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Whitestone REIT (NYSE:WSR)
Q4 2019 Earnings Call
Feb 27, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Whitestone REIT Fourth Quarter and Full-Year 2019 Earnings Conference Call. Today's conference is being recorded.

With that, let me pass the call to Mr. Kevin Reed, Director of Investor Relations.

Kevin Reed -- Director of Investor Relations

Thank you, Justin. Good morning and thank you for joining Whitestone REIT's fourth quarter 2019 earnings conference call. Joining me on today's call are Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our 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 press release and filings with the SEC, including Whitestone's most recent Form 10-K and Form 10-Q 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, February 27, 2020. The Company undertakes no obligation to update any information. Whitestone's fourth quarter earnings press release and supplemental operating and financial data package have been filed with the SEC and are available on our website, www.whitestonereit.com in the Investor Relations section.

During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the Company. Included in the earnings press release and supplemental data package are the reconciliations of non-GAAP measures to GAAP financial measures.

With that, let me pass the call to Jim Mastandrea.

James C. Mastandrea -- Chairman and Chief Executive Officer

Great. Thank you, Kevin, and thank you all for joining us today. My remarks today will address the progress that Whitestone has made to deliver consistent and predictable financial results since we did our IPO in 2010, how we got there and where we're going. We are consistently starting to perform better today than we did yesterday. 2019 was a very good year for Whitestone. We reached our annual earnings guidance range and continued to successfully execute on our strategic plan, while remaining focused on providing excellence to all shareholders.

Our commitment to our stakeholders begin with our employees, who are the driving force that connects Whitestone to our other stakeholders, especially our tenants and the communities where we operate. Our commitment to the betterment of our tenants and communities begins with our core values, through development, redevelopment and enhancement of our properties, Whitestone values are transparent to our tenants and the communities in which we operate, creating jobs, including home values and driving business-packed revenues.

As a result of our long-term commitment and the efforts of our team, our shareholders were rewarded at year-end 2019, when Whitestone achieved the ranking of top Total Shareholder Return, TSR, of all the public US shopping center REITs over the past three years and Number 2 ranking over the past five years. This ranking is even more significant when compared to traditional retail, which has significantly changed over the years and has negatively impacted the owners of retail properties in the surrounding communities.

The two most notable impacts were additional vacancies and reduced rents. First, when traditional retail tenant landlords [Phonetic] were vacated, additional vacancies occurred in these centers, decreasing cash flow and reducing property value. And second, transfer of control of the real estate with tenants from the landlord when leased operating covenants were triggered. This zero-sum game benefits the tenants with lower operating expenses and increases their net income, while landlord's rent is lower, as well as their net operating income.

Know that Whitestone's policy is to stay ahead of the curve, attracting tenants that meet the needs of today's consumers and we avoid the explicit tenant covenants minimizing the financial impact from store closures and vacancies and our policy permits us to focus on operating our business, as well as maintaining control of our real estate. We completed 2019 with minimal store closing, a solid balance sheet, profitable operating statement, larger tenant base and a portfolio of real estate with a higher value.

Other highlights I'll share for the year includes the expansion of our credit facility with $515 million, extending the term for another five years and improving several of the borrowing covenants. The completion of our inaugural bond issuance by issuing $100 million of 10-year corporate bond. The payment of the $1.14 per share in dividend funded from operating cash flow and proceeds from property sales, reflecting the value we create. The successful sale of non-core properties, reducing debt and resulting in a gain on sale of $13.8 million and net proceeds received by Whitestone of $11 million. Growth in our annualized base rent per share of -- per foot, I'm sorry, of 2.2% to $19.77, same-store net operating income growth of 4.7% Q4, and 2.4% for the full year. Improvement in our general and administrative expense reducing 80 bps to 16.6% of revenue and reduction of our debt-to-EBITDA leverage to 8.6 times from 8.7 times.

In addition to our strong operational performance, we continue to create value in properties we own [Phonetic] in high-growth markets due to redevelopment and the development of our parcels of land [Phonetic] that are contiguous with properties we acquire. From 2016 through 2019, we invested approximately $28 million in development and redevelopment of eight of our own properties that resulted in an incremental increase of $3.3 million in net operating income, which produced 11.9% unlevered return on investment.

Over the next several years, our redevelopment and development program will continue as we plan to invest approximately $230 million in our current portfolio that will add incremental value of $175 million with a total value of approximately $405 million. This aggregate investment will produce an additional $24 million of annual net operating income.

Whitestone's profitable growth has been through operation, redevelopment and development and acquisitions. From 2010 to 2019, we invested approximately $920 million in the acquisition of 43 high-quality properties. Since making these acquisitions, we have grown net operating income by 17.5% and improved our unlevered cash-on-cash return from 6.8% to 7.5% through our operations, redevelopment and development. We plan to continue making off-market acquisitions and have identified opportunities that exhibit growth, demographic trends similar to Whitestone's current market [Phonetic]. And as in the past, we intend to be judicious stewards of capital and expect to fund these opportunities through multiple sources of capital.

With that, I will now turn over to Dave Holeman, our Chief Financial Officer to present greater detail on our financial and operating results. Dave?

David K. Holeman -- Chief Financial Officer

Thank you, Jim. In my remarks, I will provide details on our fourth quarter and full-year operating and financial results, our balance sheet, our acquisition and disposition effort, progress on our long-term goal, and our 2020 guidance.

During the fourth quarter, we further enhanced the overall quality of our assets through stringent asset management and the addition of Las Colinas Village located in our Dallas market. I will provide a few more details on our newest acquisition later in my remarks. Additionally, tenant mix continues to improve, as evidenced by the increase in our annual base rent per square foot and strong same-store net operating income growth from a year ago.

On an annual basis -- our annual base rent per leased square foot increased to $19.77 and our same-store NOI for the fourth quarter grew 4.7% from the fourth quarter of 2018. Beginning this quarter, we are changing our definition of same-store NOI to provide greater transparency and to be consistent with the reporting of most of our peers. Beginning in this reporting period, we are reporting same-store NOI excluding straight line rent, amortization of above/below market rent and lease termination fees. On this basis, same-store NOI increased 2.4% for the full year and 4.7% for the fourth quarter. The primary drivers of same-store growth are embedded contractual rent increases, rental rate increases from new and renewal leases, occupancy levels and expense recovery and management.

Prior to this year and included in our 2019 guidance, we reported same-store growth including straight line rent, amortization of above/below market rent and lease termination fees. Using this basis, our same-store NOI increased 1.1% for the quarter and 0.5% for the year, which was at the lower end of our annual 2019 guidance. Our leasing volume for the fourth quarter was very strong with an increase of 55% in total lease value signed for new and renewal leases versus the fourth quarter of 2018.

Leasing spread were also very strong in the fourth quarter, growing 14.4% on a GAAP basis on new and renewal leases signed during the quarter. In 2019, we signed 208 renewal leases and 109 new leases, representing 953,000 square feet at a weighted average lease term of 4.1 years and an average size of approximately 3,000 square feet. The blended leasing spread on a GAAP basis was 10.1%, 9.6% for new leases and 10.2% for renewal leases.

Our total occupancy at year end was 90.3%, which was relatively flat with the previous quarter and the year-ago quarter. General and administrative expenses as a percentage of revenue improved 60 basis points to 15.9% in Q4 and for the full year was 16.6%, an improvement of 80 basis points over the prior year. For the quarter, our interest expense was $75,000 over the prior year, attributable to increased debt for the funding of our 2019 acquisition and a lower weighted average interest rate of 5 basis points. For the full year, our interest expense increased $1.1 million as a result of the debt for our acquisitions and an increase in our weighted average interest rate of 12 basis points.

Net income attributable to Whitestone REIT for the year was $23.7 million or $0.57 per share compared to $21.4 million or $0.52 per share in 2018. Funds from operations as defined by NAREIT for the quarter was $8.9 million or $0.21 per share compared to $9.5 million or $0.23 per share in the fourth quarter of 2018. For the year, NAREIT FFO was $38 million or $0.90 per share compared to $39.4 million or $0.94 per share in 2018.

FFO core, which adjusts the NAREIT defination in 2018 and '19 for non-cash stock compensation, early debt extinguishment cost, and in 2018 only proxy contest professional fees of $11.1 million or $0.26 per share in the fourth quarter compared to $11.4 million for $0.27 per share in 2018. For the full year, funds from operations core was $44.9 million or $1.06 per share compared to $48.8 million or $1.16 per share in the prior year. As anticipated and communicated previously, funds from operations core per share declined for the year compared to the prior year based on property disposition from harvesting the value created providing recycled capital for future investment opportunities, higher legal fees related to litigation, and higher interest costs, driven by our fixing the interest rate on a greater percentage of our debt and extending maturity. For the quarter, funds from operations core per share declined $0.01 from the prior year quarter. This was a result of property dispositions, offset by increased NOI from same-store and our late 2019 acquisition.

While our funds from operations core per share decreased from 2018, we believe the progress we have made this year includes upgrading the portfolio through selective dispositions, improving our debt structure through reducing leverage, increasing tenure and fixing the rate on a larger percentage of debt, reducing our G&A costs and enhancing our corporate governance, which all will result in long-term value creation for our shareholders.

Now let me turn to our balance sheet. Our total undepreciated real estate assets were $1.1 billion as of the end of the year, up $48 million from a year ago, reflecting acquisitions, investments in existing assets and development of additional leasable area. As of quarter end, our total real estate debt, net of cash on hand was $640 million, down from $644 million at December 31, 2018 and our debt as a percentage of total market capitalization, improved to 52% from 56% a year ago. During the quarter, we raised $12.6 million at an average price of $13.70 per share utilizing our at-the-market offering program.

Let me now give a couple of brief comments on our acquisition, disposition and development activity for the year. In December, we completed the off-market acquisition of Las Colinas Village, 105,000-square foot center located in the upwardly mobile, young, professional community of Irving, Texas, along North Dallas' Platinum Corridor, an area with very strong demographics. This acquisition was funded in a leverage-positive manner, using proceeds from disposition, debt from our credit facility and equity from issuance of shares under our ATM program and with our Dallas regional team in place, we will further scale our operating platform with no additional overhead required. On the disposition front, in late 2019, we sold three Houston non-core properties for $39.7 million, representing a 6.8% cap rate and regarding our long-term goal that we communicated in 2018 for improvement of debt leverage and G&A expenses, I am pleased to report that we have made significant progress. Our G&A expenses have improved from 19% of revenue in 2017 to 15.3% in the most recent quarter.

On the debt leverage side, we have not made as much progress, but remain committed to goal. The largest driver of leverage improvement is the financing of acquisitions with a lower debt component, which we did with our most recent acquisitions. In 2019, we were able to improve the debt-to-EBITDA ratio in Q4 to 8.6 times, down from 8.7 times in Q4 2018. We expect the pace of improvement on these key metrics to build in the next few years.

Now, let me end by focusing my comments on our 2020 outlook. Our guidance reflects management's view of current and future market conditions, as well as the earnings impact of events referenced in our earnings release and supplemental data package. This guidance does not include the operational or capital impact of any future unannounced acquisition, disposition or development activity. As the plan for any of these activities becomes final, we will communicate and update our guidance as needed. We anticipate net income per share to be in the range $0.20 to $0.24, funds from operations as defined by NAREIT to be in the range of $0.87 and $0.91 per share and funds from operation core to be in the range of $1.05 to $1.09 per share.

Key assumptions in our 2020 guidance estimates are same-store growth, inclusive of straight line rent, amortization of above/below market rent and lease termination fees of 1% to 3%, average occupancy for 2020 of 90.5% to 92% and average interest on all debt of 4.2%. We have provided a walk from 2019 actual results to our 2020 guidance in our supplemental data package with further details on the expected year-over-year changes. Although we don't give guidance on a quarterly basis, given that we are two-thirds of the way into our first quarter, I would like to highlight the fact that the first quarter typically has higher accounting and professional fees relative to the other -- the following three quarters.

And with that, Jim and I will now be happy to take your questions.

Questions and Answers:

Operator

Well, thank you. [Operator Instructions] Our first question comes from Craig Kucera with B. Riley FBR.

Craig Kucera -- B. Riley FBR -- Analyst

Hey, good morning guys.

James C. Mastandrea -- Chairman and Chief Executive Officer

Hey, Craig.

Craig Kucera -- B. Riley FBR -- Analyst

Want to start out by talking about the Las Colinas -- Hey, Jim, I wanted to talk about the Las Colinas acquisition first. Can you tell us how you sourced that transaction and what the initial cap rate is expected to be here in 2020?

David K. Holeman -- Chief Financial Officer

Yeah. I'll touch maybe on the cap rate and then I'll let Jim give a little more detail on the sourcing of the acquisition. The in-flight NOI at the time of the acquisition represented about 7% unlevered yield on our investment costs. The asset was 86% occupied, so obviously from a cap rate perspective, it would be a higher cap rate than that when it's stabilized at a 95% occupancy.

James C. Mastandrea -- Chairman and Chief Executive Officer

Yeah, thanks, Dave. Craig, we looked at this asset several times, probably more than four times, including myself, and it fits perfectly into the business model we have and into our Dallas portfolio. Number of factors come into when we buy something like this. First of all, we have upside, because it's 96% [Phonetic] occupied. The cash-on-cash going in is 7%, but we also have an excellent team in Dallas that our portfolio is performing above the 90%, but it is above that in occupancy and so that we reward different regional operation by feeding them more properties like that. So, we're pretty excited about it. We think there is some upside, some opportunity to buy some additional parcels there and it fits very well into our portfolio.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. So, it sounds like job one, probably the immediate plan in 2020 is probably to try to push up occupancy and then perhaps longer term, pursue some of those development opportunities?

James C. Mastandrea -- Chairman and Chief Executive Officer

That's correct. We are always focused on the occupancy. And as you can see, when you buy a new property and it takes anywhere from 18 months to 24 months to integrate it into the operation and it's 86% occupied, we're going to have that upside pressure on the occupancy, but we're doing a pretty good job executing there. So, yes, that's right.

David K. Holeman -- Chief Financial Officer

I'll highlight as well. We've also been able to do a good job of increasing our rental rates as we renew leases and Las Colinas as well as other assets, we feel like we come in and operate the property and via our business model, we'll have the ability to the push the rates on the rentals from those renewals as well. I think our leasing spreads for the trailing 12 months on renewals are around 10%.

James C. Mastandrea -- Chairman and Chief Executive Officer

Yeah. Just one additional note, I would say, we buy other things that we call off-market. In other words, it's not circulated, it's usually not a portfolio listed by a broker. We don't get into bidding auctions. We don't get into the final -- question final round, none of that. It's a straight up deal, principle to principle and sometimes there is a broker involved. Most of the time, it's not, but that's how we've been buying our properties and we found that we are very successful in the past.

David K. Holeman -- Chief Financial Officer

And one other thing I would like to highlight, I think, I said this in my remarks, Craig, but it really does enable us to scale our in-flight infrastructure. Our team in Dallas is very good [Indecipherable] and we added this asset without having to add any additional costs. So, we'll continue to improve in the G&A coverage and other aspects through acquisitions like Las Colinas.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. And just given your commentary on guidance, that doesn't include any dispositions. Should we take away from that, that you're not currently marketing any of the remaining eight assets in Pillarstone or are those potentially could be sold and recycled, but you're just including it in guidance at this point?

David K. Holeman -- Chief Financial Officer

I think from a guidance perspective, it's obviously difficult to predict the timing of those kind of activities. So, from a guidance perspective, we give guidance based on our current portfolio. We're going to continue to look for opportunities to take the value we created in assets and recycle that, but just due to the difficulty of timing, we don't include that in our acquisition guidance and we will -- as those activities occur, obviously, we'll update our guidance if necessary.

James C. Mastandrea -- Chairman and Chief Executive Officer

And I'll add to that, Craig, is that, a great way when you're looking at creating the net asset value of the Company, if you take the gain that we've looked at and build that into -- add that to the cash flow of the business, we're going to see it is very significant and that's what our business model is. Create added value and as we sell those properties off, you'll see some more added value and now the downside of that is that we take away some FFO, which is when Dave mentioned in his remarks, how it reduced FFO, we just -- because we sold an asset, it took away FFO. So, very sensitive balance that we see.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. One more for me. Just again, circling back to the guidance, there's a pretty healthy bump in share counts for the average for the year. How did -- should we assume that, that's sort of ATM issuance throughout the year or have you been relatively active here in the first quarter? Any color there would be appreciated.

David K. Holeman -- Chief Financial Officer

Yeah, I think that's largely driven by the full impact of -- during the fourth quarter of '19, we sold $12.6 million under our ATM program. I think for the full year of '19, we sold about $21 million under our ATM program. In 2020, it will be fully diluted versus only partially diluted for 2019. But that's the largest driver, also just the impact of the dilutive effect kind of the long-term stock brand, but the biggest piece is the ATM full year dilution from '19.

Craig Kucera -- B. Riley FBR -- Analyst

Okay. Thank you.

James C. Mastandrea -- Chairman and Chief Executive Officer

And just if I can comment on last [Indecipherable] for a second is we're excited here because it's our first acquisition since we went through about a three-year sabbatical, dealing with the activist investor, which we -- and also the class action fees which we cleaned out very favorably for Whitestone shareholders. So, we're now back on track to continue judicious growth strategy and we're pretty excited about that. So, I think that's something that all shareholders would welcome. I remind everyone before I share some closing comments that we've been doing this for long time and that we find that the track record is starting to really turn up in terms of being stable and predictable.

Operator

[Operator Instructions] And at this time, there are no further questions. Mr. Mastandrea, I will now turn the conference back over to you.

James C. Mastandrea -- Chairman and Chief Executive Officer

Yes, thank you. As always, I want to thank you for joining us in our -- on our investor call today. We really look forward to these and we enjoy sharing with our investors the success we've had and knowing that we're staying true to our discipline and to our plans. As we look forward to 2020, I'd want to say that our list of objectives and goals are clear to us and hopefully, they'll be clear to you all as owners, simply to do better this year than we did last year. And know that I am committed to serving God, whose hands I believe and feel on my shoulders through serving all of you, the shareholders, serving our tenants, our employees and our stakeholders.

With that, I'll say thank you very much. Then, if any of you have any questions or would like to give Dave and me a call or Kevin, please feel free to do so, we may make ourselves available and as always, we would be happy to see you on any properties that you own. Thank you very much.

Operator

[Operator Closing Comments]

Duration: 31 minutes

Call participants:

Kevin Reed -- Director of Investor Relations

James C. Mastandrea -- Chairman and Chief Executive Officer

David K. Holeman -- Chief Financial Officer

Craig Kucera -- B. Riley FBR -- Analyst

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