Q3 2023 Whitestone REIT Earnings Call
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It is now my pleasure to introduce your host David Martin Director of Investor Relations. Please go ahead.
Good morning, Thank you for joining Whitestone REIT third quarter 2023 earnings conference call on today's call are Dave Holeman, 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 is most recent Form 10-Q and 10-K for a detailed discussion of these factors.
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 maybe accurate only as of today's date November one 2023.
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 2023 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 2023 earnings conference call.
We had another very strong quarter with combined straight line leasing spreads of 24, 4% and combined cash basis leasing spreads of 10, 5%.
Same store net operating income increased four 9% versus the third quarter of last year and this now marks sixth consecutive quarters with a combined straight line leasing spreads in excess of 17%.
We're extremely proud of this accomplishment, which highlights the strength of our high quality portfolio.
Consistently strong leasing spreads and same store NOI growth, our not only our recent past, but they are the heart of our plan going forward.
We corrected a lot of things over the last year and a half from listening and responding to shareholders to improving our governance and balance sheet as I look forward. The road ahead is comprised of continued excellence in execution successfully ending the litigation, we have with our former CEO and <unk>.
Moving our thesis that active management focused on targeted strong geographies smaller spaces and strong tenants can outperform the sector.
The path ahead includes significantly lower G&A levels strong leasing spreads.
Best in class same store growth and eventually opportunities to scale our platform through disciplined accretive acquisitions.
Our passion and our strategy over the next five years is to prove that by focusing on quality of revenue. We can operate neighborhood centers that will deliver consistently strong leasing spreads and NOI growth investors should expect earnings growth and they should expect dividends to grow.
With earnings.
Investors may be able to look at our recent performance our assets or at market dynamics and see a lot of promise for whitestone.
However, it is managements plan to add a longer track record in terms of consistently delivering improved performance.
I'll have Christine delve more into how we accomplish this but let me review the quarterly numbers first.
Revenue grew four 9% from the third quarter of 2022.
Funds from operations per share was 23 cents down from 24 cents a year ago.
The decrease was primarily the result of higher interest and legal expenses significantly offset by increased property net operating income or.
Our total occupancy was 92, 7% up 20 basis points from the third quarter of last year.
We are reiterating our 93 and a half to 94, 5% occupancy guidance for the year we.
We've got a number of leases, we expect to commence in the fourth quarter as our leasing team continues to see strong demand for our smaller spaces.
And as of the end of the third quarter, our net effective annual base rent per square foot was $22.82 up 5% from a year ago.
Investors may have noticed that some of the themes that are core to who we are are now being echoed across the sector. The strength of the sunbelt. The idea that restaurants can be extremely valuable anchors talking about the strong demand for smaller spaces talking about using technology like <unk>.
<unk> and placer AI and discussing the supply shortage, especially when looking specifically at neighborhood centers are all themes that are being discussed by many of our peers.
These ideas aren't new to us they've driven our acquisition strategy and our key elements and how our leasing team operates.
So now the onus is on us to show that Whitestone strong position with these drivers translate into outperformance.
Whitestone continues to be well prepared for either a higher inflationary environment or a harder landing our shorter lease structure allows us to better share in the success of our tenants and in increase rates during inflationary periods.
In terms of a harder landing, although there isn't much evidence of downside yet, but within the industry. We're starting to see that higher interest rates are causing problems backed by private equity. Fortunately a very low percentage of our tenant base is funded by private equity or impacted by troubles there are.
Tenants can often fund operations out of cash and generally have very very low working capital requirements as their service oriented rather than being focused on hard and soft goods.
We also believe that the shorter leases with less restrictive structures and are constantly reviewing the strength of our tenants allows us to stay ahead of the changes in the retail space strengthening our position if there is a harder landing.
There has been an industry shift with a higher recognition of the value of small space locally connected tenants. We've embraced this view for many years and these tenants allowed us to perform very well during the pandemic.
In summary, we've consistently delivered over the last year and a half and we look forward to building on that track record and looking ahead I wouldn't trade our position with anyone else in the industry.
One final note last quarter I mentioned that we were evaluating the installation of charging stations at a number of our centers I am pleased to report that we've signed an agreement with Tesla to build stations at our whole foods anchored boulevard location in Houston, and we expect to continue to explore additional.
All locations within our portfolio.
We believe this will help drive traffic Boulevard and we're excited to be part of the solution on the transition to electric vehicles Christine.
Good morning, everyone on the leasing front, we performed very well in the quarter and we are on target to deliver strong leasing spreads occupancy increases at top of sector same store NOI growth for 2023.
Occupancy rose to 92, 7% up 20 basis points from a year ago occupancy for 10000 square foot plus spaces came in at 96% with our higher ABR smaller spaces coming in at 98%.
Leasing spreads were 24, 4% for the quarter 23, 6% on new leases and 24, 6% on renewals.
One particular area of success, we're seeing lately is the multi use centers lash.
Last week, we signed a renewal agreement with our second largest tenant prospect at her boulevard location in Houston.
The center's anchored by whole foods and has great restaurants, with North Italia Nymphet, it's true food kitchen in Jonestown.
This isn't limited to boulevard or longstanding tenants, 100% chiropractic is located their offices to market Street and Scottsdale. We've also been able to utilize less physical space there for keeping Sac, which provides collaborative office space for individuals and small businesses.
The work from home movement is definitely creating a shift away from office towards well located neighborhood centers, Patrick great restaurants amenities and needed service providers offering work space that is preferable to home resume calls are often compete with their spouses call or the dog barking in the background.
The key to achieving these leasing spreads is to continue to successfully serve that community. This is a little like building a top notch sports team. This includes re merchandising efforts, where we focused on this year to strengthen the quality of our revenue we recognize that having one superstars not the best Formula for winning center and we strive to have.
Solid contributors in every position with them. This center and just like gasoline ton a sports team strong tenants are able to build off each other's success and contribute to the overall value of the center.
Accordingly, our leasing agents need expertise and core to core areas.
First determining the right category a tenant for a space within the center using.
Using asbury in phase three or all of our leasing agents at Whitestone used technology to learn the customer needs and aspirations of a specific neighborhood.
And to understand the customer traffic and patterns within a center as well as the surrounding areas. We also use wait analysis and leakage to discover the opportunities to merchandise to a specific community.
Secondly, our leasing agents are experts in evaluating businesses.
There's so much more than just evaluating credit or getting a personal guarantee we look at our business owners track record the ability to scale their resources and their commitment to the business.
Long with their assessment of the market and the overall plan for growth generally our businesses have a track record of opening at least three locations, providing us a very good insight into their given business.
Our team leads our talent Scouts had insurer centers are continually designed for success and he has the technology to be a bit moneyball and their methodology. They don't just update management on the status of the deals they frequently update management on the overall performance at a center and their plans for ensuring their continued success.
Adherence to this disciplined and holistic approach and focusing on long term traffic drivers rather than quick wins have allowed our occupancy to reach new heights over the last year and a half since the management change in early 2022.
Given our four year average lease length, we believe that we have more opportunities to strengthen our tenant base, but it will take time as we continually to improve the traffic drivers populating our centers.
We are fortunate in terms of our options going forward.
If the acquisition market opens up we know how to find it at the right centers to our portfolio in a disciplined manner. However supply continues to be severely constrained as it. Currently is we believe we can add the best in class operational expertise to the environment in order to deliver peer leading organic growth.
Looking at the supply and demand balance very little supply of neighborhood retail centers are coming online as a result of higher interest rates and higher building costs simultaneously migration is clearly driving demand in our markets.
According to the National Association of Realtors, Austin's median home prices just under 500000. Meanwhile, San Francisco's median home prices well over $1 3 million with higher interest rates, making housing affordability ever more challenging that fact alone will continue to drive migration to the cities were located in.
In all likelihood the pace of migration won't slow down unless affordability narrows between major metropolitan areas.
And whether you're looking at the benefit of continued migration in the benefit of increasing real estate values. We believe we are well positioned in markets with high job growth.
Some of you may have noticed in our October 10th press release, and supporting social motion, a local charity serving children teens and young adults with autism ADHD, social anxiety and similar special needs.
They've been strong supporters of social motion for over a decade, now and we're thrilled to encourage others to join and supporting that group details on supporting them can be found in the press release center website and with that I'll turn it over to Scott to discuss our financials.
Thank you Christine and good morning.
Dave and Christine mentioned, we delivered very strong operating results in the quarter and continue to be on track to deliver on our 2023 annual F. F O per share and same store net operating income guidance ranges.
<unk> per share came in at 23 cents for the quarter versus 24 cents for the third quarter 2022.
There are other moving parts, but here's a high level overview of the quarter over quarter F. F O comparison.
Same store NOI was responsible for <unk> of the uplift and was offset by a three fence of higher interest expense.
Well Christine discussed much of the detail on what allows us to drive same store NOI growth, if youre going to boil this down to a few numbers our path forward is clear.
Drive consistent earnings growth via same store NOI growth.
And mitigate interest expense.
The year over year interest expense increase was primarily from higher rates with the amended credit agreement, we signed in September of 2022.
We've reduced the overall debt level since the third quarter of last year.
And we anticipate interest expense variance will shrink or become positive next year as 86% of our debt is currently fixed.
And proceeds from any pillar monetization will allow us to improve our balance sheet.
Litigation expense related to our ex CEO was responsible for <unk> of G&A. This quarter and was also responsible for <unk> in the third quarter of 2022.
We don't know exactly when we'll be able to successfully into our litigation and monetize our JV investment.
We believe we are nearing the end and we would expect lower G&A levels should result in improved debt to EBITDA or a metrics.
<unk> per share in 2024 and beyond.
We're very eager to get to our next earnings call and roll out our 2020 for guidance.
Interest expense litigation and a poor performing JV investment may have obscured our fundamental growth drivers a bit in 2023.
But we believe we'll be able to lay out a very positive earnings trajectory on our Q4 call.
And with that we'll open the line for questions.
Thank you.
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Okay.
Our first question comes from the line of Mitch Germain with JMP Securities. Please go ahead.
Hi, good morning. Thanks.
Can you provide some perspective on the change.
In occupancy.
Quarter over quarter, rather than year over year, and what gives you confidence that you can hit.
The guidance range and two that D. I guess is there a bias towards maybe the lower end of the range.
Hey, Matt. Thanks for your question. This morning, So a couple of things we had talked about this before that our guidance range is going to be $93 five to $94 five so.
We're feel pretty comfortable remaining within the range.
I think the most important thing that we've taken action towards this year and besides just the bed Bath and beyond which is a large chunk of that and I'll speak to that in a moment is that there is an intentional re merchandising towards quality of revenue I believe you need to do that given my past experience that when you have a strong markets and strong.
<unk> is in a strong market in retail it's better to be more aggressive on that front and to continue to improve your merchandising efforts.
Operator: At this time, all participants are in a listen only mode.
Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on a telephone keypad. As a reminder, this conference is being recorded.
I'd, rather do that now then when the market pulls back and so that's been a goal for our team members this year to define which which tenants might not be performing as well or are not what we'd consider successfully serving the neighborhood.
David Mordy: It is now my pleasure to introduce your host, David Mordy, Director of Investor Relations. Please go ahead. Good morning.
And so that's been some of that changeover, even saying in addition to that what we've moved forward with the bed Bath <unk> beyond is that and we're very very pleased by the way with what are.
David Mordy: Thank you for joining Whitestone REIT's third quarter, 2023 Earnings Conference Call.
David Mordy: On today's call, our Dave Holeman 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.
The options that we have there and what we're working towards so I think that where we're in line with where we need to be and I think again, if you look at the strength of our revenue and in particular just over the years, how well we've done.
With the quality of revenue and I think that reflects in and just in a bad dad and and how much we've reduced that and our days our days sales outstanding that we've been improving that effort and we continue to do so hey, Mitch It's Dave I might just add one thing Kristine.
David Mordy: 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, it is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, November 1st, 2023. The company undertakes no obligation to update this information.
Specifically the change sequentially quarter over quarter is a few things as Christine said, but if you look at the one bed Bath <unk> beyond space. We have it's about 28000 square feet. So it represents really the change from Q2 to Q3, obviously theres other factors feel great about that space have a lot of interest and feel very good.
David Mordy: 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 third quarter 2023 slides on our website yesterday afternoon, which highlight topics to be discussed today.
Good about being able to increase the rate substantially.
Okay.
Okay. So like the bed Bath and it's really the you know accounts for the change in the over 10000 square feet, but you also have a change in the under its 1000 square feet. So what you're basically suggesting is that.
Dave Holeman: 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's third quarter, 2023 earnings conference call. We had another very strong quarter with combined straight-line leasing spreads of 24.4% and combined cash-basis leasing spreads of 10.5%. Same-store net operating income increased 4.9% versus the third quarter of last year, and this now marks six consecutive quarters with a combined straight-line leasing spreads in excess of 17%.
Some of that is just purpose nonrenewals. So you can upgrade tenant quality is that the way to think about it yes.
Yes, that's correct.
Okay, no sort of trend that you're seeing.
In your discussion with tenants to suggest there being any sort of distress or.
You know kind of any of the economic factors that are in potentially negatively impacting their business.
Not yet a the only thing that we have seen is that we do.
Alluded to this earlier that businesses that have high leverage within the private equity sector. Those are the ones that we've had a little bit of concern over.
Dave Holeman: We're extremely proud of this accomplishment, which highlights the strength of our high-quality portfolio. Consistently strong leasing spreads and same-store NOI growth are not only our recent past, but they're the heart of our plan going forward. We've corrected a lot of things over the last year and a half, from listening and responding to shareholders to improving our governance and balance sheet. As I look forward, the road ahead is comprised of continued excellence in execution, successfully ending the litigation we have with our former CEO, and proving our thesis that active management focused on targeted strong geographies, smaller spaces, and strong candidates can outperform the sector.
And quite frankly, we've always been very mindful of who we are.
Who we lease to that that that type of funding as part of their their capital stack. So we don't have a lot of those types of tenants, but it's something that we have on watch.
Okay, and 40 basis points, sorry, 40000 square feet of positive absorption required just to hit the low end of your guidance range and you guys are comfortable.
With that number at this point.
Yes, because I think just with the bed bath and beyond and as I mentioned that we have where we're doing a bake off for the the type of options that we have there and because obviously whenever you have a center like that and that type of space. It's a long term Phil and so it really requires a.
Dave Holeman: The path ahead includes significantly lower G&A levels. Strong leasing spreads, best in class, same-store growth, and eventually opportunities to scale our platform through disciplined, accretive acquisitions. Our passion and our strategy over the next five years is to prove that by focusing on quality of revenue, we can operate neighborhood centers that will deliver consistently strong leasing spreads and in a wide growth. Investors should expect earnings growth, and they should expect dividends to grow with earnings.
Defined focus as to what might be the best type of client for that center.
That's number one and number two there's a.
The very crowded parking field with a trader Joe's across from it. So you have to just be mindful of what type of tenant you put in there and the impact it has on the center.
Hey, Mitch I think I said in my earlier I think I said in my earlier remarks, as well we've got a number of leases we expect to commence in the fourth quarter. So I think we're very positive about the activity. We have right now are confident of our guidance range, we've given on occupancy and so just to be real clear I think we.
We feel very good we're continuing to watch for signs of stress, but frankly, we're not we're not seeing them in our in our properties in our markets.
Dave Holeman: Investors may be able to look at our recent performance, our assets or market dynamics, and see a lot of promise for Whitestone. However, it is management's plan to add a longer track record in terms of consistently delivering improved performance.
And I just like to add one more thing to add to our matches that you know the type. So if you really go back over entrepreneurial and growing businesses they've had severe shocks over the last really 10 20 years and much of that has to do with the financial crisis, and then Covid and most of the businesses that we work with there.
Dave Holeman: All have Christine delved more into how we accomplished this, but let me review the quarterly numbers first. Revenue grew 4.9% from the third quarter of 2022. Funds from operations per share with 23 cents down from 24 cents a year ago. The decrease was primarily the result of higher interest and legal expenses significantly offset by increased property net operating income. Our total occupancy was 92.7% up 20 basis points from the third quarter of last year, and we're reiterating our 93.5 to 94.5% occupancy guidance for the year.
<unk> grow out of organic growth.
So it's a little different they're not leverage the same way because they can achieve the same opportunities for that type of leverage. So that's something that I think has always played well to our space.
Great Okay.
I apologize you mentioned it I missed some of the prepared comments were there any asset sales this quarter.
Hey, Mitch and there were not.
So we are continuing to explore recycling.
As you and most others are aware of the transition is action market continues to be very shallow.
Dave Holeman: We've got a number of leases we expect to commence in the fourth quarter, as our leasing team continues to see strong demand for our smaller spaces. As of the end of the third quarter, our net effective annual base rent per square foot was $22.82 up 5% from a year ago. Investors may have noticed that some of the themes that are core to who we are are now being echoed across the sector.
Last year, we did a little bit of recycling our intent is to do a little bit of recycling. This year, but at this point in the quarter, we did not have any asset sales or acquisitions.
We're continuing to work a few small deals and we'll just see where we get to but nothing nothing significant no no dispositions in the quarter.
Do you think you may be acted a little bit too quickly on the acquisition then because I know the desire was to match fund.
Dave Holeman: The strength of the sunbelt, the idea that restaurants can be extremely valuable anchors. Talking about the strong demand for smaller spaces. Talking about using technology like Esri and Placer AI and discussing the splice shortage, especially when looking specifically at neighborhood centers are all themes that are being discussed by many of our peers. These ideas aren't new to us. They've driven our acquisition strategy and our key elements in how our leasing team operates.
Any acquisition proceeds with with disposition proceeds so obviously you've acquired without having the match funding aspect of it.
And so first of all I don't I don't think we were too quick I think the acquisition. We made this year was a great acquisition to the portfolio and we are match funding. If you look a little bit maybe of overlap year to year. If you look at if you look at.
Dave Holeman: Now, the onus is on us to show that Whitestone's strong position with these drivers translates into outperformance. Whitestone continues to be well prepared for either a higher inflationary environment or a harder landing. Our shorter lease structure allows us to better share in the success of our units and increase rates during inflationary periods. In terms of a harder landing, although there isn't much evidence of downside yet, but within the industry, we're starting to see that higher interest rates are causing problems backed by private equity.
Last year 22, and 23 together I think we're close to match funding and we continue to expect to match fund. So I think that says there is a few more dispositions to come in but our intent is to fund that with with proceeds from from sales So a great asset.
I think theres, a slide in our investor deck that highlights kind of the the metrics on the assets we've sold versus the assets. We bought we've continued to buy properties that have more of the demand drivers that we see that Christine discussed in a lot of her remarks, I've been able to sell it accretive cap rates just a just a more.
Dave Holeman: Fortunately, a very low percentage of our tenant base is funded by private equity or impacted by troubles there. Our tenants can often fund operations out of cash and generally have very low working capital requirements as they're service oriented rather than being focused on hard and soft goods. We also believe that the shorter leases, with less restrictive structures, and are constantly reviewing the strength of our tenants, allow us to stay ahead of the changes in the retail space, strengthening our position if there is a harder landing. There has been an industry shift with a higher recognition of the value of small space locally connected tenants. We have formed very well during the pandemic.
Shallow market now.
From that and a little tougher, but we do expect to match fund our dispositions and acquisitions and I think if you look at the two years combined there they're close maybe a little bit that will that will sync up shortly.
Great and then.
Last question on the litigation.
Obviously, the pillow stone trial was I guess during the summer.
And the CEO.
Is scheduled for it looks like December so I mean is.
Obviously, they're not coupled.
Do you have any sense of timing.
And then.
Is the ruling destiny or could they just get caught up in an appeals process that doesn't enable you to.
The freedom and flexibility to to kind of execute your strategy.
Dave Holeman: In summary, we have consistently delivered over the last year and a half, and we look forward to building on that track record, and looking ahead, I wouldn't trade our position with anyone else in the industry. One final note. Last quarter, I mentioned that we were evaluating the installation of charging stations at a number of our centers. I am pleased to report that we've signed an agreement with Tesla to build stations at our Whole Foods Anchored Boulevard location in Houston, and we expect to continue to explore additional locations within our portfolio. We believe this will help drive traffic at Boulevard, and we're excited to be part of the solution on the transition to electric vehicles.
Hey, Mitch Dave again, Yeah, as you mentioned really a couple of matters the Dx CEO.
Termination for cause lives lawsuit and that our attempt to receive fair value for our equity investment.
It's difficult to give a lot of detailed talk on litigation, but I will say is.
Both of the cases are nearing the end.
We feel very good about our position I think we've talked about.
The legal expense and really the underperforming JV in there and their effect on this year's numbers, we feel very good going forward that those are soon going to be out of the story. There is there is.
Christine Mastandrea: Christine?
Christine Mastandrea: Good morning, everyone. On the leasing front, we perform very well in the quarter, and we are on target to deliver strong leasing spreads, occupancy increases, and top of sector same-store NOI growth for 2023. Occupancy rose to 92.7%, up 20 basis points from a year ago. Occupancy for 10,000 square foot plus spaces came in at 96%, with our higher ABR smaller spaces coming in at 90.8%. Leasing spreads were 24.4% for the quarter, 23.6% on new leases, and 24.6% on renewals.
You know I'm not going to talk to the details of an appeal process, but we feel very strongly we're nearing the end and we feel like we are in.
In a great position once that is resolved to really remove some of that noise from the story the underlying fundamentals of the business are performing really really well and there is a bit of a noise from that but I think we're in a good spot and we're we're very close to the end we believe.
Thank you.
Thanks Mitch.
Thank you.
Our next question comes from the line of Michael Diana with Maxim Group. Please go ahead.
Christine Mastandrea: One particular area of success we're seeing lately is the multi-use centers. Last week, we signed a renewal agreement with our second largest tenant, Frostbank, at our Boulevard location in Houston. The center is anchored by Whole Foods, and has great restaurants with North Italian, Nymphas, True Food Kitchen, and Dozone. This is unlimited to Boulevard or longstanding tenants. A hundred percent chiropractic has located their offices to Market Street and Scottsdale. We've also been able to utilize less visible space there for cubic set, which provides collaborative office space for individuals and small businesses.
Hey, Thank you Hey, Dave.
I think I heard you, saying in the beginning of your remarks that you're <unk>.
Expecting lower G&A levels could you give some more detail on that.
Absolutely Thanks, Michael.
And our and our G&A. This year is about $4 2 million basically in legal expenses related to the two litigation matters.
That will go away its hard to exactly prevent present win but that alone represents a significant decrease in our G&A I'll also remind you that.
Christine Mastandrea: The work from home movement is definitely creating a shift away from office towards well-located neighborhood centers, packed with great restaurants and amenities, and needed service providers, offering workspace that is preferable to home or Zoom calls are often compete with the spouses call or the dog barking in the background. The key to achieving these leasing spreads is to continue to successfully serve the community. This is a little like building a top-notch sports team.
In early 'twenty two when we made the leadership change we took a number of steps to take significant costs out of our G&A cost structure at that time, largely resetting executive compensation. So a couple of steps, we we reduced our G&A in early 'twenty, two and we expect when we conclude our litigation to have a much lower G&A number as well.
Christine Mastandrea: This includes re-emergentizing efforts where we focused on this year to strengthen the quality of our revenue. We recognize that having one superstar is not the best formula for a winning center, and we strive to have solid contributors in every position within the center. And just like the athlete on a sports team, strong tenants are able to build off each other's success and contribute to the overall value of the center. Accordingly, our leasing agents need expertise in quote-2 core areas, first determining the right category of tenet for a space within a center.
<unk>.
We've also really worked on efficiencies I think Christine has talked about the way we've executed we've been much more clear with our folks and our goals and accountability as a result, we run leaner today I think our head count today is.
In the mid seven days and a couple of years ago that was probably close to 110 people. So we really are.
We've really streamlined the business we've become much more productive in our execution. If you look at the results.
Christine Mastandrea: Using Ezra and Facer AI, all of our leasing agents at Whitestone use technology to learn the customer needs and aspirations of a specific neighborhood, and understand the customer traffic and patterns within a center. As well as the surrounding areas, we also use void analysis and leakage to discover the opportunities to merchandise to a specific community. Secondly, our leasing agents are experts in evaluating businesses. There's so much more than just evaluating credit or getting a personal guarantee.
We're laying down a good track record and frankly, we're doing that in a more efficient way and the future is very bright because theres. Some theres some noise in the G&A number that's going to go away.
Okay, great. Thank you very much.
Thanks, Michael.
Yeah.
Thank you.
As there are no further questions I will now hand, the conference over to Dave Holeman CEO for closing comments.
Thank you we thank everyone for joining us today.
Christine Mastandrea: We look at a business owner's track record, the ability to scale their resources, and their commitment to the business, along with their assessment of the market and overall plan for growth. Generally, our businesses have a track record of opening at least three locations, providing us a very good insight into their given business. Our team leads our talent scout, saying sure our centers are continually designed for success, and we have the technology to be a bit more vulnerable in their methodology.
It's been at third quarter was a very good quarter for US. We're excited to conclude the year and we look forward to finishing out very strong and then we also look forward to giving everyone. A look into the future with our guidance with our year end earnings with that wish everyone a great day take care.
Thank you the conference of Whitestone REIT has now concluded. Thank you for your participation you may now disconnect your lines.
Christine Mastandrea: They don't just update management on the status of the deals, they frequently update management on the overall performance of the center, and their plans for ensuring their continued success. Adherence to this disciplined and holistic approach and focusing on long-term traffic drivers rather than quick wins, have allowed our occupancy to reach new highs over the last year and a half since the management change in early 2022. Given our four-year average lease length, we believe that we have more opportunities to strengthen our tenant base, but it'll take time as we continually to improve the traffic drivers populating our centers.
Yeah.
[music].
Christine Mastandrea: We are fortunate in the terms of our options going forward. If the acquisition market opens up, we know how to find that they add the right centers to our portfolio in a disciplined manner. However, a supply continues to be severely constrained as it currently is, we believe we can add the best-in-class operational expertise to the environment in order to deliver peer-leading organic growth. Looking at the supply and demand balance, very little supply of neighborhood retail centers are coming online as a result of higher interest rates and higher building costs.
Okay.
[music].
Christine Mastandrea: Simultaneously, migration is clearly driving demand in our markets. According to the National Association of Realtors, Austin's median home prices just under 500,000. Meanwhile, San Francisco's median home prices well over 1.3 million. With higher interest rates making housing affordability ever more challenging, that fact alone will continue to drive migration to the cities we're located in. In all likelihood, the pace of migration will slow down unless affordability narrows between major metropolitan and metropolitan areas. And whether you're looking at the benefit of continuing migration and the benefit of increasing real estate values, we believe we're a well-positioned market with high job growth.
Christine Mastandrea: Some of you may have noticed in our October 10th press release on supporting social motion, a local charity serving children, teens and young adults with autism, ADHD, social anxiety, and similar special needs. We've been strong supporters of social motion for over a decade now, and we're thrilled to encourage others to join in supporting the group. Details on supporting them can be found in the press release on our website.
Scott Hogan: And with that, I'll turn it over to Scott to discuss our finance. Thank you, Christine, and good morning. As Dave and Christine mentioned, we delivered very strong operating results in the quarter and continued to be on track to deliver on our 2023 annual FFO per share and same store net operating income guidance ranges. FFO per share came in at 23 cents for the quarter versus 24 cents for the third quarter 2022.
Scott Hogan: There are other moving parts, but here's a high level overview of the quarter over quarter FFO comparison. Same store in the why was responsible for two cents of the uplift and was offset by three cents of higher interest expense. While Christine discussed much of the detail on what allows us to drive same store in a why growth, if you're going to boil this down to a few numbers, our path forward is clear.
Scott Hogan: Drive consistent earnings growth via same store in a why growth and mitigate interest expense. The year over year interest expense increase was primarily from higher rates with the amended credit agreement we signed in September of 2022. We reduced the overall debt level since the third quarter of last year, and we anticipate interest expense variance will shrink or become positive next year as 86% of our debt is currently fixed and proceeds from any pillarstone monetization will allow us to improve our balance sheet.
Scott Hogan: Litigation expense related to our XCO was responsible for two cents of GNA this quarter and was also responsible for one cent in the third quarter of 2022. We don't know exactly when we'll be able to successfully end our litigation and monetize our JV investment. But we believe we're near Indian and we expect lower GNA levels should result and improve debt to EBITDA RE metrics and FFO for share in 2024 and beyond.
Scott Hogan: We're very eager to get to our next earnings call and roll out our 2024 guidance. Interest expense litigation in a poor performing JV investment may have obscured our fundamental growth drivers of it in 2023. But we believe we'll be able to lay out a very positive earnings trajectory on our Q4 call.
Scott Hogan: And with that, we'll open the line for questions. Thank you.
Operator: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question Q. You may press star and two if you'd like to remove your question from the Q. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions.
Mitch German: Our first question comes from the line of Mitch German with JMP securities. Please go ahead. Good morning. Thanks. Can you provide some perspective on the change? In occupancy, quarter of a quarter, rather than year of a year and what gives you confidence that you can hit the guidance range and to that I guess is there a bias toward maybe the lower end of the range. Hey, Matt, thanks for your question this morning.
Mitch German: So a couple of things we had talked about this before that our guidance range is going to be 93.5 to 94.5. So we're feel pretty comfortable remaining within the range. I think the most important thing that we've taken action towards this year and besides just that that bias and beyond, which is a large chunk of that, and I'll speak to that in a moment, is that there's an intentional remerchantizing towards quality of revenue.
Mitch German: I believe you need to do that given my past experience that when you have a strong market in strong markets and a strong market in retail. It's better to be more aggressive on that front and to continue to improve your merchandising efforts. I'd rather do that now than when the market pulls back. And so that's been a goal for team members this year to define which, you know, which tenants might not be performing as well or are not what we consider successfully serving the neighborhood.
Mitch German: And so that's been some of that change over you same. In addition to that, what we've moved forward with the bedbath and beyond is that and we're very, very pleased by the way with what the options that we have there. What we're working towards. So I think that we're in line with where we need to be. And I think again, if you look at the strength of our revenue and in particular, just over the years, how well we've done, you know, with the quality of revenue.
Mitch German: And I think that reflection in just in our beddad and how much we've reduced that and our day, our day sales outstanding. That we've been improving that effort and we continue to do so. Hey, Mitch, Dave, I might just add one thing, Christine. Specifically, the change, you know, sequentially quarter or quarter is a few things as Christine said. But if you look at the one bedbath and beyond space, we have about 28,000 square feet.
Mitch German: So it represents really the change from Q2 to Q3. Obviously, there's other factors. Feel great about that space. Have a lot of interest and feel very good about being able to increase the rate substantially. Okay, so, but the bedbath is really, you know, accounts for the change in the over 10,000 square feet. But you also had a change in the under 10,000 square feet. So what you're basically suggesting is that somebody that is just purpose non-rendoules.
Mitch German: So you can upgrade 10 equality. Is that the way to think about it? Yes, that's correct. Okay, no sort of trend that you're seeing in your discussion with tenants to suggest they're being any sort of distress or, you know, kind of any of the economic factors that are potentially negatively attacking the business. Not yet. The only thing that we have seen is that we alluded to this earlier that businesses that have high leverage within the private equity sector.
Mitch German: Those are the ones that we've had a little bit of concern over. And, you know, quite frankly, we've always been very mindful of who we.., who we lease to that type of funding is part of their capital stacks. So, we don't have a lot of those type of tenants, but it's something that we have on watch. Okay, and 40 basis points, so 40,000 square feet of positive absorption required just to hit the low end of your guidance range and you guys are comfortable with that number at this point.
Mitch German: Yeah, it's because I think just with the bad bath and beyond and as I mentioned that we have, we're doing a bake off for the type of options that we have there and because obviously whenever you have a center like that in that type of space, it's a long term fill. And so, it really requires a defined focus as to what might be the best type of client for that center. That's number one and number two, there's a, you know, it's a very crowded parking field with a trader Joe's across from it.
Mitch German: So, you have to just be mindful of what type of tenant you put in there and the impact it has on this center. Hey, Mitch, I think I said in my earlier, I think I said in my earlier remarks as well, we've got a number of leases we expect to commence in the fourth quarter. So, I think we're very positive about the activity we have right now, confident of our guidance range we've given on occupancy and so just to be real clear, I think we feel very good.
Mitch German: We're continuing to watch for signs of stress, but frankly, we're not seeing them in our properties in our markets. And I'd like to add one more thing to it too, Mitch, is that, you know, the type, so if you really go back over, you know, entrepreneur and growing businesses, they've had severe shocks over the last really 10, 20 years and much that has to do with the financial crisis and then COVID.
Mitch German: And most of the businesses that we work with, they grow out of organic growth. So, it's a little different, they're not leveraged the same way because they can achieve the same opportunities for that type of leverage. So, that's something that I think has always played well to our space. Great. Okay. I pause as you mentioned it, I missed some of the prepared comments. Were there any asset sales this quarter? Hey, Mitch, there were not.
Mitch German: So, we are continuing to explore recycling as you and most others are aware that the transaction market continues to be very shallow. So, last year we did a little bit of recycling. Our intent is to do a little bit of recycling this year, but at this point in the quarter we did not have any asset sales or acquisitions. We're continuing to work a few small deals and we'll just see where we get to, but nothing significant, no dispositions in the quarter.
Mitch German: You think you may be acted a little bit too quickly on the acquisition then because I know the desire was to match fund any acquisition proceeds with this position proceeds. So, obviously you've acquired without having the match funding aspect of it. So, first of all, I don't think we were too quick. I think the acquisition we made this year was a great acquisition of the portfolio. And we are match funding. If you look a little bit maybe of overlap year to year.
Mitch German: If you look at, you know, if you look at last year, 22 and 23 together, I think we're close to much funding. And we continue to expect to match fund. So, I think that says there's a few more dispositions to come in. But our intent is to fund that with proceeds from sales. So, great asset. I think there's a slide in our investor deck that highlights kind of the metrics on the assets we've sold versus the assets we've bought.
Mitch German: We've continued to buy properties that have more of the demand drivers that we see. That Christine discussed in a lot of her remarks. I've been able to sell a creative cap rates. Just a more shallow market now from that and a little tougher. But we do expect to match fund our dispositions and acquisitions. And I think if you look at the two years combined, their close may be a little bit that we'll think up shortly.
Mitch German: Great, and then last question on the litigation, you know, obviously the Pillestone trial was I guess during the summer, and the CEO is scheduled for it looks like December. So I mean is obviously they're not coupled, but do you have any sense of timing and then is the ruling definite, or could it just get caught up in an appeals process that doesn't enable you to have the freedom and flexibility to kind of execute your strategy?
Mitch German: Hey, Mitch, Dave again. Yeah, as you mentioned really a couple of matters, the ex-CEO, termination for cause-lives lawsuit, and then our attempt to receive fair value for our equity investment. It's difficult to give a lot of detailed talk on litigation. What I will say is both of the cases are nearing the end. We feel very good about our position. I think we've talked about the legal expense and really the underperforming J.V, and their effect on this year's numbers.
Mitch German: We feel very good going forward that those are soon going to be out of the story. I'm not going to talk to the details of an appeal process, but we feel very strongly we're nearing the end, and we feel like we are in a great position once that is resolved to really remove some of that noise from the story. The underlying fundamentals of the business are performing really, really well, and there is a bit of a noise from that, but I think we're in a good spot, and we're very close to the end, we believe. Thank you. Thanks, Mitch. Thank you.
Michael Diana: Our next question comes from the line of Michael Diana with Maxim Group, please go ahead. Okay, thank you. Hey, Dave, I think I heard you saying in the beginning of your remarks that you're expecting lower GNA levels. Could you give some more detail on that? Absolutely. Thanks, Michael. In our GNA this year is about 4.2 million basically in legal expenses related to the two litigation matters. That will go away. It's hard to exactly present when, but that alone represents a significant decrease in our GNA.
Michael Diana: I'll also remind you that in early 22 we made the leadership change. We took a number of steps to take significant costs out of our GNA cost structure at that time, largely resetting executive compensation. So a couple of steps we reduced our GNA in early 22 when we expect when we conclude our litigation to have a much lower GNA number as well. We've also really worked on efficiencies. I think Christine has talked about the way we've executed.
Michael Diana: We've been much more clear with our folks than in goals and accountability. As a result, we run leaner today. I think our head count today is in the mid 70s and a couple of years ago that was close to 110 people. We've really streamed line the business. We've become much more productive in our execution. If you look at the results, we're laying down a good track record. Frankly, we're doing that in a more efficient way and the future is very bright because there's some noise in the GNA number that's going to go away. Okay, great. Thank you very much. Thank you, Michael. Thank you. I have no further questions.
Dave Holeman: I would now hand the conference over to Dave Holeman, CEO for clothing comments. Thank you. We thank everyone for joining us today. It's been a third quarter. It was a very good quarter for us. We're excited to conclude the year and we look forward to finishing out very strong and then we also look forward to giving everyone a look into the future with our guidance with our year end earnings.
Dave Holeman: With that, we wish everyone a great day. Take care. Thank you.
Operator: The conference of Whitestone REIT has now concluded. Thank you for your participation. You may now disconnect your lines.