Q3 2022 Whitestone REIT Earnings Call

Greetings and welcome to the Whitestone Whitestone, REIT third quarter 2022 earnings call.

At this time, all participants are in listen only mode.

A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

This is now my pleasure to introduce your host David Morton. Thank you you may begin.

Good morning, Thank you for joining Whitestone REIT third quarter 2022 earnings conference call joining.

Joining me on today's call are Dave Holeman, Chief Executive Officer, Christine <unk>, 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.

Certainties and other factors.

Please refer to the company's earnings news release and filings with the SEC, including Whitestone is most recent Form 10-Q and 10-K for a detailed discussion of these factors.

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 maybe accurate only as of today's date November 2nd 2022.

The company undertakes no obligation to update this information Whitestone third quarter earnings news release, and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section.

We published third quarter 2022 slides on our website yesterday afternoon, which highlight topics to be discussed today I will now turn the call over to Dave Holeman, Our Chief Executive Officer.

Thank you David Good morning, and thank you for joining Whitestone <unk> third quarter 2022 earnings conference call we.

We delivered another very strong quarter of operating and financial results first.

First is the third quarter of 2021, our revenue grew over 9%.

Our <unk> per share is 24 cents up from 22 cents.

Jim store net operating income increased four 5% and is up over 8% for the nine months of the year.

Our total occupancy is 92, 5%.

260 basis points from Q3.

2021, and 100 basis points from the second quarter.

As of the end of the third quarter, our net effective annual base rent per square foot was $21.73.

Six 5% from 2021.

And our balance sheet continues to strengthen with lower debt leverage as shown by the improvement in our year to date net debt to EBITDA or a ratio of 7.9 times versus nine times for the first nine months of 2021.

I am very proud of the team for delivering these results.

We know that consistent execution is vital to producing strong results and that's exactly where our focus is throughout the company.

Specifically since I was appointed where 100% focused on our core business and on executing the Companys strategic plan.

It has been a process that started with the elimination of numerous distractions, we turned our attention to unlocking value and aligning interests to ensure that this unique business model was able to deliver results from our portfolio of properties that are positioned to serve their respective communities on.

A daily basis and drive strong consistent cash flow growth.

We have delivered 80 cents per.

Per share year to date, and we are narrowing our 2022 guidance range to the upper portion of the range, making our new target a dollar to $1 two per share.

Today, we thought we might take a different a little different approach to make the call a bit more interactive will share and answer some of the questions. We've received from the investment community. Following that we'll take additional questions from the audience on our call today David.

Thanks, Dave I'll start with a common investor question have you answer it Dave.

How do you close Whitestone is valuation gap, what's your plan.

Let's let's start with what we've already accomplished as we've done a tremendous amount in a short amount of time, we are on target for an over 16% year over year <unk> per share growth and we just delivered record occupancy of 92, 5%, but our accomplishments extend well beyond.

And just the earnings achievement.

Since the new executive team was put in place executive compensation has been reduced significantly numerous governance actions have been taken including splitting the chair and CEO roles the removal of the poison pill.

Approval of shareholder access to bylaws and board refreshment with the addition of <unk>.

Furthermore, we extended our credit facility and set the company on a path to divest of our JV investment and pillar style on capital rate operating partnership.

So we are pleased with what we've accomplished so far but additional opportunities still exist to improve.

We need to continue to grow earnings and reduced leverage we need to continue delivering consistent quarterly results, we need to demonstrate that we're the best in operating community connected centers with a well curated mix of 2000 to 3000 square foot spaces occupied by vibrant.

Successful businesses.

If we deliver on these remaining items I am confident the market will recognize and appreciate the value being unlocked.

Thanks, Dave Let's go with another question for you regarding Whitestone occupancy.

The Companys occupancy is at a record high.

Why shouldn't investors view the current occupancy is the ceiling is again just the environment, we're in and if not what's changed.

Thanks, David we are we're pleased with the progress we're making in growing our occupancy level, which I believe is the result of the numerous actions we have taken so far in 2022.

Taking the CEO role, we immediately began to engage with our various stakeholder groups to truly understand the issues and take steps to focus the business on maximizing long term value for shareholders. As I stated in my first earnings call. We know this begins and ends with high.

Quality leasing accordingly, we have taken the following steps.

First we made additional changes in the executive leadership team to achieve alignment with the investment community.

Second we increased accountability, specifically, we streamlined and strengthened the regional leasing and property management teams, providing clear goals and priorities, eliminating micro management, and allowing for faster and better execution.

Third we began the process of restoring our relationships within the real estate community, especially with the brokers, which has dramatically increased our transaction flow.

Importantly, we've improved morale throughout the company by giving employees more effective tools for success and clear objectives that we're aligned with the management team, which is resulting in greater productivity.

In combination these steps have expanded our potential on leasing and occupancy.

We have an extremely competitive team that wants nothing more.

Then to outperform there has never been a better time for our strategy.

Our tenants.

Our properties and our team to drive results and create value.

Thanks, Dave.

Staying with occupancy, let me turn to Christine for a couple of questions Kristine how high can occupancy go what's the goal for 2023.

I will address our 2023 occupancy growth target with the Q4 call. However, I think it's important to note that occupancy is an outcome. Our focus is designing the right centers. The tenants that are adding value to the community and that bring in quality of revenue, we target tenants, who can increase traffic successfully serve the community and copper.

<unk> hotels in order to grow rental rates, we seek out successful tenants not just fill the space.

We view <unk>.

Merchandising is a critical component of ensuring a center is connected to the surrounding community.

Not just occupancy that does well when you have successful tenants rent increases are far more palatable when businesses are thriving I should also point out that this quarter for the first time, we broke out our occupancy between greater than 10000 square feet spaces, and those 10000 square feet and under.

Our 10000 and under square foot occupancy, which is our core competency was 91% for the quarter and we believe still have substantial room to increase one of the additional trends. We are seeing is that as the work force reduces its orbit around the office buildings demand in our local centers is increasing and we're reaping those benefits.

Thanks, Christine can you guys give us some more color on the current environment.

We continue to see great demand within our footprint, our 260 basis point year over year occupancy that reflects not only the AD environment, but the momentum we have found from making the change Steve walked you through.

I should also mention that demand has remained strong through the first month of Q4, leading up to this call.

This strength runs throughout our tenant categories, including fitness restaurants education medical.

And as a point of reference to the court during the quarter, we signed 86 leases, representing 219000 square feet and $29 million in total lease value. This.

This is versus the pre pandemic 2019, the third quarter was 25% higher than a square foot basis, and 56% higher on a total lease basis and year to date with 56% higher on a square foot basis at 96% higher on a total lease value basis.

I am pleased that our total leasing spreads for the quarter were a positive, 9% and 19% on a cash basis and GAAP basis, respectively.

And I'll remind you that our lease structures are strategically designed with shorter lease terms, allowing for more frequent lease rate increases.

Recently, HEB, a powerhouse grocer within Texas, just announced plans to break ground on our new store across the street from our heritage trace Plaza in Dallas Fort worth.

And later today they'll have a grand opening ceremony for the Plano store their opening.

Jason to our Lakeside market Center.

The continuation of our centers, gaining strong shadow anchors and snow happy accident or data driven acquisitions, our prime locations to reap the benefits as consumers and businesses make the same determination, we get and move into our communities.

Moving with recent trends, we opened two Asian, barbecue and hotspot restaurants, this quarter, bringing the total within our centers up to six each in a different location. We think these perfectly set with the growing affluent communities focused on casual economic family dining experiences with the communal component.

Like all of you we are watching for signs of a market downturn, but that's not what we're seeing.

If that should change we believe staying true to our strategy of leasing to growing businesses, such as services and restaurants and focusing on quality of revenue and highly desirable Sun belt markets will allow us to effectively weather a range of economic environments.

A great example of the value of our centers. We operate is that our <unk> per share was off only 8% between 2019 and 2020.

Which was very strong and performance against our peer set.

Thanks, Christine I'll shift over to Scott now with a few key investor question.

How is capital prioritize how will capital allocation be handled over the course of the next few years.

Thanks, David Whitestone has twin goals of.

Growing earnings and improving leverage.

In the current environment. It means we need to focus on recurring earnings.

Activating non income producing land parcels and.

In recycling assets to fuel growth.

It also means that projects or acquisitions need to have strong returns in order to achieve our twin objectives.

We're fortunate to have strong organic growth opportunities embedded in our properties and a number of development and redevelopment projects was returns strong enough to achieve our twin goals in the near term.

On the acquisition side.

We are actively seeking well located value add properties that will meet our dual criteria.

The current transaction market is shallow and disconnected with the rising cost of capital.

So patience and discipline are doubly important.

We look forward to sharing more information on our projects and capital recycling as they progress over the balance of the coming quarters.

Thanks Scott.

One major development during the quarter was the extension of Whitestone is credit facility, what's your projection for interest expense in the fourth quarter.

Thanks, David we are pleased to have amended and extended our corporate credit facility in the third quarter.

This credit agreement amendment moves the bulk of our maturities until 2027 and beyond inclusive of our two six month extension options on that revolver.

Also the amendment allowed us to lock the interest rate on 82% of our debt.

The renewed credit facilities attractive terms reflect our strengthening balance sheet and provides us with additional liquidity and flint financial flexibility to take advantage of opportunities in our current portfolio and in the marketplace.

Looking at the forward sofa curve.

At our current debt level, we anticipate the fourth quarter of 2022 will have $1.3 million higher interest expense versus the third quarter.

We had strong support from our bank group and.

And continue to improve our overall debt leverage.

Thanks Scott.

I'll ask one final question of Dave quite simply how does whitestone standout what's your compelling differentiation.

Thanks, David This really is at the core of everything we do.

I believe we have numerous differentiating factors that make whitestone unique and attractive in the interest of time I'll just highlight one or two.

We believe there is tremendous growth to be had in a non formulaic center development.

If youre looking for a company paying low cap rates for grocery anchored centers are operating power centers with big box and soft good tenants that's not whitestone.

We believe needs based centers that serve thriving communities on a daily basis with quick serve and family restaurants fitness medical and educational offerings can effectively anchor center and deliver higher rents and we believe those centers combined with <unk>.

Great locations and high income neighborhoods in high growth Sunbelt locations are better designed to outperform in all economic cycles.

Our average base rent for spaces, 10000 square feet and under is $25.34 versus $13.58 for larger spaces.

In a properly design center, we believe the tenants in the 2000 to 3000 square foot range provide higher profitability and less risk, especially given the expense and timing of switching out a larger space and the restrictions and approval rights that often are contained in these larger tenants.

<unk>.

Thanks, Dave.

This concludes our prepared remarks by the Whitestone team and we're now ready to take some questions.

Operator.

Okay.

Thank you, Sir ladies and gentlemen at this stage, we will be conducting a question and answer session.

If you would like to ask a question. Please press star and then one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star and then two if you would like to remove your question from the queue.

Again, if you would like to ask a question. Please press star and then.

Last question is from Mitchell Germain from JMP Securities.

Great I appreciate you guys doing something different on.

On the call so thanks for that.

Maybe just some.

Color on the leasing pipeline.

Hearing a lot more national tenants, taking smaller spaces and typical maybe a little bit in terms of the types of tenants that you've seen the most traction from.

Thanks for that.

Western Mitch this is Christine.

Seeing consistently across all categories. The same type of a drive for activity to come into our markets. So most of it has been from I would say continue interest in restaurants.

But I would say that this would also be from the strength of our regional brands and franchises still still increase there.

Fitness as we talked about last quarter is still strong.

It's franchises or national brands, expanding and in addition to that it would say that.

Health beauty and wellness is still in.

And there's so many new iterations of health beauty and wellness coming out so we're seeing a new a lot of new types of.

Product out there and it's coming from both the east and the West Coast. So usually the new idea start there they move in but they come into our locations because of.

Our H H eyes.

And I think along the lines of as I mentioned earlier I think there you see some of these new trends. So for example, the Korean hot pot and barbecue restaurants.

We've opened six this year.

And they're all from.

Each one of them all six two in Dallas, one in Austin, three in Houston coming in and all again strong regional brands opening up in our locations.

Hey, Matt, It's Dave I might just add one thing to christine's comments.

You mentioned that the size of the space is exactly right. We continue to see really that demand in the in the spaces. We have if you look at our properties. We we've always said we focus on those two to 3000 square foot space tenants.

And we're really well positioned because of its AD space size continues to be a focus on the smaller spaces and that is Kristine commented on the types of tenants and just one more new trend that we're seeing that's compared Tristan is that we're seeing in the case of companies that have a workforce that are looking to be closer to home taking.

Taking spaces and retail centers for a couple of different reasons. One is they want the ability to have their brand out on the storefront number one number two it's about finding talent so much to that about the brand and also creating the opportunity for amenities for the workforce to come back and that's been out unique you need.

It moved to in those spaces have actually been a little bit larger than the norm. So they're closer to 3000 in some cases, we've had a couple of spaces south fill up at around 4000 to 5000 square feet.

Great I appreciate that Dave maybe a broad question for you pretty.

Again opportunity to do some development redevelopment opportunities within your portfolio and I know you get a pretty significant return on that but how do you weigh that versus deleveraging, obviously the balance sheet screens fairly unfavorably to peers. So you should talk to me a little bit more broadly about how you view capital allocation going forward.

Yeah. Thanks Mitch.

Excuse me I think Scott indicated in his comments that we have dual goals.

And that's that that's the way we are focused today, we are going to to look to take actions that drive earnings growth, but also that improve our balance sheet. So I think as we look at opportunities. There are I believe in our deck, we posted for the call. There's a slide on on that but we have pad sites.

We have redevelopment opportunities and then we have some some land parcels within the portfolio that have been with us for a number of years that we're going to look to activate and create income none of that happens overnight, but I will tell you that we as a management team are focused on on those opportunities and delivering those.

Consistent with our goals of driving earnings growth and improving the balance sheet.

Got you.

Any update on pillar stone, obviously I know that there was some noise, that's preventing a or at least delaying some of that but.

Is it just broadly the market that's delaying a sale or is it some other issues that are weighing on that.

So we are we've clearly communicated our intent to exit our our JV venture.

And we're setting a path to doing that there is some litigation involved in that so I can't comment a whole lot on it but be assured that.

Whitestone is focused on taking actions that are in the best interest of our shareholders.

There is no.

No nothing other than that and our focus but we do believe that the whitestone exiting those that partnership monetizing our investment and then looking to reinvest that back in the businesses is the right thing for our shareholders.

That investment is not generating a lot of return for our shareholders because of the relationship with with filler stone so not any update match other than saying we are focused on taking the steps to to monetize that investment for whitestone and looking to do that as you know in due course.

Gotcha and last one for me.

Anything happening in operating expenses property operating that need to be aware of this quarter.

Yes. Thanks for that question Mitch. This is Scott I'll just start by mentioning that the vast majority of our leases are triple net leases, meaning that we recover our common area expenses real estate taxes and insurance costs from our tenants.

And I'll also mention that over the last few years, our recovery percentage has been in the mid to high Eighty's.

And that should move up along with our occupancy as occupancy increases.

From one quarter to next.

We do have increases and decreases based on some degree of seasonality with utilities and timing of repairs.

And the utilities typically are the highest in the summer months, which is the third quarter in Houston, and well just in Texas and in Arizona, and we did have.

Higher repair costs in the third quarter as well.

But.

If you take a look at the operations expense just as a percentage of revenue on a year to date basis. Its around 18%. So far this year, which is the same as it was in 2021 and so for the.

For the full year of 2022, I expected to remain around 18%.

Great I appreciate it thanks.

Thanks Mitch.

The next question, we have is from Gaurav Mehta from Hudson.

Hi, Good morning, Thanks for taking my question in your prepared remarks, you talked about lowering leverage long term is going to the company's goals.

Can you maybe help us understand how you are planning to lower the leverage and what your long term targets are as far as leverage.

I'll I'll start this is Dave Thanks, garb, I'll start and Scott may want to add some further comments, but.

And I think that the key key answer is really we're doing that from from operations.

With a focus on really growing our EBITDA.

And using excess cash to.

Great additional EBITDA or reduce debt if you look at our our debt leverage this year I think for the nine months were down.

Debt to EBITDA at about seven nine thats down from above nine a year ago. So we believe just by.

By focusing on organic growth, we can reduce that debt to EBITDA measure significantly we've set a target of.

I think seven turns by end of 'twenty, three and we expect to be down into the sevens by end of this year.

Okay.

Second question on your G&A, you guys lowered the G&A guidance for 2022 was there any one time item driving that or you think that's like the long term run rate going forward.

So this is Scott in the first quarter, we did have four cents of non recurring G&A savings associated with the exit of some of the existing executives at the time.

I expect the G&A cost.

Hover right around the high four billions to $5 billion range going forward.

May have some puts and takes and legal costs associated with litigation with Rx CEO .

And with pillar stuff, but I do expect that G&A savings to continue.

Okay. Thank you.

Thank you Sir.

And gentlemen, just a reminder, if you would like to ask a question. Please press star and then one now.

The next question, we have is from Craig Kucera from B Riley.

Hey, good morning, guys.

I believe earlier in the year, you mentioned that you were looking at selling some assets potentially in the back half of the year, perhaps recycling 50 million and I I know you discussed sort of more challenging market conditions for for transactions, but I'd be curious.

You know at the time, you thought you'd be able to get a pretty meaningful cap rate arbitrage are you seeing as you sort of evaluate those opportunities that same sort of spread are happening sort of sort of tightened just any color. There on the transaction front would be helpful.

Hey, Craig it's Dave Thanks for the question.

I think the comment I'll give on the transaction activity is probably similar to what youre hearing from others, it's fairly shallow.

There's less deals in the market right now obviously lots of.

Dislocation potentially between bid and ask but we are we are progressing on our recycling efforts.

And really look forward to sharing that with you.

Probably next quarter as we moved to closure so.

We had identified a small amount of target of around $50 million in dispositions and then.

Obviously looking to redeploy that.

We're finding 10 31 money that's out there still so there's a little bit smaller assets are still in the market. There still are buyers that have 10, 31 money that needs to be put to work.

So I'd love to give you more but can't get ahead of myself will have more to share on that on the coming months, but.

We are on track with what we said we would do this year and look forward to sharing more details.

Okay great.

And just one more for me on the dividend.

And I think right now you're paying out about 50% of <unk>.

So, which as you know quite a bit below where it was prior to the pandemic. How is the board thinking about managing the dividend going forward is that just to grow with earnings or is there room to maybe see the dividend out strip earnings growth going forward.

Yeah.

Good question, Greg I'll start and then I'm once again, Scott may add something to add but I.

I think when we look at the dividend we're looking at obviously, our tax requirement as a REIT as one of the key criteria.

We're looking at capital allocation as Scott said.

We've got some great opportunities in the portfolio to invest and drive value. So our board is looking at our dividend level in light of our tax requirement in light of our <unk> level and then in light of obviously the different options for that cash we do think there's room to grow the dividend.

In sync with our earnings growth.

But I think we're comfortable with our dividend level, we will continue to monitor the tax and taxable income and then we've got some some great opportunities wells for some of the development opportunities that will create a lot of value.

Okay. Thank you.

Thanks, Greg.

Okay.

Thank you.

No question, we have is from Michael Diana from Maxim Group.

Okay. Thank you.

It's more on a pillar stone in your dispositions is is there because of your leverage considerations is there a a linkage there between your ability to dispose of assets in your development and redevelopment or.

Are you also thinking or considering we're working on bringing in partners for your development and redevelopment.

Okay.

Thanks, Michael.

I think when we think about that the dispositions and the investment in pillar stone I think of that as just.

Available capital.

You know that we can redeploy in a way that creates more value we do have.

No.

Significant positive cash flow that we're able to invest in some of these smaller projects as well so.

So I think when you look at our opportunities many of the development redevelopment pad site opportunities, we can find from organic cash flow as well as a little bit of recycling. We do have a couple of larger development opportunities in the portfolio that we're working towards.

Activating and those might involve a partner we're looking through the best ways a couple of those potentially are putting.

Putting some.

Some residential in line with the retail, but we're we're looking to add to continue to move forward on those but most of our development opportunities. The smaller ones. We can do from our from our organic cash flow not a lot of capital needed.

Okay, great. Thanks, and is is there any consideration to disposing of your Chicago.

Okay.

Yes.

I think what we do is just like you would do with our stock portfolio. We look at all of our holdings and we did.

Determine which ones. We can you know it's the right time to monetize so the Chicago asset is absolutely in our list with all of our properties. It is outside of our our footprint.

But it's a very well operating center, but it is it is under consideration as well.

Okay, great. Thanks.

Yeah.

Okay.

Thank you Sir.

At this stage there are no further questions I would like to turn the floor back over to Dave Holeman for closing comments. Please go ahead Sir.

Thank you operator, just like to thank everyone on the call today for joining US. We appreciate your interest in Whitestone and are very pleased with the progress we're making if we can help further don't hesitate to reach out to David Morty or any of us on the executive team have a great day.

Thank you, Sir ladies and gentlemen that does conclude today's conference. Thank you for joining US you may now disconnect your lines.

Okay.

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