Kevin Reed – Director-Investor Relations Jim Mastandrea – Chairman and Chief Executive Officer Dave Holeman – Chief Financial Officer.

Craig Kucera – B. Riley FBR John Massocca – Ladenburg Thalmann Ki Bin Kim – SunTrust Mitch German – JMP Securities Merrill Ross – Boenning.

Good day, and welcome to Whitestone REIT’s First Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Kevin Reed, Director of Investor Relations. Please go ahead sir..

Thank you, Stephanie. Good afternoon everyone and thank you for joining Whitestone REIT’s first quarter 2018 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 results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors.

Please refer to the Company’s earnings press release and filings with the SEC, including Whitestone’s most recent Form 10-Q for a detailed discussion of these factors.

Acknowledging the fact that this call may be webcast for a period of time, it is also important to note, but this call includes time sensitive information that may be accurate only as today’s date, May 7, 2018. The Company undertakes no obligation to update the information.

Whitestone’s first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC and are available on our website, www.whitestonereit.com, in the Investor Relations section.

During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the Company. Included in the earnings press release and supplemental data package are the reconciliations of non-GAAP measures to GAAP financial measures.

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

reduced leverage and improved general and administrative expense to revenue ratio, growth in our cash flow and a more robust dividend payout ratio. Our key to success is built on the discipline, growth and driving efficiencies in our operations. Our dividend is stable, and our cash flow is predictable.

We are energized by the successful start in 2018 and expect to continue to build upon our momentum, as we seek to create additional value for shareholders over the long-term. With that, I’d now like to turn the call over to Dave Holeman..

Thanks, Jim. Please note that most of the financial measures and ratios I will discuss exclude the impact of the $680,000 in professional fees incurred in the quarter related to our 2018 proxy contest. As Jim said, we got off to a very good start in 2018.

Our first quarter was highlighted by 3.9% same-store net operating income growth, strong leasing activity and spreads and solid progress toward our 2023 goals, improving our debt-to-EBITDA ratio and improving our general and administrative expenses as a percentage of revenue taking it down to 17%.

Now, let me give a few details on the quarterly results. Revenue for the quarter grew $5.3 million or 19% from a year ago. This was driven by acquisitions in 2017 and an increase in our same-store occupancy of 1.5% and growth in our annualized base rent per square foot of 6.6%.

Property net operating income was up $4.4 million or 23%, driven by strong same-store growth of 3.9% and new acquisitions. Property operating margins expanded almost 200 basis points to 69% from 67% a year ago, primarily as a result of cost reductions and higher expense pass-through percentages from increased occupancy levels.

During the quarter, we signed 127 new and renewal leases, representing 374,000 square feet and $29.7 million in total lease value, representing future revenues. This is our highest volume of quarterly leasing activity since our initial public offering. The average lease size was 2,941 square feet. The average – and the average lease term was 5.3 years.

Spreads were 12.1% positive on new leases and 13.6% positive on renewal leases for the quarter for a blended 13.4% increase on a GAAP basis. Interest expense increased $1.3 million from the prior year quarter due to higher borrowings and an increase of 20 basis points in our overall interest rate.

General and administrative expenses decreased $535,000 or 9% from a year ago, and as a percentage of revenue, improved to 17% from 21% a year ago. This was primarily due to a planned reduction of 22% in our stock-based compensation.

To emphasize the scaling of our infrastructure, we increased quarterly property net operating income by $4.4 million or 23%. And during the same time, we lowered our general and administrative expenses by 9%. NAREIT funds from operations increased $2.7 million or 37% and was $0.24 per share up from 23% in 2017.

Funds from operations core increased $2.4 million or 24%, on a per share basis, funds from operations core was $0.31 versus $0.32 in 2017. Now, let me spend a few minutes on our balance sheet. We have total real estate assets on a gross book basis of $1.1 billion, an increase of $224 million or 24% from a year ago.

Our assets have an annual in-place net operating income of approximately $93 million or an unlevered cash-on-cash return on investment of approximately 8.5%. Our capital structure remains simple and transparent with one class of stock and operating partnership units and a combination of property and corporate level debt.

Further, our underlying debt structure comprises a mix of secured and unsecured debt and well-laddered maturities. Our capital structure provides us with a financial flexibility to support growth opportunities.

At the end of the quarter, approximately two thirds of our debt was fixed with a weighted average interest rate of 3.9% and a weighted average remaining term of five years. We had $59 million of availability under our credit facility at the end of the quarter and the availability of a $200 million expansion feature.

During the quarter, we made progress towards improving the debt-to-EBITDA ratio to 8.4 times, an improvement from 8.8 times a year ago. We also continued to maintain a largely unsecured debt structure with 49 unencumbered properties out of our wholly-owned 58 properties at an undepreciated cost basis of $735 million.

As to our guidance, we are reaffirming the funds from operations core range of $1.19 to $1.24 per share for the full year. The details are included on Page 35 of our supplemental. Before we get into the questions and answers, I’d like to ask that we please focus on all of our questions on our first quarter results and outlook.

And with that, we will be happy to take your questions..

[Operator Instructions] And we’ll take our first question from Craig Kucera with B. Riley FBR. Please go ahead..

Hi, good afternoon guys. I want to start out focusing on your same-store numbers. Your operating expenses, in particular, were down 8%. I think taxes were down 7% year-over-year.

On the operations side, were there any initiatives you took specifically to reduce the expenses or any deferrals in OpEx? And I guess, the second part of that question is how sustainable are those debt level of reduction do you think?.

Craig, thanks for the question. Good question. So we’ve continued to focus, obviously, on driving efficiencies in our properties. One of the specific areas we looked at is security, making sure we have good security in properties. We’re able to do some reductions there through automation and various means.

But we’ve continued to work the property tax side well. And then we also in our same-store NOI had better recoveries due to increased occupancy. So I think we’ll continue to push for efficiencies that we’ll get as we scale our operations. And we’re very pleased with the start to 2018..

Okay.

Moving to the line of credit, I know it matures in 2019, but can you give us a little color, are you moving along any sort of negotiations or extending that at this point in time?.

Yes, Craig, this is Dave again. Absolutely, we’re always looking at our debt and maturities. We are having discussions with our very good group that we have in our bank group on our line of credit and looking forward to go and ahead and extending that and.

Potentially, obviously, we’ll work to improve the terms of the agreement to match the improvements we’ve made over the portfolio of the years, but we are looking to do that. I think we’re a couple of years into the four year agreement..

Okay. One more for me now, I’ll jump back into queue. Just curious as to the disclosure on the c accounting treatment of Pillarstone.

I know you guys are going to – through sort of an appeal process, but would that have any impact on your ability to affect the transaction one way or another if that were not – if the current opinion were to stand?.

Craig, it’s Dave again. Obviously, this is very technical accounting. I think we provided a footnote in our earnings release that, hopefully, explains it well.

I think that the last paragraph talks to while we believe the impact to our results is if anything would be a nominal increase, we could – we just have to go through with the SEC and determine the accounting, but we feel very good about the accounting. We’ve provided disclosure in the earnings release that I think explains that hopefully well..

Okay, thank you very much..

Our next question is from John Massocca with Ladenburg Thalmann. Please go ahead..

Good afternoon..

Hi, John..

So just to touch on that last question a little bit.

I know you’ve given disclosure as to the different kind of reasonings for what the staff of the OCA is saying, but why not simply change your accounting treatments if the ultimate goal has always been to deconsolidate Pillarstone?.

I think first of all, as I said, it’s very technical. We’re committed to doing correct accounting and ensuring that we are in an agreement with all the standards. So I think that the disclosure in that earnings release, hopefully, explains it better than I could do on this call.

We believe that our accounting treatment is correct and we are going through a process..

Yeah. And John, just add to that, that eventually, we have talked about deconsolidating the Pillarstone and that’s been the – that’s been our thinking all along..

Okay. And then your comparable renewal and total kind of and TIs and incentives for square foot jumped a little bit in the first quarter.

Is there something kind of onetime-ish in there? Or is that new number on a comparable basis five versus two number kind of the new run rate?.

So John, it’s Dave again. I guess, I would always caution in leasing spreads that it’s a small amount of leases that come through in a particular quarter. We had a very good quarter from a leasing activity. We had a very good quarter from a spreads activity. I think I tend to look at the rolling 12 months as a better indicator of trends.

There were a couple of leases during the quarter that were a little larger and had a larger amount of TI. But when we look at our leasing activity, it was really across all of our markets and consistent with the smaller tenants we have.

But what cause the TI to be a little higher for the quarter was one renewal with a bank that had a larger amount in it..

Understood. That makes sense. That’s it from me. Thank you guys very much..

Thank you, John..

[Operator Instructions] We’ll move on to our next caller, Ki Bin Kim with SunTrust. Please go ahead..

Thanks. Could you talk about what you have in the pipeline in terms of leasing? You have about 9% to 10% rolling this year still.

How does that look like right now?.

Sure. I’ll start out and Jim probably can give some color, but I think I would point to the first quarter, Ki Bin, as we said, a really good start to 2018. Our leasing volume was very good. We always have a fair amount of leasing rolling with our model of shorter-term leases.

I think if you look at the leases that are scheduled to roll in 2018, the percentages I’m looking forward is roughly, I think it was 9% or 10%. And the rate on those is actually a little lower than our overall portfolio. So we feel very good about the leasing about, we feel very good about the start.

We feel good about the leasing spreads we had in the first quarter. And I think we’re off to a good start..

Yeah. And Ki Bin, I’ll add to that. Our portfolio and the tenants we have mostly entrepreneurial, the size and the types of businesses they have, really did benefit from the tax cuts that have been – that have gone through. And what we are seeing is that these folks are expanding.

And it – like, in the restaurants, for example, more people are eating out. More restaurant operators are expanding their space. They’re adding more outdoor space. They’re adding fountains, they’re adding missing systems things like that. So we’re seeing the uptick in the economy that is really having a direct impact on our portfolio.

And we had anticipated that when we put it together, and I think that it’s really starting to come to a fruition..

Okay. And the comparable new lease is about 35 – it’s 35 for trailing 12 months, compared to the total new leasing number of leases about 107 for trailing 12 months.

Can you remind us what the definitions are for being comparable? Is that 12 months, or is it – where are the other kind of moving parts of that?.

Sure. I think it’s in the footnotes, but I’ll give it to you again. So it’s basically leases signed where there was a former tenant within the last 12 months, and the square footage was within 25% of the expired square footage. So obviously, we look at the leases with those guidelines in mind and try to compare the ones that make sense to compare..

And with the lease spreads looked materially different, if you included all that was maybe vacant more than 12 months? Or would it be pretty comparable?.

We provide that. We do provide the total information in the sub data. I just think comparing two things that aren’t comparable doesn’t make sense. But we do provide the total lease volume, you can see the contractual rental rates entered into for the period. So we just think it’s meaningful disclosure to compare the ones that are comparable..

Okay. And just last question from me. So there were a couple of big deals in the REIT sector past in the week or so. We had DCT and Gramercy both get taken out or proposed to be taken out. And this is a kind of corporate governance type of question. So DCT was about a – DCT and Gramercy, $8.4 billion, $7.6 billion companies.

Their change of control provisions were $30 million for DCT, Gramercy at $22 million. And when I look at your companies change of control provision is about $28 million. And when you compare to those other companies, obviously, the sizes multiples bigger than your company.

I’m just curious why the Board decided to keep this level of change in control provisions given the size of company? And how that is the best thing for shareholders?.

Sure. I’ll comment on a couple of things and first of all, I would say we remain focused on creating value for all shareholders. We have a differentiated improvement strategy to create long-term value, which I think you can see has produced results as shown in our first quarter..

Yeah, I think – and I think, Ki Bin, I think that when those are pretty standard putting in change of control provisions. And it usually involve over a period of time. They don’t just pop up and happen. So I think it’s pretty standard. But they’re put in with the idea that you never have to exercise them.

So we are optimistic that those will never be exercised..

Yeah. But at the same time, it does hinder the ability as a public company for the prospects of M&A, especially relative to the size of the company when the change of control provision which is a hurdle for anyone to get over. Is that higher than GPT which is a much bigger company? Go ahead, sorry..

No. Go ahead..

I was going to just say, I mean I think our Board is committed to adding shareholder value, obviously, it looks at lots of attributes. And believes the strategy and direction that we’ve taken is the right one. And we can’t speak to GPT and other companies; we can only speak to Whitestone..

Okay. Thank you guys..

Thank you..

And we’ll take Mitch German with JMP Securities..

Thanks.

I think might have mentioned it, Dave, but in the leasing volumes was there any sort of bulky leases that weren’t part of what’s kind of standard for you guys? Or is it really just kind of bread-and-butter smaller leases throughout the entire quarter?.

It really is just spreading butter smaller leases, I mean there were – there’s always one or two that are a little larger than they average, but a very much a normal quarter, the total volume was 127 leases, I think that average size was about our average size. The length was just a little longer than average.

So it was fairly much normal course of our strategy showing results..

So you’re around 90% - 91% occupied this quarter. I’m trying to – I know you said 233 basis points higher than a year ago.

Trying to understand kind of on an apples-to-apples basis, is that 230 – is that Whitestone to Whitestone? Or is that Whitestone to the total including Pillarstone and development?.

Well, that’s Whitestone’s. The wholly-owned portfolio year-over-year.

So, if I back out the acquisitions, where do I stand?.

It’s about a 1.5% same-store occupancy increase year-over-year..

Got you.

How much of that – okay, so that’s not even – and then if I account the sale of Belmont, how much of that contribute to occupancy in the quarter?.

Belmont contributed about 60 basis points, though Belmont was one of our lower occupied properties that we sold this year. And the impact of that was roughly 60 basis points..

Great. Last one from me. I think that you guys have talked about selling a couple of other assets to obviously help – obviously, from the cases of lower performing or to fund development. Where do we stand? We’ve got one done now, but we knew about that one when you guys reported fourth quarter earnings.

So is there a couple other in the queue here?.

We do. We have – I think we communicated we have three currently in the queue. We’re working. We think that recycling capital and where there are assets that are no longer core, we can’t add anymore value to make sense. So we currently have three in the process of looking to sell and recycle the capital..

And just if you can remind me, what sort of value you’re looking out there?.

Yeah. I think it’s in the $40 million to $50 million range..

Thank you..

And we’ll now take Merrill Ross with Boenning. Please go ahead..

Hi. Good afternoon. Wondering where you see occupancy going, and maybe the next year or so as you look towards this capital recycling? 92%, a pretty good number, pretty healthy.

Can it get better?.

We certainly think so Merrill and we have a fairly aggressive program, what we’re finding now, the lot of spaces that we prepare to lease are now ready to lease and people are leasing the space, they are making decisions regarding the space, that’s a good sign, I think we’re very optimistic that we’re in the year to higher occupancy than we have currently..

And we have given in our guidance. We’ve tried to give some transparency as to the drivers. So we’ve given some guidance on the occupancy levels that we’ve included in the guidance, but we’re very positive given the good start to 2018..

Yeah. Thank you..

All right..

One moment please. And we’ll take Ki Bin Kim with SunTrust. Please go ahead..

Thanks. That’s a quick one.

Can you give an update on The Boulevard in Eldorado what your cash-on-cash yields are today? And I know you were changing one restaurant, and how’s that progressing?.

Sure, Ki Bin. This is – I don’t have the exact numbers, but I will tell you both assets are performing as expected what we underwrote them and originally bought them if anything just a little better. So I hope that answers your question..

Let me add, Dave, if I can. The Boulevard place restaurant, we had the replacement tenant that we’re looking at now. We’ve reached the letter of understanding with them. And we hope to go to and lease it sometime very soon. It will be a commensurate rent plus about 10%. And then, in addition to that, we’ll have some percentage rent clause as well.

And it’s an exceptional tenant. And we’re pretty excited about that. With regard to Eldorado, we’re having discussions with a major coffee tenant that has in excess of 1,000 locations in the country. And we just acquired a piece of ground that is contiguous to ours, which is the location that they had preferred. So we’re still working on that deal..

Okay. And I think last quarter, you guys gave, like, the remark about these two projects delivering about a mid-6% cash-on-cash yield.

And I just want to just tie up a couple of numbers together because if I look at the supplemental for these two assets, you guys gave pretty good information, document fee, the rent per square foot, you gave the total cash rent today.

Even with a very healthy assumption about operating margins it seems like the cash-on-cash return and that be – I might be missing something here. Obviously, you have one restaurant moving, but the cash-on-cash return looks like a mid-5% using your disclosed information..

Yeah. I’m assuming you’re using the like end – this update or maybe annualized base rent.

Is that what you’re using, Ki Bin?.

Well, you guys – let me see here. Yes, I mean, pretty much you guys gave the property-by-property the ABR per square foot in annualized base rent..

Right. I was just going to – so the thing that’s probably and be open to suggestions as far as additional disclosure you’d like to see. But Boulevard has a significant percent of rent component to its revenue that you really don’t just see in the ABR, Eldorado also has a little bit as well..

Okay. Yeah. I figured there was something missing in that number, but all right. Thank you..

Yeah..

And this concludes today’s question-and-answer session. I’d now like to turn the call back over to Jim Mastandrea for closing remarks..

Hey, well, thank you, operator. And thank you all for joining us on our 2018 First Quarter Conference Call. Our strong operating results to start the year provide us with the confidence that we have the right plan in the right people in place as we look ahead. We are a differentiated e-commerce resistant business.

And are uniquely position for continued growth and value creation in the retail segment of the retail real estate industry. I’d like to remind anyone that we’re available if anyone like to call us and talk to us for property tours that we are always open and welcome that. In the meantime, we want to thank you for joining us today.

And with that, we’ll close the call..