Q1 2021 Whitestone REIT Earnings Call

Greetings and welcome to the Whitestone REIT first quarter 2021 earnings conference call.

At this time all participants on a listen only mode. A question and answer session will follow the formal presentation and then what.

The require operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded and now I'd like to turn the conference over to your host Mr. Kevin Reed Director of Investor Relations. Please proceed sir.

Thank you Latanya.

Good morning, and thank you for joining Whitestone REIT first quarter.

2021 earnings Conference call joining me on today's call of Jim Ms. Andrea Our chairman and Chief Executive Officer, and Dave Holeman, Our Chief Financial Officer.

We'd also like to introduce our new Vice President of corporate Communications, Rebecca Elliott, who is also with us today.

Please note that some statements made during this call and our historical and maybe 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 has the most recent the 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 and then.

Also important to note that this call includes time sensitive information and may be accurate only as of today's date may 5th 2021.

The company undertakes no obligation to update the information.

Whitestone REIT first quarter earnings news 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.

I will now turn the call over to Jim Ms. Andrea. Thank you, Kevin and thank you all for joining us and our first quarter 2021 of Investor call.

I will provide a brief overview on whitestone and as well and update on our business current events.

And the first quarter. Following my remarks, I will turn the meeting over to Dave Holeman, who will provide a financial update on how we did during the first quarter and we.

Following the questions and answers.

This quarter's results benefited from the decision to locate our portfolio and 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 and showing the resilience of our business model and corporate culture and our operations team continues to provide the ability to be flexible and quickly adaptable with the support of our strong financial infrastructure.

At the end of Q1 this year.

Our operating portfolio occupancy was 89, 1% and increase of 0.5 per cent from last quarter and down only <unk>, 6% from a year ago.

Our rent collection versus billings continues to put us at the top of our industry peer group.

During Q1, our collections remained strong approximately 95 per cent of our rents for the quarter and for the month of April.

Our new lease count was 46 for the quarter significantly higher than last quarter's count of 28, and our total lease countless 94.

12% higher than the previous quarter.

Blended leasing spread spread was seven 8% one full percentage point higher than last quarter's six 8%.

And our same store net operating income increased decreased four 3% with flat last quarter, you had among the best and the industry.

Additionally, in Q1, we increased our quarterly dividend by $2 four per cent and if paid our monthly dividend.

Two our shareholder for 120 consecutive months.

Our employees are back working safely at our properties and our tenants' businesses are ramping up with increasing customer foot traffic is.

Consumers continue to resume their daily lifestyle routines and visiting our properties, while migration continues the flow into our market and stuff.

Our targeted geographic portfolio was comprised of institutional quality opened here of real estate with predictable cash flow.

Our properties are adjacent to high income communities and our tenants include grocery stores pharmacies and restaurants are centers of made up of E. Commerce resistant tenants, who provide necessities and the essentials and they drive 18 hour traffic seven days of week so of properties.

And that's the result over the past year, our centers have remained open and most of our tenants remain back of some of them today are experiencing higher sales and their pre pandemic levels.

I remind our shareholders that whitestone was built during the recession of 2008, the 2010 and many of the lessons that we learned during that time, we incorporated into the fiber of the company.

Our company was built on.

Acquiring properties that were located and business friendly states fast growing and heavily populated cities and high income communities.

By creating and interest resistant business model Internet resistant business model that focuses on the services and essential needs of consumers.

By creating a diverse portfolio of the entrepreneurial tenants.

And I structuring leases with tenant owner recourse and minimal co tenancy approval rights.

Providing annual rent increases of two to three per cent well pass the true triple net expenses.

And by keeping our focus on training and developing our people for continuity.

Our Swift response to COVID-19 1912 months ago, and 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 redevelopment 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 and for specific markets.

Austin, Dallas, Fort worth Houston, and Phoenix Scottsdale.

We intend to continue this strategy to assemble valuable properties and markets, where tenants want to lease and consumers want to visit.

By growing this way, we created a substantial value of our portfolio.

The properties.

In fact, we are under contract to acquire a property and one of our identified markets are first the acquisition since the pandemic began.

And we expect to close this summer.

This acquisition will add just under 200000 square feet and will be immediately accretive to whitestone and peso per share and positively contribute the whitestone has 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 up our infrastructure.

We look forward to providing more details.

Progress through the year.

Moving forward of Whitestone, we are well positioned with the improving balance sheet and enhanced liquidity, a laser focus on driving occupancy and revenue growth and leasing.

Leveraging our deep knowledge of our markets and properties and opportunities along with our business model with to provide and craft the tenant mix to lease 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 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.

And in Arizona and continue to see significant population migration and.

And corporate relocations and producing jobs from other areas of the country.

This is best evidenced by our first quarter leasing activity Aki.

Occupancy levels.

Leasing spreads and our average base rent per leased square foot.

On leasing activity and the quarter was very strong with 46, new leases, representing 117000 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 double our average quarterly lease volume for the previous three year period, and 38% higher and the highest quarter over the past three years.

Regarding occupancy and our operating portfolio occupancy stood at 89, 1% up one 5% from the fourth quarter and down only 6.6% from a year ago with our Austin market, leading the way with the almost 4% increase and occupancy.

From Q4.

Leasing spreads on a GAAP basis have been a positive 9% over the last 12 months and first quarter leasing spreads increased by five 3% on.

On new leases.

And nine 6% on renewal leases signed.

Our annualized based rent per square foot on a GAAP basis at the end of the quarter grew 1% to $19 and 71 stands for.

From $19 58, and the previous quarter and is basically in line with our free COVID-19 ABR from a year ago.

Funds from operations core was 23 cents per share in Q1 compared to 24 cents per share and the prior year.

As Jim mentioned, our collections continue to trend toward normal pre COVID-19 levels with 95% of our contractual rent collected in Q1.

Restaurants, and foodservice, our largest tenant category, which represents 23% of our ABR and 17% of our leased square footage and continued to perform very well and <unk>.

And 95% and the quarter and we also saw positive movements and some of our more impacted customer types with entertainment, representing only 2% of our ABR and leased square footage paying 73% of the rents in the quarter up from 48 per se.

In Q4.

During the quarter, we had minimal rent deferrals, representing 5% of our total contractual billings.

Our same store net.

Net operating income was down for 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 and the portfolio of.

The reserve for Uncollectible revenue was 529000 or one 8% of revenue day.

And from 4% of revenue in Q4.

To put this into further perspective, our first quarter of reserve equates to only 9% of 2020 full year reserves.

Our interest expense was 8% lower than a year ago, reflecting 15 million and lower average debt and a decrease and our overall interest rate from three 9% to three six per se.

The first quarter is an encouraging start to 2021 and underscores the resilience of our forward thinking well crafted business model and the strength of our strategically chosen high growth markets.

Let me provide some further detail on our collections and related receivable balances.

Included on page 27 of our sub data is the breakdown of our tenants by type.

All of our tenant category were above 89% collection and Q1 with the exception of entertainment, which I previously discussed.

Our three largest categories restaurants grocery and financial services were at 95% of 100% and 99% respectively.

At quarter, and we had $23 3 million and of course.

Grants and accounts receivable.

And clearly in this amount and $16 9 million of accrued straight line rent.

And $1 8 million of agreed upon deferrals.

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.

Strengthen our liquidity and navigate the economic pressures caused by the pandemic.

Our total net debt.

$632 million down $17 million from a year ago, and our liquidity representing cash and availability on 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 paid down an additional $10 million on our corporate credit facility.

Currently we have 145 million of Undrawn capacity, and $25 9 million of borrowing availability under our credit facility.

We are in full compliance with all of our debt covenants and expect the remains though in the future.

As I stated earlier 2021 is off to a very promising start.

These results are a testament to the resiliency of Whitestone and business model.

We are encouraged by the recovery and we look forward to re engaging our growth strategy and our continued delivery of value to all of Whitestone stakeholders.

With that we will now take questions operator, please open the lines.

Thank you at the time, we will conduct a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.

And confirmation tone will indicate your lines of any question. The queue. You May press star two if you would like to remove your question from the queue.

And for participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time one moment, while we poll for our first question.

Our first question comes from Aaron Hecht with JMP Securities. Please proceed.

And Jim Hi, Dave the morning, ear and How're you doing.

Good day.

So it sounds like the the increased leasing volume is very encouraging Ah.

I just wanted to get your take on.

What do you think that means for.

Future leasing spreads and I know the numbers look pretty good on a GAAP basis. This quarter I think they were a little bit negative on the cash basis is this really about.

Laurie and the amount of square footage available on your properties and I guess surrounding areas as well.

Before you get the bigger bump on the cash side and then on the the collection side given the demand do you think that 5% uncollected.

The rent is going to dwindle and short order.

Okay.

Thanks Erinn this is Dave.

Touch on the occupancy first are.

We are very pleased with our increase and our occupancy from Q4.

And we believe that will contribute obviously positively to the future corners, and the first quarter net increase in occupancy only partially contributed with much of it 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 the result of of obviously over the last 12 months and some businesses.

Ramping up and learning to operate differently, and giving them a little bit of a.

The headway as they start as they start with their new lease 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 and the last two quarters, but we were very pleased with the the lease up and were pleased with the.

The spreads and as I mentioned, just the activity during the quarter was really outstanding and our highest quarter from a new lease perspective, we've had and.

And probably forever and look back three years, and and well above our highest quarter over the last three years.

Have you seen that traffic and extend past the quarter for accelerate.

We have.

Obviously, our one of our largest focus is the occupancy and revenue and so a lot of focus on the leasing up the space that is continuing to drive revenue.

We've seen that activity continue post quarter as well.

And we've also seen strong migration into both Texas and Arizona from outside of those states.

And of course, and it isn't the housing demand and.

And the communities are in great locations and so.

On the homes and those areas are of filling those or bacon of filling of reselling very quickly.

And that's creating a lot of confidence for the prospective tenants who were working with.

Right.

And then.

On the acquisition and excited to hear the you guys are getting into the the investment Gam again.

Can you talk a little bit about the cap rate or the yield and maybe on and.

And he development or redevelopment that you're doing what you're targeting and in terms of investment yield.

Yeah, I'll start with the redevelopment and we have approximately $240 million plus on that.

Lots of tenants within our portfolio.

And we will begin to activate those and we don't book.

And we do the over a period of time.

With regard to the.

The property that we have under contract.

And I say, well run and I will say in the wound and kind.

And Jay on the agreement with the seller.

But I can save and it makes and the extraordinarily attractive property it fits within our.

Our sweet spot in terms of one of our regions.

And the cap rate is very favorable.

And it has a.

A positive spin.

The 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 and add someone another person and that's like adding a.

The property manager and the maintenance person other than that we have no additional cost and will be able to leverage our infrastructure.

Let me get away from them, but I'm trying to get at it.

And at a higher level is.

And cap rates effectively dropped for the.

Assets that you would kind of target historically over the last 12 months or so.

And interest rates have gone down or have you not seen that as much and your sector and your <unk>.

Assets that you'd be interested in.

And that depends and in a 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've what we've seen coming through COVID-19 is that there are some.

So on people, who learn a older in age and his own retail properties for a long time and.

And they realize that they don't want to go through and they had to go through this past year and so now they are putting their properties quietly and not necessarily on the market, but knowing that were of the candidate to to acquire.

Also are in discussions on properties using our own <unk> structure with a with with a price the more commensurate with our net asset value, we've done that and the past we've done three or four deals like that so we're seeing some activity.

And in the marketplace and particular the activity is the kinds of small entrepreneurial tenants we like this.

And this particular property is and.

And the adjacent to the.

The very well regarded grocery store and a J.

<unk> feeds into the property we're buying.

And we actually looked out of a year ago, and we and when the pandemic hit we we put it on ice and went back to the seller and.

And reincarnated the deal so we like the very much.

Understood. Thanks, Jim Thanks, Dave.

Thanks, Aaron and thanks Darren.

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

Hey, good morning, guys. Congrats on the collections can you give us some color on what types of businesses you categorize as the entertainment.

Yeah. So.

<unk> on like Italian page 27 of our sub data and we provide tenant category. So we have in there.

The 2% of our ABR and 2% of our leased square footage.

We have and their movie theaters.

We have really just one movie theater large movie theater, and our portfolio, we have some the venues like.

Like activity centers like a.

For the birthday party and that sort of thing so a small group.

And I have one one theater and Austin.

Probably half of that total and they're on.

Reopening and 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 and that segment of our tenants that you believe that close the phone.

And the only the tenant and I mentioned, there is one tenant and one movie theater and Austin that is and reorganization bankruptcy bankruptcy at this point.

Our theater is one of the best performing and their chain and is not listed as the potential closure. So if there is one bankruptcy and that group with the data we have.

Got it and just want to talk about the leasing this quarter clearly a pretty big pick up were there any particular categories that you noticed had especially draw strong demand on the new lease side or was it pretty broad based.

It was broad and I'll give you.

And we'll tell you the second generation restaurants.

Restaurant operators are.

And have learned creativity throughout the pandemic has learned the operate have built businesses based on takeout and curbside delivery day might've had before so we've seen a great amount of interest and really good restaurant operators and our markets looking for space and that they can come in and start the businesses very quickly.

And some of our properties, we have a product called cube exec.

The and office products and fits right into the retail center and it's about 100 and.

25 square feet, and maybe 250 square feet and what we found is the.

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 the working at home wasn't necessarily the place. They wanted the remains a move into a small space outside of their home, but yet and that back into their office and we've seen an increase and.

And the occupancy in those spaces, it's really nice to be the have that space and the non traditional environment being that of an office building and non traditional BD you have restaurants at your fingertips and other services and it's easy to.

To be with your family and also work at the same time.

Got it and and one more for me I just wanted to follow up on the acquisition you expect to close the summer Ah is is that one of your O P unit deals that might be price closer to the M. A V or are you looking to the finance that with the line of credit just any color there on the sources of capital would be useful.

Sure Hey, Craig so.

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

Okay fair enough. Thanks.

Thank you.

Once again, ladies and gentleman, who asked the question at this time. Please press star one on your telephone keypad.

Our next question comes from Michael Diana with Maxim Group. Please proceed.

Thank you.

Are you just raise the dividends and.

Could you and and obviously the outlook here it looks good for 2021 and 2022 can you can you remind us sort of how you look at <unk>.

Change in the dividend.

Sure.

Hey, Michael It's Dave I'll start and Jim will probably add.

I think obviously as we've said before.

And we think rates were largely the great way for individual investors to participate and real estate and enjoyed the dividend and cash flow from that we were pleased to raise our dividend in March which really <unk>.

<unk> the.

<unk> of the recovery.

We look at the dividend obviously on a regular basis, our board looks at it I think we look at a couple of things, obviously, a payout ratio of our cash flow and what percentage of that and we're paying out and then of the appropriate yield for the for the real estate. If you look at both of those measures today, I think whitestone has and the high.

4% close of 5% from a yield perspective, and then our payout ratio is would be among the best and the industry. One of the lowest so we feel very confident and the the stability of the dividend and as we continue to execute and we think theres been the opportunity for for all shareholders to participate and that increased cash flow Mike.

Michael I'll add to that when we when we reduced the dividend we werent quite sure of how long the pandemic would last US no. One no one was we didnt, notably the one years the three years.

And so we did a fairly significant customer of our dividend and the board of it.

And so what we realized that we were we really ran a strong collections program and it's been very bearish on price.

And the top of the industry and.

We also found that the artificial intelligence for users and shows that we produce a lot of traffic to our centers and therefore.

And the tenants come back so we felt that we would use the cash that we had sales for two things. One is that we wanted to give something back to the to the shareholders because we had.

I agree and success in terms of the elections and.

And secondly, the share of the confidence.

Building and the company and so we felt very good about that the board and the long discussion about it and.

Yeah.

Great. Thank you.

Yeah.

Thank you at this time I would like to turn the call back over to Mr. Jim Mr. Andrea for closing remarks.

Yes, thank you operator.

And in closing I would like the upsize it.

And our positive outlook as we look to the long term growth of Whitestone and we've always we've always thought of it as the long term.

And that's what we continue to stay focused and we make decisions on wind and short term debt you benefit on long term goals and we're excited about what we see and the future down the road.

The platform is strong our business model is proven our track record is evidence of our success.

Our team is passionate and committed and well positioned to find and execute on future opportunities.

And closing know 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 every step of the way we know the God's hands 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 concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.