Q2 2021 Whitestone REIT Earnings Call
Greetings and welcome to Whitestone, REIT second quarter, 'twenty, 'twenty, 1 and earnings conference call at.
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A brief question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
At this time I'll now turn the conference over to Rebecca Elliott Vice President of corporate Communications from.
You may now begin thank you operator, good morning, and thank you for joining Whitestone REIT second quarter 2021 earnings conference call.
Joining me on today's call are Jim Mr. Andrea Our chairman and Chief Executive Officer, and Dave Honan.
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.
<unk> and filings with the SEC, including Whitestone and most recent form 10-Q and form 10-K for a detailed discussion of these factors and.
Knowledge and 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 maybe accurate only as of today's day August 4th 2021the company undertakes no obligation to update the information Whitestone.
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 Whitestone REIT Dot com and the Investor Relations section now over to Genesis day, Andrea our chairman and CEO to update you.
And on our second quarter results Jim.
Thank you Rebecca and 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.
And then Dave will provide financial insight and through the quarter.
It is a pleasure to start out telling you that we had a 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 feels fuels our growth and supports our dividends to our 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%.
120 basis points from the first quarter, highlighting the increased demand from new businesses entering our markets where on average between 15 to 20, new tenants represent 1% increase and 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 and the Sun belt 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 <unk> 12 cents up from 3 cents and the prior quarter and up from 1 cent from the prior year.
And F F O core per share increased 13% to 26 cents a share from 23 cents in the prior quarter and.
And increased to 18% from 22 cents in the prior year.
Our increases in per share earnings is derived from adding new essential service focused tenants to our existing base of grocery stores restaurants salons.
Pet care centers, drugstores banks, and financial advisory and 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 and significant upside and would benefit from applying the principles and the processes of our business model streamlining property management.
Reconfiguring and redevelop being 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 and foot traffic.
And our 59 centers and the first half of the year.
As an example of.
And if projects that drive traffic to our centers.
We install outdoor misting systems, and Arizona for customer comfort during the 3 months hottest months of the year, where temperatures can average 100 degrees.
We currently have 5 million square feet of space that generates $30.6 million and revenue for Q2.
Within each property, we curate and tenant mix with more than 1400 tenants serving customers from the surrounding neighborhoods. Our properties stay vibrant 18 hours a day 7 days a week.
1 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 and Plano, Texas.
These venues display high and 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 and each location, whose owners and admirers return as customers for our local tenants.
Increased foot traffic to our centers is 1 of the most important drivers of tenant sales and attract potential new tenants to our properties are.
Our tenants occupy and average of 3000 square feet of space and provide ecommerce resistant services.
They're entrepreneurial businesses capture sales revenues as they keep alive the American dream.
Our tenant profile at its core is entrepreneurial as a risk their financial net worth to build their businesses and.
And 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 and some larger tenants.
They paid their rent and.
Proved their resilience owners.
Owners and founders of local and regional businesses prioritize their companies because it supports their family's livelihood and their future, which align with our high collection levels.
And as they recover whitestone reported industry leading collections.
Our model was tested and proven during COVID-19.
Our culture is about personalizing, our service to tenants and our property managers and associates apply a hands on approach.
This teamwork uniting a whitestone tenant relationships gives us a competitive advantage over other retail centers and our local neighborhood markets.
Our culture of service produced leasing spreads on a weighted average by 6.8% on new and renewal leases and 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 leasable 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, no single tenant 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 remain committed to lowering our debt service leverage.
We also are committed to lowering our G&A as a percentage of revenue.
We are seeing progress as our asset base expands and our revenues increase and the second quarter G&A as a percentage of revenue was 14, 6% improving from 15.7% 1 year ago.
Turning to growth in July we reactivated our acquisition program and acquired our newest property Lakeside market and Dallas is a fluid and upscale neighborhood of Plano.
It is shattered anchored by Texas iconic regional grocer H E B and it's their first flagship format store in the Dallas market.
The purchase price of Lakeside market was $53.2 million and and has significant upside from leasing up the COVID-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, and our pipeline and locations and Dallas, Austin, and Houston and Phoenix.
Potential sellers, who have owned properties in our markets for many years understand that they could benefit from spreading their risk over a large pool of quality properties achieved liquidity to stock and selling.
By converting to stock and selling and receive a tax efficient transaction with whitestone utilize R.
R O P unit currency.
And 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 F. F O Corp.
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 and total paid our shareholders more than 300 million and dividends during the same time.
In March of 'twenty, 'twenty, 1, we increased our dividend by 1% or 2.4%, reflecting our strong recovery.
Our policy is to evaluate our dividend and regularly and consider many factors, including our profitable growth cash flow and progress toward creating long term shareholder value in.
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 increased our valuation.
Our primary focus of creating and driving long term real estate value is integral and everything we do.
As we lease up our portfolio, bringing our development land on stream and make judicious acquisitions, the intrinsic embedded value and our assets will begin to be reflected and 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 as a function of our assets our portfolio of quality real estate is spread over great markets and demand for space and in our centers as they are nearly full is highly valued.
And our rental income produces a solid.
<unk> cash flow.
Our great locations quality of properties and strong operating performance is notable and 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 developed and began to build a contrarian and business model with entrepreneurial tenants that would be e-commerce resistant.
We started with a relatively small asset base of approximately $150 million and have expanded to 59 properties and 8 major cities and over 1400 tenants and approximately 1.5 billion and real estate value today.
We continued to be passionate and 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 of our financial performance Dave.
Thanks, Jim and.
I appreciate the opportunity to share some great results for the second quarter during.
During the quarter, our best in class geographic concentration and strategically designed tenant mix have produced strong topline 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 and 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.
And year over year and quarter over quarter, net income and F. F L 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 a sequential 1.2% increase and occupancy and a <unk>, 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 uncollectible the 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 <unk> 12 per share up from 3 cents per share and the first quarter and 1 cent per share and the prior year quarter.
Funds from operations core was 26 cents per share and the quarter and increase of 13% from the first quarter and an increase of 18% from the 2022nd quarter.
Our leasing activity and the quarter continued to build on our very strong first quarter with 35, new leases, representing 75000 square feet of newly occupied square footage.
And our new lease activity for the 6 months is 100% higher on a square foot basis than 2020, and 40% higher and 2019.
Leasing spreads on a GAAP basis, and being 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 1971, and 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 8% from the first quarter and Houston grew <unk>, 6% from the first quarter.
Our collections were very strong for the quarter returning to normal pre COVID-19 levels.
Reflecting the high collection levels, our reserve for uncollectible revenue for the quarter was $143000 or approximately 1 half percent of our revenue.
Down from 529000, or 1.8% of revenue and the first quarter.
And $2.3 million or 7.9% of revenue and 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, and we had $21.3 million and 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.
And our debt to EBITDA ratio also improved 1.2 turns from the first quarter 2.8.2 times.
Reflecting our post quarter acquisition and our continued focus on deleveraging, we expect our debt to EBITDA ratio to be approximately 8 by year and reflecting significant progress on our long term debt reduction goal.
At quarter, and we have $165 million of Undrawn capacity and $55.1 million of borrowing availability under our credit facility.
During the second quarter, we sold approximately 3 million common shares under our ATM program, resulting in $25.4 million and net proceeds to the company.
After the quarter, we acquired Lake side market, and Plano, Texas for $53.2 million financing the acquisition with approximately $30 million and equity 10 million and 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 and strategic geographic focus and business model.
We are encouraged by the acquisition of Lake side market and look forward to continued delivery of value to all of Whitestone and stakeholders.
With that we will now take questions operator, please open the lines.
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1 moment and soy poll for questions.
Thank you our first question will be coming from the line of Craig Kucera with B Riley Securities. Please proceed with your question.
Hey, good morning, guys.
I have missed this but what were the actual rent collections. This quarter I think last quarter was running about 95%.
Hey, Craig this is Dave.
Thanks for your question I think are at this point, we feel like our collections are basically at the pre COVID-19 levels that kind of becomes.
And top exercise between 90, 899, 197, but our collections were as reflected in our uncollected Collectibility reserve or at the levels, we saw before the pandemic.
Our balance has continued to go down and so we didn't report a collection percentage just because it becomes very difficult at that last and what percentage level, but our collections were extremely strong, bringing <unk> down and allowing our uncollectible reserve to be really back to net 2019 levels.
Got it and.
Do you have a sense of how much rent that was previously deferred that you think you'll be.
Collecting through the remainder of this year or any sort of.
Structured payments for the rest of the year.
Yeah, we have about a 1.5 million and deferred grants.
And that the large majority of it will be collected over the balance of 2021 to 1 line.
Yes.
Sorry can you hear me.
Yes, Greg did you hear my answer.
Yeah, you did.
Cut off for a second but I think I got it.
And just kind of working through the bad debt, obviously, a very meaningful drop off since kind of at the peak of second quarter last year even sequentially.
And we interpret that you think the weaker tenants have pretty much been washed out of the portfolio and are you kind of expecting bad debt to run it at similar levels for the rest of the year.
Yes. Good question as I think that's I think that's accurate Craig I mean, obviously there is still some some.
The 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 and almost 90%. So I think we are same.
Same collection levels, we're seeing tenants.
And you know traffic levels, I think Jim talked about the traffic and our centers just sequentially from the fourth quarter of 'twenty to the said today, we see and 18% REIT and traffic. So I think we've 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.
And obviously, we worked with some of them on the timing of the rap payments, but they've all done very well and we're seeing a.
Really very very little troubled tenants and our portfolio at this time.
Great and I'm Gonna change gears and talk about the Lakeside market acquisition for a bit.
You mentioned and as far as financing that you.
You had about $30 million of equity.
Some debt and 13 million from cash flow on hand, I know you issued about 25 million and the second quarter is that $30 million is that incremental to what was already issued are you basically taking into account what was issued and the second quarter.
Yes, the $30 million is at a little bit that was issued at the beginning of the third quarter and in early July. So we raised 25 million and the quarter and then about another 5 million just in the 2 weeks post quarter.
Got it and can you talk about what the going in yield is at that asset and kind of what you're expecting on a stabilized basis I think there's a pretty decent amount of occupancy upside potential there.
Yeah, I think we think there's a great opportunity there obviously, Jim talked about the characteristics and the location and the iconic brochure H E B.
I think going and occupancy it has about 20, 19% vacancy so we didn't.
Port that the going in occupancy we are at it meets the criteria of all of our community centers. We bought we funded it and a way that obviously contributed to our delevering and scales, our G&A and.
Upon stabilization, it's probably and that the kind of 8% kind of yield cash on cash yield.
Got it and do you anticipate needing to make any significant significant redevelopment, there or or is that pretty much just standard lease up.
Yeah, Greg. Thanks, This is Jim.
The center is about 81% occupied as we mentioned its got 3 pads and going and he was very very good we'll see announcements from AGP next door, which is air force flagship store.
That will have some impact in terms of even even compressing cap rate a bit. So we see upside in terms of the vacancy there we see a couple of lots and we're already in negotiations with 1 particular restaurant.
That we find that.
And that.
It was 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 yes. It. This is the 1 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 and what we had originally under contract.
And I use that as an example of how we work on our pipeline.
Got it and can you give me.
And okay units and your commentary about your pipeline are you are you finding potential sellers that are looking at opening units as attractive a currency and do you think we might see those types of transactions this year.
We think you'll see some whether its this year next year are.
They are in discussions right now we've made I want to say 3 or 3 to 5 O P deals in the past they've all been and are at or around our net asset value of the company not our share price.
I think that the what we found is going through Covid.
Some folks who have owned properties for 20 or 30 years very very good properties and great locations, usually it's a 1 off owner has found that they don't really want to go through the Covid scare again, and they're doing some estate planning and those are the kinds of sellers that we're 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 questions.
Hey, guys its Alex on for Erin.
Couple of questions here first and.
Have you seen any impact on foot traffic from the Delta variant.
Okay.
We haven't.
I mean, obviously, we monitor our our foot traffic very regularly we're in obviously were in Texas, and Arizona, which had been markets that have been.
And much more open and and recovered much quicker and more quickly. So we really have seen we've got a population that's ready to get back to normal life and we haven't seen any impact on our traffic levels from that Delta variant.
Okay, Great and then.
You guys are making.
And are being judicial and acquisitions I'm, just kind of on and get more color around that do you have like a COVID-19.
Cap rate range for the assets you're interested in or how are you guys feeling about about that.
Yeah. Good question.
What we look at it as properties that are within our markets.
And where we can leverage our infrastructure and gaining economies of scale are.
We look at properties that aren't necessarily on the market.
1 off buyers or sellers, rather and so we look at seeing where we can go principal to principal to negotiate those deals.
We've been accumulating.
The pipeline for a number of years now so we go into a market and determine which which where we want to buy I'll give you. Some of the criteria. For example, if we look and a property and a big box that is vulnerable it is more than 50% and the square footage we'd take a pass if it's like 20 or 30.
Were sent we look at it and how we can reconfigure the box everything we buy we look at and has a component of and upside that.
And that we can redevelop and add square footage and increase the rents.
We consider and assets stabilized.
1 is at 95% occupied within the market and it's getting market rents. So we might buy somebody it's 95% occupied but the rents are below market. So we can bring those up and the other hand, we might find something where it is market rents, but the occupancy is down and so we have some very.
Strong guidelines that we use when we're when we're targeting acquisitions, 1 thing I might just add a little color on unlike side the vacancy which is about 19% roughly 30000 square feet is all small spaces, which is right in our wheelhouse. So it's not like the vacancy there is a big box, which will be tough.
To fill the vacancy is a number of small spaces, which we already have lots of interest and activity on.
Okay, great. Thanks, guys.
Thanks, Matt.
Our next question is from the line of Michael Diana with Maxim Group. Please proceed with your questions. Okay. Thank you.
Actually I was going to ask.
The other question that was just asked.
Thanks Syed.
Yes, I think you mentioned that Dallas was your strongest market.
C growth area.
No.
How long it will take to.
To lease up and 19%.
At Lakeside.
Yeah as we speak today, we've got a team up there looking.
And and examining the market 1.
Once we buy and 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.
And we're very very confident and 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.
And that the market as you said Dallas is is going great. I think we've seen a lot of characteristics of Dallas I think it was number 1 and in the back to work of all the markets and the country of companies that are having their employees back to work [noise] migration has been strong. This asset is located in a and a prime prime area and Plano with.
With the great household incomes and activity levels, and we're very confident and our ability to to lease that up to stabilized occupancy.
Alright.
Other thing I wanted to ask about was the 230 million.
And now.
Opportunities.
Even with your strong cash flow.
And that's that's a big number.
Do you have you been exploring at all some price.
And that's 1 of the opportunities for those properties.
Sure Great question and Michael we have a.
A great opportunity and our portfolio to extract some value through the development of pad sites, and some larger developments and development and redevelopment and those all total about $230 million for us today.
And we're gonna be judicious and timely and how we execute on those making sure that we have demand for the spaces as we add at G. L. A we have we are looking at different sources of capital obviously.
They're out there so.
We're going to do those developments over time it is a great value that's embedded in our portfolio and probably not reflected today in the marketplace and I think you'll see us start to execute on some of those over the coming quarters.
Okay, great. Thank you very much.
Thank you Michael.
Thanks.
Rich and have a question and answer session and I will turn the call back to James Mastandrea for closing remarks.
Well. Thank you all and thank you all for joining us and closing I'd, just like to say that Dave and I are pleased to report our second quarter results and.
And we'd like to thank you again for your continued confidence and support and Whitestone want you to know that we continue to focus on and are increasing cash flow core F. F O per share and Whitestone has long term value.
And as our progress continues and I Trust and God. The guide our work and it give me wisdom to support and service our shareholders. Thank you very much. Thank you operator.
Youre welcome. Thank you for joining US today, everyone. You may now disconnect. Your lines at this time and thank you for your participation.
Okay.