Whitestone's Presentation Twists the Facts and Fails to Address the Company's Significant Underperformance and the Board's Misguided Capital Allocation and Manifest Governance Failures
Erez Encourages Whitestone Shareholders to Vote "FOR" Catherine Clark and Bruce Schanzer, Two Experienced Real Estate Executives, and to "WITHHOLD" from David Taylor and Nandita Berry Using the BLUE Proxy Card
NEW ROCHELLE, N.Y., April 26, 2024 /PRNewswire/ -- Erez Asset Management, LLC ("Erez"), a shareholder of Whitestone REIT (NYSE:WSR) ("Whitestone" or the "Company") which has nominated two candidates for election at Whitestone's upcoming 2024 Annual Meeting of Shareholders, today sent a letter to Whitestone shareholders calling out the Whitestone Board of Trustees (the "Board") for obfuscating facts and ignoring key criticisms.
"It is deeply troubling that the Whitestone Board believes it can twist the truth and sidestep key arguments as it attempts to get elected as fiduciaries for shareholders," said Bruce Schanzer, Chairman and Chief Investment Officer of Erez. "At a bare minimum, the Board should acknowledge that the capital markets value Whitestone at a steep discount to the value of its underlying real estate assets — indeed, the steepest discount among all the shopping center REITs Whitestone frequently cites as its peers — and that something new needs to be done to resolve the crisis of confidence among investors this massive valuation disconnect evidences. Simply pretending that there is no problem, especially by misstating facts and refusing to acknowledge the Board's prior failings, is certainly not a way to build credibility with shareholders. In order for the market to ascribe fair value to its assets, change is clearly needed at Whitestone."
The full text of the letter is below:
Dear Fellow Whitestone REIT Shareholders,
We are writing to encourage you to join us in supporting critical changes at Whitestone REIT. We recently released this 69-page presentation that outlines our rationale for believing change is needed at the Company. We welcome you to review it.
Whitestone's Board has ignored most of our analysis, refusing to recognize that the Company's small scale, lack of growth, inefficient operations, abysmal capital allocation, missed performance targets and stale management team are preventing it from realizing its potential. Worse still, the Board simply glosses over its own significant failures – such as its refusal to accept a shareholder vote of no confidence in a director, adoption of an unusual slow-hand poison pill, approval of a single-trigger change-in-control payout for management, incorporation of a "proxy put" in the equity plan and debt agreements that disenfranchises shareholders, and failure to disclose significant conflicts of interest relating to the trustees.
No, to hear the story from Whitestone's Board, all is well at Whitestone, and the Company is executing its strategy effectively.1 The Company operates, in its own words, a "high quality portfolio"2 in some of the "fastest growing"3 geographies in the country, fueled by "positive supply dynamics."4
With such enviable assets and supposed "superior" performance,5 one would expect the Company to be highly valued and generating great returns for shareholders. The sad fact is, however, that the stock market disagrees with Whitestone.
Whitestone's stock trades at a 31% discount to its consensus Net Asset Value ("NAV"), the largest discount to NAV of any publicly traded REIT in the Company's self-selected peer group.6 A dollar of cash flow in the hands of Whitestone's management team and Board is valued lower than a dollar of cash flow in the hands of its peers: Whitestone has traded at a whopping 37% discount to the median forward AFFO multiple of its peers7 on average during its time as a public company. Whitestone's stock is currently trading below its 2010 IPO price8 – as it has for 876 of the last 1,000 trading days.9 On a total return basis, the stock has underperformed sector indexes and the stock of Whitestone's peers over the last five years, until rumors of a potential takeover emerged in October 2023.10
Whitestone's Board is simply being disingenuous when it claims Whitestone is performing well. It knows the Company has underperformed. After all, Whitestone's 2023 Annual Incentive Plan paid out at just 18% of the Board's target compensation level in 2023.11 Moreover, the Board surely noticed that the Company:
- failed to deliver on its long-term leverage and expense reduction commitments made to investors in 2018;12
- missed all four financial targets in the Company's 2023 Annual Incentive Plan;13 and
- missed its 2023 FFO guidance, despite setting a target that was lower than the result for 2022, cutting that unambitious target just months later and then reaffirming the further reduced guidance just a month before the earnings miss.14
Unfortunately, the Board's uber-defensive reaction to our desire to see improvements in performance at Whitestone has caused it to distort, conceal and obfuscate the truth. For example, Whitestone's Board has:
- Claimed the Board proactively fired the prior CEO for performance issues, when in fact the Board fired him for misconduct. The Board claims it "recognized the lack of execution and underperformance"15 under the Company's former leader. However, at the time of the firing, in the press release announcing the leadership transition, the Board said the termination was "not related to Whitestone's operating performance [or] financial condition."16
- Cynically attempted to damage Mr. Schanzer's credibility by highlighting baseless claims against him, both of which were resolved in his favor and without a finding of fault. The Board knows the allegations it has repeated in its materials have no basis; the very Wall Street Journal article the Board cites notes that the allegations were dismissed, and Mr. Schanzer provided the Company with legal documents indicating that an independent arbitrator found the claims to be unsupported.
- Dismissed the significance of Board Chair David Taylor's undisclosed service as counsel to Pillarstone REIT (an entity in which Whitestone's then-CEO held a 78% beneficial ownership interest),17 even though Mr. Taylor's professional relationship with Whitestone's then-CEO surely implicated Mr. Taylor's independence. Mr. Taylor's law firm was potentially paid millions of dollars to negotiate against Whitestone on behalf of an entity controlled by the Company's then-CEO. Just a few months later, Mr. Taylor was invited to join Whitestone's Board and was appointed to Whitestone's Compensation Committee. Soon thereafter, Whitestone's then-CEO received a significant pay increase. And shareholders were never told of the relationship between the then-CEO and Mr. Taylor. Moreover, aspects of the Whitestone-Pillarstone deal later became the subject of a lawsuit by Whitestone (where Mr. Taylor was then Chair) against Pillarstone (where Mr. Taylor was the drafting lawyer responsible for the deal.) The Board well knows that Mr. Taylor's work for the then-CEO's controlled entity created an ongoing independence issue (especially as Whitestone's ownership stake in Pillarstone is at risk due to the performance and bankruptcy of Pillarstone and Whitestone sued Pillarstone). This relationship should have been disclosed.
- Falsely claimed Erez and Mr. Schanzer are focused solely on selling Whitestone, even though that is both not true and was never even discussed during Mr. Schanzer's interview with the Board. Mr. Schanzer initially approached the Company shortly after Bloomberg reported interest from a buyer because he feared that the Board would hastily sell the Company. His advice and input was not to rush into a sale. Since then, in his dialogue with the Board and with shareholders, Mr. Schanzer's focus has been on cost of capital, capital allocation, lease and tenant quality, investor communications, model integrity and other operational topics. The Board obviously knows this; the subject of selling Whitestone was not discussed during Mr. Schanzer's interview.
- Incorrectly claimed Mr. ...