Bob Aronson - Director, Investor Relations Jim Mastandrea - Chairman and CEO Dave Holeman - Chief Financial Officer.

Mitch Germain - JMP Securities RJ Milligan - Baird Carol Kemple - Hilliard Lyons John Massocca - Ladenburg Thalmann.

Good day. And welcome to the Whitestone REIT Third Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Bob Aronson, Director of Investor Relations. Please go ahead, sir..

Thank you, Andrea. Good morning. And welcome to Whitestone REIT’s third quarter conference call. With us on the call this morning is Jim Mastandrea, Chairman and Chief Executive Officer, and Dave Holeman, Chief Financial Officer. Please be aware that some statements made during this call are not historical and maybe deemed forward-looking statements.

Actual results may differ materially from these 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 the factors and risks that could adversely affect the company’s results.

It is also important to note that today’s call includes time-sensitive information, accurate only as of today, November 5, 2015. Whitestone’s third 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 of these documents will be available on our website www.whitestonereit.com in the Investor Relations section. Today’s remarks may include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings press release and supplemental data package.

And now, I’d like to turn the call over to Jim..

Thanks, Bob. Good morning, everyone, and welcome to the third quarter earnings call. Today, I’ll provide you with a macro level perspective of our business, and Dave will follow with our financial details. We will both be providing you with a view on how we expect 2015 to finish.

This quarter we continued to build on a solid foundation that we put in place prior to launching our IPO in 2010. That foundation was based on our operating model, which identifies the paradigm shifts in consumer behavior patterns from shopping on foot to shopping online.

The research markets determine the needs and preferences of the residents living in and surrounding neighborhoods, doing so this enables us to redevelop and/or reposition a property specifically for the community.

Whitestone’s portfolio to quality, real estate assets are located in the biggest, fastest growing, most vibrant markets in the United States, including Austin, San Antonio, Dallas/Fort Worth, Houston, Phoenix and Scottsdale. In each of our markets, we strive to gain a leading ownership position.

Our success in growing revenues, net operating income and funds from operations per share is largely driven by our highly profitable small tenants, who lease less than 3,000 square feet.

Our portfolio which now consists of 70 properties, approximately 1,500 tenants and 6 million square feet of leasable space has an average cost of $139 a square foot, which is well below replacement cost.

We receive on average minimum base rent of $19.09 per square foot, which represents a 48% premium to the $12.89 per square foot that we received from tenants occupying spaces larger than 3,000 square feet.

The large base of local entrepreneurial creditworthy tenants mixed with our national and regional tenants, we were able to bring a balanced mix of grocery, dining, health, beauty, wellness and education services to our properties and to the communities.

Our third quarter when compared to the same quarter last year tells the story, revenues were up 33%, net operating income rose 36% and FFO core per share grew at 13%.

In the third quarter, we capitalized on strong market demand to drive our strategic growth initiatives, including completing $100 million of accretive acquisition, which brings our total over the last 12 months to almost $250 million.

During the quarter, we also expanded a property with new development attained valuable entitlements, utilized our operating partnership units as consideration for acquisition and enhanced our overall tenant mix.

With regard to acquisitions, in early July we acquired two additional community center properties containing a combined 117,146 square feet of space and approximately 100% leased in Austin, one of the most vibrant and desirable cities in America for a total of $45 million.

The two premier Class A centers are strategically positioned at the main entrance of the prominent and affluent Circle C Ranch master-planned community, which has over 4,800 households. The rapidly growing area has a demographic that includes average household income of $109,000 and is in close proximity to the city Silicon Hill high-tech company.

In August, we acquired our fourth community center property containing 109,982 square feet and 95% leased in Austin for $37.5 million. The purchase included a developable pad with all entitlements and utilities available for the site.

The well-known Class A property is ideally located between Lake Austin and Lake Travis, two top recreational areas in the affluent Steiner Ranch master-planned community. With over 25,000 residents living within the 3 mile trading ring, the rapidly growing area of both strong demographics and include average household incomes of $117,000.

This acquisition increased our holdings in Austin and San Antonio, which are now among, as I said earlier, the fastest growing cities in the country to approximately 644,000 square feet of leasable space.

At the end of August, we acquired our seventh community center containing 93,540 square feet and 90% leased in the Dallas/Fort Worth area for a contract price of $14.3 million.

The purchase included two developable land parcels and with a significant about this acquisition was the use of a 120,000 shares of operating partnership units, mortgage consideration they were contractually valued at $19 per share.

The marquee Class A property, which is anchored by a Kroger Signature store, serves the affluent Keller community with an average household income of over $101,000. With the 92% occupancy rate and the developable land parcels, the property holds significant value-add potential.

In early September, we acquired the Hard Corner at our Gilbert Tuscany Village property for $101.7 million. We originally acquired the center in 2012 and since that time we’ve increased the occupancy to 88% from 16%. A Hard Corner contains a vacant never occupied 14,603 square foot building.

The addition of the Corner is expected to enhance the marketability in the overall economics of the center. With regard to development activities, we broke ground this summer on the much anticipated Phase III expansion with The Shops at Starwood in Frisco, Texas, a growing Dallas/Fort Worth suburb.

The fully leased mixed use center comprised of Phase I and Phase II is located just 1 mile north of the new Dallas Cowboy headquarters and training facility currently being built. The land for Phase III expansion was included when we purchased the center in December of 2011.

We expect to spend approximately $6.9 million to add 38,200 square feet of space. Upon stabilization, we projected the additional space, which should be ready in 2016 will produce very attractive returns. This project simplifies our strategy of adding value through expansion.

We also obtained the approval for added entitlements at our Village Square at Dana Park property located in the fast growing Mesa Arizona, home to a burgeoning high-tech industry, which includes Apple and Intel manufacturing facilities.

The 323,000 square foot center along with development land parcels was originally purchased in 2012 for $50.5 million. Since that time we’ve increased the occupancy to 93% from the original 71%.

The added entitlements include retail, executive suites, multifamily and a hotel, and will allow us to expand and increase the size and scope of this lifestyle community center property. We believe there is considerable upside value to be realized in these properties.

Starwood and Dana Park like a number of other properties in our portfolio simplify a key component of our business model, which is to capitalize on opportunities to add value from the time we purchased a property to leasing and managing the property within our portfolio and the enterprise.

We also continue to strengthen our balance sheet and have underlying capital structure that is really quite simple with only one class of stock.

Our structure provides us with significant financial flexibility, gives us the support needed to effectively execute our strategic real estate model initiatives and keeps us nimble and quick to capitalize on many opportunities that we’re seeing. We are very pleased with our results for the quarter.

We confirmed that consumers shopping patterns are shifting within our industry and changing from the trends of the past. We have adapted to these shifts and are proud to showcase our record of success.

On a year-over-year basis, third quarter marks our 20th consecutive quarter of revenue and NOI growth, our 21st consecutive quarter of FFO growth and our 10th consecutive quarter of FFO core per share growth. We expect to continue our profitable growth while remaining intently focused on enhancing shareholder value.

I would now like to turn the call over to Dave Holeman, our Chief Financial Officer.

Dave?.

Thanks, Jim. As Jim said, we had a terrific third quarter as our distinctive Community Centered Properties business model continues to deliver outstanding results. As compared to last year’s third quarter, revenues increased 32.7% to $24.6 million and FFO core was up 36.1% to $9.5 million.

On a current diluted share and operating partnership unit basis, FFO core was $0.34 which is up $0.04 or 13.3% over last year. We also generated a 36.4% improvement in property net operating income and it rose to $16.3 million for the third quarter.

Our results reflect the strength of our operating model and the positive impact of our growth initiatives. These growth initiatives along with the efforts of our leasing team continue to be effective, producing positive leasing spreads as well as higher occupancy levels.

On a GAAP basis, our leasing spreads were an aggregate 8% increase on new and renewal leases signed in the third quarter. Occupancy was 86.0% at the end of the third quarter, which is 20 basis points higher than the level at the end of the same period of last year.

We have a diverse tenant base minimizing our individual tenant credit risk with our largest tenant representing only 2.6% of our annualized rental revenues. As Jim mentioned, we closed on almost a $100 million in new property acquisition in the quarter.

As a result, our general and administrative expenses for the quarter include $729,000 in acquisition transaction costs. Also included in our G&A costs for the quarter were approximately $1.9 million for the amortization of non-cash share-based incentive compensation.

Excluding these costs, G&A expense as a percent of revenue was down 10 basis points from last year and was 12.6% of revenues for the quarter. We continue to see the benefit as we gain scale from our larger base of assets on both property expenses and our overhead costs.

Our overall headcount was 88 employees at the end of the quarter, up only seven employees from year end 2014. Over the same time period, we’ve grown our asset base by almost 25% while increasing our headcount by less than 10%. Now let me turn to our balance sheet.

As Jim mentioned, our capital structure remained simple with one class of stock, no joint ventures and a combination of property and corporate level debt.

Our weighted average interest rate on all our fixed rate debt as of the end of the quarter was 3.92% and our underlying debt structure remained sound with a prudent mix of secured and unsecured debt as well as well-laddered maturities.

In fact, last week we amended our credit facility which extended and laddered maturity days of our revolver and our two existing $50 million term loans and provided for the conversion of a $100 million of revolving loan into a third seven-year term loan.

We expect to fix the interest rates on our three term loans through interest -- through entry into interest rate swaps, which will bring our fixed rate debt to approximately 75% of our total debt with an average term of 6.4 years.

Our debt structure gives us significant support and the financial flexibility to react quickly to growth opportunities and changing macroeconomic conditions. During the third quarter, we did not issue any shares under our ATM program.

We will continue to evaluate all sources of capital to fund our growth including recycling of capital generated from non-core property sales. At the end of the third quarter, we had a total market capitalization which includes both the market value of our equity and debt of $810 million producing close to $70 million in annual net operating income.

Our real estate debt was $498 million and our ratio of net debt to pro forma annualized EBITDA was 9.4 times at the end of the quarter. We continued to maintain a largely unsecured debt structure with 50 unencumbered properties out of our total of 70 properties with an undepreciated cost basis of $582 million.

And lastly based on our solid third quarter results, we are raising our guidance range for 2015 FFO core per share of $1.30 to $1.32 from our previous range of $1.27 to $1.32. That concludes my remarks. And Jim and I will now be happy to take your questions..

[Operator Instructions] We’ll go first to Mitch Germain at JMP Securities..

Good morning, guys..

Good morning, Mitch..

So I know that you guys build your presence in Phoenix and I might have missed some of the comments that Jim said. I hope I don’t replicate. but I know you build your presence at Phoenix through dealing with banks, servicers getting some assets under distress.

I am curious when you’re looking at your expansion now in Austin and other markets in Texas, where -- whom are you dealing with to source the deal flow?.

Mitch, this is Jim here. What we’re finding is that there are developers who really don’t have the size and horsepower that we do. The market allows them to enter with low-cost debt and some equity partnerships and we’re able to pin down great locations.

And what happened is that they didn’t time it necessarily properly in the cycle or it reached a peak and they just simply filled it with lower rents. But we’re finding a deal -- deals that got through our network that have residual opportunities to develop the properties as well.

We’re finding through just a network that we’ve created over the years, Mitch. And once we go into the market, we get to know people very, very well..

Great. And just curious about sentiment across some of your smaller customers, we’ve seen occupancy remain somewhat stable.

So, I mean how are they -- are they as constructive about taking on space and starting businesses as you’ve seen throughout your tenure there?.

We have because we have seen it. It’s still very positive. In two of our larger properties, we’re pushing 95% occupancy, which is Market Street in Phoenix and Dana Park and those are very large properties, one is 240,000, one is 300,000 and some.

Because of what we do to fit the property within the community, we tend to really study each community that every single property is in and then what we do is create the kinds of tenants to fill the need of the people in that area and that’s been very effective.

We have seven restaurants in one of our properties that in each of the restaurants we will be on the percentage rent clauses next year and basically on average the way that works is that we will get $38, $39 a square foot, about $7 in pass-through and then we get 6% over a breakpoint, which runs on average about $2.3 million to $2.4 million.

Of the seven restaurants, they should generate about $20 million in sales next year..

Excellent. That’s it for me. Thank you so much..

Thanks, Mitch..

Thanks, Mitch..

We will go next to RJ Milligan of Baird..

Hey, guys. Good morning..

Hi, RJ, how are you?.

Good morning, RJ..

I am curious, obviously you guys have made a lot of progress on the acquisition front.

Curious what you are seeing in terms of the dispositions and the attempt to sell some of the non-core assets and some of the non-retail assets, what does that market look like and what’s the demand out there for those types of assets?.

Thanks, RJ. Yes. We have talked about, we have approximately, probably 10% of our carrying value of our portfolio that we would pay would be asset we would look to the sell over the coming years. I think in the Houston market, we are seeing the opportunity to move some of our flex properties. We’ve begun the process, really looking into that.

So I would expect that we would be recycling those non-core assets over the coming quarters. We think the time is right in the Houston market. Our Houston assets continue to perform very well but probably the flex properties are the ones that are a little tougher at this point. But also, we feel like the cap rates are still very attractive to sell.

So I think you will see us ramp-up our disposition activities. We are working to do that over the coming quarters..

Yes, RJ. This is Jim. I would just like to add to that, we would be surprised if on our third quarter conference call next year we had any of the non-core assets in our portfolio..

Okay. That’s helpful.

And just curious, Dave, you mentioned it real quick Houston properties are performing well, everybody wants to know, how are the fundamentals in Texas and in general Houston, specifically? Have you guys seen any weakness in on the retail side in the Houston market?.

Yes. I will give the quick answer and then I will give you a little color. The quick answer is we really have not seen any weakness on the retail side in our portfolio. As you know, probably the impact has been much more on the industrial, multi-family and hotel segments, much more than the retail segments.

Actually, if you think about Houston, over the last five or six years Houston has added 1 million -- over a 1 million people and really not a lot of retail development has occurred during that time. So from a retail perspective, we still feel very bullish on Houston. We think there is the opportunity to push rents and continue to increase occupancy.

So the short answer was we have not seen the impact, we continue to monitor it. If there is any, it’s a little bit on our flex properties, which we mentioned as the disposition properties..

Just an add-on to that. RJ, Houston, it’s estimated to add somewhere around 20,000 new jobs in the next year, which is pretty significant compared to other cities around the country.

Now, that is down from the pace in 2014, which was around 105,000 jobs and the estimates in 2016 are probably going to be more like 30, even though they are being conservative saying 20,000. So we still have a lot of job additions. We just don’t have them at the same rate we had in the past..

Okay. Great. Thank you, guys..

Thank you..

Thank you..

We will move next to Carol Kemple at Hilliard Lyons..

Good morning, guys..

Good morning, Carol..

Hi, Carol..

On the acquisition front, do you have anything under contract that you expect to close by year end?.

We have one property under LOI that if it continues to pace it down we should be under contract next week, which is closing before year end, yes..

And then looking at guidance, it looks like you are expecting fourth quarter FFO to dip a little from the third quarter, is there anything in our estimates that we should look at, is there -- that’s going to come in higher or lower than we would expect?.

Sure. I will give a little bit of color on our annual guidance. As you know, this is our second year of providing guidance. And I think we’ve done a good job of providing numbers that are in line with our expectations. For the year, we’ve increased our guidance to $1 to $1.32.

There is a couple of factors in the fourth quarter that are a little different. We will have some additional dilution from stock, from our share-based compensation program, which will be dilutive for the full year. So, the impact of that is based into the year at consistent range.

Initially we are -- as I mentioned, we are laddering and mature and somewhat extending our debt. We plan to enter into some fixed rate clause, which will cause our interest costs to go up just a little bit. It clearly is the right thing to do and we will be able to lock in for instance that seven-year term, we just did at less than 4%.

So when you look at the guidance for the year, you got a little bit of stock dilution that will happen in the fourth quarter that will be -- that we’ll apply to the whole year’s FFO core per share as well as the little additional interest expense..

Can you quantify the additional shares that we will see in the fourth quarter from the share-based compensation?.

It’s about a $0.02 impact on the FFO core per share for the year. So, I don’t remember the exact number of shares but approximately, probably 500,000 to 600,000 shares that will be dilutive for the entire year..

Okay. Thanks. That helps..

[Operator Instructions] We will go next to Daniel Donlan at Ladenburg Thalmann..

Hi, this is actually John Massocca on for Dan. Good morning..

Hey, John, how are you doing?.

Good morning..

Doing all right.

First question, your TIs for new leases kind of jumped up a little bit this quarter, obviously I know it tends to be lumpy quarter-over-quarter but is there any reason for that?.

Not really, it is lumpy over quarter-over-quarter a little bit.

I mean, if you look at the trend rates, I think for the year, we’re up a little bit but fairly we’re about $2.1 million in TIs for the nine months versus $2 million prior year, but just a little bit of -- actually when those TIs are paid on the tenant, so it’s just lumpiness, nothing particular to the increase for the quarter that we expect to continue..

Okay.

And then so a good run rate going forward is probably that trailing 12 month number?.

Yes. I think that’s correct..

Okay.

And then with regards to the new amended term loan, there was no -- were there any kind of significant changes to your covenants on that, or does that basically stay the same?.

Yes. No change at all on the covenants. It’s really the purpose was just to continue to first of all fixed interest rates, ladder our maturities and then we also had the ability to go ahead and extend some of the facilities. So, all of the covenants remain unchanged. The pricing remains unchanged.

There was a new pricing on the seven-year piece but really no changes other than laddering and extending maturities..

This is Jim. And if you look at our debt structure or when we fixed the rates, we will have a fairly large percentage of our floating rate debt fixed now. We have a tendency, that percentage was kind of say somewhere in the high 70s..

Yes. We’re about -- we historically kept it in that range, over the last quarter the variable piece that ramped up just because of our acquisition activity and the ability to use our line of credit to close quickly but with our restructuring and fixing of rates will be about 75% fixed rate as a percent of our total debt..

So that kind of makes sense.

And then headcount jumped a little bit quarter-over-quarter by about five people, is that due to your guys kind of expanding in the Austin? And if so, is that going to be basically stable on a going forward basis unless you expand to new markets?.

Yes. We did obviously step up the Austin, San Antonio market. We now have three people in that market, which were really new positions this year.

The increase for the year, I think it’s seven heads, of which three of those were late projects, so new markets we have entered and the others are primarily frontline folks but I think we will be able to significantly scale our G&A and headcount cost as we grow..

Okay. Makes sense. That’s it for me. Thanks so much..

Great, John. Thanks..

And that does conclude our question-and-answer session. At this time, I will turn the conference back over to Mr. Mastandrea for closing remarks..

Thank you, Andrea. And I would like to also thank everyone for joining us today and as well your continued confidence in Whitestone.

In closing though, I want to reiterate that we are well-positioned with a differentiated business model and with a portfolio of properties ideally located in some of the biggest, strongest, fastest growing and most desirable markets in the country.

We will continue on our efforts on multiple fronts internally through leasing and managing, developing, redeveloping, reposition and rebranding and externally through accretive acquisitions in high growth, economically strong markets.

As we continue to successfully execute our strategic initiatives and continue to deliver strong financial results, we believe in time, the market will recognize the value we are creating. Thanks again for your time. We look forward to speaking with you.

And please feel free to call me or Dave or Bob at any time and you are always welcome to visit and tour any of the properties that you like with us. Thank you..

And that does conclude today’s conference. Again, thank you for your participation..