Greetings, and welcome to the Whitestone REIT First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Kevin Reed, Director of Investor Relations. Please proceed, sir..

Thank you, Tanya. Good morning, and thank you for joining Whitestone REIT's first quarter 2021 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.

We would also like to introduce our new Vice President of Corporate Communication, Rebecca Elliott who is also with us today. 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 news release and filings with the SEC, including Whitestone's most recent Form 10-Q and Form 10-K 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, May 5, 2021. The Company undertakes no obligation to update this 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. I will now turn the call over to Jim Mastandrea..

Thank you, Kevin, and thank you all for joining us on our first quarter 2021 investor call. I will provide a brief overview on Whitestone as well as an update on our business current events in the first quarter.

Following my remarks, I will turn the meeting over to Dave Holeman, who will provide financial update on how we did during the first quarter and we will follow-up with questions and answers.

This quarter results benefited from the decision to locate our portfolio in some of the country's fastest growing Sunbelt markets where we are leading our nation's reopening. This is contributing to our performance on leasing, showing the resilience of our business model and corporate culture.

Our operations team continues to provide their ability to be flexible and quickly adaptable with support our strong financial infrastructure. At the end of Q1 this year, our operating portfolio occupancy was 89.1%, an increase of 0.5% from last quarter and down 0.6% from a year ago.

Our rent collection versus billings continues to produce at the top of our industry peer group. During Q1, our collections remain strong approximately 95% of our wins fourth quarter and for the month of April.

Our new lease count was 46 for quarter significantly higher than last quarter's count of 28 and the total count was 94, 12% higher than the previous quarter. Our blended leasing spread was 7.8% one full percentage point higher than last quarter 6.8%.

And our same-store net operating income decreased 4.3% with flat last quarter, yet among the best in the industry. Additionally, in Q1 we increased our quarterly dividend by 2.4% and paid our monthly dividends to our shareholders for 120 consecutive months.

Our employees are back working safely at our properties and our tenants businesses are ramping up with increasing customer foot trafficker. Consumers continue to resume their daily lifestyle routines in visiting our properties while migration continues to flow into our markets.

Our targeted geographic portfolio is comprised of institutional quality, open new real estate, with predictable cash flow. Our properties are adjacent to high income communities in attendance include grocery stores, pharmacies, and restaurants.

Our centers are made up of e-commerce resistant tenants who provide necessities and essential, late drive 18-hour traffic seven days a week for properties. That's a result over the past year our centers have remained open, and most of our tenants remained active. Some of them today are experiencing higher sales in their pre-pandemic levels.

I remind our shareholders that Whitestone were built during the recession of 2008 to 2010 and many of the lessons that we learned during that time we incorporated into the fiber of the Company.

Our company was built by acquiring properties that were located in business-friendly states, fast-growing and very populated cities and high income communities. By creating an internet-resistant business model that focuses on the services and essential needs consumers.

By creating a diversified portfolio of entrepreneurial tenants by structuring leases with tenant on a recourse and minimal co-tenancy approval rights, by providing annual rent increases of 2% to 3% while passing through triple net expenses and by keeping our focus on training and developing our people for continue to innovate.

Our swift response to COVID-19 12 months ago strengthened our balance sheet, liquidity and financial flexibility to successfully navigate the economic impacts of the pandemic. Fast forward, the first quarter of 2021, we are activating our strategic growth plan. We are making plans for future re-development and development projects.

We have reduced our overall debt level. We have increased our dividend and we are continuing to scale our infrastructure. Our history has been to grow our portfolio by making single off-market value-add acquisitions in fewer specific markets Austin, Dallas, Fort Worth, Huston and Phoenix.

We intend to continue this strategy to assemble valuable properties and markets where tenants want to lease and consumers wants to visit. By growing this way, we created a substantial value portfolio of properties.

In fact, we are under contract to acquire property in one of our identified markets, our first acquisition since the pandemic begun and we expect to close this summer.

This acquisition will add just under 200,000 square feet and will be immediately accretive to Whitestone's FFO per share and positively contributes to Whitestone long-term goals related to debt, leverage and G&A coverage. In addition, our regional management team is in place, giving us operational economies as we scale our prior infrastructure.

We look forward to provide a more details as we progress through the year.

Moving forward, Whitestone will well position with an improvement in balance sheets, enhanced liquidity and laser focus on driving occupancy and revenue growth and leasing, leveraging our deep knowledge of our markets, properties and opportunities along with our business model with to provide and craft tenant mix the least the credit entrepreneurial businesses.

This is how we create long-term shareholder value. With that, I'd like to turn the call over to Dave..

Thanks Jim. First, I would like to provide a little more perspective on the strength of our markets. Our targeted geographic focus on top MSAs in the Sunbelt continues to produce great results. Texas and Arizona continued to see significant population migration and corporate relocation, producing jobs from other areas of the country.

This is best evidenced by our first quarter leasing activity, occupancy levels, leasing spreads, and our average space rent per lease square foot. Our leasing activity in the quarter was very strong with 46 new leases, representing 117,000 square feet of newly occupied spaces.

This level of new lease square footage was 98% higher than our average quarterly lease volume for the previous three year period, and 21% higher than the highest quarter over the past three years.

On a total lease value basis, this quarter was more than doubled our average quarterly lease volumes for the previous three year period and 38% higher than the highest quarter over the past three years.

Regarding occupancy, our operating portfolio, occupancy stood at 89.1%, up to 1.5% from the fourth quarter and down only 6.6% from a year ago, with our Austin market leading the way with almost 4% increase in occupancy from Q4.

Leasing spreads on a GAAP basis as a positive 9% over the last 12-months, and first order leasing spreads increased by 5.3% on new leases and 9.6% on renewable leads assigned.

Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 1% to $19.71 from $19.58 in the previous quarter, and it's basically in line with our pre-COVID ABR from a year ago. Funds from operations core was $0.23 per share in Q1 compared to $0.24 per share in the prior year.

As Jim mentioned, our collection continues to trend toward normal pre-COVID levels with 95% of our contractual rents collected in Q1.

Restaurants and food service, our largest tenant category, which represents 23% of our ABR and 17% of our lease to square footage continued to perform very well, paying 95% in the quarter, and we also saw positive movement in some of our more impacted customer types.

With entertainment, representing only 2% of our ABR of lease square footage, paying 73% of the rent in the quarter, up from 48% in Q4. During the quarter we had minimal rent deferrals, representing 45% of our total contractual billings.

Our same-store net operating income was down 4.3% for the quarter versus the prior year quarter, and we expect our same-store growth to resume as we move throughout the balance of the year and into 2022.

Reflecting the continued improvement in the portfolio, our reserved for uncollectible revenue was 529,000 or 1.8% of revenue, down from 4% of revenue in Q4. To put that into further perspective, our first quarter reserve equates to only 9% of 2020 full-year reserves.

Our interest expense was 8% lower than a year ago, reflecting 15 million in lower average debt and a decrease in our overall interest rate from 3.9% to 3.6%.

Our first quarter is an encouraging start to 2021 and underscores the resilient of our forward thinking well crafted business model and the strength of our strategically chosen high growth markets. Let me provide some further details on our collections and related receivable balances.

Included on Page 27 of our supps data is the breakdown of our tenants by type. All of our tenant categories were above 89% collections in Q1, with the exception of entertainment, which I previously discussed. Our three largest categories restaurants, grocery, and financial services were at 95%, a 100% and 99% respectively.

At quarter end, we had 23.3 million in accrued risk and accounts receivable included in this amount is $16.9 million of accrued straight line risk and 1.8 million of agreed upon deferral. Our agreed upon deferral balance is down 18% from year-end, reflecting tenants honoring their payment plans.

Since early last year, we have implemented various measures to strengthen our liquidity and navigate the economic pressure caused by the pandemic. Our total net debt is $632 million, down $17 million from a year ago and our liquidity representing cash and availability of our corporate credit facility stands at $39 million at quarter end.

We continue to make progress on our publicly stated goal of reducing leverage. During April, we pay down an addition $10 million our corporate credit facility. Currently, we have $140.5 million of undrawn capacity availability and $25.9 million of borrowings availability under of credit facility.

We are in full compliance with all of our debt covenants and expect to remain so in the future. As I stated earlier, 2021 is off to a very promising start. These results are testaments to the resiliency of Whitestone's business model.

We are encouraged by the recovery, and we look forward to reengaging our growth strategy and our continued delivery of value to all of Whitestone's stakeholders. With that, we will now take questions. Operator, please open the lines..

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Aaron Hecht with JMP Securities. Please proceed..

Good morning. It sounds the increased leasing volume is very encouraging. Just wanting to get your take on what you think that means for future leasing spreads? I know the numbers look pretty good on a GAAP basis this quarter. I think they were a little bit negative on a cash basis.

Is this really about lowering the amount of square footage available in your properties? And I guess surrounding areas well before you get that bigger bump on the cash side, and then on the collection side, given this demand, you think that 5% uncollected rent is going to dwindle on short order?.

Thanks Aaron. This is Dave. Just on the occupancy first, we are very pleased with our increase in our occupancy from Q4. And we believe that will contribute obviously positively to the future quarters in the first quarter that increase in occupancy only partially contributed with much of the coming towards the end of the quarter.

Leasing spreads have been positive, as you said on a GAAP basis, a little lower on the beginning rent versus the ending rent. Some of that is just a result of obviously, over the last 12 months since the businesses ramping up and learning to operate differently for giving them a little bit of headway as they started with their new release.

We do expect our leasing spreads to continue to be robust. I mean, if you look at our track record over the last several years, they've been typically double digit with a little bit lower the last few quarters. We're very pleased with the lease up. We're pleased with the spreads.

And as I mentioned, just the activity during the quarter was really outstanding, our highest quarter from a new lease perspective we've had and probably forever, I look back for years, and then it's well above a highest quarter over the last three years..

Have you seen that traffic extend past the quarter or accelerate?.

We have obviously our one of our largest focus is occupancy and revenue. And so a lot of focus on the leasing of the space is continuing to drive revenue. We've seen that activity continue first quarter as well..

We've also seen star migrations in both Texas and Arizona from outside of those states. And of course, housing demand and our communities are in great locations.

So the homes in these areas are filling – those that are vacant are filling or reselling very quickly, and I think it's a clear on our confidence for the prospective tenants we're looking at..

Right. And then on the acquisition, I'm excited to hear that you guys are getting into the investment game again.

You talked a little bit about the cap rate or the yield and maybe on any development or redevelopment that you're doing what you're targeting in terms of investment yield?.

I'll start with the redevelopment. We had approximately $240 million plus an opportunity within that portfolio beginning to activate growth and we don't do -- do over a period of time. And with regard to the top of that we have in the contract that I can say [indiscernible] And the cap rate is very favorable.

It has a positive spread and it's also accretive. What's interesting about as we add properties now, we do have the full team in place. And when you add someone another person is like adding a property manager and a maintenance person. Other than that we have no additional costs and we'll be able to leverage our infrastructure..

At a higher is and our cap rates effectively dropped for the assets that you would kind of target historically, over the last 12 months or so, as interest rates have gone down, or do not gain that as much in your sector and your asset that you'd be interested in?.

In this case, the cap rate is higher than what we've seen in the past. It depends on the quality of the properties and the location.

What we have coming seen through COVID is there are some people who are older in age and they own retail properties for a long time, and they don't want to go through and they want to go through this past year, and so now they are putting their properties quietly, not necessarily on the market but knowing that we can't wait to acquire.

We also are in discussions on properties in our own key infrastructure with a price to be more commensurate with our net asset value. We've done that in the past. We've done three or four deals like that. So, we are seeing some activity in the marketplace.

And particularly, the activity is kinds of small entrepreneurial tenants we like with particular property is adjacent to a very well regarded grocery store. And so, it fits into the property we are buying. We actually look at a year ago and when the pandemic hit, we put it on ice and we got it to the seller and we incarnated the deal.

We like it very much..

Our next question comes from Craig Kucera with B. Riley. Please proceed..

Hey. Good morning guys. Congrats on the selections.

Can you give us some color on what types of businesses you categorize with entertainment?.

Yes, so entertainment on Page 27 of sup data we provided same category. So we have been there -- it's 2% of our ABR and 2% of our lease square footage. We have in there, movie theaters. We have really just one movie theater, large movie theater in our portfolio. We have some venues like activity center, like a birthday party that sort of thing.

So, a small group and one thing is that, probably half of total and there we are doing better..

Got it. So, are there any -- I know you only had a very small amount of bankruptcies last quarter.

Are there any bankruptcies in that segment or tenants that you believe?.

We always and it depends and I mentioned that one tenant is one movie theater is and the organization bankruptcy. At this point, our theater is one of the best performing in the chain and not listed as potential closure. So, there is one bankruptcy with the deal we have..

Got it. And just want to talk about the lease in this quarter. Clearly, a pretty big pick up.

Were there any particular categories that you noticed had especially dropped strong demand on the new lease side or was it pretty broad based?.

It was broad. I would tell you the second generation restaurants, great restaurant operators have learned creatively throughout the pandemic to operate and have built business based takeout and curbside delivery they might have had before.

So we've seen a great amount of interest in really good restaurant operators in our markets, looking for spaces, they can come in and start their businesses very quickly. In some of our properties, we have a product called cube exec, which is an office product and fits right into the retail center. It's about 125 square feet to maybe 250 square feet.

And what we found is that those spaces are close to capacity right now. Because what happens is, during the pandemic, folks that have moved out of their offices and worked at home decided that working in home facilities, they wanted to remain, they moved into a small space outside of their home, but yet not back into their office.

And we've seen an increase in the occupancy in those spaces. It's really nice to be to have that space in a non-traditional environment, being that of an office building, non-traditional being that you have restaurants at your fingertips, and other services. And it's easy to be with your family and also work at the same time..

Got it. And one more for me, I just want to follow up us acquisition you expect to close this summer.

Is that one of your op deals that might be priced closer to NAV or are you looking to finance that with a line of credit, just any color on sources of capital would be useful?.

Obviously, we look forward to providing a whole lot of details on closing. At this point, we are comfortable with the financing of the property. We are conducting due diligence and are very confident in the closure. But right now, we're not going to provide a lot of details on the other financing structure until we get it closed..

[Operator instructions] Our next question comes from Michael Diana with Maxim Group. Please proceed..

Thank you. You just raise the dividends.

Could you -- we now see the outlook here looks good for 2021 and 2022? Can you remind us sort of how you look at changing the dividends?.

Hey, Michael, it's Dave, I'll start and Jim will probably add. I think, obviously, as we said before, we think rates were largely it's a great way for individual investors to participate in real estate and enjoy the dividend and cash flow from that. We were pleased to raise our dividends in March, which really shows the difference of the recoveries.

We look at the dividend obviously on a regular basis are born with that. I think we look at a couple of things, obviously, a payout ratio, our cash flow and what percentage we're paying out and then an appropriate yield for the real estate.

If you look at both of those measures today, I think Whitestone is in the high 4% close to 5% from yield perspective, and then our payout ratio would be among the best in the industry, one of the lowest. So, we feel very confident in the stability of the dividend.

And as we continue to execute, we think there's going to be an opportunity for all shareholders to participate in a free cash flow..

When we reduce the dividend, we weren't quite sure how long the pandemic was last and no one was we didn't know we were one year or three years. And so, we have a fairly significant customer demand.

And so what we do is, we really ran a strong collections program in very, very strong industry, and we also found that the artificial intelligence we used it shows that we produce a lot of traffic to our tenants and therefore helping the tenants come back.

So we felt that we will use the cash that we had saved for two things, one is that, we wanted to give something back to the shareholders because we had a great success in terms of our collections. And then the second is the confidence that we're building in the Company. So, we feel very good about that and we had a long discussion about it.

And we think it was model..

Thank you. At this time, I would like to turn the call back over to Mr. Jim Mastandrea for closing remarks..

Yes, thank you, operator. First thing I would like emphasize that we have a positive outlook as we look through the long-term growth of Whitestone and we always thought about the long-term goals, and we will continue to stay focused.

We make decision though in the short-term that, we will benefit our long-term goal and we are excited about what we see as a future down the road. Our platform is strong. Business model is proven. Our track record is evidence of our success, our team is passionate, committed and well-positioned to find and execute on future opportunities.

In closing now that we look forward to moving ahead and intend to stay true to our values, our strategic plan and to work with unwavering standards as we always have as we step away. We know that God's hand is on our shoulders and our work is clear as we remain focused on our value-adding long-term goals. Thank you all for joining us today..

This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation. And have a great day..