Q2 2023 Whitestone REIT Earnings Call
Yes.
Greetings and welcome to the Whitestone REIT second quarter 2023 earnings Conference call.
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A brief question and answer session will follow.
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It is now my pleasure to introduce your host David Morgan.
Thank you you may begin.
Good morning, and thank you for joining Whitestone REIT second quarter 2023 earnings Conference call on today's call are Dave Holeman, Chief Executive Officer, Christine Messenger, 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 is most recent form.
10-Q, and 10-K for a detailed discussion of these factors.
Technology and the fact that this call may be webcast for a period of time. It's also important to note that this call includes time sensitive information that may be accurate only as of today's date August <unk> 2023.
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 second quarter 2023 slides on our website yesterday afternoon, which will 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> second quarter 2023 earnings conference call.
Operations delivered another very strong quarter in.
In the second quarter of 2023.
Legal expenses related to our termination for cause of our former CEO and our associated joint venture investment detracted from what would otherwise be a strong headline number.
But we expect these to be short term impacts to earnings this year and not ongoing.
We will discuss litigation and our guidance in greater detail, but let me start with the second quarter results.
Revenue grew over four 2% from the second quarter of 2022.
Funds from operations per share was 21 cents down from 25 cents a year ago.
This decrease was primarily the result of higher interest and legal expenses.
Set partially by increased property net operating income.
Same store net operating income improved by <unk>, 4% for the quarter and is up one 7% for the six months.
We expect the impact of our occupancy gains and strong leasing spreads to be more fully reflected in the second half of the year and are projecting same store net operating income growth in excess of 5% for the balance of the year.
Which should get us to our full year same store NOI growth guidance.
Total occupancy is 93, 3%.
180 basis points from the second quarter of 2022.
Sequentially 60 basis points from the first quarter of 2023.
As of the end of the second quarter, our net effective annual base rent per square foot was $22.78 an increase of four 9% from a year ago.
Two 5% from the first quarter.
We continue to be very optimistic as we are seeing fundamental trends driving organic growth in 2023 that we anticipate will last well beyond this year I'll outline a couple of those trends.
First and foremost our portfolio of properties are well located in the fastest growing cities in the country.
The Dallas, Houston, Phoenix, and Austin Msas ranked first through fourth in terms of the greatest number of new residents between 2019 and 2022.
This influx drives business growth, both small and large businesses.
Houston, just stop the paychex small business jobs index for the eighth month in a row with Phoenix coming in third in the rankings.
This kind of robust business growth generally allows us to have multiple options to fill spaces, enabling enabling us to optimally fill centers to maximize foot traffic and take advantage of synergies.
We've been positioned almost exclusively within these high growth cities for over a decade, and we continue to see strong benefits.
The second key trend, we're seeing right now is lack of supply.
Acquiring new centers in our markets in the right neighborhoods is extremely challenging.
This is both because of limited existing product and because higher interest rates and a focus on other sectors are shutting off the valve for new retail center development.
We've now delivered five consecutive quarters of combined GAAP leasing spreads in excess of 17% and we're seeing no evidence of a pick up in the construction pipeline that would cause a dampening of the current environment.
Despite despite the supply trend. We recently have founded two great additions to our portfolio with our like woodlands acquisitions at the end of last year, and our second quarter acquisition of Acadia.
We continue to upgrade the quality of our portfolio trading out a number of properties with lower a b or where we felt additional value gains were limited in order to make these acquisitions.
Our leasing team has already produced fantastic results for the first two quarters, we've owned the like woodlands property and were similarly excited about our Arcadia acquisition.
We may have some additional activity on the acquisition and disposition front during the second half of 2023, and we anticipate will roughly balanced the two in terms of financing the acquisitions.
Now let me address the the legal expenses included in our second quarter results.
In late 2021 pillar stone capital rate the general partner of our joint venture in which we have an ownership interest of approximately 81% in real estate assets filed a poison pill solely to frustrate, our contractual rights to redeem and <unk>.
Monetize our investment.
Our former CEO beneficially owns 64, 3% of filler stone capital rate.
Whitestone initiated a Delaware lawsuit in mid 2022, asking the court to declare the poison pill unenforceable and to permit whitestone to redeem and monetize its investment.
Whitestone seeks an award of monetary damages of approximately $60 million, including the amount that the general partners misconduct precluded whitestone from receiving in or around December of 2021, and pre and post judgment interest at a statutory.
Right.
The Delaware trial on removing the poison pill was held just over two weeks ago and went very well we remain confident the court will support our position while timing is difficult to predict in these type of legal matters, we anticipate a decision before the end of the year.
The original intent of pillar stone with a vehicle to monetize these noncore assets and we're going to get back to that very shortly.
Necessarily our legal expenses have been significant and unfortunately greater than estimated in our initial guidance.
Our legal expenses are included in our G&A expense. Additionally, pillar stone capital rate. The general partner has communicated that they have or will charge their legal expenses to the partnership and our pro rata share is reflected in equity and earnings of real.
State partnership.
Both charges significantly impacted this quarter's results and full year guidance.
<unk> will provide greater detail on those numbers in his remarks.
As many of you know we dramatically improved our governance profile over the last year and we're working hard to advance our environmental objectives with several new initiatives.
We'll be rolling out green leases across the board during the third quarter. In addition, we are evaluating the installation of charging stations at a number of our centers, which both attracts customers and helps facilitate the transition to electric vehicles.
Finally, we completed our second <unk> filing in June , which we believe is an important tool for benchmarking our progress versus ESG practices across the wider real estate industry. We believe it's vital to do our part as the world Grapples with climate change.
My wrap up comment is very short the business is firing on all cylinders and we believe that will become ever more apparent as we get past the litigation noise that is occurring now and will likely last until about year end and with that I'll turn the call over to Christine.
Good morning, everyone on the leasing front, we've had a strong quarter and we are on target to deliver on leasing spreads occupancy and same store NOI growth for 2023.
Occupancy rose to $93 three up 180 basis points from a year ago achieved by signing the largest volume of leases since the second quarter of last year.
Leasing spreads were $18 seven for the quarter.
32, 2% on new leases and 16, 2% on renewals.
Most importantly, we hit these numbers signing tenants that will drive traffic and boost the overall value of our centers.
One very interesting trend that we're seeing is a definite uptick in the level of location technology used by retail.
For years, we have used placer AI and S right in order to drive our acquisitions and determined the right merchandising mix to populate our centers.
We now have tenants that are using the same technology and finding us.
This is not only boosting our success in the terms of new tenants, but we believe well also benefit as renewals with tenants, we're able to attract more concrete value to the traffic provided by our center.
We are continuing to also see the shift with the neighborhood retail from the mall the smaller spaces and as retail continues to search to be closer to the work from home customer.
In terms of tenant categories. We are seeing several that have strong success right now there seems to be a generational movement away from eating off sites and towards consuming cups and bowls. This goes well beyond the exciting kind of IPO or the fact that Starbucks is in expansion mode.
We've got great restaurants, like flower child, and K pop capturing the bowl phenomena and expanding franchises like Lucerne Lane and swayed building out America's increasing demand for coffee and caffeine.
Bluestone Lantus in Australia Cafe coffee shop that opened five days ago enter late woodlands location.
Great to see the crowd drought in there for the opening.
Swank is where you go if you want a beverage options for sugar and caffeine and they're rapidly expanding to the delight of immature mythology.
<unk> signed a ground lease with swag for a pad at our color center in Fort worth.
In fact swag as one of the three paths, we've carved out that will help drive revenues in 'twenty 'twenty four pads.
Accretion is a fantastic way to enhance our revenue and our very in demand.
We anticipate about 300000 per year in additional revenues from the three paths leases, we just signed and anticipate we'll be able to complete about the same number of pads each year for the foreseeable future.
Starbucks just signed a long term lease for a pattern we've created at Lakeside market in Plano, Texas, We bought the center in 2021 at just over 80% occupancy now we've reached 92% occupancy and we're creating additional value with the pad sites.
Green Street recently scored our portfolio with an initial tap score of 78 for the portfolio.
Within the top third of our peer set as shown in slide six of our earnings presentation.
Green Street's tab or trade area power score combines income population education and cost of living to create a common metric to gauge real estate demand or neighborhood centers across the U S.
We believe this is an excellent reflection of the strength we have in our markets.
We also believe that Texas, and Arizona will continue to all China coastal markets and improve our relative ranking.
<unk> is our largest market and it led the way that leasing in the last quarter Manny.
Manufacturing in the city is already booming prior to the White House designating Phoenix is one of five workforce hubs in may.
And house made this designation further release, because Phoenix is a growing hub for semiconductor manufacturing optical table and critical mineral and battery manufacturing efforts. We believe this will benefit our centers in Phoenix and Scottsdale.
I'll wrap up by saying the team is energized for a strong second half of 2023 as we continue on our work to improve the lives of others by meeting the community needs a connection convenience and commerce Scott.
Thank you Christine and good morning.
As Dave and Christine mentioned, we delivered very strong operating results in the quarter.
And continue to be on track to produce sector, leading full year same store NOI growth in 2023.
Our second quarter F O per share was significantly impacted by legal expenses related to pillar stone in our former CEO .
So let me take a minute to provide detail on this subject.
Contained within our G&A for the quarter as two cents of legal expenses incurred by Whitestone related to litigation.
With pillar stone in our former CEO .
We also estimated two cents of litigation expense incurred by pillar stone capital REIT.
Which they have communicated that they have or will charge to the partnership.
While we do not believe that their trial expenses related to this litigation are reimbursable by the partnership.
While these amounts are a part of our damages claim in Delaware.
GAAP accounting requires that we accrue these amounts.
Any recovery of these amounts by Whitestone will ultimately be reflected when received.
And there is no current cash impact to Whitestone from litigation expenses incurred by pillar stone capital REIT.
As a result of these legal expenses, we are reducing our 20th twenty-three full year F. F O per share guidance range by five cents.
Looking forward there are a number of positives for 2024 and as analysts look at slide 10, and begin to think about 2024.
Let me provide a few thoughts.
First we are anticipating eight cents from litigation in 2023 related to pillar stone and the former CEO .
This should allow us to improve G&A in 2024.
Second we expect to record a gain if and when we redeem our pillars don't O P units and when we do the activity in the earnings and equity line should end.
Our equity and earnings is projected to decrease F. F O per share by <unk> <unk> in 2023.
Third once we're able to monetize our pillar stone O P units, the cash will be meaningful and significantly reducing our total debt and related interest expense.
While we anticipate monetizing the op units during 2024, we cannot yet estimate the timing and hope to have greater clarity on the timing later this year.
Fourth we expect interest expense to be somewhere between a minor negative and a positive in 2024.
The reason for the 11th and negative impact this year was mostly from renewing our credit facility.
We currently have 84% of our debt fixed.
So any move up in rates will likely have a modest impact.
Finally, I'll mention that all of the drivers that Dave and Chris being discussed are expected to result in a continuation of our same store NOI growth and its contribution to F O per share growth in 2024.
The entire management team has a clear vision.
And the path forward to create shareholder value.
We are eager to hit the outcome coming milestones and we will update investors as we do so.
And with that we'll open the line for questions.
Okay.
Thank you we will now be conducting a question and answer session. If you like to.
A question Please press star one.
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One moment, please while we poll for questions.
Thank you.
Last question is from Mitch Germain with JMP.
G M B Securities. Please proceed.
Good morning.
Good morning, Mitch.
Can I talk a little bit about the legal costs.
Right.
I guess my first question is is it the <unk> or <unk>, because I think.
Scott in your comments you talked about two cents in G&A to send some pillar stone, but I think the press release talks about <unk>. So I'm just trying to understand.
What was the impact on the quarter.
The impact on the quarter versus the guidance.
Was.
<unk>.
And we had two cents of impact on the quarter from the pillar stone equity line.
Overall for the quarter, we had two.
<unk> <unk> of legal expense.
We had.
<unk> in the guidance if that makes any sense. Okay. You had one second guidance. So in G&A you had an extra penny and then in pillar stone, you're estimating two cents. So net net <unk> of.
Of charges that were not initially guided by you is that the way to think about it.
For the second quarter, Okay, and I guess some.
I guess the pillar stone charges to you is a little bit probably new versus what you may have been thinking about previously, but if you saw any momentum or shift or in terms of how the process would have played out why not take a bit of a conservative view.
To start with rather than you know come up with a little bit of a surprise here.
Sure, Hey, matched Dave I'll take that one and Scott may add to it.
Part of the frustration has been.
Till Archstone has not provided financial information as it required per the contract as well.
So we're doing our best to make Scott and his team are doing our best estimate and understand the numbers.
But a little bit of.
Surprised in that they notified us during the quarter of those expenses that.
I had not previously been notified of.
So if any of the previous charges of litigation or not in your numbers.
Before and now they're there in the pillar stone side is that the way to think about it.
That's why we are.
We became aware that they were charging and the partnership the general partner was charging in the partnership in the second quarter and up until the second quarter. We didn't have any reason to believe that they were.
And the trial the trial was actually held in July So Q2 would probably be one of the heavier litigation expense quarters.
Okay.
From a modeling perspective.
Expect litigation expenses, how I guess, you talked about eight cents in the year and it seems like this quarter had four.
Just remind me how much was in <unk> and then how much you're estimating for the rest of the year.
So on the Whitestone side, we're estimating three 9 million of legal expense for the entire here with the difference between that and what we had already baked into the guidance.
<unk> for the full year.
So <unk> versus guidance for the balance of the year on the Whitestone side.
And then on the pillar stone side, we're estimating two additional cents.
Of impact for the balance of the year.
And I think Mitch if you look at the press release.
And the guidance table, we did give a breakout we show G&A.
That's all related to the litigation and then we show the deficit in earnings which is all related litigation. So I think we do provide.
The detail of those in the in the guidance table.
Okay.
Two more questions for me what was the occupancy lift from the acquisition did that have any impact on the quarter.
It Didnt really I mean, it's I.
To be honest I don't know the number but I think it was.
It's such a small part of the whole number I don't believe it had an impact on it I can follow up and clarify that's pretty easy to do but I think really what we're pleased with our we're pleased with our leasing activity I think if you look at the leasing activity Christine can cleared up I think the new leases were the highest we've had in a period of time.
<unk> activity, so at a really good solid leasing quarter.
With occupancy increasing I think our ABR is moving in the right direction about 5% as well over a year.
But you're saying the financial impact of that leasing is probably not going to hit until the back part of the year. So that's the way to think about it.
We're expecting yes mentioned, Scott, we're expecting in the third and fourth quarters to have around 5% same store.
Both each Q3 and Q4.
So that's the the differences there or just the lease up we've got some lease incentives that are going to be rolling off from earlier leases in the third and fourth quarter and just continued strong leasing activity.
Okay and last one from me, where there any asset sales in the quarter. It seemed like you I mean your book some gains and the number of assets are down so.
We sold two small assets in Houston called Sandridge and West Chase.
A recorded about a $9 million gain and those were actually sold on June 30th. So the proceeds from the sales of those two assets were actually used to pay down the credit facility in July by $14 million.
And I think we do provide some details as to the cap rates on those and our earnings material in our deck. So I think theres, a slide that shows acquisitions and dispositions.
Anybody in the room I believe it was.
Slide eight of the deck because it has a cap rate on the dispositions.
All of US all of the dispositions. So we continue to be.
Doing our recycling rates like we talked about and I think we also said we will have a few more coming throughout the year, but all in all we're balancing that this year and where we're doing that in a manner. That's accretive from a cap rate day, one and then obviously more importantly, we're buying assets. We think we can add value in and just one more time on the debt side bench, we ended the quarter with about 650 million.
And of that and we took the proceeds from those sales $14 million and pay down the 650 in July .
Okay. Thank you.
Thank you.
Thank you. Our next question is from Craig Kucera with B Riley Securities. Please proceed.
Hey, good morning, guys.
I've got a couple on the lawsuits and then they will move out of the business.
I guess first it looks like there was a countersuit filed by last September by one against the Whitestone by pillar stone regarding reach a agreement fiduciary duty.
Is that sooner component of kind of what you're referencing the poison pill as far as your G&A expense expectations.
Hey, Craig Thanks for the question I'll try to I'll try to do this as simply as possible, obviously don't want to spend a ton of time couple of items in our we did our year end letter last year, which literally lays out the three lawsuits and kind of what the components are.
For us the biggest issue obviously is monetizing our JV investment, which has been sitting on our books and not providing a return to our shareholders. But there are there are three pieces of litigation one is just a.
Is the.
Mmm I believe about 51 million plus interest in damages it.
<unk> is that approach and your share of what you believe to be the fair market value of the assets or how how are you coming to that number.
Yeah. So that's that's based on our our damages expert which is you know his value of the real estate as of December of 21, which is when the basically we believe our rights were blocked so that's our damages claim ultimately we would look to probably liquidate the.
Okay got it and I always circle back to the guidance you know it looks like based on your your net income guidance. There may be some additional <unk> can you talk about what you're sort of capital recycling expectations are for this for this year victim of the guidance.
So what what we've got in the guidance now is just the the actual gain of 9.6 million that we realized in June .
And then I I think <unk> you wanted to talk about so I can have the recycling Sir just just in summary, we got about 50 million.
Dispositions and acquisitions are expected for the year I think we closed our Arcadia.
And the first half of the year, which is about half of that number on the acquisition side and then on the disposition side. Scott mentioned, we closed on two assets near the Alan June 30th and so we have a few other so we have about 50 million in total for the year I think for the first half of the year, we've done roughly 25 million and act.
Physicians, and 13 or 14, Meghan and dispositions, but at the end of the year, we expect all that to balance out.
Got it and just have it for me.
I was just gonna ask on the transaction market, you know last quarter, you'd mentioned that that things it seems pretty shallow, but you were able to execute both some sales and in a purchase here. This quarter kind of what are your what are your current thoughts on the market have you seen any deepening.
At <unk>. Thanks Grant Yeah add continuing to see I think we talked about some of the fundamentals that are really helping the organic business are are not helping the transaction business. Obviously, the the the supply continues to be tight the the demand continues to be strong.
So you know, we're we're we're being judicious and and continuing just to prune and upgrade the portfolio continuing to look for opportunities like like many of our peers. We expect those to happen, but at this point, we are really positioning the business continuing to strengthen the business and not not seeing I think there's still a.
Gets spread between private pricing in in public pricing, but we've got our eye on it for continuing to strengthen the business and looking to be ready when when available.
Okay. Thank you [noise].
Thanks, Greg.
As there are no further questions at this time I would like to turn the floor back over to Mister Dave Holman for closing comments.
At thank you operator, thanks to everyone for joining today's call as we said we continue to be very optimistic about the fundamental trends of our business, which are really going very well, we anticipate a strong finish the 2023 and really excited about the future.
Thank you again for for joining us today and if there's anything we can do to help please reach out thank you.
This concludes today's teleconference. Thank you for your participation you may now disconnect your lines.
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