Suzy Taylor - Director of Investor Relations James C. Mastandrea - Chairman and CEO David K. Holeman - CFO.

Mitch Germain - JMP Securities Carol L. Kemple - Hilliard-Lyons Michael Diana - Maxim Group Peter Martin - JMP Securities.

Good day and welcome to the Whitestone REIT Third Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Suzy Taylor, Director of Investor Relations for Whitestone REIT. Please go ahead, ma'am..

Thank you, Don. Good morning and thanks all of you for joining Whitestone REIT's Third Quarter 2014 Earnings Conference Call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our Chief Financial Officer.

Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual statements may differ materially from those forward-looking statements due to a number of risks and uncertainties.

Please refer to the Company's filings with the SEC, including Whitestone's Form 10-K and Form 10-Q, for a detailed discussion of these risks.

Acknowledging the fact that this call may be webcast for a period of time, it is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, November 10, 2014.

Whitestone's third quarter earnings press release, supplemental operating and financial data package and Form 10-Q have been filed with the SEC. All are available on our Web-site, whitestonereit.com, in the Investor Relations section. Also included in the supplemental data package are the reconciliations from GAAP financial measures.

With that, let me pass the call to Jim Mastandrea.

Jim?.

Thank you, Suzy, and thank you all for joining us on our call today. Today, we're going to review our third quarter results and update you on the recent progress of our initiatives. Dave's portion of our call will focus on our financial results and Whitestone's improving operating metrics.

Our 2014 third quarter was marked by a 28% year-over-year improvement in property net operating income, same-store net operating income growth of 11% and the signing of 82 new leases totaling over 226,000 square feet of space with an average positive leasing spread on the new leases of 15%.

Core FFO increased 36% to $6.9 million for the quarter over the prior year, and on a year-to-date basis FFO Core increased to $20.6 million, up from $14.6 million in 2013 or 41%.

FFO Core per share increased 3.4% to $0.30 per share in the third quarter, up from $0.29 per share in the same period last year and again exceeded our annual dividend of $0.285 per share. Our third quarter occupancy was 85.8%, up 77 basis points from the same time period during the year before.

Whitestone has a highly differentiated Community Center Property business model and it is this model that is contributing to our ongoing progress in growing key operating and cash flow metrics and ultimately shareholder value. We have truly focused on owning assets in two key growth – the business running states, Arizona and Texas.

The types of properties we own in underserved markets and highly desirable locations of these states support our tenants and the businesses that occupy our centers.

We believe that our hands-on high-touch model results in a service culture that is supportive of our tenants and in the end ultimately attracts the customer that is enticed to frequent our properties. Through the repositioning and redevelopment of our properties, we have enhanced the communities we own in these high-growth markets.

We need to remain disciplined and add assets at meaningful discounts to replacement cost, we then need to leverage the current cash flow being generated or we invest additional capital to create vibrant Community Centers that drive additional long-term cash flow.

We continue our repositioning efforts as we embark on the launch of two new Houston property redevelopments. The key to Whitestone's value-added business model is to convert intrinsic value into net asset value.

Specifically, construction has begun on SugarPark Plaza and Providence Plaza, both of which are located in growth quarters in the Houston area and serve densely populated affluent surrounding communities.

This type of investment allows us to strengthen our portfolio resulting in increased property revenues, leasing spreads, net operating income and overall property value. Our investment will result in two centers with dramatically increased visibility for our tenants that should drive additional traffic to the center and revenues to Whitestone.

This type of redevelopment investment allows us to strengthen our portfolio resulting in increased property revenue, leasing spreads, net operating income and overall property values. Turning to external growth, during and subsequent to the third quarter, we added four Community Centers via acquisition, two in Texas and just last week two in Arizona.

Our Texas acquisitions were Heritage Trace in Fort Worth, which we discussed on our last call, in The Strand at Huebner Oaks, a 90% leased, family-focused property containing 74,000 square feet of leasable area on 8.2 acres in the northwest submarket of San Antonio which we purchased for $18 million.

In Arizona we acquired two value-added Community Center properties for $47.9 million located in the technology hub corridor within the Chandler, Gilbert and Mesa, Arizona areas.

Both properties enhanced our presence in growing southeast valley of Phoenix, Mesa and expanded our opportunities for economies of scale and leasing synergies with Whitestone's existing infrastructure.

The Fulton Ranch Towne Center acquisition totals 114,000 square feet of leasehold space on 18.1 acres and includes two pads which can be developed adding 19,000 additional square feet, as well as an option to purchase additional leasable square footage. Occupancy of this center is currently 86.3%.

The Promenade at Fulton Ranch totals 99,000 square feet of leasable area on 14.3 acres, and occupancy in this center is currently 76%. The acquisitions are accretive to FFO per share at a unleveraged 7.5% cash on cash return.

All of these acquisitions are consistent with many of our other Class A acquisitions as they mirror our business model with 90% of our tenants being small service businesses meeting the needs of surrounding communities. These four acquisitions brings our total acquisition for 2014 to $86 million.

We now own approximately 5.3 million square feet of leasable space in 64 Community Center properties including future development plan parcels at advantages high growth markets. Whitestone remains focused on adding value driven by our distinct strategy and the execution of our business model resulting in strong organic as well as external growth.

We also expanded our credit line to support additional acquisitions from our more than $500 million acquisitions pipeline and we continue to maintain a balance sheet to provide us with financial flexibility and is positioned to support additional growth. With that, I would like to turn things over to Dave Holeman, our Chief Financial Officer.

Dave?.

Thank you, Jim. I will start by reviewing our operating results followed by discussion of our balance sheet or financial position and then close with an update on our 2014 financial guidance. Throughout my comments I will discuss both our third quarter and our year-to-date results.

During the first nine months of the year, we have continued to grow our top line, our bottom line and overall cash flow through solid same-store growth, acquisitions and judicious expense management. FFO Core for the quarter was $6.9 million or $0.30 per share. This compares to $5.1 million or $0.29 per share in 2013.

For the nine months ended September 30, FFO Core was $20.6 million or $0.90 per share. For the nine months of the year, FFO Core is up $6 million or 41% over the same period in 2013. On a per share basis, FFO Core is up 10% or $0.08 per share over the same period in 2013.

Total revenues for the quarter were $18.9 million, an increase of 16% or $2.6 million from the same period of 2013. Year-to-date revenues are up 21% or $9.4 million over 2013. Same-store revenues represented 88% of our total revenue for the quarter and were up 2.5% from the prior year.

The increase in same-store revenues was attributable to the increase in our average occupancy of 0.5% and an expansion in rental rates of 2%. Same-store revenues represented 80% of our total revenues for the nine month period and were up 3.1% from the prior year.

The increase in same-store revenues for the nine month period was attributable to growth in average occupancy of 1.3% and rental rates of 1.4%. Leaving spreads remained strong in the quarter and are up on a GAAP basis 14.6% on new leases and 5.1% on renewal leases for the rolling 12 month period ended September 30, 2014.

During the quarter, our leasing team signed 82 new and renewal leases totaling 227,000 square feet with a total lease value of $15 million and an average tenant size of 2,800 square feet. The total lease value represents a 15% increase over the value signed in the previous year third quarter.

Weighted average lease term for leases signed in the quarter was four your and generally includes minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance.

For the nine months, we have signed 297 new and renewal leases totaling 679,000 square feet with a total lease value of $41.4 million and an average tenant size of 2,300 square feet. The total lease value represents a 24% increase over the value signed in the previous year nine month period.

Other key operating measures include, as Jim mentioned, a total occupancy rate of 85.8% at the end of the quarter, up 77 basis points from September 30, 2013. I will remind you that our total occupancy represents physical occupancy and does not include tenants under lease which have not yet moved into our properties.

As of quarter end, we had approximately 50,000 square feet of leases that were signed but they had not yet moved into our properties. Our tenant base consists of 1,272 tenants and our unique leasing strategy continues to be effective producing increases in occupancy and positive rental rate spreads.

We have a diversified tenant base with our largest tenant comprising only 1.8% of our annualized revenues. Our total property net operating income for the quarter grew 27% to $12.1 million from a year ago. This increase was attributable to same-store NOI growth of $1 million or 11% and NOI from new acquisitions at $1.6 million.

Our total property NOI for the nine months was up 26% to $35.2 million, an increase of $7.3 million from the nine month period in 2013. This increase was attributable to same-store net operating income growth of 6% or $1.5 million and NOI from new acquisitions of $5.8 million.

Our interest expense for the quarter was $2.8 million at an average effective interest rate of 3.6%. Approximately 70% of our debt is at a fixed rate and the average term of all of our fixed rate debt is six years. The average term of our property level secured financing is 7.2 years.

We continue to benefit as we gain scale from our larger base of assets on our property expenses and our overhead costs. We remain focused in our cost savings efforts throughout the Company and as of the end of the quarter we have 75 employees located in our five high-growth markets.

We continue to believe that performance-based stock compensation, resulting in significant ownership by management, is the best way to align our team with our shareholders. Included in the G&A expense for the quarter was approximately $1.5 million of amortization expense of non-cash share-based compensation.

Based on our current financial performance, we expect the expense related to the amortization of non-cash share-based compensation to be approximately $4.5 million for the full year 2014. Now let me turn to our balance sheet.

As of quarter end, our total undepreciated value of our real estate assets was $586 million, up $102 million or 21% from a year ago. Real estate debt was 48% of total market capitalization at quarter end and the Company's ratio of EBITDA to interest expense was a healthy 3.1x in the third quarter.

We have 43 properties unencumbered by mortgage debt as at quarter end with an undepreciated cost basis of $366 million. As of September 30, 2014, $204 million or proximately 70% of our debt was subject to fixed interest rate.

The Company's weighted average interest rate on all debt and fixed-rate debt as of the end of the quarter was 3.4% and 3.9% respectively.

On Friday, we announced that we have closed on an amended and restated credit facility that more than doubles the existing $175 million facility, extends the current maturity and improves the overall terms including improvement of the capitalization rate used for valuation of our assets from the current 9% level to 7.5% for all non-Houston assets and 8% for Houston legacy assets.

We also improved the pricing in our credit facility by approximately 35 to 55 basis points, which is based on corporate leverage levels. The new facility is comprised of two $50 million term loans and a $400 million revolver.

Pricing for the revolver and term loans is based on corporate leverage levels and is priced at LIBOR plus 1.4% to 1.95% on the revolver and LIBOR plus 1.35% to 1.9% on the two term loans. The facility also includes an accordion feature that will allow the facility to further increase to $700 million under certain conditions.

We believe the expanded facility demonstrates the continued strengthening of Whitestone's overall financial position and provides Whitestone greater financial flexibility. The Company plans to use the new facility primarily for acquisitions and redevelopment of value-added properties in our portfolio.

The transaction was led by BMO Capital Markets, Wells Fargo Securities, Bank of America Merrill Lynch and U.S. Bank as co-lead arrangers and joint book runners. Additionally, we are pleased to add SunTrust Bank, Regions Bank, Royal Bank of Canada, and Deutsche Bank, and Huntington Bank, as lenders in the credit facility bank group.

We expanded this facility at terms that we believe reflect the continued strong financial and operating trends of the Company to meet our strategic growth requirements and lower our overall cost of capital, which will contribute to our financial results over the coming quarters and years.

Our new facility will provide us with a greater degree of financial flexibility and enable us to continue to make opportunistic acquisitions of properties and potentially portfolio the Community Center properties. We are pleased to have earned the confidence and support in both our business model and management team from top-tier banks.

Finally, let me conclude with a few comments on our 2014 earnings guidance. We are tightening our guidance to the top of the range expecting FFO Core per diluted share for 2014 to range from $1.16 to $1.18 per share, which is up from our previous guidance of $1.09 to $1.18 per share.

We have also updated the key drivers of our guidance in the supplemental data package, including increasing our acquisitions guidance to over $100 million which we expect to mark our third straight year of exceeding the $100 million acquisition level. And with that, let me turn the call back to Jim..

Thank you, Dave. I would like to say that earlier I mentioned that our business model has 90% of our tenants being small service based tenants. It's actually 70%, and the 30% are the larger types of tenants that we're used to seeing in most properties such as ours with groceries and other soft and hard goods.

In closing, I'd like to reiterate that Whitestone continues the progress of increasing our financial trends in our key metrics and that's a product of staying true to our value-add strategy.

We've done this by helping and investing in our tenants to successfully grow their business, by rigorously leasing and asset management and by developing on land that we own and by acquiring accretive assets in high growth target markets.

Finally, I would like to thank you for your continued confidence and support, for the privilege I have to lead Whitestone. With that, operator, I would like to conclude the review of our results and open for questions..

(Operator Instructions) We'll go first to Mitch Germain with JMP Securities..

Dave, you might have said this, so I just want to make sure, how much of – I know your occupancy guidance is down a bit from the original, how much of that was related to kind of change in assumptions, how much of that's related to acquisitions?.

So one of the things we've seen, Mitch, is we've seen – we've really worked our tenant portfolio this year. I think we pointed out that we've seen nice leasing spreads, we've got NOI growth. And so, part of that from an operating perspective has been really maximizing the mix of our tenant in our centers and with that we moved out a few tenants.

So operationally we have moved out a few tenants more than we originally expected but the result of that has been obviously increased NOI and increased revenue. And then on the acquisition side, the two most recent acquisitions, the Fulton assets, will bring the overall number down slightly as one was in the 70s and one is in the 80s.

So, a little bit of both, Mitch..

Got you.

And then is the plan for acquisitions, I mean I think the upsized line you had mentioned kind of funding that with – funding any future deals with the line, but I mean is the plan just to keep the new deals on the line until you hit a certain point where you maybe have to pursue something and term out the debt longer term?.

So, yes, we take a very judicious look at our debt obviously and what we do is we initially use the line to close on acquisitions and then on a regular basis we look for assets that make sense to do longer-term locked down debt. We also fix the rate on the term loans in our facility.

So with that we keep I mentioned our average term of about seven years and then an average fixed rate of about 70%. So we'll continue to use the line to be able to move very quickly, and then on a regular basis look to put secured financing on select assets..

Great.

And then last question for me, just in terms of looking at the deals that you've done, I guess the ones you've announced since last quarter end, and also just maybe looking at your pipeline, maybe for Jim more strategically thinking with regards to generating the appropriate cash flows and whatnot, I mean will you be just kind of mixing up and kind of trading off value-add deal for a stable deal, is that the kind of way you're approaching your investments going forward?.

Good question, Mitch. We'll always be a value-add company, it's just a question of when you buy a property it might have a stabilized occupancy which may be in the 90% to 95% range. The rents may not be really representative of what the market area is.

So it may have carried characteristics of a stabilized property but we'll see value-add component to it. All of our properties will be of value-add nature.

For example, two of the properties we purchased we found from a seller who had an institutional investor who had what we call the denominator effect and they were over-allocated and therefore had to bring down some of the real estate investments. So we had an opportunity to buy those at 7.5% return. So we're in that 7% to 7.5% return.

If you notice, there is some vacancy there that we project, that we like to be in that mid-range of the double digits, in the teens once we get it fully occupied.

The other thing we do, Mitch, is we continue to look at deals with a risk adjusted return, so that we think that the return that we're getting are always risk adjusted, we do them on an unleveraged basis initially going in and then we can engineer later on, and that's really proved to be satisfactory.

We do the same thing with investing in some of our tenant spaces, we look at their credits. And it's interesting because most of our tenants, I would say over 50% of them if not closer to 60% up to 70%, are credit based tenants with balance sheets that significantly cover their rent obligations.

So we look for more of the same thing with the line of credit. You'll see us doing some multiple property deals. We've looked at two portfolios in the last six months.

So I think you may see something in near future where we do something that has a multiple variation of properties to it in our markets with the same kind of returns as more than one property..

Great. Thanks, guys..

We'll take the next question from Paul Adornato with BMO Capital Markets. Paul Adornato, check your mute function. There is no response. We'll go to Carol Kemple with Hilliard-Lyons..

Do you have any dispositions that you are under contract on or what's the change on the disposition activity? I know you've talked about wanting to sell some assets before. .

I'll touch them and Jim can add if he wants to. We do have three listed properties for sale and we've had those listed for a little bit. I think we talked about those on our prior calls.

We really don't have pressure to sell those assets, so we're continuing to look to maximize the value and we're being very patient on those sales and we think that's proven to be the right approach. The three properties we have for sale are in Houston, they are non-core assets and they are not part of our longer-term plan.

But in the meantime given that we have resources from an acquisition and disposition standpoint, we've remained more focused on enhancing value from the Community Centers that are strategic to our long-term plans.

We believe that these will provide increased cash flows as they drive benefits from our redevelopment or repositioning efforts and also as we add centers. So we'll continue to look to sell assets but we're going to be very, very patient in that and we're going to make sure that we maximize the value for our shareholders..

Okay. And then, it looks like in your guidance you have room to close on another one or two acquisitions this year.

Do you have anything under contract currently?.

We always have a lot of assets, I think we talked about we keep a pipeline of roughly $500 million. And then in that we have assets under LOI, we have some under contract. So we continue to have that same level, and Jim can add if he'd like, but we do have an active acquisition program that's ongoing..

Carol, we expect to close two more deals before year-end. Of course they're in due diligence right now, they are under contract and I say 'expect' because we never know what we're going to find when we're at this stage. I will mention though that every deal we've been under contract with few exceptions, we've closed on.

So we have a high probability of closing anything we put under contract..

And the updated guidance we've given, the top end reflects closing of those two assets. So that's the guidance range we've given..

We'll go next to Michael Diana with Maxim Group..

You mentioned you've begun construction on two redevelopment projects in Houston.

What's the approximate timeline on those, I mean when the redevelopment will be finished?.

Just to touch on our redevelopment efforts on SugarPark and Providence, we have begun on both of those. We expect those will be completed mid next year. They are not large capital investments.

One of the things we do is we're very good at looking at efficient ways to upgrade a center and make a difference from signage and visibility and we use paint and colors a lot. So we're going to do some very nice improvements to those centers over a few months that will be not a large capital investment and expected to be completed by mid 2015..

At this time, we have one question remaining in the queue. (Operator Instructions) We'll take our next question from Mitch Germain with JMP Securities..

This is Peter on for Mitch.

Just going back to the pipeline real quick, is there any progress on some of the new markets that you had mentioned on previous calls or I guess where is the current pipeline and some of the deals under contract focused?.

The deals under contract are in Houston. So we're starting to rotate our portfolio in Houston which will more represent what you've seen in Arizona, different locations and great locations and actually two really terrific properties. We're also focused in the other parts of Texas, which is Dallas, San Antonio and Fort Worth.

So we have 24 properties now in Arizona and we think that's pretty close to where we want to be right now until the next down-cycle, and as opportunities come up we'll look at more, but right now we're focused on the Texas markets..

At this time, I would like to return the conference to Mr. Jim Mastandrea..

Thank you very much and thank you all for joining us, and I would like to say, feel free to give us a call if you'd like to follow-up after we finish this call, and also any of you would like to come by and visit us in Houston or in Arizona or in one of our locations, Dave and I would be most happy to meet you and give you a tour of some of our properties.

With that, operator, we'll conclude and thank you all for joining us..

This concludes today's conference. Thank you for your participation..