Jim Mastandrea - Chairman of the Board of Trustees, Chief Executive Officer Dave Holeman - Chief Financial Officer.

Mitch Germain - JMP Securities Carol Kemple - Hilliard Lyons.

Good day and welcome to the Whitestone REIT's First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Dave Holeman, Chief Financial Officer. Please go ahead..

Thank you, Caleb. Good morning and thanks all of you for joining Whitestone REIT's first quarter 2015 earnings conference call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive 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 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's also important to note that today's call includes time sensitive information that may be accurate only as of today's date, May 06, 2015. Whitestone's first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC.

Our Form 10-Q will be filed shortly, all will available on our Web site, whitestonereit.com, in the Investor Relations section. Also included on the supplemental data package are the reconciliations from GAAP financial measures. With that, let me pass the call to Jim Mastandrea..

Thank you Dave and thank you all for joining us on our call today. We're pleased to report another strong quarter highlighted by year-over-year revenue of 22% growth and FFO core per share growth of 10%.

This is result of our forward-looking operating model that continues to drive value, accretive acquisitions on value-add properties in high growth markets and maintenance of a vast and flexible capital structure.

Our strategy of acquiring attractive properties in our core markets and transforming legacy properties into profitable community centers continues to be successful. During the quarter we had one property City View Village located in San Antonio, Texas for approximately $6.3 million.

While small in comparison to scope of the portfolio, at the time of the purchase it was 17,870 square foot property and was a 100% leased. But what it did, this acquisition, was provide the competition, took away the competition across from The Strand at Heubner Oaks, our 74,000 square foot community center that we acquired in 2014.

Together they provide us with the dominant two corner position on a high traffic area is just off interstate in San Antonio.

Consistent with our previously communicated strategy Whitestone was a first mover in implementing a business model which recognizes two significant macro-level societal changes that have created a paradigm shift in consumer behavior.

First the greater percentage of households with two wage earners, and second, online commerce continuing to transform the way consumers shop.

Consumers, while facing greater demands on their time, are benefiting from the increasing transparency in pricing and product information on the Internet and web-based services that yield far more choices than ever before. Today consumers make trips to the local retail centers seeking convenience, service and unique experience.

Following shifting consumer behavior and preference pattern and Whitestone has crafted its business model and modified its real-estate to meet these consumers' underserved needs.

Whitestone's community approach was designed to cater to these new purchasing habits on a property level by blending a complementary mix of grocery and restaurants, health, wellness and beauty, education and services.

Our customer-centric discipline strives for a tenant mix of small, regional and national tenants that meets the unique needs and preferences of the neighborhoods we serve.

Our typical customers are growing businesses that occupy smaller spaces which produce premium rental rates a seldom contained restrictive lease clauses such as co-tenancy, approval rights and exclusive uses over our properties and often contain attractive rent bumps and percentage rent clauses.

As a leader in this space, our approach and attention to a complementary tenant mix differentiates our business and allows us for a continued higher value creation in our communities.

Day to day our leasing team continues to work to acquire tenants for our vacant spaces, client's revenue by releasing our occupied spaces to existing tenant at higher square footage rental and when the leases roll, and as replacement tenants will improve the overall tenant mix and the existing tenant does not need our community service standards.

Our tenant base continues to expand and strengthen, as we replace lower paying tenants with higher paying tenants, and break down largest spaces into smaller ones.

The timing of this transition can impact our quarterly reporting digital occupancy rate as we did in the first quarter when we moved out a 30,000 square foot tenant at our Mercado, our property in Scottsdale Ranch center in the Phoenix market.

The space was occupied by a tenant when we acquired the property, but the tenant was only paying $2 a square foot. We expect to re-lease this space in the near future at a significantly higher rate.

Our value driven growth model was designed to balance increasing occupancy and rental rates in each of our community centers that results in the maximizing of individual properties and ultimately shareholder value. Let me briefly touch, on our existing holdings and then the impact, real or perceived from continued low oil prices.

In short we have expressed little, if any impact. General line attributes that brought us the Houston market are still meaningful and intact. Outside of Houston and Whitestone other taxes markets, San Antonio and Dallas are business model in particular continues to perform well.

We also continue to believe that our Community centered property business model insulates us to a large degree for many overall adverse effects have lower energy prices. We've a proven operating model and track record, a substantial acquisition pipeline and strategic development and redevelopment opportunities.

Whitestone is strategically positioned to continue to add value as we grow. Our solid balance sheet and flexible capital structure with available capital from our expanding credit facility and proceeds from our sales of non-core assets supports this growth.

Along with our experienced management team we believe that we're well positioned to execute our plan throughout 2015 and the beyond. With that I'd like to turn it over to Dave Holeman, our Chief Financial Officer to discuss our financial results.

Dave?.

Thank you, Jim. As Jim said we began 2015 on a strong note, our first quarter revenue grew 22.3% to $21.3 million and FFO-Core grew 16.6% over the prior year to $8.2 million. We continue to grow our profitability with FFO-Core first share of $0.34 in the first quarter up 10% from our first quarter of 2014.

Our first quarter was marked by more than 23% year-over-year improvement in property net operating income and positive leasing spread on a cash and GAAP basis. On a GAAP basis our spreads were 4.9% and 10.9% on new and renewal leases signed in the quarter respectively.

Our operating model continues to be effective, producing increases in occupancy and industry leading positive leasing spreads. We have a diverse tenant base, minimizing our individual tenant credit risk with our largest tenant representing approximately 2% of our annualized rental revenues.

Our general and administrative expenses for the quarter include $264,000 in acquisition expenses and $1.7 million in expenses related to the amortization of non-cash share based and incentive compensation.

As of the end of the quarter, we have 86 employees and our G&A cost excluding acquisition expenses and non-cash stock expense was 12% of revenues down from 14% a year ago. We continued to see the benefit as we gain scale form our larger base of assets on both our property expenses and our overhead cost.

We also continue to believe that a performance based compensation program is the best way to align our team with all of our shareholders. Now let me turn to our balance sheet. Our capital structure remains solid with one class of stock, no joint ventures, property level debt and corporate level debt.

Our weighted average interest rate for the quarter was 3.1% and our underlying debt structure remain sound with a prudent mix of secured and unsecured debt and well laddered maturities. This composition gives us significant financial flexibility and the support we need to execute quickly on our growth business model.

During the first quarter, we did not issue any shares under our ATM program. In 2015, we will continue to evaluate all of our sources of capital including usage on our corporate credit facility, further recycling of capital from property sales, public debt issuance and other accretive capital transactions.

At the end of the first quarter we had a total market capitalization of $775 million producing approximately 58 million in annual net operating income. Our real-estate debt was $403 million and our ratio of debt to EBITDA is 8.6 times as of the end of the quarter.

We continue to maintain largely unsecured debt structure with 44 unencumbered properties with an undepreciated cost basis of 434 million. Finally, we are regenerating our full year FFO core guidance in the range $1.25 to $1.30 per share.

We expect to have greater acquisition volume in future quarters and we'll update our guidance as those acquisitions occur or other factors necessitate. With that, let me now turn the call back to Jim..

Thanks Dave. As you can see our momentum in the first quarter continued to build on the last three quarters of profitable growth. In closing, I'd like to reiterate our commitment to our shareholders to accomplish the following.

Increasing overall portfolio occupancy and rental rates, enhancing the quality and size of our portfolio through acquisitions, selected deployment, redevelopment and repositioning, driving additional cash flow through organic growth, value add acquisitions and prudent expense management and judicious sourcing of capital from all of our sources including recycling capital through sale of non-core assets.

Thank you for joining us today and for your continued interest and support of Whitestone. And operator with that, I'll now be happy to return over to you to set up to take questions. Thank you..

Thank you. [Operator Instructions]. We'll take our first from Mitch Germain with JMP Securities..

Just curious about -- obviously the smaller tenant focus and just little of to get some insight on [sentiment], based on your discussions. Are you seeing a lot of expansions or if things clearly appear to be improving which is whatever you can offer with, I'll really appreciate it..

Yes, we're definitely seeing a direction of moving towards small spaces. Let me give you an example, we have a legacy property that was in the portfolio when we got involved in the company back in 2006 which has been one of our nemeses in terms of vacancy.

Its 125,000 square foot property, it has 75,000 square feet of occupancy, so it's 50% vacant and it's an office building in Dallas Texas. And we've struggled with it not because of the quality of building but the fact that it was built on a cemetery.

Now as within one mile of Texas Instruments and at the time it was acquired which was before we got involved and it had a greater occupancy and it was brought on the cheap. I would say a B plus to A minus quality building, wrong location for the tenant use.

So we applied our community center business model making communities out of office space and have copy written the section of our business model called [Cube Exec]. And so what we've done is we've gone it and carved up a space on one of the floors that's around 6,000 square feet, we did this, we finished this space less than six weeks ago.

We had 13 individual office spaces with locks and security high tech, it's very much like a regency on a high tech basis which has all kinds of bells and whistles in there. And we've already leased nine out of 13 spaces in like six weeks.

So what we're seeing is the smaller you carve up your spaces the more technology you include the easier it is and more quickly it leases. The second thing we're finding is that the compatibility of tenants. If you mix the tenants properly, you’re going to, it's going generate its own potential occupancy.

Now just because I mentioned Houston property or the Dallas property which I wasn’t intending to, our plan has always been to sell it, but you don’t want to sell a building that is 40% vacant. So you will see this come up for sale once we fill the property..

Great, I think Peter has one..

Just want to see if you could kind of comment on the geographic mix that you are seeing in the pipeline, may be deals versus you know Texas versus Arizona for the rest of the year?.

What we're finding is that the, we've seen fewer starts in the Houston market and it's starting to slow down in terms of new starts in the Dallas market. We are also seeing listing deals get very pricy.

We're seeing deals that are going into sub 6 cap rate that have occupancies that are soft above 90% that they're representing 90% plus occupancy, but there is a little or no upside. And we're also seeing around the bidding options on those properties where they represent [vacant] are bidding prices up too high.

I think we saw the premium that AmREIT sold for, I think they are struggling a little bit now, we're not seeing them as being competitive with us in the market place because they have such a high price on those new conditions.

So we're seeing the strength in San Antonio continue and still opportunity there, we're seeing it in its sister area Austin, we're seeing some deals in Phoenix, not too many though.

So what in this stage in the cycle what we're seeing is that the properties that we bought two years ago that had residual development plan you know for example an out parcel for 30,000 square feet or 5,000 and 10,000, we have a lot of properties like that when we were buying in that down market, we're seeing opportunities to bring that square footage online at a much lower bases to be competitive with our neighbors.

And so we're in that part of the cycle right now..

And Peter this is Dave, the only thing I might add is we've talked about with our business model, obviously we get a lot of scale and benefit as we go market and expand, so to Jim's point the San Antonio, Austin market as well as the Dallas market are markets that we like to expand our holding, therefore we’re able to utilize our infrastructure better.

So we're seeing opportunities in those markets and also it fits very well with our plan..

We will take our next question from Carol Kemple with Hilliard Lyons..

I know in the past you all talked about interest in potential new market where it sounds like where pricing is in your current markets, are you getting any closer to entering the new market?.

We did make a bid on a property in the market outside of our existing markets earlier this year and it was so pricy that we just pulled back from it.

Again it was a sub 6 cap rate, we thought the opportunity for growth was taken out of it the way it got priced, it was in a market that we saw as being potential new core market for us and we decided it was just the wrong, it was just the wrong time buy and exercise our discipline to pull back on.

So we still look these opportunities, we just look at slower amount in terms where we are looking..

So would you say overall that market is just pricy, wasn't just that one asset?.

I think what's happened is that because of the low interest rates you are seeing a lot of folks come into the real-estate business, who don’t necessarily have the experience that we may have but have the availability of raising capital and debt. And that's exactly what we experienced on a lot of the assets that we brought when we were in Phoenix.

So as a result they are buying deals just to do transactions and that’s what we're seeing in the market place right now.

I think that will cool off a little bit when interest rates begin to rise and we've been through, we've run the business, many businesses with high interest rates and actually welcome that because we understand the balance sheet how to make in this business.

So that’s what we’re seeing, we’re just seeing a lot of buyers who don't have quite the experience in capitalization but we’re able to raise some capital investment at this time..

And then can you quantify the size of your acquisition pipeline at this point, whether if you have anything under contract?.

We have a hug pipeline and obviously when we quantify we got to talk a little bit. We follow a lot of assets, I know it's been in excess of $0.5 billion as there is been for a while. Our acquisition team tracks asserts we told you stories about assets we closed on that we watch for two years and three years.

So the pipeline is still very robust doesn't mean that all those properties meet our price standards they all meet our community center standard and so we watch them and we look for an opportunity to enter at the right price.

As far as deals we have under contract or LOI we always have a large population of deals working, we got about $60 million right now in two deals that are in the process of moving to close.

I think they are both one is LOI one is under contract but one will move the contract shortly clearly we do our diligence during the contract period so there is some chance that we would not close, but we have an active pipeline of acquisitions and then behind those two deals we also are looking at other opportunities.

So to Jim's comment about seeing competition in cap rates, are spot on and we’re continuing to see opportunities, we’re seeing opportunities at a little higher cap rates but still with very good economics that match what we've done in the past as far as cash on cash return on in IRR..

[Operator Instructions]. And we'll take our next from the [Nate Kennedy-Mould] with BMO Capital Markets..

I just had a question about your development pipeline, I am just trying to put a number on that to get an idea of sort of what size of construction development pipeline you guys are comfortable with?.

I will take a pause and then Jim you could maybe add some color. I will do the quantitative side little bit and Jim can add the color to it.

Currently we have as Jim said we've over the last two years we strategically acquired adjacent land parcels to the properties we bought many of those properties we have a couple of one in Dallas and one in Scottsdale that we’re currently in the process and expect to break ground this year for two small developments.

I think they are roughly 30,000 square feet each and adjacent to centers that are at much larger amount of GLA.

The spend on those two is somewhere in the $10 million to $15 million range and that we probably got another handful of pad opportunities, we've got several pad opportunities in our properties where we bought properties as far as the value add was they were over part then we had the opportunity to add pads.

So I think can think of three or four of those small dollars but just quantitatively we probably got 20 million or so development and redevelopment activity that we expect to move through on over the next 12 months to 18 months..

The only part of that Nate would be that we also do some redevelopment like in our Lion Square property which we've concluded redevelopment to sign and with that has been able to see rent increases beginning of the 10% to 12% in the returning of that property.

And we have several of the -- I would say at least the half of dozen of the redevelopment opportunity that happen..

And the economics on the development will be very good because obviously we acquired these land parcels downtime in the market many of them are in the Phoenix market.

So we got several examples where we picked up but I think of one where Pinnacle of Scottsdale property where we had a parcel of land and had the great frontage on the Scottsdale road had a note on it for $4 million and we were able to acquire land for $950,000.

So the economics will be good we’re doing most of these obviously at centers that have great demand and the occupancy is very good..

With regard to development as it's interesting because our business model truly resonates in terms of tenants wanting to be in the one of our properties.

And then we illustrate that Dave mentioned the Pinnacle of Scottsdale that’s approximately 125,000 square foot center with the Safeway, Subway, a Starbucks cigar store and we’re developing 35,000 acres next to it -- 35 square feet next to it.

Across the street on the corner in the last 24 months was developed and build a new sprout centers and that’s approximately 100,000 square feet and it's the same quality as ours. What was interesting about is we didn’t lose one single tenant in the new center.

And I think really test of the way that we manage our business model and we train our property managers not to manage necessarily bricks and mortar but to the customer service agents..

And I had a question about your balance sheet, I know this is quite a bit quite large amount of debt coming due in 2018 and 2019 and after just wondering if you guys had any thoughts about how to address or if you have a strategy for that going forward?.

So we have at the end of 2014 we expanded and renewed our credit facility, so we did that in November of '14 that credit facility has term fees as well as our revolving fees. The revolving fees as a four year life and the term has a five life both of those obviously extension option.

So when you see the big bumps on our debt maturity schedule they are related to the credit facility that we just renewed for four year period but comes due and it would be in 2018 the revolving fees and then the term fees in '19.

We have historically put place longer term debt pulled assets out of our credit facility and put five year, seven year, 10 years debt we will continue to do that.

We were fairly active in that in '14 and '13, so we will continue to do that but we’re building our balance sheet to be primarily unsecured positioning ourselves for ultimately a credit rating in the near future.

But we’re confident that as the debt maturities and will continue to latter out maturity also we’re aware of the good mix of fixed rates and variable rates, right now our variable rate is probably a little higher than it has been, so I think you will see us move out, we've done a good job of taking advantage of the lower interest rate obviously we’re seeing those move up and we’re continuing to ladder out debt.

If you look at our debt on a debt per square foot makes us very conservative meaning the properties we bought, bought non-value add properties that will increase the value over time. And so there is lot of different measures and our debt per square foot is very conservative..

And there are no further questions at this time. I would like to turn it back to Mr. Mastandrea, for any closing or additional remarks..

Thank you operator. And thank you all for joining us on today's call and your continued interest in Whitestone. We continue to be excited about the business in general and particularly Whitestone it's been an enterprise is been exciting to build and we think it's got a great future.

We’re getting lots of traction now and not only in the marketplace that in each and every one of our properties. I think in time you will see that the real value of the company will be reflected in the share price, and I think that that’s probably not too far in the distant future.

We are currently trading at one of the lowest multiples in our segment of the business which is around 11 multiple to 12 multiple most of our peers at least our peers in that 18% to 22% multiple.

And we have -- what we've really been able to demonstrate is that our dividend is on very solid ground at the $1.14 a share, with the results of this quarter and the previous I want to say seven quarters of increasing growth in FFO, I think you all realize that. Thanks again.

And please feel free to call either me or Dave if you have any questions or if you would like to tour any of our properties we would love to take you. Thank you operator..

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