WSR - NYSE

Ladies and gentlemen, greetings and welcome to the Whitestone REIT First Quarter 2025 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, David Mordy, Director of Investor Relations. Please go ahead.

Good morning and thank you for joining Whitestone REIT's first quarter 2025 earnings conference call. Joining me on today's call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, President and 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, May 1, 2025. The company undertakes no obligation to update this information. Whitestone's 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 first quarter 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.

Good morning. For a lot of investors looking at a lot of companies, they may not view the first quarter as overly indicative of the future as it was entirely pre-tariff announcement. We believe there are a number of reasons to look at Whitestone's first quarter results and view it exactly as the type of quarter you should expect. This morning, we are reiterating our core FFO guidance and I'd like to walk you through the reasons why we believe this quarter very much represents what investors will see in terms of continued performance from Whitestone. There are 3 primary reasons. First, our redevelopment efforts are translating into same-store net operating income growth exactly as we expected and exactly in the way we're anticipating our ongoing redevelopment will translate into financial results. The capital is modest, $20 million to $30 million over the next few years but we anticipate our investments will deliver strong results. Second, as we've discussed on the last earnings call, Whitestone is designed to benefit as change occurs. This design means we're capable of performing better in various economic cycles. And today, we'll highlight how our business model and the actions we've taken over the past 3 years provide both accelerated growth and greater durability of cash flows if economic conditions worsen. And third, our properties are at the heart of the reshoring dynamic that is occurring right now. We strongly believe reshoring isn't really a matter of whether tariffs succeed or not, trillions of dollars of Chinese manufacturing no longer has a young labor force needed to operate effectively and globalization is breaking down. That translates into TSMC's new operations in Phoenix and Apple's announcement of a 250,000 square foot manufacturing facility in Houston. Those investments transform the communities around them and we benefit as long as we ensure that our centers remain anchored to the community and adapt in tandem. We are confident there is more reshoring on the horizon and our strategy and operational model is set up to benefit from that. In 2024, we spent roughly $8 million in capital above the 2023 level and this translated into an approximate 1% lift in same-store NOI growth that we delivered this quarter. Of the 6 redevelopment centers shown on Slides 20 and 21, Williams Trace was the vanguard in terms of our efforts and Windsor Park is well underway. We've issued press releases on redevelopment efforts at Lion Square, Terravita and Davenport. And collectively, those centers are anticipated to create up to 100 basis points of same-store NOI growth lift in 2026, '27 and '28. So here's what we delivered for the quarter. Core FFO per share of $0.25 for the quarter, up 4.2% versus Q1 '24. Same-store net operating income growth of 4.8%, near the top of our forecasted range. Straight-line leasing spreads of 20.3%, our 12th consecutive quarter with leasing spreads in excess of 17%. And we raised our annual net effective ABR per square foot 4% over Q1 '24. All of this fits perfectly within our longer-term expectation of 4% to 6% organic core FFO per share growth driven by 3% to 5% same-store NOI growth. As a reminder, that same-store NOI growth breaks down to 2% from contractual escalators, 1% to 2% from new and renewal leasing and up to 1% from redevelopment. I'm going to have Christine talk about what we've done organically that provides greater durability of cash flows but I wanted to touch briefly on our acquisition and disposition activity. In 2020, we were one of the top-performing retail REITs as measured by year-over-year same-store NOI performance or as measured by bad debt levels. Since 2020, we have sold 11 properties and acquired Lake Woodlands, Arcadia, Garden Oaks, Scottsdale Commons, 2 non-owned multi-tenant pads at Dana Park and a non-owned pad site at our Anderson Arbor property in Austin. One obvious benefit from our capital recycling has been to raise the average household income level and ABR for our properties. But what is more important is that we have a greater degree of confidence about the growth of the communities surrounding our centers and our ability to continue matching tenants to that growing demand. That science of connecting tenants to demand is the key to performing in any economic environment and we're always eager to walk investors through exactly how we do that. While the overall macroeconomic environment has uncertainty to it right now, the dynamics in our markets, especially for service-based businesses are much more favorable. Green Street's population forecast for our footprint is 50 to 70 basis points higher versus the national average and the job growth CAGR is forecasted to run 40 basis points above the rest of the nation. According to CommercialEdge, Phoenix, our largest market, leads the country in terms of industrial construction underway. All of these trends are in line with what we've seen over the past decade and it allows demand to recover much more quickly from any shocks to the system. We pay close attention to the current environment in terms of the decisions we make but we are making decisions with a multiyear horizon in mind and we are very bullish on the future of service-based businesses in the Sunbelt. We're looking forward to seeing many of you at REITweek in June. Please reach out to our Investor Relations if you will be at the conference and would like to spend some time with management. And I'll now turn the call over to Christine.

Good morning, everyone. We delivered a very strong quarter with $31 million of total lease value signed. It is the highest first quarter amount we've ever signed with 40% over the average of the last decade. Leasing spreads were 22.6% for new leases and 19.9% for renewals, giving us a combined leasing spreads of 20.3% for the quarter. This activity, combined with our previous strong quarters translated into a 4.8% same-store NOI growth which is the key to our delivering our targeted earnings growth. As we discussed on the fourth quarter call, our shop space at 77% of ABR versus the peer average of 50% provides greater flexibility to adapt to surrounding demand, more flexibility in terms of the mix of businesses that we can accommodate and is more attractive to a sophisticated multichannel services business. Complementing the physical design advantage of high-value shop space is our ability to utilize local knowledge and relevant data from Esri and Placer.ai to constantly pay attention to the demand drivers that translate into the success for the businesses populating our centers. Matching the tenants to the community not only provides Whitestone the opportunity to deliver peer-leading growth, it provides better downside protection in 3 distinct ways. First, relying strictly on anchor tenants in order to drive success for shop space tenants exposes shop space tenants unnecessarily to the anchor. Rather, we ensure that all tenants are connected to the primary demand needs driven by the community and accordingly limit the risk presented by roping our climbers together. Second, businesses that are out of sync with the community are the first businesses to become more problematic during difficult times. Our proactive approach to minimize the risk of stale businesses gives financial guarantees and long leases that don't protect the traffic and the vibrancy of the center which is why our underwriting process goes well beyond the financial guarantees and assesses the ability of the businesses to thrive in their new location. For existing tenants, our team constantly assesses the health of each tenant and does not wait for the end of the lease term to take action if we can upgrade to a tenant that better serves the community. This proactive approach better protects cash flows in challenging times. Terravita is a perfect example. We had a previous tenant that wasn't adapting to the changing demographic in the area. The surrounding area was dominated by second homes but has been rapidly changing as high-paying jobs for Taiwanese semiconductor facility and other reshoring operations are causing young upwardly mobile families to transform the community into one dominated by primary residents. We identified this mismatch between the prior tenant and the community early and moved to bring in a tenant that would capture the community shift. We are already familiar with the Picklr, a best-in-class operator, as we brought them in our McKinney, Texas, Eldorado Center. We knew they'd be a high-traffic driver capturing the active-minded families and health-conscious individuals into the Terravita community. The third and final dynamic I'll mention in terms of downside protection is the diversity of service-based tenants we achieved in combination with our high percentage of shop space. Having a diverse spread of strong local, regional and national tenants removes leverage dynamics that can work against REITs in difficult times. During the pandemic, many property owners relying on national tenants for achieving the security were pressured by these tenants leveraging the size in order to obtain numerous concessions from REITs. Our largest tenant is 2.2% of Whitestone's annual base rental revenues and this definitely helped translate into our outperformance during the pandemic. So those are reasons shop space produces greater durability of cash flows. In a strong environment, shop space tenants have higher rents, sign higher escalators and are far more flexible. This flexibility allows Whitestone to better control the real estate and far better ability to capture the upside opportunities as we constantly evaluate bringing in the strongest tenants possible. Shop space is also perfectly suited to service tenants that have lower capital requirements, allowing us to use the cash flow for growth, either in the forms of redevelopment or acquisitions, both of which are important components of our 5% to 7% core FFO growth target. Dave spoke on some of these financial benefits anticipated with our overall redevelopment efforts but I'd like to dive into one specifically to give a little color on what our investments look like. Lion Square should represent a little over the 6th of the overall $20 million to $30 million forecasted redevelopment spend. Lion Square sits within the Houston Asiatown which attracts over 9 million visitors annually. We've recently improved the center, bringing in Sun Wing Supermarket and are closely monitoring Park Eight Place, a $1 billion investment down the road that is transforming Halliburton's former campus into a 70-acre mixed-use project centered on a healthier lifestyles. Lion Square benefits from the high barriers to entry of the area being adjacent to this development. We expect 30% to 50% boost in the center's NOI as a result of this redevelopment project. Our capital is extremely well targeted and timed to deliver strong results. We are also seeing an acceleration in construction time frames as the government university project cancellations free up resources. It is important to note that taking advantage of newly available construction resources isn't something that happens without forethought. Plants, permits, vendors need to be ready to go and we are primed to take advantage of the current environment when the pricing changes. I'll wrap up by pointing out the percentage of shop space versus the peer set we show on Slide 12. It's important for investors to recognize that our higher percentage of shop space only delivers results because it's paired with our ability to connect with the surrounding community and because we built a company with the operational chops to manage it. The team there is guiding -- keeping the pedal down and advancing our continued growth. I'd like to thank them for keeping us at the front of the pack. With that, I'll turn things over to Scott to cover the financials.

Thank you, Christine. This morning, we reiterated our $1.03 to $1.07 core FFO per share guidance and our longer-term 3% to 5% same-store NOI growth target. For the quarter, as planned, we took back some space slightly lower, lowering our occupancy from the prior quarter and we produced strong same-store NOI growth of 4.8%. Intentionally taking back space in order to bring in higher-performing tenants and drive growth is a fundamental part of our quality of revenue focus. Specifically, this quarter, we made room for the Picklr and Ace Hardware coming in at Terravita. All in all, we are reiterating our 3% to 4.5% same-store net operating income projection for 2025. The longer-term 3% to 5% is higher in anticipation of the full impact of redevelopment projects. We continue to see opportunities to acquire centers that fit our stringent criteria and that have the potential to contribute to earnings in both the short and long-term as our leasing team utilizes data from Placer.ai and Esri to anchor tenants to surrounding demand to a much greater degree than previous owners. I'll estimate that we have about $50 million in acquisitions in the current pipeline financed primarily through cash flow and dispositions. Touching on the balance sheet. Our debt-to-EBITDAre was 7.2x versus 7.8x a year ago. And we remain on track to continue to strengthen our balance sheet in 2025. In terms of Whitestone's liquidity, we have $16 million in cash and $98 million available under the credit facility. Our dividend remains very well supported with nearly -- with a nearly 50% payout ratio and we anticipate strong dividend growth as we grow the dividend in conjunction with earnings growth. And with that, I'll keep my comments brief and open the line for questions.

[Operator Instructions] The first question comes from the line of Gaurav Mehta from Alliance Global Partners.

I wanted to follow up on your comments around occupancy taking some space back. Can you provide some more color on why the occupancy went lower?

Yes, sure. Gaurav, this is Scott. The biggest piece of the decline in occupancy is from a retenanting effort at Terravita. There's low-paying tenant in there at the end of the year. That's about a 37,000 square foot space that was formerly a grocery store. And we have 2 great new tenants coming in, the Picklr and Ace Hardware. And so while we prepare that space for the new tenants to take occupancy, there's a slight -- there's a roughly 0.7% decline in occupancy from the end of the year. And that's the majority of it.

Okay. Second question on your comments around $50 million in acquisitions in current pipeline. So is that amount that you guys are looking at? Or is that something that you already have under contract?

Gaurav, this is Dave. Thanks for your question. Yes, I think we're currently obviously looking for opportunities in our market to acquire properties that match our -- what we look for is characteristics and our ability to add value. So $50 million is just -- is an estimate of where we are right now with our expectation. If you look back, we've done roughly that level over the last couple of years and we funded that from cash flow and dispositions. So currently, that's what we expect this year. Obviously, we are looking for opportunities and are continuing to do so. But right now, we're very confident in kind of that $50 million amount that Scott talked about being able to add properties. We've done that, through that, we've improved the overall quality of the portfolio. I think we talked about -- you've seen the increase in our ABR. You've seen the increase probably in our Green Street TAP scores. So that's really an effort just to continue to refine and improve the quality of this portfolio.

Okay. And then lastly, on your debt-to-EBITDA at 7.2x which seems a little higher than 6.6x in 4Q. Can you provide some color on your expectations for your leverage level this year?

Yes. I think we expect to end the year in the low 6s. That's where we expect to end up. There's always a little bit of extra NOI that comes in, in the fourth quarter around percent sales from tenants. Tenants tend to hit their break points in the fourth quarter. And so we see a pretty sizable increase in percentage rent in the fourth quarter that doesn't repeat in the first quarter. And we also had some termination fees in the fourth quarter that were higher than we had in the first quarter here. So I think when we get to the end of the year, we expect to be in the low 6s.

Gaurav, it's Dave, I might just add. I think you've seen, obviously, over the last few years, our focus on continuing to strengthen the balance sheet. Through that, we received an investment-grade credit rating. We continue to be committed to growing, obviously, earnings per share but also strengthening the balance sheet. So I think if you look back -- Scott mentioned the seasonality but if you look back clearly, I think we're down 600 basis points from the first quarter of '24. I think it was 7.2x versus 7.8x [ph]. So super pleased with the progress we're making. We think we've taken some big steps there and you should continue to see us not only grow earnings at a rate we think will be very attractive but also have a stronger balance sheet.

The next question comes from the line of Mitch Germain from Citizens Bank.

I wanted to touch on some of the redevelopment efforts. I think all of you provided some perspective on them. And I get that you're doing work on pad sites. It seems like a lot of those, though, are build to sell. I just -- I guess, more granularly, like what are the projects that are underway at your centers that you think are really contributing to that 100 basis point lift in same-store?

Mitch, it's Dave. I'm going to give just a quick intro to your question and then I'm going to turn it over to Christine to give you some more details. But one of the things we've tried to do is show the building blocks for investors of how we continue to have consistent sustainable earnings growth. And a piece of that is through redevelopment, remerchandising and making sure that we're getting the most value out of each piece of our property. As you said in our deck, I think we have a series of slides that shows the properties we're working. And maybe I'll just pause and turn it over to Christine to maybe talk about the specifics. I think in her comments, she talked about Lion Square. But Christine, hit anything you want to hit, it would be great.

Sure. I think the important part in the redevelopment process is to evaluate where the opportunity, the lease term, leases turn, right? So we always evaluate the terms and then look where we can turn tenants and improve the quality of revenue. In addition to that, that requires some investment usually in the facade but also into some of the TI with those tenants. And so we found really good opportunities. I think the one that we've used as an example was Williams Trace, where we retenanted with an EoS Fitness and that allowed us to free up some of the parking for some pads. In addition to that, Lion Square is one of the larger ones that we'll be doing this year, should be completed or the majority of the completion should be by the end of the year. That will allow us to retenant some of the space too to, again, higher quality of revenue. This is -- we look for these ideal locations where we're also seeing adjacent development activity. So we ramp up some of those opportunities tied to where we're seeing massing and new development coming to the area. So I anticipate that along those lines, too, for example, Garden Oaks has a very large track next to it. It should be sold at some point. There's rumblings with various large grocers looking at the site. When that turns, we're already starting to do the planning effort to invest in that property. The planning is something that's really most of the time when you do an investment like this. Most of it is into the planning. The actual execution takes anywhere from 6 months to 8 months to complete. So you're seeing the ones, especially the ones that we've been talking about on Page 20 and 21, these are already in planning and we'll start continuing the execution through 2020 -- this year, 2025 and 2026 and we're already starting to look at 2027 and 2028 with additional properties. So hopefully, it gives you a little bit of color as to what we look for and why. And then again, that's where we expect that we'll be able to drive quite a bit of the returns in our portfolio.

Great. On to the balance sheet, there were some nuances. Some notes were a portion of some notes paid seems like with the revolver. Can you just talk about kind of what happened in the quarter and what is that leg to push leverage lower? I know Pillarstone is certainly something that is out there but what else is exist that's going to bring into the kind of low 6x range?

Mitch, it's Scott. Thanks for the question. First, the debt that was paid in the first quarter was just some amortization on our prudential bonds that we rolled into the revolver. To lowering leverage, I think it's going to come from both the increase in earnings that we expect to realize over the course of the year and over the next few years and then also cash flow from operations. Last year, we had about $58 million from operating cash flows. We were able to use a good portion of that to improve our balance sheet. And this year, I think we'll be in the $50 million to $60 million range in operating cash flows again. And so there's both just continuing operating cash flow improvement and certainly, the Pillarstone when we work through that bankruptcy process and we expect those proceeds to be probably between $50 million and $70 million but it's hard to predict the timing. That's why we haven't included it in our guidance. We'll certainly also improve the balance sheet and lower our leverage.

Great. Last one for me and probably for Christine. I know you and your team do a really fantastic job getting the pulse of what is happening at your centers and your tenants. So obviously, with everything happening in the world, there is some likelihood of a consumer pullback. And I'm curious if some of your tenants on the service side or on the restaurant side are seeing any indication of that trend happening at this point?

Thank you for the question, Mitch. It is something that we've been having a close eye on. I may have mentioned this earlier but one of -- we see this as a trend more than just a pullback but alcohol sales for our restaurants have decreased. It seems like dry January is extending into the year but we see that more related to people making healthful choices and lifestyle. We have not -- we've been tracking quite closely on the fitness side to see if there's been a decrease in traffic and that has not been the case. If anything, we've seen a pickup on fitness, again, I look at that as people really looking for the comfort of their communities. On the restaurant portion, we do have a few restaurants that are towards the high end. Surprisingly, that's probably been a little bit where we've seen some pullback. But then we've had 2 restaurants that just -- that do serve a little bit more on the higher end of the community in Phoenix just opened with huge success. So it's been something we've been watching but we haven't really seen it impact us yet. But again, closely monitoring it but it hasn't been -- we're not seeing the full effects of it and we're also not seeing people pull back from -- on the traffic yet as well. So the traffic is still there, sales may be changing. Definitely do see the restaurant trade that they're starting to move again towards a different mix for items that they're producing out there to entice people but it hasn't been a big pullback in sales yet.

Mitch, it's Dave. The only thing I might add, Christine is spot on but I will tell you that her and her team do a tremendous job of picking the right operators. I mean, obviously, in any market, picking the right operators. So our underwriting standards, our tenant identification standards have improved significantly since Christine has taken leadership of that team. And so that's a big part of what Whitestone does is obviously watching but ensuring we're picking the strongest tenants through local knowledge and data.

And I just will add one more thing to it. This is really something that's been very striking is we're definitely seeing the contractors coming out of their book shortening in 2026 which is one of the reasons why we're looking at amping up some of that investment into the centers because we see that there might be a bending of the cost curve with construction projects.

Mitch, do you have any more questions? The next question comes from the line of John Massocca from B. Riley Securities.

I know you talked a little bit about kind of what was moving the numbers around in the occupancy this quarter. But if you included those 2 leases you talked about where you brought in kind of a higher paying tenant, what would kind of be the occupancy on like a signed but not opened basis, if you will, roughly?

I think it was roughly flat. If you look at just Terravita and moving out the tenant that Scott talked about and the 2 new ones, Picklr and Ace, roughly, that makes up our -- we think we were 93.9% [ph] last quarter. Correct me, Scott but we were down about 700 basis points from last quarter and it's largely flat with those 2 new tenants. We don't report signed not opened like some of our peers because typically, it's not as big a gap for us because we get tenants open very quickly. But I think roughly, it would be flat, John.

That's very helpful. And then bigger picture, just in kind of the context of tariffs, as you think about your shop tenant base today, what's kind of the rough divide between people offering services and people selling kind of hard goods?

Yes. I'll start out and Christine will probably maybe add some as well. But I think in our deck, we do have a slide that talks about our mix. We've always focused on services and kind of e-commerce compatible tenants. And so if you look at our space that we've identified as kind of hard soft goods, it's probably 15% but we don't have your traditional big boxes. So our tenants tend to be a little less impacted clearly by the impact of tariffs and I'll let Christine add if she'd like.

Yes. I mean that's one of the reasons why we've leaned into the services side because of the challenge in the goods being just if you look back just with Amazon. So we've always been defined our role around that in the community is to be more service focused. And so along with that, I'd say it's really less than 15%, if that. We've asked, again, checked and touch base with some of our restaurants. And again, they're able to pivot quite quickly. So they haven't been as affected. We do have some -- we do have Fergusons in the portfolio. We haven't seen anything from them yet that would cause us concern. But again, that's less than 15%, maybe a fact that's maybe a generous portion.

Okay. That's helpful. And then I know it's only 60 basis points but your Dollar Tree exposure, just as a reminder, are those true Dollar Trees or are those Family Dollars and kind of if they are Family Dollars, what are you kind of expecting in terms of underwriter credit impact from the split?

Total [ph], Dollar Trees.

Yes.

Ladies and gentlemen, as there are no further questions, I will now hand the conference over to Dave Holeman for his closing comments. Dave?

Thank you. Thanks to all for joining us today. We very much appreciate your attending and your interest in Whitestone. We're pleased with our start to 2025 and really remain very optimistic about our business model and the ability to produce in different economic cycles. Obviously, there's a fair amount of uncertainty today in the economic environment but Whitestone is positioned very well. We look forward to engaging with a number of you at the upcoming conferences, ICSC and NAREIT. And with that, I'll wish everyone a great day. Thank you.