Q2 2022 Whitestone REIT Earnings Call
Greetings. Welcome to Whitestone REIT's second quarter 2022 earnings conference call.
This time, I'll just been sort of listening only mode.
A question and answer session will follow the formal presentation.
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Please note that this conference is being recorded.
At this time, I'll turn the conference over to David Morty, Director of Rest Relations. Mr. Morty may now begin.
Good morning and thank you for joining Whitestone REIT's second quarter 2022 earnings conference call. Joining me today on today's call are Dave Holman, Chief Executive Officer, Christine Mastandrea, Chief Operating Officer, and Scott Hogan, 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 SEC, including Whitestone's most recent Form 10Q and 10K for a detailed discussion of these factors.
Acknowledging the fact that this call may be webcast for a period of time is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, August 3, 2022. The company undertakes no obligation to update this 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, www.whitestonereak.com in the Industrial Relations section. www.whitestonereak.com in the Industrial Relations section.
I'd also like to draw investor attention to the fact that we published second quarter, 2022 slides on our website yesterday afternoon and we'll reference page numbers throughout this call. I will now turn the call over to Dave Holman, our chief executive officer.
Thank you, David. Good morning, and thank you for joining White Stone's second quarter, 2022 earnings conference call. I will begin on slide number two. I will begin on slide number two.
We're pleased to announce another strong quarter of operating and financial results, driven by continued demand for spaces in our centers and associated leasing activity.
First is the second quarter of 2021. Our revenue grew over 14%.
FFO for share is 25 cents per share up from 24 cents.
Same store net operating income increased 8%.
Total occupancy is 91.5% up 150 basis points from Q2 2021 and up 50 basis points from the first quarter.
As of the end of the second quarter, our net effective annual base rent per square foot was $21.72, up nearly 9% from a year ago, and up over 2% from the first quarter.
And our balance sheet continues to strengthen with lower debt leverage as shown by the improvement of our net debt to EBIDA RE ratio to 8.3 times.
Total second quarter, 2022 leasing spreads were very strong and I'll have Christine discuss that leasing further in her section.
Our strategy of designing necessity-based community centers located in high-growth, high-household income Sunbelt markets continues to produce strong and improving results.
Given another quarter of successful results, I wanted to discuss some of the positive steps we've taken over the last six months.
I've shared some of the big focus points over the last several conference calls.
We have enhanced our governance, increased our investor outreach and interaction, strengthened our leadership team while reducing overhead expenses, grown FFO for share 25% and meaningfully improve our debt leverage.
Our dedicated team of associates share a common purpose to meet the needs of our communities, position our tenants to reach their success, and to create value in commercial real estate better than anyone in our industry. as a child.
We value hard work, teamwork, integrity, and growth, and I am honored to lead a team dedicated to executing on our business model and delivering long-term shareholder value.
Our strategy is clear and consistent.
Whitestone has had the right strategy in place for over a decade and we believe the environment has never been stronger to showcase that strategy.
First, in terms of strategic consistency, our focus has been on well-located, necessity-based retail centers located in high household income neighborhoods in the best submarkets in the fastest growing MSA.
And today, our portfolio is located 99% in the top markets in the Sunbelt.
The importance of geographic focus is something the industry has recently and rightfully placed tremendous value on.
Beyond our geographic focus, and even more important, is our strategy of crafting service-oriented centers designed around meeting local needs.
This strategy has always been embraced throughout the company, including our acquisitions team.
where we have utilized local sharpshooters to find centers in high-income neighborhoods capable of morphing into one of our growth centers. Integrations are built here. Desperate those 32-year-olds who offer a life training of generation of adult grasshoppers, such as a community and a community family, you
This strategy is relentlessly pursued by our in-house leasing agents who are ingrained in the surrounding communities and know how to attract tenants that meet the demands of their communities.
This strategy is embedded in the way we write our contracts, opting for shorter leases because of our strong belief in the tenants we choose for our centers, validated by the successful track record of growth of our tenant base.
This strategy is understood by our tenants as they grow, strengthening a center's connection with the surrounding neighborhood, and benefiting from increased traffic levels.
And finally, this strategy is also embraced by our development and redevelopment team, eager to find opportunities to build value through improvements to our current properties and through adding additional leaseable areas.
I'll have Christine expand on some of the detail behind our strategy, specifically unleashing and by walking through a property development cycle, but I have a couple new additions to the team I wanted to mention first.
Tim Ng recently joined the team as our vice president of acquisitions and brings over 20 years of real estate experience, most recently in similar roles with fifth-order and amriete.
Tim has great relationships in our markets, knows our product type very well, and we're excited to have him on board.
For the balance of 2022, he will be focused on our disposition efforts and sourcing great new acquisitions for the Whitestone portfolio.
I also want to welcome our newest Board member, Amy Fang, to White Stone. As part of our continued focus on governance, we are strengthening our board through the edition of Amy and increasing the number of independent trustees on our board.
Amy is currently the Director of Investor Relations for Shopify, a leading provider of essential internet infrastructure for many of the same businesses we work with.
Amy brings significant debt and experience in providing strategic counsel the hundreds of companies in her time at several leading strategic financial communications firms.
She has tremendous capital markets knowledge, having spent her time as an analyst on the sell side, and we're thrilled to have her join our board.
And with that, I'll turn things over to Christine.
Thanks Dave.
One of our team's strengths is leveraging our tenant relationships to continue to produce strong results. Since we've made the change as Dave mentioned earlier, we've continued to grow our occupancy, which is now at 91.5%, 150 basis points higher than the prior year, and a new record for Whitestone.
Aggregate leasing spreads were a positive 17.4% of the second quarter, and are a positive 13.8% over the last 12 months.
New leasing spreads were up 15.6% in the second quarter and have grown 11.2% over the trailing 12 months. And have grown 11.2% over the trailing 12 months.
Renewal leasing spreads expanded 17.6% in the second quarter and have increased 14.3% over the trailing 12 months.
The qualitative reasons behind these impressive leasing spreads on slide three depict our strategy that we have pursued over the last decade and positions us well to benefit from the trends that have been emerging the last few years primarily. Demand for smaller spaces continues to increase, especially in the 2,000 square foot range. Convenience, necessity and service are ever more critical to our customers and cannot solely be replaced with an online presence.
that are optimized by a combined click and border strategy.
Second, we are seeing a strong rebound in the fitness category, which has numerous brands coming in a variety of sizes and are strong and sticky traffic drivers. And are strong and sticky traffic drivers.
Demand for restaurant space continues to strengthen convenience and casual restaurants are seeing a significant uptick in demand. This may be a part of a post-pandemic trend, but we think the larger influence is the generational shift as demand per millenials and Gen Z strengthens, with both groups spending a higher percentage of their income in this category.
Importantly, a number of our centers are reaching higher levels of occupancy, which allows us to optimize tenants and their rents.
On slide four, we show that within our specific metros, we are in the best location within each of our metropolitan statistical areas, as evidenced by the premium runs we collect versus the average for each MSA.
Looking at the specifics in each metro, in Phoenix we targeted key neighborhoods in the immediate aftermath of the 2009 financial crisis and acquired the base of our centers at well below replacement cost. Our strategic focus on the East Valley and North Scottsdale is paid off due to the outsized gains in job growth and out of state relocations which have driven traffic at our well-located centers.
In Houston, a majority of our NOI comes from the main retail district known as the out of town district, or Galleria, and from the affluent western suburbs.
In Dallas, we were early investors in the northern suburbs that have been magnets for corporate relocations and are among the fastest growing zip codes in the country.
In Austin and San Antonio, we purchased centers in prime locations in both cities before the migration from coastal cities really gains strength.
Often the reason we're able to secure these premier locations within cities is because we're very in tune with where concentrations of educated talent are attracting employers.
Looking at the chart in the bottom right, the portfolio average base rent per square foot with the blue bars and the same store straight line basis rent increases with the green line. This takes out some of the variability with different size tenants and shows the overall rent trend in addition to the fact that rents are accelerating as weíre coming out of the pandemic. On slide 5, we illustrate the general life cycle of our properties, which is the inner ring of the slide.
As an example, we use Lakeside Market, a 2021 acquisition, which is rapidly moving through the phases.
Had to acquisition in 2021, Lakeside market had an occupancy of just over 80%. Lakeside was sandwiched between more developed areas and had an unmet need demand for young families prime to invest money in their children and need of services designed for hardworking parents with limited time.
The same dynamics that attracted us to making this acquisition also attracted HEB as a shadow anchor shortly thereafter closing down the property. As recently, a new Coles across the street is opening as well.
And just over a year, we have grown the occupancy to over 90% while increasing renewal rates as we go. In conjunction with adding new tons, we are rebranding like side with the new identity.
The location strongly centers around educational and fitness offerings for kids as well as affordable casual dining and dessert offerings that young families seek out as they spend time together.
We are in the process of developing the pad sites in order to take advantage of the morning commuters as well. We anticipate that within a short time Lakeside will join the roughly 40% of our properties in the refining phase with an occupancy over 95%.
Once properties reach this level, we heavily monitor the sales reports and further strengthen the center by referencing thriving businesses that tie strongly with the surrounding neighborhood and are more likely to endure through any economic cycle.
Often a property will take two to three years to make the refining part of the cycle, but still has several years of strong improvement within that fining phase.
Achieving all this takes a dedicated, well-trained team and I'd like to thank our team for driving results and for their commitment to our communities, tenants and customers. With that, I'll turn things over to Scott to go over the results in detail.
Thank you, in first thing.
As you can see on slide six.
They read funds from operations per deluded share was 25 cents for the quarter versus 24 cents for the same period in 2021.
You will notice that we have shared drivers regarding our 2022 FFO.
As Dave and Christine have shared, the quarter business is doing very well, which is driving up our occupancy and base rents.
Reduction and management compensation was most impactful in Q1 and will continue to be impactful in future quarters. and will continue to be impactful in future quarters.
Development opportunities may be a modest driver late in the year.
Our guidance contains an assumption on interest for none of our dispensing increase in?? What?
We anticipate we will refinance the majority of our 2022 and 2023 maturities within the next few months which will provide us with greater clarity on our future interest expense.
earnings growth continues to contribute to our strengthening balance sheet.
Total net debt was $638 million, improving our debt-to-gross book real estate cost ratio to 51% and improvement from 52% a year ago.
We are pleased with the significant progress we have made on strengthening our balance sheet and we remain steadfast in our commitment in this area.
Our board approved a quarterly dividend of 12 cents per share for the second quarter, representing an annualized dividend amount of 48 cents per share and an 11.6% increase versus the previous level.
To wrap up, I would like to reaffirm our previously issued 2022 guidance.
FFO for fully deluded common share and OP unit guidance is expected to range from 98 cents to $1.2 and is represented in a 14 to 19 percent increase from 2021. FFO for fully deluded common share and OP unit guidance is expected to range from FFO for fully deluded common share and OP unit guidance is expected to range from
This includes four cents of non-recurring stock forfeitures and severance costs from the first quarter.
Our key assumptions related to the guidance have not changed.
With that, we will now take questions. Operator, please open the lines.
We'll now be conducting a question and answer session.
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One moment please while we poll for questions. Thank you.
Thank you, and our first question is from the line of Mitch Dermain with JMP Securities. Thank you, and I appreciate your questions.
Is there anything changed with regards to the lease negotiation? I guess I'm curious if you're requiring more security deposit or requirement for financials. Anything different in terms of the discussions you're having with your tenants?
Well, I think, and thanks for your question, but I think what they're looking at is they're starting to see the impact of inflation and they're also asking for longer lease terms. And so this is something that we're still sticking with, keeping shorter lease terms because that's benefited us as a company, them as well, because it gives an opportunity to revisit their business when there are lease terms. Thanks for watching.
additional security and those other items. I mean, we have changed our focus to a quality of revenue focus about two years ago. We did this primarily during COVID, and that's really strengthened, I think, our product line, the stickiness of the kind of client that we have now. That involves a deeper look in their financials, but not just their financials. It's a look at what resources they have. It's not just cash. It's how they operate..
who their teams are, you know, what's the quality of some of their vendors looking into their current operations to understand how well they understand the metrics of their business, their commitment to the business as an owner and how engaged and how involved they are. So those are some of the things that we've refocused the team and their efforts on and it's paid off.
Hey, Mitch, it's Dave. I'll just add a couple things to Christine's comments. As she said, just a continued focus on quality revenue and just to highlight, we have seen obviously that be very successful. If you look at our leasing activity as well as our leasing spreads, they're trending very well with this quarter being 17.5% leasing spreads on a gap basis and 9% on just a starting point basis. So.
Really, really pleased with the activity levels we're seeing in our centers, pleased with the leasing activities and really a focus on continuing to lock in really quality revenue.
Great. Question on same store. Obviously the results have been significantly above guidance through the year. Are you implying a slowdown?
Potentially in the back part or are you just taking a conservative view with regards to your guidance?
Thanks for the question. I think we expected the first part of the year to...
to yield higher same store results because we were still in a recovery mode from COVID.
In the first few quarters and by the time we got to the back half of the year we started to see improved collections or we ended up with record leasing by the time we got to the end of the year.
And so I think it's just, it has more to do with 2021 than it does to do with 2022 results.
Gotcha. And then what should I be thinking about asset sales in the back part of the year? Is there are there any?
ask this on the market and you know what's the status, if there are, what's the status of discussions.
Yeah, so as we communicated previously, we expect to do some recycling this year. We do have a handful of assets that are hitting the market. So I think we've targeted somewhere less than 50 million kind of in dispositions and acquisitions. We are actively in the market on a handful of dispositions to come up to about that amount.
and we're sourcing potential recycling deals for those. So I think we're on track and look forward to having more to report potentially in the next couple quarters.
Again.
Thank you.
The next question. Thank you very much. The next question comes to an end of Grav Metta with EF Hutton. Please see the next question.
Thank you, good morning.
Following up on your comments on sourcing for binions transactions, can you maybe provide some color and what you guys are seeing in that position market? What you guys are seeing in that position market?
Dave Morning Garv, this is Dave. Yeah, so what we're, you know, obviously we are seeing some softening of pricing, but it's a little early. We're still seeing, you know, a fairly decent gap between sellers and buyers on cap rate expectations. But Whitestone has always looked for a little different type of asset. Part of our search is our depth in the markets we're in.
but probably not a whole lot more to comment until we get further along the line.
Okay. And on the assets that you're trying to sell, can you talk about your expectations for the assets that you had to be?
I'm sorry, Garb. Could you repeat that question? I lost you at the end.
Maybe you can talk about what you are expecting for the assets that you hold in the joint venture. Would you be planning to sell those assets as well?
Yeah, I think that's, you're talking about the properties we own in our joint venture, the non-core assets. Whitestone is working toward liquidating that equity investment. We have on our books about $35 million of investment in some assets that are non-retail and so we are working towards monetizing that. To me that's a little hard to predict now but we are actively working toward recycling those.
those properties as well. Okay, and then lastly on the balance sheet, you talked about the potential refinancing of 22 and 23 debt expirations in the next few months. Can you maybe provide some color on what you're gathering as far as the interest rates? And then the 23 debt expirations that's the credit line with the floating rate debt should be expected. Now you guys do fix that.
to enter the fixed rate as you try to refund the maturities.
Hi, it's Scott. We're working on the recast right now. We do expect to fix the interest rates on the $260 million that are fixed now and probably to leave around 20% of our dev variable. But we're assessing that as we go through the process. But those are our current expectations. And Dave, I don't know if you have anything to add there. I might just add. If you obviously there's been a ton of volatility around rates.
But it has come down just a little bit. If you look at the treasury rates, they're very similar where they were four years ago. When we did our last recast of our credit facility, I think we've looked at the five-year swap rates and they're somewhere in that two, five percent today. Obviously, a little bit of variability. So we're in the process. There's a fair amount of activity in the banking world, as you guys know right now with folks doing.
refinancing, so we expect to be closed in the third quarter. We've built a little bit of extra interest expense into our guidance for the second half of the year, and we'll have greater visibility on that, obviously, as we close. But I think we're on track with the refinancing, moving out those 2022 and 2023 maturities, and then continuing to look at laddering our debt, continuing to look at our fixed-rate variable rate. But we do believe having a portion variable right now makes sense about, as Scott said, about 20%.
Okay. Thank you.
Okay, thank you.
The next question comes from the line of Craig Cusara with BRI Securities. This is your third question.
Hey, good morning guys. You reported a loss in your joint venture portfolio for the first time I think since you reported it. It looks like occupancy drops sequentially at some of those properties, but can you give some color going on there? Were there any one-time adjustments, maybe impairments, and what are your expectations for the rest of the year?
No, there weren't any impairments in that portfolio. There's a number of properties that I believe they're trying to cycle the leases out of there to have flexibility with purchaser.
And so we do see an OI going down in a number of those properties, but I think in several of those cases they're just getting them right into you.
at himself.
And all I might add to that is I do think, Craig, that we clearly would like to exit those assets. So I think there might have been some additional expenses incurred by the general partner this quarter that were charged as well. But I think we think clearly from a Whitestone perspective, it's in the best interest of our shareholders to exit. We're working toward that and recycling that into the retail assets that we do very well at.
Got it. And I would say for over the last year, so you've been able to keep a lid on taxes pretty well, but there was a pickup this quarter. Were there any one-time adjustments in there, or is that just a function of the rise and value of the assets?
In the Texas market, there's sort of a three step process in the tax valuations, and that's where...
a good chunk of our assets are.
So...
There's an initial valuation, then we get a chance to protest and then we litigate. So oftentimes we see a little bit of a bump until we work our way all the way through that three step process. And we're just conservative in the way that we estimate those taxes. And what would expect us to valuation to get lower is to be worked through the process this year.
Got it. I appreciate the color. Just one more for me. With the potential for recycling capital, Dave, are you guys looking at maybe getting involved in any sort of development or redevelopment of your existing properties, placing capital there versus maybe making acquisitions? Or what are your current thoughts there?
Sure, I'll start with just a couple comments and have Christine give some more thoughts. But, excuse me, yeah, we're continuing to look at, so just on the dispositions and recycling, obviously focus on 22 to get back into the markets, obviously do some acquisitions, but do it in a capital neutral way through recycling. We do also have several opportunities within the portfolio.
that maybe some are small, some are larger, through development, but we're ramping those up and expect to have that coming. Oh, Christie, you're Christine, what's that, anything she may not? But we have, within the portfolio, I will say, is as we've acquired assets over the years, sometimes we've picked up land parcels, sometimes we've picked up a little extra parking field, and we're working internally to look for had-fine opportunities, development opportunities. For had-fine opportunities, development opportunities.
and really getting those starting to plan up so they can contribute to our earnings over the coming years. So we think we'll have more to announce on that, but I think that right now we are, our plan is to extract that value to start to work toward that and working through five more details later. And working through five more details later.
Okay, thanks.
Thanks Greg.
As a reminder to ask a question today you may press star 1.
Thank you.
Thank you. At this time, I'll turn the flow back to management for the recosing remarks.
Well, thank everyone for joining on today's call. We very much appreciate your interest in Whitestone. Should you have any questions, I encourage you to reach out to David Morty or anyone on our team. And once again, we thank you for your interest and have a great day.
This concludes today's conference. We disconnect your lines at this time. Thank you for your participation.
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