind as they grow or head out into the business world?
CM: Well, thank you for that. I think that, I’ve always looked and recognized that, our industry is a little bit challenging to get in. It’s still, even as big as it is, real estate houses, the economy, it’s difficult to get in. And much of that has to do with people either coming to the business through somebody they know or some relationship or a family relationship.
There’s a lot of families that still operate in this space. The institutionalization of the business has become greater, but when it comes down to, if you really think about how local it is, it’s still – you have many family businesses that operate there in the space. So, it is a challenge to get in.
Part of that, what I’ve said, with people coming in and especially in my class is take a point of view. Take a point of view in a perspective that you can be strong in because of your knowledge and what you have that you can offer into the industry.
That’s made a huge difference for me coming into it. One of the things I tell is that it’s not a business that’s for the faint of heart. You have to be strong in this business. You have to be resilient in this business. You have to have the wherewithal to take, to get through some very difficult trials, especially in the cycles.
And, with that means being in tune with demographic shifts, the potential for extreme shifts such as COVID happening or the financial crisis in 2008 where all of a sudden credit was cut off. And I look for this and the hires that I take in is, do you have an open mind? Do you have a specific point of view that relates well to our industry? Do you have that strength of character to get through difficult times and be resilient, but be robust at the same time to see opportunities?
Because, I always find the real opportunity happens is when there’s a repricing and you’ve got to be strong when you make those marks by jumping in when things look a little rough. And, that’s where the great strength comes from this.
And so gray hair matters in this business. It’s one of the things that I look at. Tech has a tendency to age out early. Having gray hair, I always joke around and say that I covered mine. I got plenty of it. That comes from the wisdom of going through some pretty tough cycles and some tough times and still coming out strong and being wiser than before.
RS: Well, thanks for sharing that. I really have enjoyed this conversation, Christine. So, thank you so much for taking the time. As we’re heading to the end of it, do you think that there’s anything that we’ve left out of this conversation?
And if you want to share with listeners where they can find out more about Whitestone, you’re welcome to type in their ticker (WSR) on Seeking Alpha, but where else can they find out more about you, more about Whitestone as investors or just observers of the industry?
CM: Yes. So, thank you. I think one of the things to take a look at is, of course, our website. You can get an idea of the type of real estate we own and what we’re about at Whitestone REIT. We’re pretty active out there now. We’re getting asked a lot about our type of business and our business model. We also have a LinkedIn page that posts up some of our people being interviewed and it has a very distinct point of view and a very interesting culture. So, I welcome your interest.
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