David Holeman - CFO Jim Mastandrea - Chairman, CEO and President.

Craig Kucera - Wunderlich Securities Mitch Germain - JMP Securities Gerry Fershtman - Maxim Group.

Good day, ladies and gentlemen, and welcome to the Whitestone REIT First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Holeman, Chief Financial Officer. Please go ahead, sir..

Thank you, Alan. Good morning, and thank you all for joining Whitestone REIT's first quarter 2017 earnings conference call. Joining 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-Q and Form 10-K for a detailed discussion of these risks.

Acknowledging the fact that this call may be web cast 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 4, 2017. 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 be 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 over to Jim Mastandrea..

Thanks Dave, and thank you all for joining us on our call today. Today, I will provide an overview of our recent acquisition, capital raise and some highlights of the quarter's results. Dave will follow with the details of the quarter and our capital markets activity. Let me start with some quick history, which I think is important.

We are a relatively young company that has evolved and grown from an asset base of approximately $150 million in assets, comprised of retail warehouses and offices in Texas in 2010 at the time of our IPO. Today, we are a pure-play retail company whose real estate assets exceed $1 billion.

We are now geographically diversified with 69 community center properties, which I'll touch on later, located in the best submarkets and in the fastest growing cities in Texas and Arizona.

Our culture promotes a property by property value add discipline with an e-commerce resistant, I'll repeat that, an e-commerce resistant retail service-based platform.

A big differentiator for Whitestone is that the large majority of Whitestone tenants are service providers to local communities, making our approach more insulated from the impact of the transfer of sales from bricks and mortar to the Internet.

Let me now highlight our two recently announced acquisitions, which are located in strong submarkets in Houston and Dallas. BLVD Place in the uptown area of Houston and Eldorado Plaza in Dallas have value add components, complement our business model and add to long term shareholder value.

Specifically, the total purchase price for Eldorado and BLVD Place is $204.6 million with a stable occupancy in the high 90s, longer leases and credit tenants with upside from expansion of the gross leasable area. We expect to close both of these properties in the second quarter, in fact, yesterday we closed on Eldorado Plaza.

Let me touch on some of the great demographics of both markets. Uptown Houston is one of the largest business districts in the United States, ranking 15th nationally and comparable in size to the CBDs of Pittsburgh and Denver.

Uptown Houston has impressive density, with an estimated 499,000 residents living within a five mile radius, estimated to grow by 8% to 537,000 by 2022 with an estimated average household income within the five mile radius of the BLVD Place of $124,000.

The Class A lifestyle center includes 217,000 square feet of leasable space and approximately 1.4 acres of developable land that will give Whitestone the ability to build an estimated 130,000 square feet of additional leasable area based on current plan with the infrastructure of parking entries and exits all in place.

BLVD is 99% leased and will be Whitestone's 28th property in Houston region.

Eldorado Plaza is located in McKinney, Texas on the north end of Dallas, referred to as the Platinum Corridor, which is known for its mix of national companies and regional branch offices including Coca Cola, Wells Fargo, Pizza Hut, Hilton Hotels, NexBank, iHeart Communications and Mary Kay Cosmetics.

An estimate of 191,000 people live within a five mile radius of Eldorado Plaza and the population is estimated to grow 12% to 214,000 by 2022. The average household income of the population within the five mile radius of Eldorado Plaza is $124,000, same as BLVD. Unemployment rate in this submarket is 2.8% and the [indiscernible].

The Class A lifestyle center contains 222,000 square feet of leasable space with the option to purchase an additional 1.86 acres to develop an estimated 24,000 square feet of additional leasable space. Eldorado is 97% leased and will be Whitestone's seventh property in the Dallas market.

With the addition of these two assets, our growth should continue as we execute on the plans we shared in regards to achieving success in 2017.

To that point, once we close on the two properties, we will have increased our presence in two key existing markets, leveraged our in-place market and enterprise level infrastructure and deepened our tenant base that serve the communities surrounding our properties. Let me now discuss our first quarter highlights.

In the first quarter of 2017, we had 11% growth in revenue, reaching $28.3 million. 9% improvement in property net operating income to $18.9 million; FFO core of $0.32 per share; and 88.6% occupancy in our operating portfolio, up 90 basis points from a year ago.

Impacting net operating income and FFO core per share in the first quarter were a few non-recurring items that Dave will comment on in his remarks. I repeat, non-recurring. The impact of these items was approximately $0.02 per share and 1% in our NOI growth.

Without exception, we continue to be laser focused on creating long-term shareholder value underpinned by a portfolio of Class A Community Center Properties located in the best submarkets in high-growth MSAs.

Most importantly, our leases are net leases, structured with our tenants to increase rental rates, attain percentage rent on a considerable number of tenant revenues, increased leasable square footage and grow as our tenants' businesses grow. While the tenant pays the pass-throughs of taxes, insurance and common area maintenance.

I would like to point out that we recognized early the significant disruption in the retail space that e-commerce would and is causing.

We have proactively focused on our acquisition, development and leasing efforts on the distribution of services and meeting neighborhood needs, including groceries, through a retail property network, rather than the traditional retailers that distributed goods. This opportunity was clear to us and one which have targeted the last six years.

The community property center approach fortifies our upside earnings with relatively little downside, having built our business on the businesses of our tenants. Our strategies enable us to expand occupancy, rent and overall square footage, while limiting risk.

Our successful and differentiated business model enables us to avoid the big box traditional retailers, the concerns that they have -- we've had with them. And our capital structure enables us to acquire quality property off market, to achieve the highest potential property short and long-term income and value for our shareholders.

For the balance of 2017, we expect to continue to drive long-term shareholder value by focusing asset by asset and tenant by tenant. Our dividend coverage remains strong, we continue to improve as we increase occupancy, rental rates and the resulting cash flows.

We are confident in our ability to produce superior real estate returns with our performance-based culture which we believe rewards shareholders for their commitment to Whitestone.

As we work to successfully grow our differentiated business model to over $5 billion in assets, we look forward to continuing to serve our shareholders as we build on our accomplishment.

With that, I'd like to now turn the call over to Dave to provide a more detailed review of our financial and operating results, and then I will provide some closing remarks and conclusion of our Q&A.

Dave, please?.

Thanks Jim. Our distinctive e-commerce resistant business model remains well-positioned to build upon the growth we have produced over the past six years. Today, I will discuss our first quarter results, our recent acquisitions and capital markets activity.

For the first quarter, total revenues increased 11% over the same period last year to $28.3 million. This was driven by strong growth in our same property revenues of 5%.

Property net operating income for the quarter was up 9% over last year, driven by our top line growth and efficiencies gained in our property operating expenses, reflecting our scalable business model. Same property net operating income grew 2% versus the prior year and includes approximately $200,000 in bad debt expense related to re-tenanting.

We do not expect this bad debt expense repeat in Q2. Excluding this bad debt expense for same store growth would have been slightly over 3% for the quarter year-over-year. Funds from operations core for the quarter increased 5% or $500,000 versus the prior year quarter. On a per share basis, funds from operations core was $0.32.

Negatively impacting funds from operations for the quarter were $200,000 of bad debt expense related to re-tenanting that I mentioned earlier and approximately $270,000 of professional fees of audit and tax fees related to year-end audit and non-core asset dispositions, which we do not expect to repeat in future quarters.

Excluding these two expenses, funds from operations core would have been $0.34 per share. NAREIT funds from operations per share for the first quarter was off $0.03 from the prior year, primarily because of the re-tenanting bad debt expense, higher audit and tax fees and acquisition and disposition transaction costs incurred in Q1 2017.

General and administrative expenses for the quarter, excluding the amortization of non-cash performance based share compensation, acquisition and disposition transaction costs from both periods and the nonrecurring audit and tax fees in quarter one was 10.7% of total revenues. This compares to 11.1% for the full year 2016.

At the end of the quarter, we had 103 employees, down slightly from year end 2016. For the quarter, of our leasing team signed 91 new and renewal leases totaling 220,000 square feet with a total lease value of $16.3 million.

Our leasing spreads for the first quarter 2017 on a GAAP basis are a positive 8.2% on renewal leases and a positive 3.1% on new leases for an aggregate positive 7.4% increase. We ended the quarter with total operating occupancy at 88.6%, up 90 basis points from a year ago.

Our annualized base rent on a year-over-year GAAP basis expanded 14% to $17.36 per square foot at the end of the first quarter. We have a diverse tenant base, minimizing our individual tenant risk, with our largest tenant representing only 3% of our annualized rental revenue.

At the end of the quarter, we had approximately 1,600 tenants, which represents an increase of 6% in our tenant count from a year ago. Now let me spend a few minutes on our balance sheet. We had total real estate assets on a gross book basis of $925 million at the end of the quarter.

These assets produced approximately $76 million in annual net operating income. This equates to an 8.2% unlevered cash on cash return on investment. Upon closing of our pending acquisitions that Jim commented on, we will have grown our real estate assets to over $1.1 billion on a book basis.

Our capital structure continues to remain quite simple with one class of stock, no joint ventures and a combination of property and corporate level debt. Further, our underlying debt structure is comprised of a mix of secured and unsecured debt and well laddered maturities.

Our capital structure provides us with the financial flexibility to support growth opportunities and be able to weather changing conditions. At the end of the first quarter, approximately two-thirds of our debt was fixed with a weighted average interest rate of 4% and a weighted average remaining term of five years.

We have $102.4 million of availability under our credit facility at the end of the quarter, with additional availability of up to $200 million from the exercise of the facility's Accordion feature.

As previously communicated, we expect our debt leverage metrics to improve over time, because of increases in net operating income generated from higher occupancy and rental rates and capital structuring of future acquisitions and additional asset dispositions. Our debt-to-EBITDA at the end of the quarter was 8.7 times.

We continue to maintain a largely unsecured debt structure with 46 unencumbered properties out of our 55 wholly-owned properties at an undepreciated cost basis of $668 million. Let me add a few comments related to the funding of our recent acquisitions. In late April, we issued 8 million shares, resulting in net proceeds of approximately $100 million.

These proceeds, matched approximately 50-50 with debt, will fund our pending acquisition. We are currently under contract to obtain an $80 million secured loan on BLVD Place, which we expect to close concurrently with the acquisition of the property.

The loan is from an insurance company, has a term of 10 years, a fixed rate of 3.72% and is interest-only for the full term of the loan. We expect the balance of the debt to come from our credit facility. We also expect that the pending acquisition will increase our percentage of fixed rate debt and improve our overall debt leverage metrics slightly.

We are reaffirming our 2017 funds from operations core guidance range, which is $1.34 to $1.39 per share. Once again, let me remind you that this guidance does not include future unannounced acquisitions or dispositions.

Please refer to the supplemental financial information that is posted on our website for additional details on our financial guidance. That concludes my remarks. And Jim and I will now be happy to take your questions..

[Operator Instructions]. And we will take our first question from Craig Kucera with Wunderlich..

Hey good morning guys.

Appreciate the color on your top tenants, but can you give us a sense of what percentage of your total tenant base is exposed to some of the more challenging retail categories? Particularly, apparel and maybe sporting goods?.

Sure. I think one of the highlights of our business model is our approach to the tenant mix. As Jim mentioned, we focused on these tenants that we think will have the greatest success over the coming years, which are those that are less impacted by the trends on e-commerce.

Approximately 83% of our tenants we have categorized that are not impacted by e-commerce. Those are health and wellness, entertainment, dining, grocery. So we continue to build a tenant mix of tenants that the feel like will be those that will perform very well in the coming years..

So should I infer from that then, that outside of the 83% then, you do have some exposure to more your generalized -- whether it's general merchandise or apparel or sporting goods, some sort of combination of that?.

I would not infer to that, because that's a fairly high percentage. But we probably have 10 tenants right now that are impacted, like a RadioShack, that's maybe 2,000 square feet. Now we're talking 6 million, 6.5 million square feet of space. So the tenants that we have are not necessarily affected by that.

3% is really quite strong, quite the opposite, yes..

Yes, I'll give you a very firm comment. We're really seeing no impact in our business on the shift of e-commerce that many of the traditional retail REITs are seeing. When I say we have 83% of our tenants categorized, we go through and look at the tenants and we have, about 17% we categorize as more traditional retail.

We look for more specialized -- we have very few big boxes, big retailers. Our model is small tenants. So we feel like we're really well positioned for a lot of the changes that are happening in retail market today..

Got it..

We have one of the traditional big-box properties, which we inherited, and it's roughly in the 90% occupancy. And I think the impact that we're seeing there is that we can't increase the rent because of -- on the big box tenant, because of the limitations in their leases.

Meaning that, most of the big box tenants have a 5% increase over five years, which is only 1% a year. Where our business model offsets this, again, we recognized it six years ago; is that we have smaller base tenants that are solid financial statements, that are restaurants, learning centers, medical, offices, things like that.

And we have rent increases of 3% to 5% and we include triple net expenses. So the experience that we're seeing in the marketplace today is really not impacting Whitestone tenants..

Got it. And one more for me. I hopped on the call a little bit late, but I think I caught that you mentioned that the uptick in bad debt expense was -- you thought was not recurring or more of a one-timer.

Can you give us a little bit more color on what happened there?.

Yes. So a bit of it was -- it was very specific tenant related. We had a large bad debt write-off in the first quarter related to one tenant that we moved out in our Arizona region. So it was something that occurred in the quarter, that caused the bad debt expense to go about $200,000 over what we expected to be going forward.

Obviously, we think from a long-term perspective, it's going to be good to re-tenant and get a new tenant in there. But we took the hit of moving out a tenant in the first quarter in our Arizona region that we had built up a little bit of an AR balance on.

We obviously will continue to pursue collection and to the extent we can collect it, which would be positive in future quarters..

Okay. Thanks guys..

Thanks Craig..

[Operator Instructions]. And we would take our next question with Mitch Germain with JMP Securities..

Good morning gentlemen..

Good morning Mitch..

Good morning Mitch..

So couple questions for me. And I apologized I missed some of other questions that might have been asked. I'm curious about the bidding process in particular for the BLVD asset. So obviously, Houston is a market that's being somewhat scrutinized.

So just curious about how the deal came to you, your underwriting and maybe some characteristics about the investment that really stood out in a positive way?.

Yes Mitch, it's a surprise to a lot of people. As I mentioned in the beginning of my remarks, we built this enterprise in a short six years. And we built it on relationships and non-traditional methods. For example, we go hunting for properties, property by property. We built Arizona that way, we built Dallas/Fort Worth that way, we built San Antonio.

We do the same method in Houston, Texas. And relationships that we built around allowed us to learn that the property could be available, wasn't necessarily available, -- could be available.

And when we learned that, we had taken the opportunity to contact the seller, begin -- as the relationship that goes back a long-long time and we were able to strike a price that was acceptable to the seller.

So it's a lot of -- I don't like to use the word, but I will, but a lot of covert strategies that we use in our company, and we build on a lot of relationships.

And to give you just an example, our other listeners of what our relationships are like, if you look at the smallness of our company, we're now $1 billion, $1.2 billion, yet we have in our line of credit, the best banks in the country. And they were in our line of credit when it was one-fourth the size of what it is today.

So in anticipation of how we're going to build the company, we assembled that bank group and we started focusing on the kinds of properties that we felt, would sustain what we expected to happen in the retail industry..

I might add just a couple comments on BLVD to what Jim said. I think part of what Jim said was clearly, we continue to believe that real estate is very much a local business. In the markets we're in, we get to know the areas, the tenants. Uptown Houston is absolutely the best area in Houston.

And really through our relationships that Jim highlighted on, I think also from a little bit of other folks pulling back on Houston, we were able to enter into BLVD Place. The going in kind of cash-on-cash return on BLVD Place is about 6.2% and we think that's an attractive going-in entry rate.

And then from an underwriting perspective, we expect with the development opportunity to be able to produce IRRs in the mid-teens. And the tenant base at BLVD Place is just outstanding. The average lease term is 10 plus years, weighted average lease term. Over 60% of the tenants are institutional grade credit tenants with an average rating of BBB+.

So just a home run asset that we were able to enter into and we think will be a great addition to our portfolio over time..

Yes, two additional comments. We mentioned the residential population in the five mile radius. Within one half mile of the BLVD Place asset, which is at the corner of what we would call in real estate, Main and Main or San Filipe and Post Oak. Within one half mile is the world headquarters of the BHP Billiton International.

They just expanded another 500,000 square feet. And three quarters of a mile in walking distance is Apache, which is an international oil company. And then closer to that would be Stewart Title's headquarters.

So we have a huge base there and we feel very fortunate that we were the ones that were able to put that under contract, before it really was circulated..

One other thing I might add just on the tenant base that is helpful, I think, and plays to Houston. When you look at the tenants in the property, there are no tenants that are oil and gas related in any way and a 100% of the tenants are outside of that industry..

That's helpful.

When you talk about the development parcel at that property, in particular, because I think the other one has somewhat been committed already, tell me about what your plans are? What type of customer fits? And what you're planning to do there?.

All right. I'll start, Dave, you can jump in. We have approximately 140,000 square feet we can add to the property. There's a great website called BLVD Place, Houston, Texas. Any of our listeners jump on and take a look at the quality of the asset. The two stories of retail and then four stories of office.

We have Frost Bank has the headquarters building there, and they're a great Texas bank, about $31 billion in size. We have five restaurants currently, all have percentage leases. Whole Foods, they're doing close to $1,000 a square foot and they have a percentage lease as well.

We know Whole Foods is under pressure right now, but we think that they are a survivor in this industry. On the development parcel, we have interest from two additional banks who really would like to move into the area. What we're seeing is, a movement from The Galleria, which is really about less than a mile away, towards that center.

Going down, Post Oak Boulevard is the infrastructure under construction now, with a transit system that will take folks all the way to Houston's Intercontinental Airport. So there's a lot of new development in that area and this is kind of the focal point.

And the city years ago have taken the expense of building the underwater systems so when you have heavy rain in Houston, which we all know happens once in a while, right, there's no flooding in that area..

Yes, just a couple comments maybe to add. As Jim said, about 140,000 square feet, 50,000 retail. We have had a great amount of interest so far. We feel very confident about being able to lease the center. We've also done studies of the area to understand the missing retail components. So we think it's a great opportunity.

All of the infrastructure is in place and clearly the economics we would expect on the development portion really enhanced the overall returns. So we expect to begin the redevelopment portion very shortly after we close on the asset and plan to finance it primarily [indiscernible]..

Great. That's it for me. Thanks..

Thanks Mitch..

Thank you, Mitch..

[Operator Instructions]. And we will take our next question from Gerry Fershtman with Maxim Group..

Hey guys. Good job. Just one quick question. I had read an article recently that voiced concerns about the recent raise and subsequent acquisition that suggested the math doesn't add up, specifically voicing concerns about the high cost, significant expense, concerned about debt levels.

Would you guys mind speaking to that and addressing it? I'd appreciate it..

Yes, let me kick it off, and then I'm going to turn it to Dave. Gerry, thanks for being on the call. We've been building this company for six years and I want to say that we are really good at what we do. And we synchronized our capital market activities with the assets we have and then we target value-add assets and then we actually add the value.

So matching that is something that we really looked at very closely, to not compromise anything that we built in the company so far. So I just wanted to give you that 40,000 foot kind of vision of mine and Dave's. And I'll let Dave give you some details on that, Gerry, thanks..

Sure. Hey Gerry, how's it going? [indiscernible]. First of all, I'll hit maybe the debt levels comment. We continue to focus on putting a good match of debt and equity, putting proper leverage on the assets. We expect to fund these two acquisitions approximately 50% debt, approximately 50% from the equity raise.

So what that does is, it slightly improves the debt metrics. So I think that the comment that this would be pushing our leverage is inaccurate. This is a transaction that overall improves our debt metrics. From the economics of the properties, just to give a couple highlights there.

BLVD Place, I think I said is about a 6.2% unlevered cash-on-cash return going in. We project that, that will grow into the mid-7% with the development.

Eldorado is approximately a 6.7% cash-on-cash yield going in, that grows into the 9% cash-on-cash with a little bit of rolling leases up to market and then about 24,000 square feet of additional GLA we're building there. We have the commitment from Starbucks to move to a standalone pad, that significantly increases the rent.

So economics-wise and then when you layer on to that, the fixed rate debt we're obtaining on BLVD, which is at 3.72%, it absolutely works economics-wise. These assets are underwritten as well, will produce an IRR in the mid-teens.

So from a long-term shareholder value perspective, these assets and the funding of them is absolutely accretive to our shareholders..

Thanks guys. Thank you for addressing this..

Yes, let me add sort of one of the things that played into this as well in the overall building of the company is that, we felt it was important to all of our shareholders at a larger base of institutional shareholders with our recent capital raise provided. And we did that. We had a large number of institutional shareholders, long-term, primarily.

The second thing is, we wanted to increase our liquidity in trading volumes, because what happens is, you get stuck on a trading volume is around 125,000 shares a day, and we didn't have much liquidity. Our hope is that we can at least double or triple that.

And then the third is to get over the $0.5 billion of market capitalization side, so that we could start approaching the $1 billion range to get into the credit rating opportunity with Standard & Poor's and Moody's, because attaining a credit rating is something that a REIT like ours would like to have.

So we had those capital market characteristics that were important to do on a raise like this. Plus we had great assets that we had to take advantage of..

Right. Thank you..

Thanks Gerry..

You're welcome..

And gentlemen, there appears to be no further questions at this time. Mr. Jim Mastandrea, Chief Executive Officer, I'd like to turn the conference back to you for any additional closing remarks, sir..

Thank you, Alan. I'd like to once again just like to thank you all for joining us on our call today. And let you know that we appreciate your interest and your continued confidence in Whitestone. We continue to make progress on our strategic initiatives that support, what I believe is the most innovative business model.

Building upon our well positioned portfolio of properties with an optimal mix of e-commerce resistant tenants, we will continue to grow our profitability and shareholder value. Once again, thank you, and we look forward to updating you on our progress as we move through 2017 and beyond..

And ladies and gentlemen, that does conclude today's conference. Like to thank everyone for their participation. You may now disconnect..