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Greetings and welcome to Whitestone REIT Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Mordy, Director of Investor Relations. Thank you, Mr. Mordy. You may begin.

Good morning and thank you for joining Whitestone REIT's third quarter 2024 earnings conference call. Joining me on today's call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, Chief Operating Officer; and Scott Hogan, Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors. Please refer to the company's earnings news release and filings with the SEC, including Whitestone's most recent Form 10-Q and 10-K for a detailed discussion of these factors. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, October 31, 2024. The company undertakes no obligation to update this information. Whitestone's third quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section. We published third quarter 2024 slides on our website yesterday afternoon, which highlight topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

Thank you David, Good morning and thank you for joining Whitestone's third quarter 2024 earnings conference call. We've had tremendous success over the past three years improving every facet of Whitestone, from implementing governance best practices to the commitment and quality of our employees. The daily steps we've taken add up to a fundamentally different company versus Whitestone of the past. From time to time we hear a comment that we are stuck or challenged to grow. Let me be clear, we are neither. We've led the peer group in total shareholder return over the last three years and we've implemented stronger shareholder engagement practices to gain a better understanding of shareholders perspectives and better incorporate that into our decision making. And most importantly, core FFO per share, our key growth metric is robust and we are aligned to continue core FFO per share growth in 2025 and beyond. Today we reiterate our target of 11% core FFO per share growth for 2024. Not only is this growth something we're proud of, we believe it is directly connected to our operational improvements and the discipline with which we have pursued and will continue to pursue our strategy. Whitestone's momentum continued at a strong pace this quarter. We delivered our 10th consecutive quarter with leasing spreads above 17%. To be specific, combined total straight line leasing spreads were 25.3% for the quarter. We are increasing our same store net operating income target range for the second quarter in a row, raising the midpoint another 50 basis points this quarter after delivering same store NOI growth of 4.6% in the third quarter. The leasing team improved our occupancy up to 94.1% as we move into what has typically been a very strong quarter, the fourth quarter. We improved our debt-to-EBITDA RE metric to 7.2 times and are on track to achieve our year end 6.6 to 7 times for our Q4 annualized target. We are confident we will be able to continue improving leverage in 2025 via earnings growth, free cash flow and collecting on our Pillarstone settlement, but we'll leave that projection to our next earnings call. Last quarter, our Green Street Trade Area Power Score increased again. Green Street has updated their scoring and once again scored our portfolio within the top quartile in terms of the quality of the portfolio versus the peers and we completely agree with their conclusions on the strength of our portfolio. But I'll emphasize that it just isn't the high disposable incomes surrounding our centers or the strong traffic patterns ordering our centers to drive our success. What sets us apart is growing demand and our ability to remerchandise our centers to match the evolving neighborhood needs. This is made possible by active management by having the right structure in place, including our use of shorter leases by having operational expertise including a leasing team well versed in utilizing technology, disciplined underwriting and tenant selection. I mentioned earlier that we define growth as core FFO per share growth combined with a strengthening balance sheet. This measure most directly reflects what we as management control. We hold our teams accountable for FFO per share growth and the metrics that drive it forward. We do not deliver NAV or share price quarter after quarter. However, we firmly believe that consistent core FFO per share growth will reward our shareholders over the long run. As we have previously communicated, we have planned to announce and onboard two new trustees prior to yearend, our board level nominating and governance committee in combination with leading executive search firm Spencer Stuart and utilizing valuable shareholder input, is conducting an exhaustive search to identify board member candidates that will further strengthen our board, complementing the skills of existing trustees, holding management accountable and maximizing shareholder value. Keep an eye out for an announcement in the near future. We are eager to connect with investors at REIT World in a couple weeks and we look forward to sharing more about Whitestone and gaining valuable investor feedback. And with that, I'll turn the call over to Christine.

Good morning everyone. Every Monday our leasing team meets to discuss deals very similar to what many investment firms do. We discuss prospective deals, pending leases and commenced leases. We share what is working and what isn't. We discuss how to properly evaluate businesses and assess their ability to serve the community and drive the center forward. We check our progress against our targets for the year. And most importantly, we discuss long-term successes and failures. If a tenant is struggling, our team knows we're going to discuss it and learn from it. If there is a lease cause that causes us a problem, our team knows it and we're going to study it. And if the tenant is successful driving traffic around them and allowing us to share in that success when the lease is renewed, we celebrate the success. This is how we're focused on continuous improvement and continuing to drive quality of revenue. While accountability is a key facet of this progress, the most important aspect is our ability to develop the leasing team and leverage their ability to learn from one another. This year I've spoken about our remerchandising initiative. We challenged the leasing team to take back space and upgrade our tenants wherever it would result in strengthening our centers and our business in the long-term. It is sometimes difficult to look beyond the immediate quarter, but especially in an environment this strong, it's the right thing to do for investors and for that center. Even beyond that, it is what our leasing team is trained to do walk a mile in the shoes of the community and figure out if the tenant is truly meeting their needs and succeeding. We dropped 70 basis points in occupancy between the fourth and second quarters. This was deliberate. We did this thoughtfully in identifying stronger new tenants, in negotiating favorable lease terminations. We're now back up to 94.1% occupancy rate and we're poised to move higher. We certainly aren't done with our remerchandising effort. Given our average lease length of approximately four years, we are a little over halfway through our first path of the initiative and we're getting better as we go. This initiative is directly related to the strong results we've delivered this quarter and the momentum we have going into the fourth quarter. The 94.1% occupancy rate is the second highest in company history, second only to the fourth quarter of 2023. Anchor occupancy was up to 97.4%, up 140 basis points from a year ago. Small space occupancy was 92.2%, also up 140 basis points from a year ago. In the quarter we achieved renewal leasing spreads of 25.9% and new leasing spreads of 22.7% for a combined overall positive leasing spread of 25.3%. For any business looking to expand opening a new physical location, one of the critical questions is will this new location allow me to tap into a new customer base? Whitestone's differentiation is that we're committed to answering that question just as much as the business owner is. Our leasing agents specialize in answering that question by knowing the community and utilizing technology to understand ongoing trends. They answer that question by knowing the center and assessing the synergies and they look at the business and the business's ability to acquire customers. Do they have an existing customer acquisition strategy? Are they sophisticated in terms of their social media outreach? Is the product something that pulls from a larger area? We recently had a space open up at Lakeside Market center which is an H-E-B Shadow-anchored center. By running the void analysis, we understood the needs in the area and looked for a business that would be synergistic with H-E-B. We focused on finding the right tenant with a boutique feel and product offering. Our new tenant, [Indiscernible] fit our vision perfectly. They offered a high end, hard to get bourbons and liquors and because of their strong following on social, they had customers lined up overnight for the grand opening pulling from a much larger distance than just the normal trade radius for the center. So what sets us apart here is not just our ability to capitalize on the attractiveness of an H-E-B anchor center. We also increased the ABR by over 50% our ability to increase the traffic and reach the center and help ensure longer term success for both Whitestone and the tenant. We had a similar success recently bringing in an Asian grocer Sun Wing into our Lion Square center in Houston. Not only did this allow us to transform the center into a grocery anchored center, Sun Wing's customer following within the Asian community has greatly extended the reach of the center, often pulling customers from a greater 5 mile plus radius. Securing Sun Wing is part of a larger remerchandising and redevelopment plan for Lion Square. We have seen the community evolve with the demand increasing as incomes have risen and younger families are moving in. A major mixed use development project is occurring adjacent to the center and we'll be able to maintain a cash flow as we redevelop the center to match the evolving demographic and take advantage of higher traffic. In terms of the overall strength of demand, we're seeing no signs of Slack Fitness, Health, Beauty and Wellness all continue to see an uptick, especially with the younger demographics. EoS Fitness opened at our Williams Trace Plaza. Inside, they're offering everything from -- to a theater room for those that want a much larger screen when they work out. However, one of the most interesting items is the social media space for those that want to share video of their workouts on social media, it's no wonder that we're seeing a strong demand for health and beauty for both men and women, particularly among Millennials and Gen

Thank you Christine and good morning. We delivered core FFO of $0.25 per share and we have very good momentum going into the fourth quarter. Our annual guidance anticipates that FFO in the fourth quarter will benefit from leasing momentum and percent sales clauses kicking in more heavily in the fourth quarter similar to the last three years. Pursuant with our delivering same-store NOI growth of 4.6% this quarter, we raised the full year same store NOI guidance range to between 3.75% and 4.75%, raising it 75 basis points at the bottom and 25 basis points at the top end of the range. On the debt side, after the quarter concluded, we added $20 million of unsecured debt to our term loan and executed a hedge to lock the interest rate at 5.2% using the proceeds to pay down the revolver. Our term loan extends our scheduled debt and maturities with a Q1 2028 end date. This reduces the amount on a revolver below where we finished the quarter, which was at $129 million with $79 million of that representing our variable rate debt. We'll continue to look at opportunities to reduce that amount and ladder our maturities and at the end of the quarter, 12% of our debt was variable and we had $121 million of availability on the revolver. The revolver matures in 2026, not including two six month extension options. We had one disposition in the quarter, Fountain Hills. This balances our acquisition disposition activity since we started with our asset recycling program in late 2022. Over the course of our recycling program, we've had an average disposition cap rate of 6.4%. Just looking at the individual TAP scores, dispositions are below the midpoint in terms of our property scores. This shows that where we've applied our expertise, the market places a high valuation on our assets. As I mentioned last quarter, our goal is to make sure that our underlying growth engine becomes more and more visible to investors. We will do this both by eliminating noise and by continuing to drive same-store NOI growth in order to deliver bottom line growth. With that, we will keep our comments brief today and I will open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Mitchell Germain with Citizen JMP. Please go ahead.

Hey, thanks. Just on that asset sale, what were the characteristics of that asset that made you consider that for a sale versus any other asset in the portfolio?

Hey Mitch, Dave Holman, thanks for your question. I think the primary characteristic just at the high level was just looking at the potential growth, the potential value add in that asset as we look forward versus what we could do with recycling the capital and buying an asset where we can really apply our strategy, remerchandise and add value. So that asset we felt like we had positioned to the point where we could use those funds to add value better through the purchase of another asset. That's the high level.

Got you. Great. About a third of your rents come from the restaurant sector. Hearing some headlines that have been less than flattering. Pullback of the consumer clearly impacting some of them higher wages, etcetera. So are you seeing any of that kind of flow through with your customers or has it really been business as usual?

Mitch, thanks for the question. Two things that we always look for importance is how competitive are they in the market. And we have not seen really too much pullback in ours. Maybe a little flattening in sales and some, but overall we really are careful and cautious about how we underwrite our restaurant operators. Where we are seeing a pullback is on and it's not for us because we don't have these types of locations. And I would say that's more on the lower end of the spectrum. When you think about that area, the McDonald's, so on and so forth, they're being impacted. But ours really play more to the middle, to the higher income customer. And we have not seen much in that area as of yet. But we do see that our operators are trying different offerings and tacking a little bit to the market conditions.

Got you. Was there any specific lease that drove the spread this quarter?

Not really. I mean, we've been just actively, as we discussed really in the first quarter of this year and we started already in the previous year, remerchandising and again, I believe firmly when you have a strong market like this and a changing in demography, it's very important to serve your local community. And most of this has been with our remerchandising efforts.

Got you. Okay, great. And last one for me. I know that you had contemplated some Pillarstone in coming in and helping facilitate some of the deleveraging this year. I don't know, I mean, we're kind of three quarters of the way through. Is it kind of we pushing that to 2025 at this point because of what's happening there. Can you just give a quick update?

Hey, Mitch. Dave. I'll start and then maybe get Scott to comment as well. But just to give a quick update, we are making progress with our, working through the, our Pillarstone collection during the quarter. I think we've got a couple positive steps and that we've now have a plan of liquidation that we've agreed upon. We have a third party plan agent that's overseeing that. So I think we're making steps and with that obviously we continue to feel better about collecting and the timing. I think as far as the timing, I do think I'll let Scott comment on the guidance.

Yes, sure, Mitch, thanks for the question. Well, we've kept our core FFO range wide at this point in the year just because of some of the uncertainty around the monetization of Pillarstone. You've seen the same store growth numbers increase a little bit, but we did have a small amount forecasted in the fourth quarter for liquidation proceeds on Pillarstone. And it's just, it's just too hard to say whether we'll see that this year or next year given that it's in a bankruptcy process.

Excellent. Thank you.

Thank you. Next question comes from the line of Gaurav Mehta with Alliance Global Partners. Please go ahead.

Yes, thanks. Good morning. I wanted to ask you on your asset recycling program, are there any more assets in your portfolio that maybe sold in the future or you are finished with asset recycling?

Thanks, Gaurav. Dave Holman. I think, we view it as an investment portfolio. And so I believe you're always looking at your holdings and determining, which ones do we feel like we should recycle out of. So our recycling program, I guess, may be different than some of the others in that it's, it's not been, getting rid of non-core assets or assets that don't fit our strategy. It's just been making sure that we're investing our money in the best way to return value to shareholders. So I think you'll always see some level of sales as we go forward from us. But I think we reported in our remarks we've done about 100 million kind of since late 2022 and balanced that. So that's 100 million over a couple years. Volume might be a little less than that, but you'll always see a little bit of recycling, I believe.

Okay. I also wanted to ask you on your same store NOI guidance for the year of 3.75% to 4.75%, just curious around what gets you to the lower end and the upper end of the guidance and what's forecasted for 4Q.

I didn't understand the same-store.

So I think you said I'll start maybe. I think you said on the same store guidance, what's forecasted for 4Q and then what are the drivers kind of on the low end and high end.

I think it's. I'll start off and Scott, you can talk, but I think it's largely timing. Right. Anytime you're looking at leasing activity and new leases, etcetera, there's some, there's some uncertainty as the exact time when it starts. So that's probably the largest. And I'll let Scott add to that.

Yes. We have a range forecasted for 4Q. You're not going to get into specific amounts, but maybe a little tiny bit of a pullback from what we've seen in the first three quarters, but still strong. Same store growth in the fourth quarter, and we would expect to see good same-store growth in 2025 as well.

Okay, thank you. That's all I have.

Thank you.

Thank you. Next question comes from the line of John Massocca with B. Riley Securities. Please go ahead.

Good morning.

Good morning, John.

Maybe kind of building on that last question, is there something specific you're kind of seeing in the leasing pipeline today that's driving a little bit more conservatism around the 4Q same-store NOI growth forecast, or is that just kind of broad conservatism given a decent amount of leasing activity that's going to occur then.

I do think, hey, John, when you look at same store growth, obviously you're comparing toward a period. I think we continue to have great momentum, continue to be very aren't seeing any signs of slowing down. But I think when you look back at the fourth quarter of last year, it was a strong quarter you're comparing against. So with that, we're just looking at an annual number. So I would say, and once again, Scott can add, I would say I don't think we're seeing any slowdown or of that sort. We're just, we raised our same-store NOI guidance by 75bps at the bottom and 25 increased at 25 at the top. So I think we're continuing to see really positive momentum.

Right. And there was some variation last year in same store growth from quarter-to-quarter that may have resulted in little higher number of 1/4 versus another quarter this year.

Okay. And then in terms of investment, how are you thinking about kind of external acquisitions today? Is that something you would need to match fund with capital recycling or do you think some of the liquidity you created with the term loan and the asset sale in the quarter allows you just be a pure acquirer for kind of granular stuff?

It's no different than, you would always do, John. It's disciplined acquisitions. Right. We're actively looking for opportunities where we can acquire assets and apply our skills in ways that are accretive. Obviously there's a lot of pieces there of finding the right purchase price and then looking at capital to put to work. We have the ability to grow. We have room on our credit facility, we have the ability to tap multiple sources, but it's largely just disciplined underwriting. So I wouldn't answer that. I would answer that with we have opportunities. We've just got to obviously make sure we're disciplined in that, just like everyone in the space.

Okay. And then last one on my end, just kind of a bigger picture question. In light of the very recent, very active shareholder base recently and the demand in the retail space, what are your thoughts around running a formal strategic alternatives process.

I'm not just, hey, John. So I would tell you that our board reviews the best things for shareholders all the time. So we are actively looking at what are the best ways to add value, what are the best ways to produce a return to our shareholders. So I think we are actively doing that just like we should. And so I'm not sure I'm clear with your question, but. And then as far as the active shareholders, I would say we've had great engagement with our shareholder base over the last several quarters. We've really got great positive feedback. If you look at the results today and the progress we're producing, I think the shareholder feedback we've got has largely been, we recognize that and we appreciate that. 11% earnings growth, FFO growth, which frankly is pretty much top of the pack.

Okay. Is there anything you would like to see from a valuation perspective or maybe certain kind of achievements on the operating end if you're not getting kind of the price you think for the market to go out and maybe more actively seek interest on an M&A from an M&A perspective, or is it, you know, we're just going to keep executing and if we get inbound, that's great?

No, I think we're going to. I think we and the board are going to keep very actively looking at what are the best decisions for all shareholders. We look at the market conditions, we look at the operating performance and regularly look at what are the best conditions. So there's no decision that says we're going to do this, we're going to do that. We're going to continually evaluate and look at what we think is the best course. Right now our momentum is very strong, and so we're evaluating all sources and we'll continue to do so.

Okay. I appreciate the color. Thank you very much.

Thank you. Next question comes from the line of Craig Kucera with Lucid Capital Markets. Please go ahead.

Yes, good morning, guys. Obviously, another solid leasing quarter. You mentioned the continued strength of fitness and health and beauty as a few examples. But I'd be curious, sort of, are those the tenant categories that you are more focused on during the quarter, in the back half of the year? Or what are the categories that really kind of fit more for where Whitestone's shopping centers are today?

Again, we've always focused on food, rather restaurants, and as we just mentioned, we added another grocery anchor to one of our centers. And health, beauty, wellness has been just a really hot category over the last couple of years and continues to grow. But along with that, there's also continued other services too that we're finding that are unique to our environment. And I would say that we've stayed focused on these categories that have been essential and compatible with the Internet and it's worked well. And that's why we've been able to deliver the last couple of years and continue to do so.

Okay, great. Changing gears, it looked like your real estate taxes, I think averaged about 4 million the prior three quarters this quarter ticked up to 5. Were there any revised appraisals or is this just a timing issue?

There's some talk in Harris County that the tax rates may be going up this year. And so what we do during the year until we get the tax bills is we consult with our tax advisors on what we ought to be accruing. And so just based on what we've heard about tax rates going up in Harris County, we increased our tax accruals a little bit this year and we'll actually get the tax bills later and be able to true those up in the fourth quarter.

Okay, got it. Appreciate the color. Just one more for me. You've been pretty successful in bringing on leverage year-to-date. The guide is I think 6.6 times to 7 times EBITDA by year end. But I guess can you give us some color on kind of the longer term goal there? I mean, does that bring the balance sheet where you want it to be or do you think you'll continue to deleverage over time?

Well, I think we'll continue to deleverage over time. I think we probably. Dave can comment here too. But low sixes, high fives might be a great place to end up. But I think we've made a lot of progress from a couple years ago when we were north of 10. We expect to end the year at 6, 667 as you mentioned and we look to continue to ladder our debt and strengthen our balance sheet as we go forward.

Okay, thank you.

Thanks Craig.

Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Dave Holman for closing comments.

Thanks so much. We very much appreciate all of you joining us on today's call. Look forward to seeing many of you at the NAREIT convention coming up in a couple weeks. And should you have any questions, please reach out to our investor relations. But once again, thank you for your interest and thank you for participating in today's call.