Greetings, welcome to the Whitestone REIT Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I will now turn the conference over to Rebecca Elliott, Vice President of Corporate Communications. Rebecca Elliott, You may now begin..

Thank you, operator. Good morning, and thank you for joining Whitestone REIT is second 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.

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, August 4, 2021. The Company undertakes no obligation to update this information.

Whitestone's second quarter earnings news release and supplemental operating and financial data package have been filed with the SEC, and are available on our website at www.whitestonereit.com, in the Investor Relations section. Now over to Jim Mastandrea, our Chairman and CEO to update you on our second quarter results. Jim..

Thank you, Rebecca. Good morning, and thanks for joining us today. I will focus my remarks on our performance. The demand characteristic around those results, provide some insight on our operations and the strategic direction of the company, then Dave will provide financial insight into the quarter.

It is a pleasure to start out telling you we have a great business with great properties and we run them well. As a result, we had a record second quarter 2021, and our focus remains on leasing and more leasing, which fuels our growth and supports our dividends to a core payout ratio of 41%.

It also validates the quality of our portfolio drive cash flow, which strengthens our balance sheet and reduces risk.

Our second quarter leasing activity brought our total occupancy to 89.9% up 120 basis points from the first quarter, highlighting the increased demand from new businesses entering our markets, where an average between 15 to 20 new tenants represent 1% increase in occupancy.

We attribute this growing demand to several factors, including the location, quality and maturity of our properties, and tenants expanding their businesses and moving to second and third Whitestone locations.

Our properties also are benefiting from population migration, and a robust recovery in the Sunbelt markets, where we target properties that are in densely populated high income neighborhoods, located in the fastest growing cities in Texas and Arizona.

We achieved net income per share of $0.12 up from $0.03 in the prior quarter, and up from $0.01 from the prior year. And FFO core per share increase 13% to $0.26 a share from $0.23 in the prior quarter and increased to 18% from $0.22 in the prior year.

Our increases in per share earnings is derived from adding new essential service focus tenants to our existing base of grocery stores, restaurants, salons, pets, care centers, drugstores, banks and financial advisories, medical out care centers health and wellness and other services.

We grew our asset base organically, and by making off market acquisitions of properties that we believe had significant upside and would benefit from applying the principles and the processes of our business model, streamlining property management, reconfiguring and redeveloping our community centers and adding features that attracts additional visits and extends consumer time at the properties.

This is best evidenced by almost 18% increase in foot traffic at our 59 centers in the first half of the year. As an example of projects that drive traffic to our centers. We install outdoor misting systems in Arizona for customer comfort during the three months hottest months of the year, where temperatures can average 100 degrees.

We currently have five million square feet of space that generates 30.6 million in revenue for Q2. Within each property we curate the tenant mix. With more than 1400 tenants serving customers from the surrounding neighborhoods, our properties stay vibrant 18-hours a day, seven-days a week.

One proactive example that is driving increased visits is a rotation among our properties of coffee and cars at our Market Street property in Scottsdale, Arizona, and our Starwood property in Plano, Texas. These venues display high end sports cars, and appeal to a large variety of car lovers and families.

On a given Saturday during each month, we accommodate upwards of 150 cars in each location, whose owners and admirers return as customers for our local tenants. Increased foot traffic to our centers is one of the most important drivers of tenant sales and attracts potential new tenants to our properties.

Our tenants occupy an average of 3,000 square feet of space and provide e-commerce resistance services. They are entrepreneurial businesses, capture sales revenues, as they keep alive the American dream, our tenant profile at it is core, as entrepreneurial as a risk or financial net worth to build their businesses.

In the REIT industry, these tenants, however, are referred to as small businesses. They comprise a large percentage of our overall tenant base, and they recovered more quickly from COVID than some larger tenants.

They paid their rent and proved their resilience owners and founders of local and regional businesses prioritize their companies because it supports their families, livelihood and their future, which align with our high collection levels. As they recover, Whitestone reported industry-leading collections, Our model was tested and proven during COVID.

Our culture is about personalizing our service to tenants and our property managers and associates to apply a hands-on approach. This teamwork uniting a Whitestone tenant relationships gives us a competitive advantage over other retail centers in our local neighborhood markets.

Our culture of service produced leasing spreads on a weighted-average by 6.8% on new and renewal leases in the second quarter. We expect this trend to continue, as we receive annual lease increases of 2% to 3%, on new and renewal tenant leases and pass-through triple net expenses, helping us to hedge against inflation.

Another driver of our revenue is increasing our leaseable square footage. Adding space to existing properties with no added cost of land and land development is very profitable. We have approximately 230 million of development and redevelopment opportunities in our portfolio that we believe will add significant value.

Our diversified tenant base also has a notable impact on our balance sheet. For Whitestone, those single tenants can impact our revenues by more than 2.9%. During the second quarter, as our earnings increase, we strengthened our balance sheet and improved our debt-to-EBITDA ratio by 1.2 turns to 8.2 turns.

We have remained committed to lowering our debt service leverage. We also are committed to lowering our G&A as a percent of revenue. We are seeing progress as our asset base expands and our revenues increase. In the second quarter, G&A as a percent of revenue was 14.6%, improving from 15.7% one year-ago. Turning to growth.

In July, we reactivated our acquisition program and acquired our newest property, Lakeside Market in Dallas as fluid upscale neighborhood of Plano. It is shattered anchor by Texas iconic regional grocer HEB, and it is their first flagship format store in the Dallas market.

The purchase price of Lakeside Market was 53.2 million, and it has significant upside from leasing up the current 19% vacant square footage. Rental rate increases and developing the additional pad sites to add leasable square footage.

We currently are working with other sellers on other properties in our pipeline in locations in Dallas, Austin, Houston, and Phoenix.

Potential sellers who have owned property in our markets for many years understand that they could benefit from spreading their risk over a large pool of quality properties, achieve liquidity to stock and selling, comply converting to stock and selling and receive a tax efficient transaction with Whitestone utilize our OP unit currency.

In turn Whitestone benefits by expanding our asset base, lowering our cost of capital and increasing our economies of scale. Dividends are an important component of the REIT structure. Our dividend is well funded, with a payout ratio in the second quarter of 41% of FFO Core. I would like to expand more on our dividend and our policy.

We have a solid record of paying 131 consecutive monthly dividends since our IPO in 2010 and in total paid our shareholders more than 300 billion in dividends during the same time. In March of 2021, we increased our dividend by $0.01, or 2.4% reflecting our strong recovery.

Our policy is to evaluate our dividend regularly and consider many factors including our profitable growth, cash flow and progress towards creating long-term shareholder value. In the meantime, we use our excess cash flow to fund internal development opportunities, acquisitions and reducing debt.

I would also like to discuss how we expect to achieve our long-term value goals and increase our valuation. Our primary focus of creating and driving long-term real estate value is integral in everything we do.

As we lease up our portfolio, bring our development land on stream, it makes your dishes acquisitions, the intrinsic embed value in our assets will begin to be reflected in our valuation. While the value we are creating is not yet fully reflected in the market, we trade at a significant discount to our true valuation.

We know that as we continue to grow occupancy, revenue and cash flow, it will be recognized by the investment community. Achieving our long-term goals is a function of our assets. Our portfolio of quality real estate is spread over great markets and demand for space in our centers, as they are nearly full is highly valued.

And our rental income produces a solid, stable cash flow.

Our great locations, quality of properties and strong operating performance is notable in our success and extracting value from our properties, along with our ability of seeking and closing new acquisitions from our deep pipeline of properties will continue to keep us at the forefront of our industry as we grow.

In summary 10-years ago, we develop and began to build a contrarians business model with entrepreneurial tenants that would be ecommerce resistant.

We started with a relatively small asset base of approximately 150 million and has expanded to 59 properties in eight major cities in over 1,400 tenants and approximately 1.5 billion in real estate and value today. We continue to be passionate in executing our plan and are pleased to deliver our second quarter results.

I would now like to turn things over to Dave Holeman to provide a more detailed results or financial performance. Dave..

Thanks, Jim. I appreciate the opportunity to share some great results for the second quarter.

During the quarter, our best-in-class geographic concentration and strategically-designed tenant mix have produced strong top-line and bottom-line growth, and our long-term focus and day-to-day execution have allowed us to make significant progress toward our long-term goals of scaling our infrastructure and improving our overall debt leverage.

The MSAs that we operate in, continue to see significant population migration and corporate relocations, producing jobs from other areas of the country.

This is best evidenced by second quarter and year-to-date year-over-year and quarter-over-quarter top-line revenue growth, year-over-year and quarter-over-quarter property net operating income growth and year-over-year and quarter-over-quarter net income and FFO core per share growth.

This growth is driven by our strong leasing activity, resulting in increased occupancy levels and strong positive leasing spreads. The growth is driven by reduced debt levels and borrowing costs, greater scale of our G&A infrastructure and asset sales at attractive prices.

Total revenue for the second quarter was 30.6 million, up 5% from the first quarter and up 11% from the second quarter of 2020. The revenue growth was driven by sequential 1.2% increase in occupancy, and a 0.7% improvement, compared to Q2 2020.

We are also benefiting from our ABR per square foot, rising 1.2% sequentially, and 1.9% from a year-ago, along with lower uncollectibility reserves. Property net operating income was $22 million for the quarter, up 4% sequentially and 10% from the second quarter of 2020. Our Q2 same-store net operating income increased 8.4% from Q2 of 2020.

Net income for the quarter was $0.12 per share, up from $0.03 per share in the first quarter and $0.01 per share in the prior year quarter. Funds from operations core was $0.26 per share in the quarter, an increase of 13% from the first quarter, and an increase of 18% from the 2020 second quarter.

Our leasing activity in the quarter continued to build on our very strong first quarter with 35 new leases, representing 75,000 square feet of newly-occupied square footage. Our new lease activity for the six months is 100% higher on a square foot basis than 2020, and 40% higher than 2019.

Leasing spreads on a GAAP basis have been positive 8% over the last 12-months, and second quarter leasing spreads increased by 3.1% on new leases, and 7.9% on renewal leases signed.

Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 1.2% to $19.95 from $19.71 in the previous quarter, and a 1.9% increase from a year-ago. Total occupancy stood at 89.9%, all of our markets saw increased quarter-over-quarter occupancy, led by our Dallas market at a 3.6% increase.

Austin and Phoenix both grew 0.8% from the first quarter, and Houston grew point 6% from the first quarter. Our collections were very strong for the quarter returning to normal pre-COVID levels.

Reflecting the high collection levels, our reserve for uncollectible revenue for the quarter was $143,000, or approximately 1.5% of our revenue, down from 529,000 or 1.8% of revenue in the first quarter, and 2.3 million or 7.9% of revenue in the second quarter of 2020.

Our total tenant receivables improved 8.4% from the first quarter and 13.5% from a year-ago. Our interest expense was 5% lower than a year-ago, reflecting our lower debt levels. At quarter end, we had 21.3 million in accrued rents and accounts receivable.

Included in this amount is 16.4 million of accrued straight line rents and 1.5 million of agreed upon deferrals. Our agreed upon deferral balance is down 34.4% from year end, reflecting tenants honoring their payment plans. Turning to our balance sheet, since early last year, we have implemented various measures to strengthen our liquidity.

Our total net debt is 601.3 million down 48 million from a year-ago, improving our debt to gross book real estate cost ratio to 52% and improvement from 56% a year-ago. Our debt-to-EBITDA ratio also improved 1.2 times from the first quarter to 8.2 times.

Reflecting our post quarter acquisition and our continued focus on deleveraging, we expect our debt-to-EBIT ratio to be approximately 8 by year end, reflecting significant progress on our long-term debt reduction goals. At quarter end, we have 160.5 million of undrawn capacity, and 55.1 million of borrowing availability under our credit facility.

During the second quarter, we sold approximately three million common shares under our ATM program, resulting in 25.4 million in net proceeds to the company.

After the quarter, we acquired Lakeside market in Plano, Texas for 53.2 million financing the acquisition with approximately 30 million in equity, 10 million in debt from our corporate credit facility, and 13 million from cash flow and cash on hand.

These results are a testament to the strength of Whitestone's strategic geographic focus and business models. We are encouraged by the acquisition of Lakeside Market and look forward to continued delivery of value to all of Whitestone's stakeholders. With that, we will now take questions. Operator, please open the lines..

Thank you. [Operator Instructions]. Our first question will be coming from the line of Craig Kucera with B. Riley Securities. Please proceed with your question..

HI good morning, guys. I may have missed this, but what were the actual rent collections this quarter? I think last quarter it was running about 95%..

Hey Craig this is Dave. Thanks for your question. I think at this point, we feel like our collections are basically at the pre-COVID levels. It kind of becomes a tough exercise between 98, 99, [197] (Ph). But our collections were as reflected in our collectability reserve were at the level we saw before the pandemic.

Our AR balance has continued to go down. So, we didn't report a collection percent just because it becomes very difficult, that last little percentage level. But our collections were extremely strong, bringing our AR down and allowing our collectively reserve to be really back to the net 2019 levels..

Got it.

And do you have a sense of how much rent that was previously deferred that you think you will be collecting through the remainder of this year or any sort of structured payments for the rest of the year?.

We have about 1.5 million in deferred grants. The large majority of it will be collected over the balance of 2021..

2021?.

Yes..

Sorry, can you hear me?.

Yes, Greg, did you hear my answer..

You did cut off for a second, but I think I got it. And just kind of working through the bad debt, obviously you have a very meaningful drop-off since kind of the peak of second quarter last year, even sequentially.

Should we interpret that you see the weaker tenants had pretty much been washed out of the portfolio and are you kind of expecting bad debt to run at similar levels for the rest of the year?.

Yes. Good question. I think that is accurate, Craig. I mean, obviously, there is some volatility, but our tenants are doing very well. Just to touch on maybe like the cash-basis tenants. We had minimal tenants that we converted to cash-basis this quarter and our tenants that are on cash-basis, which are approximately 50 tenants paid us almost 90%.

So, I think we are seeing collection levels. We are seeing traffic levels. I think Jim talked about the traffic in our centers, just sequentially from the fourth quarter of 2020 to today, we see an 18% rise in traffic. So, I think from a tenant perspective, we didn't wash out a lot of tenants. Our occupancy is up year-over-year.

So, our tenants did very well through this. Obviously, we worked with some of them on the timing of the rent payments, but they have all done very well, and we are seeing a really, really very little troubled tenants in our portfolio at this time..

Great, I will change gears and talk about the Lakeside Market acquisition for a bit. You mentioned as far as financing that you had about 30 million of equity debt and 30 million in cash flow on hand.

I know you interviewed about 25 million in the second quarter, is that 30 million? Is that incremental to what was already issued? Are you basically taking into account what was issued in the second quarter?.

Yes, the 30 million is a little bit that was issued at the beginning of the third quarter and early July. So, we raised 25 million in the quarter, and then about another five million just in the two weeks post quarter..

Got it.

And can you talk about what they are growing in yield versus that asset and kind of what you are expecting on a stabilized basis? I think there is a pretty decent amount of occupancy upside potential there?.

Yes, I think we think there is a great opportunity there. Obviously, Jim talked about the characteristics and the location and the, iconic grocer ATB. I think going in occupancy, it has about 19% vacancy.

So, we didn't report that the going in occupancy, we did meet the criteria of all of our community centers we bought we funded it in a way that obviously contributed to our delivering, scaled our G&A. And upon stabilization, it is probably in the kind of 8% kind of yield cash on cash yield..

Got it.

And you also stated needing to make any significant redevelopment there or is that pretty much just standard, lease-up?.

Yes Craig, this is Jim. The center is about 81% occupied, as we mentioned, it is got three pads and we are going in, you was very, very good. We see announcement of ATB next quarter, which is their first flagship store that will have some impact in terms of even compressing the cap rate a bit.

So, we see upside in terms of the vacancy there, we see a couple of lots of we are already in negotiations with, we have one particular restaurant, that we find that is a carryover deal. And I want to point out that we had this property under contract a year ago.

And when COVID hit this was the asset, this was the one acquisition that we had that we put the brakes on, and stop. We kept the relationship with the sellers. We talked to them during the COVID period, we went back we were able to buy it for less than what we had originally under contract. I use that as an example of how we work our pipeline..

Got it. You did mention that OP units in your commentary about your pipeline.

Are you finding potential sellers that are looking at OP units as attractive or currency? Do you think we might see those types of transactions this year?.

We think you will see some whether it is this year or next year. They are in discussions right now we have made I want to say three to five OP deals in the past. They have all been at around our net asset value of the company, not our share price.

I think that what we found is going through COVID some folks who have owned properties for 20 or 30-years, very, very good properties in great locations. Usually it is a one off owner is found that they don't really want to go through the COVID scare again. And they are doing some estate planning.

And those are the kinds of sellers that we are talking to..

Okay, great. thanks for your time..

Thank you..

Thanks Craig..

The next question comes from the line of Aaron Hecht with JMP Securities. Please proceed with your question. .

Hey guys, it is [Alex] (Ph) on for Aaron. A couple questions here. First, have you seen any impact on foot traffic from the Delta variant..

We have it. I mean, obviously we monitor our foot traffic very regularly. Obviously, we are in Texas and Arizona, which have been markets that have been much more open and recovered much more quickly.

So we really have seen - we have got a population that is ready to get back to the normal life, and we haven't seen any impact on our traffic levels from that Delta variant..

Great and then you guys are missing how you are being judicial on acquisitions. I just kind of want to get more color around that.

Do you have like a cap rate range for the assets you are interested in or how are you guys feeling about that?.

Yes. Good question. What we look at his properties that are within our markets, where we can leverage our infrastructure and gain economies of scale. We look at properties that aren't necessarily on the market, one-off buyers or sellers rather. And so, we look at seeing where we can go principal-to-principal to negotiate those deals.

We have been accumulating the pipeline for a number of years now. So, we go into a market and determine where we want to buy. I will give you some of the criteria for example, if we look at our property in a big box that is vulnerable is more than 50% of the square footage. We would take a pass.

If it is like 20 or 30%, we look at it and how we can reconfigure the box. Everything we buy, we look at has a component of upside that we can redevelop and add square footage and increase the rent. We consider an asset stabilized. When it is 95% occupied within the market, and it is getting market rents.

So, we might buy somebody that is 95% occupied, but their rents are below market. So, we can bring those up. On the other hand, we might find something where the market rate where I can see is down. So, we have some very strong guidelines that we use when we are targeting acquisitions..

One thing I might just add as a little color on like side, the vacancy, which is about 19%, roughly 30,000 square feet is all small spaces, which is right in our wheelhouse.

So, it is not like the vacancy there at the big box, which will be tough to fill, the vacancy as a number of small spaces, which we already have lots of interest and activity on..

Okay, great. Thanks guys..

Thanks Alex..

Our next question is from the line of Michael Diana with Maxim Group. Please proceed with your question..

Thank you. Actually I was going to ask more about the question that was just asked, on the Lakeside. In terms of you mentioned, that Dallas was strongest occupancy growth area.

So, how long you will take to lease up the 19% vacancy at Lakeside?.

Yes. As we speak today, we have got a team up there looking and examining the markets. Once we buy an asset, Michael, we put it into our strategic group, and they look at and see how we want to define the tenant mix. And then, we work with our leasing team there. And they begin to look at the types of tenants that we think will complement the property..

We are very, very confident in our ability to lease it up quickly, Michael. Obviously all of us hate to just put timelines on those things, but, we feel great about the market. As you said, Dallas is going great. I think we have seen a lot of characteristics of Dallas. I think it was number one.

And in the back to work of all the markets in the country is companies that are having employees back to work. Migration has been strong. This asset is located in a prime area in Plano with the great household incomes and activity levels. And we are very confident in our ability to lease that up to stabilize occupancy..

The other thing I wanted to ask about 230 million of developments and redevelopment opportunities, even with your cash flow. That is a big number.

Have you been exploring at all some co-investment opportunities for those properties?.

Sure. Great question, Michael, we have a great opportunity in our portfolio to extract some value through the development of bad sites, some larger developments, and develop and redevelopment. Those all total about 230 million for us today.

We are going to be judicious and timely in how we execute on those making sure that we have demand for the spaces as we add GLA, we are looking at different sources of capital obviously, that are out there. So, we are going to do those developments over time.

It is a great value that is embedded in our portfolio and probably not reflected today in the marketplace. And I think you will see us start to execute on some of those over the coming quarters..

Great, thanks very much..

Thank you Michael..

Thank you. We have reached the end of our question-and-answer session. I will turn the call back to James Mastandrea, for closing remarks. .

Well, thank you all. Thank you all for joining us. In closing, I would just like to say that Dave and I are pleased to report our second quarter results. And we would like to thank you again for your continued constant and support and Whitestone.

I want you to know that we continue to focus on our increasing cash flow, core FFO per share and Whitestone long-term value. As our progress continues, I trust in God to guide our work, and to give me wisdom to support and service our shareholders. Thank you very much. Thank you, operator..

You are welcome. Thank you for joining us today everyone. You may now disconnect your lines at this time and thank you for your participation..