Q1 2023 Whitestone REIT Earnings Call
Speaker 2: Greetings and welcome to the Whitestone Read First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please...
Speaker 3: Thank you for joining Whitestone REIT's first quarter 2023 earnings conference call.
Speaker 3: Joining me on today's call are Dave Holman, Chief Executive Officer, Christine Mascandrea, Chief Operating Officer, and Scott Hogan, Chief Financial Officer.
Speaker 3: 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 mistakes made during these email Season Despitements.
Speaker 3: Whitestone's most recent Form 10Q and 10K for a detailed discussion of these factors.
Speaker 3: Acknowledging 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 may be accurate only as of today's date, May 3, 2023. The company undertakes no obligation to update this information.
Speaker 3: Whitestone's 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 first quarter 2023 slides on our website yesterday afternoon, which highlighted topics to be discussed today. I will now turn the call over to Dave Holman, our chief executive officer. Thank you, David. Good morning, and thank you for joining Whitestone's first quarter 2023 earnings conference call. We are pleased to deliver another quarter of strong results.
Speaker 3: is offered one category in many of the headlines today.
Speaker 3: So I wanted to make a straightforward point that investors know, but that sometimes seems to get lost.
Speaker 3: Simply put, not all commercial real estate is the same. Whitestone is in the most desirable markets, has the right types of tenants, the most flexible and in-demand size of leaseable spaces and continues to benefit from limited supply and strong population and job growth in our markets. sixteen
Speaker 3: and also continues to benefit from hybrid work as consumers spend less time in offices and urban centers and more time at home and in their neighborhoods. The lane we've been in for the last decade is exactly what is in greatest demand today.
Speaker 3: We specialize in smaller spaces and populating our centers with service oriented businesses. As people continue to migrate to Texas and Arizona, we see the fundamental drivers of our business are not just remaining strong, but accelerating in the current environment.
Speaker 3: In the first quarter, we signed new and renewal leases at a blended 20.8% increase over the prior leases on a straight line basis and 13.3% increase on a cash basis.
Speaker 3: During the first quarter, we grew our top line revenue over 5% produced strong 2.8% same-store growth in OI growth and achieved FFO for share of 24 cents.
Speaker 3: And we strengthen our balance sheet, reducing our exposure to variable rate, variable rate debt and improving our liquidity.
Speaker 3: Our occupancy at quarter end was 92.7% up 170 basis points from a year ago, and our net effective annual base rent per square foot was $22.22 up 4.7% from 2022.
Speaker 3: Christine and Scott will provide greater detail of our operating and financial activities and results in their comments.
Speaker 3: We are pleased with our start to 2023, and our focus for the remainder of the year will be growing shareholder value through operational and financial performance.
Speaker 3: FFO for share growth, and delivery of consistent results.
Speaker 3: The new management team has delivered five quarters of strong results and understands the value of building on those results.
Speaker 3: We will continue to focus on the balance sheet and cost of capital with improvements to debt leverage in 2023 and future years and remain disciplined stewards of capital. We recognize the value of a strong balance sheet and we recognize the importance of reaching the leverage milestones we have set.
Speaker 3: We will continue to focus on a creative recycling of capital. As we highlighted on the fourth quarter call, in 2022, we made a number of strategic dispositions that funded our Lake Woodlands acquisition and allowed us to improve our debt leverage.
Speaker 3: We are targeting similarly accretive activity, probably about the same magnitude within the next few quarters. And finally, we will continue to focus on monetizing our underperforming joint venture investment in Pillarstone. Our team is aligned, our focus is clear, and we are confident in our ability to add value from a unique business model and a great portfolio of high quality, open air, convenience, and necessity-based centers.
Speaker 3: that are positioned to serve their respective communities on a daily basis and drive consistent cash flow growth. With that, I will now turn the call over to our Chief Operating Officer, Christine.
Speaker 4: Good morning everyone. As Dave mentioned, we remain confident in terms of achieving our 2023 objectives and our own track with our internal monthly and quarterly goals.
Speaker 4: Our leasing efforts remain very strong in the quarter, although the actual leases signed were a little lower than previous quarters. We expect the very active first quarter to show positive results in future quarters in terms of leases signed, leasing spreads, and overall occupancy. Occupancy remains high at just under 93%.
Speaker 4: Up 170 basis points from a year ago and down slightly from the last quarter as a result of re-merchandizing efforts, which are going well.
Speaker 4: We achieved renewal spreads of 23% and new lacing spreads of 9.5% for a combined overall positive lacing spread of 20.8% in the quarter.
Speaker 4: It is gratifying to see the number of trends that we acted upon a decade ago really accelerated in the recent quarters and we're working hard to capitalize on those trends.
Speaker 4: Probably the most important activity we do in order to ensure we're skating to where the puck is going is the mix of businesses we select for our centers.
Speaker 4: In turn, the shorter lease is allowed to be much more nimble in terms of optimizing our tenant mix to best service the surrounding neighborhood. Where active managers are by centers and the shorter refresh rate allows us to ensure that our centers are thriving for their communities. Proactive management requires that we know how our tenant businesses are performing and we do. We're continually verifying that local customer demand is being met and we're designed to take better action of the business is not meeting those needs. We have a very low number of big box tenants outside of grocery stores and a risk.
Speaker 4: Instead of big box tenants and power centers, we have entrepreneurial tenants, often fast growing regional franchises, and we've anchored either by grocery restaurants or combination of high traffic tenants. We've averaged over 25 tenants per center and we have a very high retention rate, providing a high dispersion of risk for our investors.
Speaker 4: One of the advantages that arises from the closeness that we have with our tenants is that we have a very good pulse on the current business environment Texas and Arizona. Consumer demand remains very strong within our markets. Additionally, many service-oriented businesses within our center are low capital businesses because they don't have capital tied up in inventory. We're keeping an eye out to see if credit conditions become a concern.
Speaker 4: but we see no evidence currently in either Texas or Arizona. Scott?
Speaker 3: Thank you, Christine and good morning. Our solid first quarter results demonstrate the strength of our high quality portfolio of properties as evidenced by robust leasing spreads and positive same-store NOI growth. Our NA REIT funds from operations for deluded share was 24 cents for the quarter.
Speaker 5: I-growth largely due to higher-based rent of $900,000 offset by higher interest rate cost.
Speaker 5: largely due to higher base rent of $900,000 offset by higher interest rate cost. In addition,
Speaker 5: Pro Rata FFO from our joint venture was lower by approximately $500,000.
Speaker 5: Same store, NOI, was a positive 2.8% increase fueled by strong leasing spreads.
Speaker 5: and increase your over your occupancy.
Speaker 5: In addition, furthering our ability to narrow in our guidance target and minimize interest rate risk, we entered into an interest rate swap on $50 million of variable rate debt on the last day of the quarter.
Speaker 5: reducing our variable rate debt to 63 million or approximately 10% of our total debt.
Speaker 5: While the sulfur curve would indicate rates will flatten or fall soon.
Speaker 5: As shown on slide 9, while we estimate higher interest rates to be a drag on 2023 earnings, we expect same-store-in-o-I growth and scaling of G&A infrastructure to positively contribute to our 2023 results. We continue to strengthen our balance sheet with improved debt leverage from $8 million in lower net debt and increased EBITDA RE with lower variable rate interest exposure. Our even-a RE ratio improved to 7.8 turns as compared to 8.1 turns a year ago.
Speaker 5: excluding stock forfeiture benefit in 2022, and our variable rate debt as a percentage of total debt improved to 10% from 17% at your end.
Speaker 5: We have a well-lattered debt stack with limited maternity coming due over the next three years, and we expect to continue to focus on strengthening our financial position to position us for opportunities as they occur.
Speaker 5: Let me conclude my prepared remarks by reaffirming our full year 2023 guidance.
Speaker 5: As Christine and Dave both said, our results are in line with our internal monthly and quarterly expectations and have us well on track for achieving our 2023 full-year targets.
Speaker 2: And with that, we'll open the line for questions. Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your align using the question queue.
Speaker 2: You may press start 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. Our first question comes from Anthony Howe with Drift Securities. Please go ahead. Good morning guys.
Speaker 5: You know, a little bit of challenges with the parking lot being so full from the Trader Joe's that we blend that appropriately with the right user. And I hand it to you today, but I think the second part of your question was, is it included in our guidance? I'm going to let Scott respond to that. Yeah, the answer to that is no. We didn't anticipate a bad bath in Beyond bankruptcy, but we view that as upside. There might be a short reteniting period, but no, that's not in the guidance. And one small, very small percentage of our, it'll I? It's small, but we also look forward to when you get, when you get the opportunity of a well placed box like this, number one, it was heavily restricted.
Speaker 5: And at the same time, we had a number of caps on it as well. So I think when we turn this, we're going to see some upside. Do you mind quantifying the market upside? No, I think it would be premature probably to do that. All of us are. All about.
Speaker 5: part of our revenue, but we do feel confident that it's going to be a positive upside and a positive to the center when we reach in at that space.
Speaker 3: Gotcha. And how will the water burgers stay that winds are apart? I think right now it's categorized as a 24,000 office space.
Speaker 6: Just curious what's the plan there for the last phase and what's the interest for that space as well?
Speaker 5: So, similar nature. Let me just walk back and explain how we look at when we get these spaces back. It was very similar to when we last year when we replaced the Randles with an EOS. First of all, we look at the demand in the market. Number one, what type, what do we need to do to blend that center with the right merchandising mechs? That's first and then what do we need to do to blend that center with the right merchandising mechs?
Speaker 4: We utilize that space in the appropriate way. Whether it means demising it, so we get the best premium for it, or does it mean keeping the current infrastructure in the space so we're not having to make an extreme change to the value of that space. So in this case, this is a little bit of a different type space that we normally have in our portfolios. We're being very, very selective as to who...
Speaker 5: Once again, this was known and is part of our reteniting efforts. We think that once we retenited it will be a positive for the space. But this was known, included in the guidance, and we feel very good about the releasing. And when does that office people leave expires at this center? I think I heard a little bit. When does office depot do what? The office depot leaves that our Windsor Center in San Antonio. I think that's a couple years out. That center is very stable. I think the turn that occurs.
Speaker 7: next.
Speaker 4: Thanks for thinking about question guys. Thanks Anthony. Thank you. Good morning. Back to the decline in occupancy. I think you characterized it as we are emerging dicing efforts. But we are at about 100 basis points. Anything more specific you can provide there? Yes. I think really are focused on quality of revenue.
Speaker 5: faster because I find that if you leave a tenant on the roles that's not performing well rather than taking an active stance against them, the leasing agents don't market as they should. And so we changed our philosophy. It's worked really well for us. I think I'll be showing some data can really the next time around about retention and why.
Speaker 5: This is healthy for our portfolio. And so I think a number of those active stance that we've taken over the last year has probably pushed some tenants out quicker than we normally would because I'd rather have the space actively marketed in a very, very hot market right now. In addition to that, it's not unusual that we do have this on the first quarter. You would've killed him but it's still nearby.—I will not allow
Speaker 4: The last two years we had such hot demand in the first quarters. It was a little unusual, but normally we always have a little bit of a fall off in the first quarter. It's not, you know, it's not out of theme for us, but that being said, we're right on track with where we expect to be for the year.
Speaker 5: Yeah, Mitch, and it's Scott here. I'll just mention that when we when we do our forecasting, we look at all 1,500 tenants and forecast those out for the entire year. And we're just a little bit above the forecast, actually, for first quarter in terms of occupancy. So there's nothing unexpected with where we are right now.
Speaker 4: To that point, Scott, are you, is there a little bit of a bias maybe toward the lower to the midpoint? Because of some of the uncertainty that, or the unknowns like that bath, or are you still confident that the plan can evolve as the air progresses?
Speaker 5: I think we're confident that we're going to end up where we expected around the midpoint of the guidance.
Speaker 4: Okay, last one for me just curious about 10th demand. I think Christine said or maybe was Dave said, obviously it's kind of, you know, the sweet spot is that small part of the market, but I'm just curious about how the pipeline looks this year versus kind of, or pipeline looks today versus like, you know, maybe this time last quarter.
Speaker 5: Let me just clarify Mitch, are you talking about the leasing pipeline? Yes, please.
Speaker 5: Okay, great, thank you all at Christine Kamen on that. Yeah.
Speaker 5: What we're seeing is that the stronger operators are very, very active in the market, and that's what we prefer. So this last quarter we've had the same thing with our restaurant spaces, which if you have a second generation restaurant space, I'd rather have that available to market if we have a weak tenant, which again we've been very active in replacing.
Speaker 5: So we haven't seen a change with the exception of, I would say, that there's little less new entrepreneurs coming to the market with less experience. If anything, it's been consistency with those that know the strength of our markets, have strong business.
Speaker 4: strong businesses and are continuing to grow. Great, last one. Scott, was there any one time versus quarter? I think I saw a least term fee.
Speaker 5: Is there anything that we should be aware of? No, not really. We list out the least term fees in our same store reconciliation so you can look to see that.
Speaker 5: If anything, when locking the interest rates, we might have a little bit of upside-down interest rate versus where we forecasted. So no, I can't really think of any one-timers that we need to call out. Great. Thank you.
Speaker 2: Thanks, Mitch. Our next question, Control Craig Zero, Be Rily Securities. Please go ahead.
Speaker 8: Yeah, good morning guys.
Speaker 3: You've had a significant amount of variability in your pillar storm results. I think it was about a penny per share year over year. I guess can you give us some color on how we should think about you know what pillar stone will contribute or maybe take away from white stone this year? And I know you mentioned there weren't any one-timers, but speaking specifically to the
Speaker 5: A goal for us is to exit our JV relationship with Phil or Stone. We said we'd like to monetize that. The asset is underperforming and not returning what we expect for our shareholders. So we as a company are working toward that in a lot of ways toward exiting that partnership.
Speaker 5: That's largely through the court system at this time, but we are committed to exerting that partnership. That said, right now I think we are doing our best to estimate the financial performance. Colorstone is a public company.
Speaker 5: and is the link when in their SEC filings for a few quarters. And so we're using the information that's available. We're having some communication and doing our best to estimate it, but that investment is significantly underperforming and we are committed toward working toward an exit of that. Scott, you want to add anything? I would just add that when we think about pillar stone from my cash flow perspective, it's...
Speaker 5: 100% upside for us at this point. There's not distributions coming from Pillarstown, and we do have some legal fees that are embedded in our GNA costs for last year or so. So, exiting, I think, we'll see improvement in GNA when we're able to exit and when we all monetize some of that.
Speaker 5: investment that we have on the balance sheet right now, but so from a gap basis while we see some amount of loss right there The there's no there's no cash flow going out other than legal fees to try to monetize it and I think of the future It should be thought of as upside from a cash flow perspective
Speaker 3: Got it. And we're able to transact successfully in the fourth quarter. And I know you kind of are thinking about capital cycling again, but Dave, I guess we'd be curious sort of what your thoughts are on this year and then this current environment and what you're seeing.
Yeah, Dave, once again Craig. The transaction market continues to be shallow. I think you've probably heard that theme from others. We are seeing a little bit of movement in cap rates, but not a lot. We are, you know, we are a targeted, we're targeted very much in the markets we're in. So we are.
and Woodlands, Texas as well as contribute to our deleveraging. So I think we would expect to do the same this year. We're actively looking for opportunities. We're continuing to recycle. You think about our portfolio, just like a portfolio of stock. It's important that we look at each asset and.
to look to win at the right time to sell and win at the right time to own. So not a big amount, but probably similar to what you saw us do last year from a recycling perspective with the goals being to sell assets and buy new assets that are more creative kind of day one and in the future as well as contributing to strengthening of the balance sheet. Okay, great. Just one more for me.
and then, in terms of the Christian circling back to your reemerging but icing efforts, I be curious if there's any sort of themes that you see that are either. Thank you.
Yeah, the restaurant is still very hot this year. Again, this is why we're proactively making changes because if you have a restaurant that's not performing well in this market, we believe being active with that tenant and making a shift to somebody else that would better serve that community is the right thing to do. It has not slowed down in that space at all. It's the same thing. It's QSRs. In addition to the QSRs, I think it's still that affordability factor that we look for. restaurants that really serve in the ticket price that works for families.
works for a consistent stickiness to a client that comes back often is we're staying within that range and that's really worked well for us. In addition, we're seeing, so this is something that again I'm just watching this more than anything, but we are seeing without particularly assaulting communication.
How did it interesting change with the workforce coming back?
and owners of businesses that want to attract talent going into horizontal way call horizontal office space. It's kind of unusual, but it's something that when we have a space available at some of our mixed-use centers which have a little bit of this component, it fills up.
And those space sizes, they tend to be again the same range small about 1,000 to maybe 1,500 square feet. And we're in there ready. You know, we just clean them up, paint them up. Maybe have to re-carpet them sometimes, but they lease up. They've been leasing up very, very quickly in our markets. Little unusual. It's not something that we focus on too deeply, but it started with some of our cubic zX space, which has always been
is really important and convenience is really important as well. In addition, I'd say a little bit of a pullback in fitness. I think that's just because last year there was such a demand for it, and I think it's just normalized. But just across all of our groups, we've seen pretty good strong demand.
Our next question comes from Gaurav Mita with E-at-Hidu. Please go ahead.
Yes, thanks. Good morning. I wanted to ask you on your asset recycling comments again, so if you were to acquire any properties this year, should we expect that would be match-funded by dispositions? Hey Garb, this is Dave.
Obviously, we continue to look for opportunities in the marketplace and be aware of those. But right now, from an acquisition perspective, we've targeted funding that through recycling. Okay. Second question I wanted to ask you on your debt maturity for the 4.28 percent note that you're exploring in June should we expect that you will replace that with credit line?
I think right now that's the most likely scenario. We'll look at all refinancing options but more than likely we'll roll it into the revolver. It's part of the reason we locked down $50 million of debt. We're down to 10 percent floating rate debt right now and that gives us the ability to be flexible and use the facility.
to handle these maturities that are coming to you in the next three years which are on the smaller side Okay, and we are the rates today for fixed rate nodes
So, while Scott's looking, I think the question was what are the rates, fixed rates, versus the credit line. Credit line is the revolver is priced at a variable rate that is SOFR plus I think we're at about 160 today. So, I think that's in the SOFR is around 4ish I believe. So, in the 5 to 6 range. Fixed rates, Scott's looking at that and should be able to give it from you from our subdata. Yeah, it looks like the fixed rate note that's expiring 23 is around 4 and a quarter percent and
24 closer to 4.5 or 5%. So a bit of an increase on the RAVE that is factored into our guidance and the way we've forecasted that is to roll it into the facility using the SOFRA curves.
Okay, thank you. Thanks, Garf. Our next question comes from Mikhail D.N. with NAXINGRA.
please go ahead. Hey Dave, I think you may have partly answered this on your when you talked about recycling your recycling plan but is there any update on out parcel developments or any redevelopment styles?
Hey Michael, Dave, thanks for your question. I'm going to give you just a quick thought and then I'll ask Christine to maybe give more on it. As we've communicated in the past, one of the things that Whitestone has as far as embedded value is the opportunity.
to develop some pad sites and a few land parcels that we acquired when we bought centers, really looking for future value add. So continue to have those and I'll turn it over to Christine to give a little bit of an update on those activities. The demand is there. I think it's frustratingly slow with cities, with approvals. It's...
that started during COVID and you would think that some of the pipeline has moved through a little quicker but we're just finding that it's been very challenging from what you would consider the pre-development aspects of a project. And the pre-development aspects of a project are working with the approval rights with the city working with your architects and engineers.
It has not been for lack of demand. It's really been for what I would say is the timing, it's taking twice as long as it normally takes to work through the early.
But think about it in terms of, I think one of our assets we recycled in 2022 was the pad site that we had built for Dunkin Donuts. We've got a few of those in our portfolio that we can do similar, but I think we built that pad site at probably about double the return, closer to a 10% return on cost, and we were able to sell it at probably half of that from a cap rate perspective. So small amount, we've got the number of pad sites. I think one of the things that Christine has commented on before is from a use perspective we continue to see smaller pad sites. There's some really interesting folks out there that are doing even smaller sites. So the ability to put those on our properties continues to increase because they take up less space and potentially less of our parking.
Great, great. Thanks for the update.
There are no further questions at this time. I would now like to turn the floor back over to Dave Holman, Chief Executive Officer for closing comments. Please sir, go ahead. Thank you and thanks to all for joining today's call and we really appreciate your interest in Whitestone. I would like to share that we're very pleased to have Julia Bethmann as a nominee for the Whitestone Board of Directors at our upcoming annual meeting of shareholders on May 12th. Julia will be our third new addition to our board since the beginning of last year.
and really making our board a better reflection of society and our customers with 50% female representation on our board. We're super excited and really wanted to welcome Julia and with that I will now conclude the call and wish everyone a great day. Thank you.
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