Q4 2020 Whitestone REIT Earnings Call
Greetings and welcome to the Whitestone REIT fourth quarter, 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation at the.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Kevin Reed director of Investor and Investor Relations.
Thank you operator, good morning, and thank you for joining Whitestone REIT fourth quarter and year end 2020 earnings conference call.
Joining me on today's calls of Jim Mr. Andrea <unk>, Chairman and Chief Executive Officer, and Dave Holeman, Our Chief Financial Officer. Please.
Please note that some statements made during this call and not historical and maybe deemed forward looking statements actual results may differ materially from those of forward looking statements due to a number of risks uncertainties and other factors. Please.
Please refer to the company's earnings press release and filings with the SEC, including Whitestone has the 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 the period of time. It is also important to note. The this call includes time sensitive information that maybe accurate only as of today's date February 25th 2021.
The company undertakes no obligation to update this information.
Whitestone is fourth quarter earnings press release, and supplemental operating and financial data package have been filed with the SEC and are available on our website www Dot Whitestone, REIT dot com and the Investor Relations section.
During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the company included in this 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 the gym Ms. Andrea Thank you Kevin and thank.
And you all for joining us on our fourth quarter and year end, 'twenty and 'twenty investor call.
We continue to hope that all of you your families of your businesses remain healthy and of doing well as we continue to navigate these most of unusual times.
Let me discuss the many positives and can be derived from the last year of challenges and how our unique business model that we designed and successfully passed they got one of the stress test over this past year.
The proof of Whitestone concept has become a reality.
Well before Covid hit.
And the previous Investor calls, we've often talked about.
And the necessity of being local.
The essentials of convenience.
The leasing to a well capitalized tenants that have skin in the game and the evolution of retail to smaller more flexible spaces.
From its inception, Whitestone has differentiated itself from our competitors with our avoidance of big boxes, and hard and soft goods selling national retailers and have favored the smaller footprint service based entrepreneurial tenants.
Our tenants are triple net and <unk>.
No during normal times, and the real estate World Eh, the strep, a disruptive contrarian concept like ours would take years to play out.
What we have wished and this however is in the real estate industry.
10 years of this Rushmore and was convinced and 210 months.
The results.
We make this statement given the results of our team has been able to achieve and facing such difficult headwinds this past year.
<unk> nine per cent for new and renewal leases.
This productivity underscores the quality.
And the desirability of our properties.
And the well coordinated work of our leasing team.
Well any time of the stress and uncertainty tenant.
Tenants exhibited a flight to quality and signed leases where they do their businesses would thrive.
Third.
We had steady occupancies and.
And it is a testament to the quality of the tenant mix, we strategically crafted and Harrow of occupancy has held consistent over the past three quarters.
We have maintained levels between 88, and 90% and ended the fourth quarter with an occupancy level 88, 2%, roughly just 2% below whitestone and 2019 year and occupancy.
We consider the upside of bringing our occupancy into the 90 to 95 per cent range very doable and we will report our progress during 2021.
We had minimal tenant bankruptcies. Another example of the sustainability of our tenant mix as we have less than 0.5% of our annualized base rent a b R or only six out of almost 1400 tenants that are in bankruptcy.
Our diversified entrepreneurial.
Tenant base brings stability to our cash flows without these interruptions.
Fifth our foot traffic one of the most encouraging signs from these actions and a good harbinger of things to come is the significant foot traffic we are seeing at the properties.
The December article by S&P Global and highlighted Whitestone is number one ranking for the shopping center industry and foot traffic recovery on Black Friday.
And with an 81% of year over year recovery.
And this far outpaced the industry average of only 48%.
It also supportive and confirm our Toronto research using third party artificial intelligence software that showed over 80% year over year recovery at the properties for the entire month of November.
And sixth we had other interrupted monthly dividends.
It was one of the few monthly dividend paying public REIT, we were very conscientious of the importance of the monthly dividend to our shareholders, albeit at a reduced rate during COVID-19.
We continued with the monthly dividend, while many other suspended distributions.
With the strength stability and predictability of our cash flows we continue.
Uninterrupted payout.
We're now going on 126 consecutive months.
As we navigate this pandemic I have often said we are not looking to win the ban to make but we are looking to win the recovery the.
These results are putting us and a great position to do so.
Highlighting the fact the success of the six factors.
Dave Us the ability to do three things first we increased the dividend most.
Mostly the our board decided to raise the dividend by two 4%.
This increase underscores the team's confidence and the consistency of our operations and the ability to enter 'twenty 'twenty, one with a winning recovery and profitably go with our base of high quality properties in the future.
Second.
We repaid the $30 million of Covid borrowings.
Again, I read reiterate that the strength of our operations have mitigated the need for our precautionary 30 million dollar of drawdown of our credit facility availability during COVID-19.
A year and we had repaid the entire $30 million of borrowings and strengthened our balance sheet.
And third we published our inaugural corporate responsibility report.
Well, they look to the future and our continued enhancement of our ESG efforts, we published our inaugural corporate responsibilities and sustainability report in December.
We view ESG.
As an integral element of Whitestone as we continue forward.
Taking a step back at all of these results and aggregate one will realize it is a true testament of the.
And the uniqueness of our business model our forward thinking management team are high quality properties.
And high growth markets, we specifically chose to be here.
And the nature of our business model begins with owning properties located in areas with high household income neighborhoods and fastest growing msas and business friendly states.
One of the key Differentiators that separates Whitestone is we own the properties and places where people want to live.
Covid has accelerated the pace migration already and emotion out of the regulatory and tax burden and some states and into the business friendly states of Texas, and Arizona, where we presently concentrate our work.
Another key differentiator and further proof of Whitestone and small.
The concept is that we own the right sized retail.
A recent article published by Forbes and September discussions of the acceleration of national reach and retailers like target Kohl's.
Kohl's and Macy's transformation is to get smaller the.
The obsolescence of the larger big box retailers and.
And malls.
Continue to move ahead as we continued to benefit from this shift of traditional mall tenants out of malls and in the open air shopping centers.
The essential convenience of our community centered properties was never more evident.
And it has been during the pandemic.
99% of our businesses are open as of year end.
The press upon this important fact, even further year over year of foot traffic continues to increase at some of our properties.
We eagerly anticipate.
Getting back to our growth.
And now you add the strategy.
That includes our $250 million of.
And the internal intrinsic value of opportunities and.
And $500 million of and external.
Acquisition pipeline.
Prospects.
We have a proven model the stronger platform with greater financial flexibility.
And the leaner more cohesive team the scale our business.
The performance of our team and the execution of our business model is deeply rooted and whitestone culture.
Throughout this past year I have been often reminded of a classic book titled the.
The little engine that could.
This inspiring story illustrates the human determination displayed at Whitestone.
Despite our current size, we continue to the liver large returns with.
With a purpose and our mission to serve our shareholders.
Regardless of the challenges we may face of him.
I am very pleased with the dedication of our management team and what they displayed and navigating this crisis I am proud of how whitestone the op operations team stepped up.
Net the daunting challenges head on.
Nor the naysayers and overwhelming the exceeded expectations.
Given these results and staying true to our values.
And I remain very optimistic for the future and the potential to create increased value for our shareholders.
With that background and I would be pleased the turn the call over to Dave Holeman, Our Chief Financial Officer, Dave.
Thanks, Jim.
First I would like to Echo Jim's comments regarding the strength of the economy economic recovery and our markets and properties.
Our foot traffic recovered strongly and our cash collections continue to build towards pre COVID-19 normal levels.
Our occupancy has been impacted but only by about 2% our leasing activity has rebounded to pre COVID-19 levels and leasing spreads have remained strong throughout 2020.
We have of highly dedicated team that works every day to create local connections and communities that thrive.
We continue to see the strength of our geographic focus and our forward thinking well crafted tenant mix.
Despite having a significant amount of our tenant businesses impacted we only had a handful of tenants close for good such that the portfolio occupancy rate held up well ending the year at 88, 2% down two 1% from last year or approximate.
100000, less leased square feet, representing the net loss of only nine tenants year over year.
Also our annualized base rent per square foot at the end of the quarter was 1943.
And 1958 on a cash and straight line basis.
This represents less than a 1% decrease on both a cash and straight line basis from a year ago.
The change on a straight line basis is largely related to the conversion of 102 tenants to cash basis accounting and the associated write off of accrued straight line rents.
During 2020, the impact to funds from operations from these cash basis conversions was approximately $3 5 million or eight cents per share.
At year, and we have 54 tenants on a cash basis, representing four 2% of our gross leasable area and four 6% of our annualized based rent.
Cash basis tenants paid 65% of contractual rents and the fourth quarter up from 63% and Q3.
And 41% in Q2.
Our square foot leasing activity was 10% higher than the fourth quarter of 2019, and our blended leasing spreads on new and renewal leases on a GAAP basis was a positive eight 9% for the year.
As Jim mentioned for the quarter, we collected 95% of our rents.
This includes base rent and triple net charges billed monthly.
Our deferred rents for the quarter were two 6% of our total contractual billings.
While we are encouraged by how things are progressing the pandemic has had an impact on our full year 2020 financial results.
Funds from operations core was 24 cents per share for the fourth quarter and 93 per share for the full year.
Same store net operating income.
Was $4, 2% lower for the quarter and 4.4% lower for the full year.
The impact on F F L core for the quarter and year from incremental Covid reserves was approximately two cents and 13 cents respectively.
Let me provide some further details on our collections and related receivable balances.
Included in our supplemental data package is the breakdown of our tenants by type.
All of our tenant categories were above 90 per cent collections and Q4 with the exception of fitness, representing 4% of our revenue at 82%.
And entertainment, representing only 2% of our revenue at 48%.
Our largest tenant categories restaurants grocery and financial services were at 96%, 99% and 99% respectively.
At year, and we had $23 million and accrued rents and accounts receivable.
Broken down the components of the 23 million consist of $16 3 million of accrued straight line rents and other receivables $20 7 million of billed receivables.
And $2 2 million of deferred receivables offset by of bad debt reserve of $16 4 million.
Since the beginning of the year, our billed receivable balance has increased $4 million and our deferred receivables have increased $2 2 million for a total billed and deferred receivable balance increase of $6 2 million.
Against this increase we have recorded and uncollectible reserve and 2020 of.
$5 6 million or 90%.
Turning to our balance sheet since March we have implemented various measures to strengthen our liquidity and navigate the economic pressures caused by the pandemic.
Our liquidity, representing cash and availability on our corporate credit facility stands at $44 million at year end down only 6% from $47 million at year end 2019.
During the fourth quarter, we paid off all COVID-19 liquidity borrowings and our total net real estate debt is down $12 million from a year ago.
Currently we have $131 million of undrawn capacity and $18 million of borrowing availability under our credit facility.
We are in full compliance with our debt covenants and expect to remain so and the future.
2020 has been an unprecedented year in which our team has worked together through this ongoing crisis and our shareholders will reap significant future benefits through greater collaboration and.
The more robust exchange of ideas, better and more effective communication and improved systems and processes that provide whitestone, new actionable data and allow us to more efficiently scale our infrastructure.
Whitestone operates and many of the most highly desirable growth markets and high population growth States and we expect these markets to continue to lead the country and economic recovery from the pandemic.
And lastly regarding guidance. It is our intention to resume providing guidance later in 2021 as the pandemic and macro economic uncertainty continues to dissipate.
And with that we will now quite take questions.
Yeah.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is and the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Our first question is from Aaron Hecht with JMP JMP Securities. Please proceed with your question.
And gentlemen, thanks for taking my questions.
Wanted to start with Texas, obviously, the weather's been really tough there.
Over the last week or so wondering if there's.
Any damage has occurred at the properties and any sort of impact you believe the whitestone from the weather conditions and Texas.
Hey, Hey, Aaron it's Dave. Thanks for your question Yeah. It has been a it's been a strange of week. So we had some unprecedented cold weather in Texas Whitestone has done very well had minimal damage and our properties had a couple of small pipe breaks, but but nothing significant but a lot of a lot of folks and the area has been.
Impacted but whitestone and.
It did very well throughout it.
Okay. The the here and then I'll.
And the demand side of it sounds like the foot traffic is really starting to pick back up which is good.
Looking at the new leases and the renewals it looks like new leases were down about 5% renewals up double digits.
Pretty big divergence, there any sort of takeaways the.
And the new leases and the renewals.
To give us better insight into what's going on and I mean is it.
A certain group of tenants that have lower demand for their product moving out of the higher demand and tenants wanting to renew its causing us any sort of insight there.
Okay.
Sure, It's Dave again, I'll start off and Jim might have some comments as well, but yeah.
One of the things we do obviously.
Is try to give some transparency as to the leasing spreads and I will tell you we like to look at it more on a 12 month basis and an individual quarter because in any given quarter there's only.
Not not that many leases that come through so are our leasing spreads as you said for the quarter were a little lower on the new leases and I think the renewal leases were kind of consistent there really isn't any trend. We've seen we saw a couple a couple of little shorter leases, where we're doing a smaller amount, but not a trend I think.
Eric Lee are we've been around the the 10% kind of level with the blended spreads and Thats, where we are for the 12 months. So we you know we were very energized by the activity. We're seeing we're seeing a lot of demand and I think one of the things we've talked about a little bit on the call was the the migration and I think and our markets with the the amount of popular.
<unk> and migration as well as some business migrations, we're seeing very good activity. Yes. This is Jim Erin. Thanks for asking the question companywide were seeing a lot of enthusiasm from the leasing team. We've got we meet once a week and we meet once a week and.
For about two hours with every single leasing person and we screen the deals and the letters of intent and and the leases that are out for signature.
And so we're seeing a lot of a lot of activity in that regard and it's interesting too at these meetings, we learn things and this is something that the earlier in our remarks, we talked about the migration into Texas and Arizona.
And we learned this past Monday that one of the large homebuilders and Arizona is now and the lottery system for selling lots and they've separated the sale of the house from the lot.
And so you can buy a house, but then you have to go into of lottery system for a little a lot and that's and that's part of the reason is the influx from California, and Arizona, So that in effect will triple over trickle over to the demand for our centers were seeing that very closely so where youre going to see youre going to sales numbers changed a bit in the future.
Oh, that's great insight on the net migration and appreciate that.
Nice quarter, guys I'll jump back in the queue.
Thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Our next question is with Craig <unk> with B Riley Securities. Please proceed with your question.
Yeah, Hi, good morning, guys, David I'd like to talk about your bad debt assumptions, I think we've seen and bad debt fall and half from the second quarter, but it didn't materially change from third quarter.
And we're sort of midway through the first quarter are you looking at collections that are relatively flattening of the modestly improving kind of what of your thoughts there as we move through first quarter and the first half of the year.
Yeah, Hey, Greg and Dave Thanks for Thanks for the question and obviously, it's been a.
A year of assessing collectability on our tenor of the tenant base and.
And we've done that at a very granular level are really looking at the tenant's understanding their financial position, we've converted about 104 tenants to cash basis.
Youre right I think our highest bad debt quarter was the second quarter, obviously, and we've seen that come down and the third quarter and then fourth quarter was fairly consistent with third quarter, we do expect.
Obviously to see that dissipate in 2021, but there's a lot of of continued uncertainty with the pandemic and the impact, but but our collections are improving 96% in January.
We're very pleased with them and so I do think you'll see you know for the year, we recorded about six.
$6 million and kind of reserves for for Covid.
The ability and I think with the increasing trends and our collection rates, we should see that obviously improve and 'twenty one.
Okay. Thanks for that.
And we're hearing that there's an increasing amount of money looking to buy shopping centers here in early 'twenty one.
And given your leverage are you considering at all maybe selling some assets to to possibly deleveraged the balance sheet or is that not of consideration at this point and time.
You know as as prudent owners of real estate, we're always looking at this as the investments. We do think there's a lot of benefit to whitestone from continuing to scale our platform and one of the things. Jim mentioned is we are seeing some opportunities out there from the acquisition side and we're gonna be very prudent with our capital allocation, but.
Right now, we're we always look at the individual assets and look at.
What's the best way to get a return to our shareholders from from owning those assets and Greg. This is Jim Theres a lot of there is always the right time to sell properties.
And we've got some really terrific properties that we've handpicked and.
And we're in the process of getting those to what we call of stabilized level.
And we consider of property stabilized when it's at a 95% of occupancy and when the rents are equal or greater than the market rents and the surrounding three to five more of them. So.
Each property, we buy you usually have some turnaround features of them and some value add features and so we like to really get the to the point of where they match that stabilized characteristics.
We are and the market looking on the other side to buy properties. We think there's a we have of enormous pipeline about a half of $1 billion, we mentioned and our remarks.
We're seeing some really good opportunities.
Mostly from sellers, who may not have one of the sell their properties before but since Covid realized life is getting too short and we've had we've been reading of the introduces the properties, we've carried and our pipeline for some time. So so we're looking at some really terrific deals right, though Greg I might just make one one further comment on it.
Thank you mentioned the the debt I am very pleased that we were very positive and reducing our leverage this year, even given the the collectibility issues of Covid, we brought down our total net debt of about $12 million year over year.
Alright, Thanks, and one more from me I know you've got about 16% of your leases expiring. This year can you give us a sense of kind of how many of those are may be month to month.
The fleet.
Yeah. So we are well historically, if you look at our leasing activity. This year, we signed the letter.
We see about a 900 almost a million square feet. So we're very comfortable with the level of of leases, we have expiring and 21, which is about 800000. So historically, we've we've done that level.
We do have on the month to month side.
I'm going to I don't have a number there Craig it's a small amount of the of the square feet. We typically are.
Roll tenants over when they go to month to month, we rolled them over to leases. So we don't have a significant amount of month to month leases and that we're also very comfortable with that and then if you look at the the square foot.
Price of those leases the around $17. So a little below our portfolio, so very comfortable and our lease roll and very comfortable and the leases that are maturing and the next and next year.
Got it so it doesn't sound like there's any known large move outs and in 'twenty, one that youre aware of.
And that's right no.
You know our tenant base are very we are of great diversification of the tenant base with our largest tenant making up a little of about 3%, but we have no no known significant move outs at all coming out of nothing large and our and our average size tenant and 5000 square feet. So when a tenant moves out we can absorb that very quickly and then release it to the Newton.
Okay. Thanks, that's it from me.
Thanks, Greg.
Our next question is from Michael Diana with Maxim Group. Please proceed with your question.
Thank you.
You said you expect to increase your occupancy to 90% to 95% and you already talked about the role that the migration from California may play and that what it would what the.
Sort of assumptions are behind that in regard to.
Opening of the economy, and just general growth and Texas and Arizona.
Yeah, Hi, Michael.
In terms of how we see our occupancies increasing one one of the key factors is adding people and we've added three new leasing people to our team. We are of very specific business model that requires a certain characteristics and our leasing effort and so by adding new people are we will be able to.
The fill more of the vacancies that we've had I think that's one of the assumptions that we've we've.
And working with the second thing is that we have a large space and taro Vida. It was and Albertsons that went empty and that's now and that was approximately 60000 feet and we're now about two thirds of the way.
Under the lease contracts to the debt.
The pipe. So we have a couple of holes like that that we're filling and we see those go up very quickly and then just of just a matter of a lot of small spaces that we got of Phil but we're we're very optimistic of the opportunities. We have this year and I can touch on the the market conditions.
And obviously geographically the the recovery as I think happening at different levels throughout the country. We say as we said 99% of our businesses are open today.
And then really and Texas and Arizona, there are largely able to operate it at pretty close to pre COVID-19 operating levels with a little greater distancing and spacing.
So we anticipate that the the economy and our markets will continue to improve but were.
We're pretty well along today, probably compared to some other parts of the country.
Okay, great. Thank you.
Thank you Michael.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Jim Mastandrea for closing remarks.
Well. Thank you. Thank you all for being here I'd like to close by rearing Whitestone <unk> proof of concept and our business model is focused on the necessity of being local the essential must of convenience leasing the credit tenants as we've said that have skin in the game and the evolution of retail to smaller.
And more flexible spaces. These small spaces of really captured the delivery process directly.
Our work has served us and served our shareholders very well by stabilizing our business quickly and the early days of the pandemic, we've delivered solid results and significant headwinds and this has enabled us to really refocus on our pre COVID-19 goals of targeting accretive acquisitions and extracting the siggi.
Difficult and embedded intrinsic value and our properties and then to further scale our platform.
Along with the board, we're pleased to recognize the quick stabilization and momentum of our business and the confidence to increase our dividend earlier this month.
Prioritize the people, we ultimately serve and that's our shareholders.
As we continue to serve our shareholders employees and tenants and all of our stakeholders, we know that God's hands and so on our shoulders and we.
And we truly thank you all for your continued confidence and support and our efforts with that I'll close. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.