Good day and welcome to the Whitestone REIT Third Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Kevin Reed. Please go ahead sir..

Thank you, Shaite. Good morning and thank you for joining Whitestone REIT's third quarter 2019 earnings conference call. Joining me on today's call are 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. 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 that this call includes time-sensitive information that may be accurate only as of today's date October 31, 2019. The company undertakes no obligation to update the information.

Whitestone's third 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 refer -- 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..

Yes. Thank you, Kevin, and thank you all for joining us on our third quarter 2019 conference call. Since Whitestone's IPO in August of 2010, our shares have produced a total return of 175%. This compares to SNL Shopping Center Index, which returned 120% over the same time period.

Investors own real estate directly for income, growth and a hedge against inflation. Whitestone REIT has provided its shareholders all of these attributes as if they own the real estate directly throughout our nine-year history. Let me illustrate with some data from the last five years.

We have provided income distributing over $220 million in dividends. We have provided an annual compounded growth rate of approximately 14% for property net operating income.

And we have provided a hedge against inflation with a solid base of high-quality properties that have annual rent increases built into triple net leases averaging 2.5% to 3% and continued to exceed inflation index. Over this five-year period Whitestone's annual property net operating income has grown by $40 million -- over $40 million.

Our annual dividend during the same period has grown by approximately $21 million. With that background, I would like to highlight four reasons why our history and track record provide a bright future for Whitestone. First and foremost, we invested real estate for the long run.

Since our 2010 IPO, we have had nine years of sustained growth, increasing key property drivers of revenue, fourfold to over a $130 million and our net operating income over 4.5 times to approximately $89 million.

In the same time frame, our equity market capitalization has grown 6 times to over $0.5 billion today and our estimated real estate value has grown 7 times to $1.5 billion, which is almost $300 million higher than the implied market valuation based on today's stock price.

This growth has been accomplished during what many are calling a retail apocalypse. During the third quarter of 2019, our progress continued and our accomplishments are noticeable. We improved occupancy 100 basis points from the second quarter to 90.4%. We grew rental rates to 6.6% and 7.6% on a GAAP basis.

The renewal leases signed over the trailing 12 months respectively. We increased ABR per square foot 4% year-over-year to $19.64. And we completed 100% lease-up of our two newly developed assets.

Second, we invest primarily in local entrepreneurial tenants with revenue growth profiles that provide services to their local communities and nationally recognized tenants like Starbucks, Safeways, Whole Foods and not with national retailers, who are once exalted as credit tenants. Now many of those tenants face significant challenges.

Whitestone's portfolio is concurrent through the traditional retail real estate REIT. As examples, we tend to focus on service tenants, not soft line retailers that today are fighting to stay relevant.

Store closures in 2019 of soft good retailers have already exceeded the total recorded closures for all of 2018 and according to a September report 2019 by Coresight Research announced U.S. store closures could reach 12,000 by the end of 2019. These will primarily come from national, apparel and consumer hardline product companies.

By contrast, Whitestone's e-commerce resistance focus is primarily on local service-based entrepreneurs.

We craft the right mix to serve the consumer and we take a community center approach in high-growth markets and locations to continue to drive Whitestone's improving quality of revenues, as we strive to make the right -- meet the right tenants to meet the consumers' needs.

Whitestone's industry-leading total shareholder returns have been bolstered by our exceptional track record of off-market acquisitions at a total acquisition cost of approximately $1 billion, or $250 per square foot, well below construction replacement cost within our markets.

Our acquisitions have been well timed, well-located and we're carefully analyzed with most of our properties having a substantial value-add components. As an example, the annual net operating income of the 21 acquisitions we made between 2010 and 2013 is 32% higher today.

This is in contrast to most owners of retail properties who have seen decreases over that same time period.

Whitestone's increase in property value is accomplished strategically by the development of pad sites on residual land we acquired with many of our initial acquisitions at little or no cost, grasping the right tenant mix to meet the needs of the consumer and the surrounding community and through lease-up of vacant spaces and renewals of existing tenants at market rates.

Recent pad site developments that include a completion of multi-tenant pad site at Anthem Arizona is one example in 2019, generating an annual unlevered return on total cost of 10.5% and the completion of a 100% lease-up of multi-tenant pad site in Chandler Arizona, which will produce $263000 annual net operating income with similar returns on investments.

These examples of successful pad developments exemplify our analysis pays off as we extract embedded value from our portfolio and achieve double-digit returns on the incremental added investment. Whitestone's strategic approach over the same time period has also minimized property and portfolio risk.

Third, Whitestone's strategy is focused on unlocking value through future operations that include; additional pad site development opportunities within our portfolio, redevelopment opportunities to invest in our existing bricks and mortar, including Williams Trace, which is located in Sugar Land, the expansion of our current tenant base at BLVD Place located in the Galleria area and the Kentwood Plaza are just a few.

In acquisition pipeline we have an active robust and accretive opportunities are out there, as we remain patient and disciplined. And finally, some recycling capital from asset sales.

An example, subsequent to this third quarter, we profitably sold $39.7 million of non-core assets and paid down all of the related debt, providing additional dry powder for value-add opportunities.

Fourth, our disciplined approach to investing in real estate is to stay the course on our strategic plan, which is to maximize shareholder value and make decisions for the long run profitability of the company.

As we have stated before, our long-term goals include, reducing leverage, improving general and administrative expense to revenue ratio, making accretive acquisitions and dispositions, and redeveloping and developing our out parcels and land. The discipline at Whitestone is the result from an exceptional team that has been together for over a decade.

And what's really exciting is that they really enjoy what they're doing. As a team, we have a strong belief that employee development is fundamental to achieving our long-term goals. We hire talented people and remain dedicated to further developing them to become our future leaders.

By creating a talented, diverse workplace with differing backgrounds and prospectus and a culture that is performance based and dedicated to that vision, we've currently excelled over the past nine years. In closing, I would like to say that we remain committed to our business plan and strive to become a leader in our industry.

In doing so, we want to continue to provide shareholders with income but in fact we've been paying a monthly dividend for 112 consecutive months, growth and a hedge against inflation. With that, I'll turn the call over to Dave..

Thanks, Jim. I'm happy to provide a few more details on our third quarter and year-to-date operating and financial results. During the third quarter, we further enhanced the overall quality of our assets.

Additionally, tenant mix continues to improve evidenced by our increases in our annual base rent per square foot and in occupancy compared to the second quarter.

Our composite average annual base rent per leased square foot increased 1% sequentially from the second quarter and 4% from a year ago to $19.64 and our total occupancy increased 1% sequentially from Q2, 2019. Let me now discuss in greater detail our leasing activity.

During the third quarter, we signed 68 new and renewal leases, representing 176,000 square feet, an $18.6 million in total lease value. These leases had an average size of 2,584 feet at an average term of 3.5 years.

As a result of our strategy, markets, properties and leasing team, we have achieved a 13.4% increase in the amount of square foot -- footage leased in 2019 compared to 2018. Our GAAP leasing spread on a trailing 12-month basis are a positive, composite 7.5% increase comprised of 7.6% for renewals and 6.6% for new leases.

This robust leasing activity allowed us to expand our overall occupancy to 90.4%, an increase of 1% from Q2. Net income attributable to Whitestone REIT for the quarter was $1.8 million or $0.04 per share compared to $7.8 million or $0.19 per share in 2018.

Included in the third quarter 2018 net income was approximately $4.4 million in gain from asset sales, contributing $0.11 per share to the 2018 per share amount. Net income attributable to Whitestone REIT for the nine months was $7.8 million or $0.19 per share, compared to $13 million or $0.31 per share in 2018.

Included in the nine-month 2018 number was approximately $3.9 million incremental gain from asset sales, representing approximately $0.10 per share. NAREIT, funds from operations for the quarter was $9.2 million or $0.22 per share compared to $10.8 million or $0.26 per share in 2018.

For the nine months, NAREIT, funds from operations was $29.1 million or $0.69 per share compared to $29.9 million or $0.71 per share in 2018.

Funds from operations core, which is just NAREIT funds from operations or non-cash stock compensation expense and proxy contest professional fees for the quarter was $11 million or $0.26 per share compared to $12.2 million or $0.29 per share in 2018.

For the nine months funds from Operations Core was $33.9 million or $0.81 per share compared to $0.037 compared to $37.3 million or $0.89 per share.

The primary reasons for the decline in funds from Operations Core per share for the nine months and the quarter were property dispositions of $13.4 million in our wholly-owned properties and $15.9 million of assets owned in our equity investment in real estate partnerships.

Our same-store net operating income, which I will discuss in greater detail later in my remarks higher legal fees related to litigation and higher interest cost driven by fixing the interest rate on a greater percentage of our debt and extending maturities.

Property net operating income was $22.1 million for the quarter as compared to $22.7 million for the same period in 2018 and $67 million for the 2019 nine months as compared to $68.1 million for the 2018 nine months. The decrease for both periods was primarily attributable to property dispositions.

Our same-store net operating income growth was down 1.2% for the quarter and a positive 0.34% for the nine months as compared to the same period in 2018. The change in same-store net operating income for the quarter is largely a result of a 150 basis point reduction in our occupancy between September of 2018 and September of 2019.

While we are disappointed in our year-over-year occupancy performance much of the decrease comes from proactive re-tenanting with stronger operators.

We believe that these actions while somewhat negative to short-term results will ultimately result in higher quality revenue long-term occupancy increases and more attractive vendors producing higher rent levels and greater NOIs.

In the quarter general and administrative expenses were $600,000 higher than the prior year from the timing of non-cash stock compensation expense and higher legal fees incurred. The higher legal fees in the quarter primarily relate to litigation with an adjacent property owner and are expected to continue through the balance of 2019.

We expect the noncash stock compensation expense in Q4 to be consistent with Q3. For the nine months general and administrative expenses decreased $1.5 million relative to 2018. The improvement for the year was primarily from lower professional and advisory expenses in 2019.

General and administrative expenses for the nine months as a percentage of revenue have improved 60 basis points to 16.8% from 17.4% in the full year 2018. For the quarter, our interest expense was up $260,000 over the prior year, primarily as a result of an increase in our average interest rate to 4.1% from 4% a year ago.

As of the end of the quarter 87% of our debt is subject to fixed rates with a weighted average rate of 4.1% and a weighted average remaining term of 5.5 years. Now, let me turn to our balance sheet. Our total real estate assets were $1.06 billion as of the end of the quarter.

This is up $13 million from a year ago reflecting investments in existing assets and development of additional leasable areas. As of quarter end, our total real estate debt was $622 million or 52% of total market capitalization.

Subsequent to quarter-end, we completed the sale of $39.7 million of non-core properties owned in our equity investment real estate partnership. Proceeds were used to pay down debt, which will further reduce our debt leverage in the fourth quarter.

During the quarter, we judiciously issued 374,000 common shares at an average price of $13.15 utilizing our at-the-market offering program. Lastly, let me turn to our outlook for 2019.

We are increasing our net income per share guidance to reflect the gain on post quarter asset sales and we are reaffirming our previously issued annual FFO and FFO Core guidance. And with that Jim and I will now be happy to take your questions..

Thank you [Operator Instructions] We'll now take our first question from Mitch Germain from JMP Securities. Please go ahead. Your line is open..

Good morning. I'm curious, how much of the income from the pad developments that were stabilized.

How much of that was recognized in the quarter? And should we expect there to be like a staggering of how it gets recognized in earnings?.

Sure. Thanks, Mitch. As we stated, we completed the development and lease-up of two pads. Those pads were both about 7000 square feet. I think the incremental contribution should be probably a couple of hundred thousand dollars annually beyond what was kind of reflected in the current quarter..

Great. I'm curious about I think Jim you said that you've got some acquisition activity that you're considering in the pipeline.

I'm curious about how should we consider market mix, the types of properties that you're looking at? Any color I'd really be grateful for?.

Sure, Mitch. Great properties in markets that we're already in. We're in the contract stage for one and LOI stage for another. We -- they're accretive to our overall -- to the overall company. And we're looking at cap rates that really make them give us a really good return on investment.

What's great about these potential deals is they are expansions in our existing markets so that we have no added cost of related overhead because we already have really solid regional managers in each of our regions..

Right. Last question for me. I guess, I've mentioned before about my desire for you guys to sell more particularly non-core.

And I'm curious if that is part of the strategy going forward as well?.

Yes. I think clearly our strategy is as an investment company to look to maximize the value of the assets we own and continue to look to where there are properties we feel like we can get a great value-add of to sell those in recycle.

So we'll continue to look at our portfolio and evaluate assets and determine if we can recycle and put the use of the capital to use for more accretive acquisitions..

Thank you..

Thank you, Mitch..

Thank you. We'll now take our next question from Craig Kucera from B. Riley FBR. Please go ahead..

Hey, good morning, guys.

Can you talk about the reduction in operating expenses in the same-store pool? Were there any cost initiatives that you executed or anything specific that led to the decline?.

Sure. Thanks, Craig. Yes, let me flip there and reference. So one of the things we do obviously is a big part of what we do is continuing to manage the expenses. So we have focused on our property operating expenses as well as our taxes. We always tied for the lowest tax valuations.

And then as we've grown, we've been able to scale and leverage our expenses as well. So one of the things we've done is from a maintenance perspective look to enter into contracts where we could get a lower rate by maybe consolidating some of those contracts.

So there's a consolidated focus in the company not only is to drive lease-up in revenues, but continue to manage the expense levels at our properties. So nothing really specific but just an overall continued focus that you should see us continue to do as we go forward..

Okay, great.

And as far as the dispositions subsequent to quarter-end, were those office or industrial assets that were sold or maybe both?.

There were three kind of like plex properties located in Houston, so industrial plex. Three properties in the Houston market..

Got it..

And I - all the related debt to those properties was paid off with the sale. So there are -- now fleet assets remaining there free and clear..

Great. And I know that you had considered those assets to potentially have some redevelopment opportunity.

Was the buyer planning on going through that process? Or do you have any color on kind of what they're expecting to do?.

Yes, we don't really fully know obviously what any buyer of our assets is going to do with them. We went to market with those assets, I think at the right time. We were very pleased with the sales price getting a 6.8% kind of cap rate on the disposition. So we're not fully aware of what the buyer intends to do with those assets..

Okay.

And you kind of touched on this earlier, but is pricing strong enough in those Texas markets for those types of assets that you may be more likely to pursue additional sales versus maybe other strategic decisions with Pillarstone?.

We -- so Whitestone has an investment in Pillarstone which is our real estate partnership. We continue to focus on our retail portfolio and over time reducing our investment in that partnership.

We accomplished that through the asset sales and Whitestone continues to expect to move away from those non-core properties and have our focus beyond our retail community centers..

Okay, great. One more for me. Yes, you had a pretty strong leasing quarter particularly on the renewal side.

Were there any markets in which that pickup in leasing and certainly the lease growth was concentrated or it was pretty broad-based?.

Overall, I'd say it covered most of the regions. We really have one or two large holes in one or two properties that we're addressing. We address them every day. We've made a slight shift in terms of how we approach our leasing and that is that, we were doing it region by region.

And at the beginning of the year, we shifted to doing it on a general corporate level. So one morning a week every single leasing person is on a call and on a televised call and relating to the deals that they're working on and it's really start to get the momentum because now we have a really unified approach to leasing..

Okay. Thanks..

[Operator Instructions] There are no questions in the queue at this time. I'd now like to pass the call back to Jim Mastandrea. Please go ahead..

Thank you, operator. Well I'm going to make my conclusion brief and just say that we really appreciate all of you are following us and we have an interest in Whitestone. It's been an exciting company and a fun company to build. And I want you to know that we're just staying the course that we set out to accomplish early in 2010.

And we are extraordinarily optimistic that we will execute on our long-term goals successfully. Well we're looking forward to future calls and a lot of really great things are happening in the company. So thank you very much for joining us on our 2019 third quarter conference call..

Ladies and gentlemen this concludes today's call. Thank you for your participation. You may now disconnect..