Q3 2019 Earnings Call

At this time I'd like to turn the conference over to Mr., Kevin reach please go ahead sorry.

Thank you.

Good morning. Thank you joining why Stoneridge third quarter 2019 earnings Conference call joining me on today's call Jim as Dan.

<unk>, Chief Executive Officer, David Palmer, our Chief Financial Officer. Please.

Please note that some statements made during this call it not historical maybe games.

Actual results may differ material from those forward looking statements due to a number of risks uncertainties and other factors. Please refer to the company's earnings press release, <unk> filings with the FCC, including White cells. Most recent.

Thank you for a detailed discussion of these factors.

I'll take effect this call may be what catcher theory decide it's also important to note that this call include time sensitive information that may be accurate only as of today's date October 31st 2019. The company undertakes no obligation to update the information.

So its third quarter earnings press release, and supplemental operating and financial data package.

The FCC and are available on our website www Dot Whitestone Green Dot com any investor Relations section.

During this presentation, we may refer we they reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the company.

Alluded in the earnings press release, a supplemental data package or the reconciliations of non-GAAP measures to GAAP financial measures with that let me pass the call to Jim to say, yes. Thank you Kevin and thank you all for joining us on our third quarter 2019 conference call.

His wife sums IPO in August of 2010, our shares have produced a total return 175%.

This compares rationale shopping center index, which returned 120%.

The same timeframe.

Investors.

The directly.

For income growth.

A hedge against inflation.

Wait so really that's provided that shareholders all these views.

As if they own the real estate directly through our nine year history.

Let me on the street with some data from the last five years.

We have provided income.

Just distributing over $220 million in dividends, we have provided an annual compounded growth rate approximately 14%.

The net operating income and we've provided a hedge against inflation with a solid base of high quality properties.

No rent increases bill.

Yes to triple net leases, averaging two and a half a 3% <unk>.

It continues to exceed inflation index.

This five year period Whitestones annual property net operating income.

By $40 million.

Like over $40 million or annual dividend during the same period has grown by approximately 21.

With that that bad I'd like to highlight for reasons, why our history and track or provide a bright future for waste.

First and foremost we invested in real estate for the long run.

Since our 2010 IPO, we have had nine years of C rose.

He seemed key property drivers of revenue fourfold over 130 million in our net operating income were 4.5 times approximately 9 million.

Let's see timeframe or equity market capitalization has grown six times.

Half a billion today in our estimated real estate value has grown seven times to 1.5 billion, which is almost $300 million higher.

Implied market valuation based on todays stock price.

This growth has been accomplished during what many are calling a retail apocalypse.

During the third quarter 2019, our progress continued in our accomplishments are noticeable.

We improve occupancy 100 basis points for the second quarter to 90.4%.

We grew at a rate, 6.6% and 7.6% on GAAP basis.

We are new and renewal races side over the trailing 12 month, respectively.

Increased hbr per square foot, 4% year over year the $90.64.

And we completed 100% Lisa.

Our two newly developed at sites.

Second we invest primarily in local on small tenants with revenue growth profiles that provides services to their local communities.

Yeah nationally recognized tenants like Starbucks Safeways full food.

Not with national retailers.

We were once exalted as credit tenants.

Now many of those tenants face significant challenges.

Milestones portfolios can trend through the traditional retail real estate.

As examples.

We tend to focus on services not software and retailers that today are fighting to stay relevant.

Store closures in 2019 of software or retailers have already exceeded the toll recorded closures for all 2018 and according to US. It's tempting for 2019, I Coresite reserves announced U.S. store closures could reach.

12000.

By the end of 292019.

These will primarily come from national apparel, and consumer hard line product companies.

By contrast, Whitestone E Commerce resistance focus is primarily on local service based on entrepreneurs.

We graphs, the right mix to serve the consumer.

And we take a community center approach.

Hi growth markets in locations. It continues to drive whitestone, improving quality of revenues as we strive to make right I mean, right tennis to meet the consumers' needs.

Why so 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.

For $250 per square foot well below construction replacement cost within our markets.

Our acquisitions have been well time.

Well located.

Carefully analyze most of our properties, having a substantial value add component.

As an example.

Net operating income of the 21 acquisitions, we made between 2010.

In 2013.

32% higher today.

This is in contrast, the most owners of retail properties, we have seen decreases over that same timeframe.

Whitestone increase in property value is accomplished strategically.

By the developed at sites on residual then we acquired with many of our initial acquisitions.

Little or no cost.

Lastly, the right tenant mix to meet the needs of the consumer in the surrounding community.

And through lease up of vacant spaces and renewals of existing tenants that market rates.

Recent pad site developments that include the completion of multi tenant.

Pad site and anthem, Arizona is one example in 2019 generating an annual Unlevered return on total cost of 10.5%.

And the completion.

100% lease up of multi tenant pad site in Chandler, Arizona.

Produced 263000 annual net operating income was similar returns on investments.

These examples of successful passive elements exemplify our analysis pays off as we extracted.

From our portfolio achieved double digit returns on the incremental added investment.

Based on strategic approach over the same time period as also minimize property and portfolio risk.

Third Whitestone 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 we industries.

Which is located in sugar land the expansion of our current tenant base at board face located in the gallery area and they kept the plaza or just a few.

And acquisition pipeline, we have as active robust accretive opportunities are out there.

As we remain patient and disciplined.

Finally from recycling capital that capital from asset sales.

An example, subsequently to subsequent to this third quarter Weve profitably sold $39.7 billion of non core assets and pay down all the related debt, providing additional dry powder.

Value add opportunities.

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

As we have stated before our long term goals include reducing leverage.

Improving general and administrative expense, the revenue ratio, making accretive acquisitions and dispositions.

And redeveloping and developing our all of parcels in Atlanta.

A disciplined way. So is the result of an exceptional team that has been together over a decade.

And what's really really exciting is 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 are talented people and remain dedicated further developing them to become our futures.

By creating a.

Diverse workplace.

Differing background prospectus in a culture that has performance based and dedicated to that vision.

Itself over the past nine years.

In closing I'd like to say that we remain committed to our business plan.

Strive to become a leader in our industry.

In doing so want to continue to provide shareholders with income.

In fact, we've been paying monthly dividends.

For 112 consecutive months.

Growth in.

In a hedge against inflation.

I'll turn it over to David.

Thanks, Jim.

I'm happy 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 increases in our annual base rent per square foot and in occupancy compared to the second quarter.

Our composite average annual base rent per lead square foot increased 1% sequentially from the second quarter and 4% from a year ago $19.64 and our total occupancy increased 1% sequentially from Q2 19.

I'll now discuss in greater detail our leasing activity.

During the third quarter, we signed 68, new and renewal leases.

Presenting a 176000 square feet and 18.6 million in total lease value.

These leases had an average size of 2584 feet and an average term a 3.5 years.

As a result of our strategy markets.

Operating and leasing team, we have achieved a 13.4% increase in the amount of square foot footage late in 2019 compared to 2018.

Our GAAP leasing spreads on a trailing 12 month basis or 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 four cents per share compared to 7.8 million or 19 cents per share in 2018.

Included in the third quarter 2018, net income was approximately 4.4 million in gain from asset sales contributing 11 cents per share to the 2018 per share amount.

Net income attributable to Whitestone rate for the nine month was 7.8 million or 19 cents per share compared to 13 million or 31 cents per share in 2018.

Included in the nine month 2018 number was approximately 3.9 million incremental gain from asset sales, representing approximately 10 cents per share.

Navarrete funds from operations for the quarter was 9.2 million for 22 cents per share compared to 10.8 million or 26 cents per share in 2018.

For the nine month Knavery funds from operations was 29.1 million or 69 cents per share compared to 29.9 million or 71 cents per share in 2018.

Funds from operations core, which adjusts nave rate funds from operations or noncash stock compensation expense and proxy contest professional fees for the quarter was 11 million or 26 cents per share compared to 12.2 million or 29 cents per.

Share in 2018.

For the nine months.

Tons from operations core was 33.9 million or 81 cents per share compared to 37.3 cents.

Compared to 37.3 million for 89 cents 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 a real estate.

Turning to ship.

Our same store not 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 at 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.

The 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 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 retenanting 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 factors, producing higher rent levels and greater and greater allies.

In the quarter general and administrative expenses or $600000 higher than the prior year.

From the timing of noncash 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 month 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 $260000 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 ended the quarter, 87% of our debt is subject to fixed rate.

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 1.6 billion as of the ended the quarter. This is up 13 million from a year ago, reflecting investments in exists in existing asset and development of additional leasable area.

As of quarter end, our total real estate debt was 622 million or 52% of total market capitalization.

Subsequent to quarter ended 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 374000 common shares at an average price of $13 in 15 cents 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 Fs, though and FFO core guidance and.

That Jim and I will now be happy to take your questions.

Thank you if you would like to ask a question. Please take note by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow you to take now to reach our equipment again that darwan to ask a question.

Well now take our first question from Mitch Germain from JMP Securities. Please go ahead. Your line is open.

Hi, good morning, I'm curious.

How much of the income from the pad development that were stabilized how much of that was recognized in the quarter and should we expect there to be like a staggering the of how how it gets recognized an earnings.

Sure. Thanks, Thanks Mitch.

As we stated we completed that development and lease up of up to two pad.

Pad were both about 7000 square feet.

Thank the incremental contribution should be probably.

Probably a couple of hundred thousand dollars annually.

Beyond what was kind of reflected in that 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.

Curious about.

How should we consider market mix.

Types of properties that you're looking at.

Any color I'd really be grateful for.

Sure Mitch.

Great properties in markets that were already in.

We're in.

The contracts days for one and Oh I see each for another.

We are accretive to our overall.

The overall company and we're looking at cap rates it really makes them.

Give us in really good return on investment what's great about these.

Actual deals.

Is there were 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.

Great last question for me.

I guess I've mentioned before about.

My desire for you guys to sell more particularly noncore and I'm curious if if that is part of the strategy going forward as well.

Yes, I think at clearly our strategy is as the.

As an investment company to look to maximize value at the assets, we own and continue to look too.

Where where their properties, we feel like we can get at a great value add up to sell those and recycle. So we'll continue to look at our portfolio and.

And evaluate assets and determine if we can recycle and put to use the capital to use for more accretive acquisitions.

Thank you.

Yes, Thank you made.

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

Hi, good morning, guys.

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

Sure.

Sure. Thanks, Thanks, Craig.

Yes, let me.

There is 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.

We have focused on our property operating expenses as well as are our taxes, we always.

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 think we've done is.

From a maintenance perspective look to enter into contracts, where we can get a lower rate by maybe maybe consolidating some of those contracts. So there's consolidate focus and the company not only to drive leased up in revenues, but continue to manage the expense levels at our properties. So nothing.

Nothing really specific but just an overall continued focus that you should see us continue to do as you go forward.

Okay great.

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

So they were it was there were three kind of like flex properties located in Houston, So industrial slack.

Three properties in the Houston market.

Got it only add that all all the related to those properties was paid off with the sale.

So there are.

Now.

These assets remaining that are free and clear.

Great and I know that you had consider those assets to potentially have some redevelopment opportunity was was the buyer planning going through that process or do you have any color on kind of what they are expected to do.

Yes, yes, we don't really fully know obviously, what any buyer of our assets is going to do with them.

We went to the market with those assets I think at the at the right time, we were very pleased with.

The sale price getting at 6.8 kind of cap rate on the disposition. So we're not fully aware of what that what the buyer at density with those assets.

Okay.

And then you kind of touched on this earlier, but this is pricing strong enough in those Texas markets for those types of assets that you are maybe more likely to predict pursue additional sales versus maybe other strategic decisions with pillar. So.

Yes, So whitestone has an investment in pillar stone, which is our real estate partnership we continue to focus on our our retail portfolio and and overtime, reducing our investment in that partnership we accomplish that through the through the.

Asset sales in Whitestone continues to expect to move away from those noncore properties and have our focus beyond our retail community centers.

Okay, Great one more for me.

Yes, it's pretty strong leasing quarter, particularly on the renewal side were there any markets in which that that pickup and leasing and certainly the lease growth was concentrated or it was pretty broad based.

Overall, I'd say is covered most of the regions, we really have one or two large holes.

Our two properties that we're addressing we address them.

Every day.

We have.

Maybe a slight shift in terms of how we how we approach our leasing and as we we were doing it region by region and at the beginning of the year, we shifted the doing it on a general corporate level. So.

One morning, a week every single leasing version.

Is that a call on a call in on the televised call and relating to the deals as theyre working on and it's really start to.

Get the momentum because now we have a really unified approach that we've seen.

Okay. Thanks.

Thanks, Greg.

Thank you.

I cannot sell reminder, if he would like to ask your question. Please take note by pressing star one on your telephone keypad.

What Paul said, just a moment.

Okay.

Okay.

There are no questions in the queue at this time I'd now like past call Bank of Jamison, Jeff. Please go ahead.

Thank you operator, well after that make my conclusion, threeq and just see that.

We really appreciate all of you are.

Following us in them and interest in white assume it's been an exciting company fund company to two bill.

And then once you know that were just staying the course.

We set out to accomplish early in 2010, and we are extraordinarily optimistic.

We will execute on our long term goals successfully.

So we're looking forward to future calls and and a lot a really great things are happening in the company. So thank you very much for joining us one or 2019 third quarter conference call.

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