Q3 2021 Whitestone REIT Earnings Call
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Pardon me.
Greetings and welcome to the Whitestone REIT third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
And answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being.
I'll now turn the conference over to your host Rebecca Elliott you may begin.
Thank you operator, good morning, and thank you for joining Whitestone REIT third quarter 2021 earnings Conference call. Joining me on today's call are Jim Mr. Andrea <unk>, our chairman and Chief Executive Officer, and Dave Holeman, Our Chief Financial Officer.
Please note that some statements made during this call are not historical and may be deemed forward looking statements actual results may differ materially from those forward looking statements due to a number of risks uncertainties and other factors. Please refer to the company's earnings news release and filings with the.
C C, including Whitestone, most recent Form 10-Q and Form 10-K for a detailed discussion of these factors.
Knowledge and the fact that this call may be webcast for a period of time. It is also important to note that this call include time sensitive information that may be accurate only as of todays date October 27th 2021. The company undertakes no obligation to update this information.
<unk> third 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 in the Investor Relations section.
Now over to Jim Mr. Andrea our chairman and CEO to update you on our third quarter result.
Thank you Rebecca.
And thank you all for joining us on our third quarter conference call.
I would like to begin by sharing with you the highlights of our third quarter.
Operating portfolio occupancy increased to 92% from 89, 9% last quarter and annualized base rent increased to $20.41 from $19 95 last quarter.
Our overall foot traffic at our centers and three Q 'twenty, one was 35% higher than the same quarter in 2020.
With the resurgence of Covid through its delta Marianne, we maintained a steady but slightly lighter pattern versus <unk> 21.
We continue to experience active recurring traffic from existing and new community members visiting our centers as population shifts continue with the ongoing migration from corporations and individuals to Arizona and Texas.
Regarding our financial performance for the quarter revenue grew by 9% to $32 4 million this quarter compared to $29 9 million and <unk> 20.
Same store net operating income growth of 7% in this quarter and 8% in Q2 was driven by increases in occupancy and annual base rent per square foot.
As previously noted as well as positive leasing spreads.
A key financial indicator for Reid is F F O.
Funds from operations core.
Was 25 cents per share and 75 cents per share in the quarter and the nine months ended September 30th 2021 respectively.
Along with this noted growth we continued to make progress towards one of our long term goals of deleveraging the trust.
We reduced our debt to EBITDA, which is now 8.1 times down from nine four times a year ago.
Equally important to the trust is our dividend.
Which we consider sacred regarding our quarterly dividend, we now have paid dividends to our shareholders for the 134th consecutive months since our IPO.
Our dividend yield of 4.3% remains at a premium and our payout ratio to F. F. O core is exceptionally strong at 42%.
This quarter, we reactivated our external growth plan with the acquisition of Lakeside market in Plano, Texas at a purchase price of $53 25 billion.
Importantly, this acquisition did not require any additional corporate overhead, which is a key component towards our attaining economies of scale.
Along with this acquisition, we are actively pursuing additional properties and our strong pipeline of assets in Austin, Dallas and Phoenix.
Looking at our current portfolio, we now have $4.6 million of our 5.1 million square foot of space leased.
Our approximately 1500 tenants average lease space is 3000 square foot per tenant complemented by a mix of larger square footage leases by our grocery anchors.
Our strong tenant relationships and rigorous vetting process ensures the quality of our revenue for our portfolio and stability of our cash flow.
I would like to point out that our tenant improvement costs to bring a new smaller tenant into one of our centers is much lower per square foot than the cost of a big box tenants.
By doing so we spread our risk among a group of tenants in a relatively.
The same space as a larger tenant.
<unk> higher rent per square foot.
Annual escalators of 2% to 3%.
In some of our tenants pay percentage lease of revenues.
In addition, typically our tenants pay taxes insurance and common area maintenance.
Our strong leasing activity is one of the key drivers and performance this quarter.
Some important metrics to highlight.
Our new lease count four three Q 'twenty, one is 38 versus <unk> 35 in the prior quarter and 32 in the prior year.
Our leasing spreads were three Q, 'twenty, one or five 4% versus three 1% in the prior quarter and two 9% in the prior year.
Both of which are moving in a positive direction.
In summary, the update I've shared with you today.
Highlights in particular, our business model continues to perform exceptionally well.
Our leasing strategy.
Focusing on entrepreneurial tenants continues to produce consistent results.
And most notably we are continuing to make good progress toward achieving our long term goals.
While we are pleased with our continued improving performance. We know that the work ahead of us is cut out.
But our team remains committed to serving our shareholders and increasing long term value.
With that I would now like to turn the call over to Dave Holeman, Dave.
Thanks, Jim.
I appreciate the opportunity to share some great results for the third quarter.
During the quarter, our best in class geography.
And strategically designed tenant mix have produced strong topline and bottomline growth and our long term focus and day to day execution have allowed us to make significant progress towards our long term goals of scaling our infrastructure and improving our overall debt leverage.
The msas that we operate in continue to see significant population migration and corporate relocations producing jobs from other areas of the country.
This is best evidenced by record leasing activity.
Occupancy.
And annualized base rent growth.
Year over year and quarter over quarter top line revenue.
And <unk> growth.
Robust leasing spreads.
Strong same store NOI growth.
Reduced debt levels and interest cost, resulting in improved debt leverage metrics and greater scale of our G&A infrastructure.
Total revenue was $32 4 million for the quarter up 6% from the second quarter and up 9% from the third quarter of 2020.
The revenue growth was driven by a sequential 3% increase in same store occupancy from Q2, and a one 2% improvement compared to Q3 of 2020.
We are also benefiting from our ABR per square foot rising two 3% sequentially and five 3% from a year ago, along with lower uncollectible <unk> reserves.
Property net operating income was $23 2 million for the quarter up 5% sequentially and up 9% from the third quarter of 2020.
Q3 same store NOI increased 7% from Q3 of 2020.
Net income for the quarter was <unk> <unk> per share up from <unk> <unk> per share in the prior year quarter.
Funds from operations core was 25 per share in the quarter up 9% from the second quarter of 2020 and year to date <unk> core per share was <unk> 75 cents per share up 9% from the same period of 2020.
Our leasing activity in the quarter continued to build on our very strong first and second quarters with 38, new leases, representing 90000 square feet of newly occupied spaces.
Our new leasing activity for the nine months was 56% higher on a square foot basis in 2020, and 48% higher than 2019.
On a total lease value basis, our new leasing activity for the nine months was 112% higher than 2020, and 191% higher than 2019.
Leasing spreads on a GAAP basis have been a positive eight 5% over the last 12 months and third quarter leasing spreads increased by five 4% on new leases and 14, 1% on renewal leases signed.
Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew two 3% to $20 41.
From $19 95 in the previous quarter and increased five 3% from a year ago.
Total operating portfolio occupancy stood at 92% up one 2% from a year ago and up 3% from the second quarter.
Including our newest acquisition Lakeside market. Our total occupancy is 89, 9% up 1% from a year ago.
Our collections continued to be very strong in the third quarter.
Selecting the overall high collection levels and collections on tenants classified as cash basis, our tenant receivables decreased by $1 million an improvement of four 4% from year end 2020.
Our interest expense was 4% lower than a year ago, reflecting our lower net debt.
At quarter end, we had $22 million and accrued rents and accounts receivable.
Included in this amount is $17 8 million of accrued straight line rents and $1 3 million of agreed upon deferrals.
A great upon deferral balance is down 43% 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 was $616 6 million down $25 million from a year ago, improving our debt to gross book real estate cost ratio to 51% down from 55% a year ago.
Our debt to EBITDA ratio improved one three turns from a year ago and one turn from the second quarter to $8 one times in Q3.
We are pleased with the significant progress we are making toward our long term debt reduction goal and remain steadfast in our commitment in this area.
As of quarter end, we have $155 5 million of Undrawn capacity and $81 8 million of borrowing availability under our credit facility.
During the quarter, we sold 3 million common shares under our ATM program, resulting in $28 million in net proceeds to the company at an average sale price of $9 49 per share.
These strong results in 2021 are a testament to the strength of Whitestone strategic geographic focus and business model.
We are encouraged by the acquisition of Lake side market in the quarter and look forward to continued delivery of value to all of Whitestone stakeholders.
With that now we will now take questions operator, please open the lines.
Okay.
And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if he like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question is from Craig Kucera with B Riley. Please proceed with your question.
Hey, good morning, guys.
You had a pretty decent increase in operating expenses, both sequentially and year over year were there any onetime items in there driving that up or is that just a function of more broad based increases in utilities and insurance and other expense items.
Hey, Craig Thanks for your question.
Not really any one time items I would say obviously in 2020 like others, we pulled back where we could on our operating expenses and we're catching up a bit on those in 'twenty. One so just kind.
Kind of normal.
Maintenance of the properties.
But a little bit.
A reduction in 'twenty, one a little bit of a catch up I'm, sorry, a reduction in 'twenty and a catch up in 'twenty one.
Got it that's helpful.
Jimmy you had a solid leasing quarter from a spread perspective, as we start to potentially look at it the specter of inflation in the economy are you pushing to get and perhaps able to get a higher escalators in your leases.
Well right now Craig and thank you for your question and thanks for participating right now.
Bridging.
2% to 3% increases annually and thats, probably closer to 3%.
All of our commentary maintenance taxes and expenses are all pass through to the tenant and those have increases as well.
We also have.
Somewhere in the area of around 275 restaurants in a number of those restaurants, which are local fine operated.
<unk> in our local markets half percentage participation causes where there was a breakpoint and we get a percentage of the sales.
For example for the Breakpoint is $2 5 million, we'd get 6.6% on anything over $2. Five. So if you go up to three and $300 million, where you get another 6% on it.
And the restaurants are doing exceptionally well, particularly in the Phoenix marketplace. So we'll pick up something there and then we've always stayed relatively short term on our leases three to five years and when we have time for renewal again, you take tenants that are doing exceptionally well they want to stay where they are when it's time for renewal we.
Look at the greater of the.
The rent at the end of their lease at or that term or the market and usually we're able to go back to the market, which is inflated at that time. So so when we have precautions built in we've done that all along.
I'll remind you that we pay out 40% of our <unk> and dividends. So we have a huge cushion there and we're accumulating a lot of cash each month.
Got it no I appreciate the color on that.
Let's shift gears back to Dave.
As far as your rent recoveries here this coverage deferred rents.
What was recovered this quarter I may have missed that and kind of what are your expectations here in the fourth quarter.
Yes, so we have.
On our kind of agreed upon deferrals with during Covid I think initially the.
We've reduced that about 40 over 40% this year, so we're down.
About one 2 million.
Deferred rents, which are really balanced.
Back largely probably over the next 12 months so we've.
Cut that number in half from year end and expect the rest of it to come in over the next 12 months.
Okay. That's helpful.
Jim you made the decision to make the acquisition.
And Dallas.
Some commentary Youre looking at Austin, and Dallas as well in Phoenix for other acquisitions, but can you talk about sort of your your expectations. Here is it are we far enough along in fourth quarter, that's probably too late to close something or where might we see something this quarter and maybe kind of what youre thinking about early next year as well.
Sure. We do have we do have a contract in Austin on our property.
We're under a confidentiality agreement so I can't say I cannot say anything more than that its a great property it fits our portfolio.
<unk> is a very thin and Austin.
But we've got our people on the ground that have.
Really looked at it I looked at looked at the market and we have two other properties that we were very attracted to there. Our goal is to grow each one of the regions for example, Dallas San Antonio or.
Dallas, and Fort worth and Austin, and San Antonio as well as Houston to the same size as as.
Phoenix, where we can where we control our rank about.
The top one or two owners of real estate in that marketplace. If we do that.
We'd be on track for our strategic growth plan of about $5 billion.
We will we will try to keep making headway towards that next year and at some point in time as our cost of capital come down comes down the b assets are much easier to acquire.
Got it and I know in the past you've been able to do O. P unit deals that are maybe price closer to your NAV.
Year to date, you've been issuing more common of course, but some are are any of these deals youre looking at opening unit deals.
We have one that we're looking at that at Sanofi deal and by the way. It's that's great observation on your part because we we do issue the op units at something closer to net asset value than we do with it.
As the market price.
Okay. Thanks, that's it for me.
Yes.
And as a reminder, if anyone has any questions you May press star one on your tongue.
Doing so will ensure your spot in the question and answer queue.
Okay.
And.
Our next question is from Michael.
Michael.
Diana with Maxim group.
Please proceed with your question. Thank you.
Uh huh.
The leasing activity was very strong in the quarter can you maybe give us one or two examples.
New lease and a renewal lease that you thought it was particularly important.
Sure Michael Thanks for your question.
Let me just go back and give you a slight little bit of background and history.
When we bought a property called Sunset, which is in our Scottsdale marketplace. There was a tenant called sole cafe.
We work very closely with her she has and has an amazing reputation now in the marketplace and that was several years back.
Since then we.
Worked with her to move about four miles away and open another restaurant called called <unk>, which is an Italian restaurant.
That's been an enormous success is probably doing about 3 million a year in sales its only been open a year and a half following that.
That success in the same property she's opened.
Whats called the copper club do banquet facilities around Christmas Thanksgiving large parties.
Our deal structure, there that she pays all the commentary maintenance taxes and insurance and we get 20% of the revenues not the net operating income.
So then last year, even during Covid, we negotiated and opened a new restaurant with her call all MA down at Seville.
Seville property on Scottsdale Road.
Across from where they are building the new Ritz Carlton complex.
And that now has its a different age group.
Tequila kind of Mexican theme to it.
That's doing exceptionally well and we've just now signed another lease with her to open a second generation restaurant, where we do very little Ti.
And our markets through property.
All the restaurants as she has are doing exceptionally well they all have a breakpoint in percentage leases on it and Thats. Just one example, we have another example called Hell opinion Fearnow, they're on their third restaurant with US we have a new cigar lounge at we're opening we have eight cigar lounges, we have a 50% equity interest in <unk>.
That particular tenant we have a pilates studio that we.
Lease to over a year ago, we have a 25% equity interest in that and the woman who runs that pilates studio as a license to certify other pilati instructors and we have earmarked about 10 properties, we'd like to see Pilates Studios just to give you. An example of how that works you have your spaces.
Already existing minimal ti paint and lighting things like that and then we purchased the equipment for about $60000 and then we have the operator, we're looking at the opportunity to possibly franchise that so those are some of the color on some of the leases that we're doing more of an entrepreneurial approach and we have more of an incubator.
Patients have tenants approach.
Wow, Okay no.
Lakeside and Atlas.
As soon as you acquire a property you you go about trying to move it to the way you want it to look because can you give us any updates on what's been going on there.
Yeah.
Great about lake side.
Is that.
HEB is opening their flagship store in Dallas and it literally is it's a private.
Not a main street, but its a street that goes into the center and it bifurcate and HEB is under construction now Lakeside is part and parcel to that whole parcel.
<unk> side, we had under contract when Covid when Covid came around back on March 20th we we Peel back our contract on that and we put it on pause the seller worked with us very closely.
It came back around we knew about <unk> and what their intention was.
And so we were able to reactivate that and make the acquisition.
Wonderful property I think we already have two or three leases signed to it.
So our team was already focusing on that and that was growing that's been going very well so far.
Okay great.
I know you have.
Developed properties pads.
Acquire Clarice acquisition since there.
Any update on what.
The possible development opportunities are.
Yes.
What we have been.
What we had been doing in the past before Covid and we pulled back on it is would feed a couple of those into the market every year.
We initiated one of them several months ago and that believe.
Believe it or not in our Chicago property.
We had enough land to build a dunkin' donuts.
And so we leased it to an out parcel.
They they usually come with about a 5% cap rate.
That will generate over our cost about $1 million in equity value and I am going to just off the top of my head, saying generates about $800000 in net operating income so that should be I mean, it's about it's about I'm sorry, it's about $100000 in net operating capital we are building it at about a $1 million.
And to Jim's point about value creation, five cap would be about a million dollar value creation. So it's a situation where we are where.
Where we can look at it Michael to either feed that too.
Triple net owner of properties and it doesn't it doesn't take away from our funds from operation or we can just put it in our funds from operation of stream.
What's interesting in leading our read is that you can sell these properties and make a great capital gain but two quarters later the market forgets about it.
So we're very careful not to take funds from operations out of our cash flow.
While on the other hand, we've created enormous value within the portfolio appreciated land opportunities and let me just give you. One example of that.
In Arizona, we have a property called market.
Place not market Street.
And in the area.
Called Sunny slope.
We bought that property for $65 a square foot.
We put a walmart grocery grocery store in there.
98% occupied.
The cap rate with a Walmart is is sub six almost 5%.
We could sell that property today for somewhere between.
18% and $20 million and they will they will give you more precisely the numbers if you like.
So you've got this huge profit in there, but if you saw you've just reduced your funds from operation. So we're looking to see where we can replace some of these assets and started selling and taking advantage of the enormous capital that we build up and profits in some of these properties.
I can't give you more examples like that if we go down property by property, but theres a lot.
On the development front.
We have about $250 million to $260 million of development opportunities on land that we already own that was acquired with the acquisitions of properties.
Hello.
That's a great update thank you very much.
Youre welcome. Thank you Michael.
And our next our next question from Aaron Hecht with JMP Securities. Please proceed with your question Hey, guys. Thanks.
Thanks for taking my question I'm wondering if you could give us some thoughts on underwriting standards for new deals within the portfolio today.
Obviously, you have somewhat of a pipeline are you looking for simply stabilized yields are you looking for more deals like the one you recently did where theres upside through occupancy gain and you can capture.
Better effective cap rate any parameters around deal flow would be helpful.
Sure.
I'll give you a couple.
We look at a property in a marketplace that.
And we determined what it takes to stabilize that property and stabilization to us is 95% leased and receiving market rates and I think you know from previous conversations we've had erinn. We're heavy on the artificial intelligence in the company we run we run AI all the time.
On each of our properties and corporate wide.
So, let's say, we buy a property is 95% occupied but it might be 20% under the.
The market rent so if it's if it's <unk>.
If it's a $30 a square foot its probably and it might be it might be getting 24 cents or 20.
$24, a square foot, which obviously tells you why it's under market, but it's fully leased so one criteria is what do we what do we need to do to stabilize it was little very little additional costs.
The second thing we look for is we always make sure. There is a parcel of land that comes with it.
So when we announce it we buy something at a seven cap rate or six five cap rate of $6, two camera or whatever that might be it usually has.
The first criteria and also has a piece of land within it so we can expand it.
And then the third criteria, we have about 10 10 things we look at third Criterias when we're looking at a center.
If let's say 100000 square feet.
We won't buy it if there is a box on it in the box is over 50.
50% of the center, so we like to breakdown boxes into smaller spaces, but we don't want to do it if the percentage is too high we also want to make sure the boxes the corner corner piece of the property. So that we can we can carve it up into different sections that make it into smaller smaller areas. So.
Those are some of the criteria I might add that we look at the neighborhood, we don't like in a low income tax.
Tax credit properties behind it we like to see really great neighborhoods, we always look at the rear and the delivery systems and properties to make sure. They're clean I personally look at every property at least two or three times before we would go to an LOI. We have drones that we fly on these properties and we look at the very carefully so when we.
Take it to our investment committee. They then look at what it looks like from the air as well and then and then our process for this is we signed an LOI. We go from an LOI to a contract with prior to do that we've done a lot of due diligence. We go to the contract. After we've taken it to the full investment committee, which is.
The board of trustees once in the it's a thick packet about an inch on every property, we do once the board of trustees.
Likes of property agrees to of course, we make we run it through the financial traps. So we look at how we finance it to make it accretive and once we do all of that then and there.
Then of course, we sign a contract and when we sign a contract we have never walked from a property. After we've signed the contracts we have 100% closing rate on that side. So I hope that helps a little bit.
Dave you want to add anything to that.
Thank you Oh, sorry, Dave.
No go ahead Eric.
I think it does.
It sounds like every deal is going to have the value add component.
I guess I was trying to simplify it down to are you looking for a minimum spread on investment.
Any sort of stabilized portion. So for example, if.
If the market is at a five cap you have to get an effective fixed cap once you've added improvements or gotten rents up to market or increased occupancy like is there is there a spread that.
Or it's spread range.
If you could provide us to give us.
Our ideas on value creation there.
Yeah, I'll start and maybe Jim can add but obviously, we look at as we look at the contribution of the cost of our capital obviously versus the <unk>.
The net operating income of the property initially and then we look at it on a pro forma basis with the improvements we expect to make so the first test is that debt.
The capital raised for the acquisition is less than that.
The income produced from the property.
We also.
Look at the that the operation of the property one of the big goals for US is continuing to scale, our overhead lifestyle market required no additional corporate overhead and so we're going to continue buying properties, where it is.
It's accretive from a from an earnings to a cost perspective, it leverages and scales our overhead and then as we've done this year, we're doing that in a way that also contributes to our long term goal of reducing our debt as a percent of total GAAP.
Okay and I.
I guess that implies.
Sure.
Acquisitions would be a little bit over EKO ties, if youre going to reduce leverage.
While going into growth mode is that.
Fair to say or how would you characterize the ability to do both.
Yes, that's fair to say I'll give you just if you look at the nine months of this year. Obviously, we've moved that deleverage very significantly probably not quite at that pace going forward, but this year for instance, we've added $60 million to our assets $53 million of that was life side, the balance was improvements to our assay.
We've paid down our debt by $10 million, so $70 million of that and we financed that from equity proceeds of about 53 million and cash flow of 17, we target we target about 40% debt on our deals going forward.
Two basically.
On the acquisition and contribute to improved debt metrics.
And I'll just add to that.
We always analyze potential acquisition.
100% cash on cash return.
Once we so if you hear us say, a six cap rate or six five cap rate.
Purchase price based on the going in NOI.
Once we own. It then we decide if we want to financially engineer.
So when you look at the pure cap rate first.
I appreciate that response, Tim Thanks Derek.
Thank you Eric.
We have reached the end of the question and answer session I will now turn the call back over to Jim that Australia for closing remarks.
Yes, Thank you and thanks, all I really we really appreciate the questions. We love to talk about the company as you can tell.
For me, it's been a pleasure to share our quarter results with you again.
We are pleased as a company to report our continuing progress towards achieving our long term goals and increasing shareholder value and.
And we worked very diligently to achieve them.
We believe that owning shares in whitestone, REIT as an opportunity to own an interest in some of the very best quality properties in the heart and soul of both Texas and Arizona.
Just want you to know that as we continue to remain focused on acquiring the very best in class properties.
And then we apply our disciplined management and leasing fields.
We have been able to help many tenants as I've explained in some of the Q&A grow their businesses and achieve their success.
Im reminded each morning that God has given us a plan to serve him by serving our shareholders and all of our stakeholders. Thank you very much and please have a great day.
Okay.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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