Whitestone REIT (WSR) Q1 2021 Earnings Call Transcript

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Whitestone REIT (WSR)
Q1 2021 Earnings Call
May 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Whitestone REIT First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Kevin Reed, Director of Investor Relations. Please proceed, sir.

Kevin Reed -- Director of Investor Relations

Thank you, Tanya. Good morning, and thank you for joining Whitestone REIT's first quarter 2021 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. We'd also like to introduce our new Vice President of Corporate Communications, Rebecca Elliott, who is also with us today.

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's most recent Form 10-Q and Form 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 may be accurate only as of today's date, May 5, 2021. The Company undertakes no obligation to update new information.

Whitestone's first quarter earnings news 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.

I will now turn the call over to Jim Mastandrea.

James Mastandrea -- Chairman and Chief Executive Officer

Thank you, Kevin. And thank you all for joining us at our first quarter 2021 investor call. I will provide a brief overview on Whitestone and as well an update on our business, current events in the first quarter. Following my remarks, I will turn the meeting over to Dave Holeman, who will provide a financial update on how we did during first quarter then we will follow with question and answers.

This quarter's result benefited from the decision to locate our portfolio in some of the country's fastest growing Sunbelt markets, where we are leading in our nation's reopening. This contributed to our performance on leasing, showing the resilience of our business model and corporate culture. Our operations team continues to provide their ability to be flexible and quickly adaptable with the support of our strong financial infrastructure.

At the end of Q1 this year, our operating portfolio occupancy was 89.1%, an increase of 0.5% from last quarter and down only 0.6% from a year ago. Our rent collections versus billings continue to put us at the top of our industry peer group. During Q1, our collections remains strong approximately 95% of our rents for the quarter and for the month of April. Our new lease count was 46 in the quarter, significantly higher than last quarter's count of 28 and our total lease count was 94, 12% higher than the previous quarter. Our blended leasing spread was 7.8%, 1 full percentage point higher than last quarter 6.8%. And our same-store net operating increase -- decrease 4.3% was flat last quarter yet among the best in the industry.

Additionally, in Q1 we increased our quarterly dividend by 2.4% and have paid a monthly dividend to our shareholders for 120 consecutive months. Our employees are back working safely at our properties and our tenant businesses are ramping up with increasing customer foot traffic as consumers continue to resume their daily lifestyle routines and visiting our properties while migration continues the flow into our markets.

Our targeted geographic portfolios comprise of institutional qualities open air real estate with predictable cash flow. Our properties are adjacent to high-income communities and our tenants include grocery stores, pharmacies and restaurants. Our centers are made up of e-commerce resistant tenants who provide necessities and essentials. They drive 18 hour traffic, 7 days a week to our properties. As a result, over the past year our centers have remained open and most of our tenants remained active. Some of whom today are experiencing higher sales than their pre-pandemic levels.

A reminder of shareholder that Whitestone was built during the recession of 2008 to 2010 and many of the lessons that we learned during we incorporated into the fiber of the company. Our company has built by acquiring properties that are located in our business friendly states, fast growing and really populated cities and high-income communities. By creating an interest resistant business model, internet resistant business model that focuses on services and essential needs of consumers. By creating a diverse portfolio of entrepreneurial tenants, by structuring leases with tenant owner recourse and minimal co-tenancy approval rights. By providing annual rent increases of 2% to 3%, while passage through triple net expenses and by keeping our focus on training and developing our people for for continuity.

Our swift response to COVID-19 12 months ago strengthened our balance sheet liquidity and financial flexibility to successfully navigate economic impacts of the pandemic. Fast forward, the first quarter of 2021. We're activating our strategic growth plan. We are making plans for future redevelopment and development projects. We have reduced our overall debt level, we have increased our divided and we are continuing to scale our infrastructure.

Our history has been to grow our portfolio by making single off market, value ad acquisitions in four specific markets. Austin, Dallas-Fort Worth, Houston and Phoenix Scottsdale. We intend to continue this strategy to assemble valuable properties in markets where tenants want to lease and consumers want to visit. By growing this way, we created a substantial value add portfolio of properties.

In fact, we are under contract to acquire a property in one of our identified markets, our first acquisition since the pandemic began and we expect to close this summer. This acquisition will add just under 200,000 square feet and would be immediately accreted to Whitestone's FFO per share and positively contribute to Whitestone's long-term goals related to debt, leverage and G&A coverage.

In addition, our regional management team is in place giving us operational economies as we scale up our infrastructure. We look forward to providing more details as we progress in the year. Moving forward at Whitestone we're well positioned with the improving balance sheet, enhanced liquidity, a laser focus on driving occupancy and revenue growth and leasing, leveraging our deep knowledge of our markets, properties and opportunities along with our business model to provide and craft the tenant mix to lease, to credit entrepreneurial businesses. This is how we create long-term shareholder value.

With that, I would like to turn the call over to Dave. Dave?

David K. Holeman -- Chief Financial Officer

Thanks, Jim. First, I would like to provide a little more perspective on the strength of our markets. Our targeted geographic focus on top MSAs in the Sunbelt continues to produce great results. Texas and Arizona, continue to see significant population migration and corporate relocations producing jobs from other areas of the countries.

This is best evidenced by our first quarter leasing activity, occupancy levels, leasing spreads and our average base rent per leased square foot. Our leasing activity in the quarter was very strong with 46 new leases, representing 117,000 square feet of newly occupied spaces. This level of new lease square footage was 90% higher than our average quarterly lease volume for the previous three year period. And 21% higher than the highest quarter over the past three years.

On a total lease value basis, this quarter was more than double our average quarterly lease volume for the previous three year period and 38% higher than the highest quarter over the past three years. Regarding occupancy, our operating portfolio occupancy stood at 89.1%, up 1.5% from the fourth quarter and down only 6 -- 0.6% from a year ago with our Austin market leading the way with almost 4% increase in occupancy from Q4.

Leasing spreads on a GAAP basis have been positive 9% over the last 12 months, and first quarter leasing spreads increased 5.3% on new leases and 9.6% on renewal leases signed. Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 1% to $19.71, from $19.58 in the previous quarter, and basically in line with our pre-COVID ABR from a year ago.

Funds from operations core was $0.23 per share in Q1, compared to $0.24 per share in the prior year. As Jim, mentioned our collection continued to trend toward normal pre-COVID levels, with 95% of our contractual rents collected in Q1. Restaurants and food service, our largest tenant category, which represents 23% of our ABR and 17% of our leases square footage continued to perform very well, staying 95% in the quarter and we also saw positive movements in some of our impacted customer types, with entertainment representing only 2% of our ABR, and leased square footage paying 73% of their rents in the quarter, up from 48% in Q4.

During the quarter we had minimal rent deferrals, representing 45% of our total contractual billings. Our same-store net operating income was down 4.3% for the quarter versus the prior year quarter, and we expect our same-store growth to resume as we move throughout the balance of the year and into 2022. Reflecting the continued improvement in the portfolio, our reserve for uncollectible revenue was $529,000 or 1.8% of revenue, down from 4% of revenue in Q4.

To put this in further perspective, our first quarter reserve equates to only 9% of 2020s full year reserves. Our interest expense was 8% lower than a year ago, reflecting $15 million in lower average debt, and a decrease in our overall interest rate from 3.9% to 3.6%.

Our first quarter is an encouraging start to 2021, and underscores the resilience of our forward thinking, well-crafted business model and the strength of our strategically chosen high-growth markets.

Let me provide some further details on our collections, and related receivable balances. Included on Page 27 of our soft data is a breakdown of our tenants by type. All of our credit category were above 89% collection in Q1, with the exception of entertainment, which I previously discussed. Our three largest categories, restaurants, grocery and financial services were at 95%, 100% and 99% respectively. At quarter end, we had $23.3 million in accrued rents and accounts receivable, included in this amount is $16.9 million of accrued straight-line rents, and $1.8 million of agreed upon deferrals.

Our agreed upon deferral balance is down 18% from year end, reflecting tenants honoring their payment plans. Since early last year, we've implemented various measures to strengthen our liquidity, and navigate the economic pressures caused by the pandemic. Our total net debt is $632 million, down $17 million from a year ago, and our liquidity representing cash and availability on our corporate credit facility, stands at $39 million at quarter end.

We continue to make progress on our publicly stated goal of reducing leverage. During April, we paid down an additional $10 million of our corporate credit facility. Currently, we have a $140.5 million of undrawn capacity, and $25.9 million of borrowing availability under our credit facility. We are in full compliance with all of our debt and expect to remain so in the future.

As I stated earlier, 2021 is off to a very promising start. These results are a testament to the resiliency of Whitestone's business model. We are encouraged by the recovery and we look forward to reengaging our growth strategy, and our continued delivery of value to all of Whitestone stakeholders.

With that, we will now take questions. Operator, please open the lines.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Aaron Hecht with JMP Securities. Please proceed.

Aaron Hecht -- JMP Securities LLC -- Analyst

Hi, Jim. Hi, Dave. Good morning.

James Mastandrea -- Chairman and Chief Executive Officer

Hi.

David K. Holeman -- Chief Financial Officer

Yeah, how you doing?

Aaron Hecht -- JMP Securities LLC -- Analyst

Good. Thank you. So it sounds like the increased leasing volume is very encouraging. Just wanted to get your take on what do you think that means for future leasing spreads? I know the numbers look pretty good on a GAAP basis this quarter, I think they were a little bit negative on a cash basis. Is this really about lowering the amount of square footage available in your properties, and I guess surrounding areas as well, before you get that bigger bump on the cash side and then on the collection side, given this demand, do you think that 5% uncollected rent is going to the dwindle in short order?

David K. Holeman -- Chief Financial Officer

Thanks Aaron. This is Dave. To touch on the occupancy first, we are very pleased with our increase in our occupancy from Q4, and we believe that will contribute obviously positively to the future quarters. In the first quarter that increase in occupancy only partially contributed, with much of it coming toward the end of the quarter.

Leasing spreads have been positive as you said on a GAAP basis, a little over the beginning rent versus ending rent, some of just a result of obviously over the last 12 months since the business is ramping up and learning to operate differently, so giving them a little bit of a headway as they they start with their new lease. We do expect our leasing spreads, to continue to be robust. I mean if you look at our track record over the last several years, they've been typically double digit, with a little bit lower over the last two quarters. But we are pleased with the the lease-ups. We're pleased with the spreads. And as I mentioned just the activity during the quarter was really outstanding, our highest quarter from a new lease perspective, we've had in probably forever. Look back three years and well above our highest quarter over the last three years.

Aaron Hecht -- JMP Securities LLC -- Analyst

Have you seen that traffic extend past the quarter or accelerate?

David K. Holeman -- Chief Financial Officer

We have. Obviously one of our largest focus is occupancy and revenue, and so a lot of focus on the leasing up the space is continuing to drive revenue. We've seen that activity continue post quarter as well.

James Mastandrea -- Chairman and Chief Executive Officer

Yeah. We've also seen strong migration into both Texas areas from outside of those states. And I think we're seeing that I housing demand. And our communities are in great locations, and so the homes in those areas are filling or those filling or reselling there quickly. And I think it's clearly not a confidence for the perspective tenants working in.

Aaron Hecht -- JMP Securities LLC -- Analyst

Right. And then on the acquisition, excited to hear that you guys are getting into the investment game again. Can you talk a little bit about the cap rate or the yield and maybe on any development or redevelopment that you're doing, what you're targeting in terms of investment yield?

James Mastandrea -- Chairman and Chief Executive Officer

Let's start with the redevelopment. We have approximately $240 million plus of opportunities within that portfolio, we do need to activate growth and we don't do -- period of time. With regards to the talk that we have -- I can say we -- I will say -- with the seller and can say extraordinarily attractive property, it fits within our sweet spot in terms of one of our regions and the cap rate is very favorable. It has a positive spread and it's also accretive. What's interesting about as we add properties now, we do have the full team in place, when you add someone, another person is like adding a property manager and the maintenance person. Other than that we have no additional cost, and will be able to leverage our infrastructure.

Aaron Hecht -- JMP Securities LLC -- Analyst

To get at a higher level is have have cap rate effectively dropped for the assets that you would kind of target historically over the last 12 months or so, as interest rates have gone down or do you not seen that as much in your sector and your assets that you'd be interested in?

James Mastandrea -- Chairman and Chief Executive Officer

That depends. In this case, the cap rate is higher than what we've seen in the past. It depends on the quality of the properties and the locations. What we've seen coming through COVID is that there some people who are over in age and have owned retail properties for long time. They realize that

They don't want to go through what they had to go through this past year. So now they are putting their properties quietly, not necessarily on the market, but knowing where a candidate to acquire. We are also in discussions on properties in our OP structure, with a price more commensurate with our net asset value. We have been doing that in the past. We have gone through a few deals like that.

So we're seeing activity in marketplace, in particular the activities is the small entrepreneurial tenants that we like. This particular property is adjacent to a very well regarded grocery store, and adjacent to the property that we are buying. We actually looked that a year ago and when the pandemic hit, we put it on ice and went back to the seller and we incarnated the deal. We like it very much.

Aaron Hecht -- JMP Securities LLC -- Analyst

Understood. Thanks, Jim. Thanks, Dave.

James Mastandrea -- Chairman and Chief Executive Officer

Thanks, Aaron

David K. Holeman -- Chief Financial Officer

Thanks, Aaron.

Operator

Our next question comes from Craig Kucera with B. Riley. Please proceed.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Hey, good morning guys. Congrats on the...

David K. Holeman -- Chief Financial Officer

Good morning.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Collections. Can you give us some color on what types of businesses you categorize as entertainment?

David K. Holeman -- Chief Financial Officer

Yeah. Entertainment on like I said, on Page 27 of our sub-data we provide tenant category. So we have in there, it's about 2% of our ABR and 2% of our leased square footage. We have in there, movie theaters, we have really one movie theater -- large movie theater in our portfolio. We have some venues like activity centers, like a birthday party, that sort of thing. So, a small group and then one is there in Austin, that is probably half of that total and they are reopening and doing better.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Got it. So are there any type -- I know you only had a very small amount of bankruptcies last quarter. Are there any bankruptcies in that segment or tenants that you believe chose to stay silent?

David K. Holeman -- Chief Financial Officer

We already -- I mentioned there is one tenant here, one movie theater in Austin that is a reorganization bankruptcy. At this point our theater is one of the best performing in their chain, is not listed as a potential closure. So there is one bankruptcy in line with the theatre we have.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Got it. And I just want to talk about the leasing this quarter. Clearly a pretty big pickup. Were there any particular categories that you noticed had especially strong demand on the new lease side or was it pretty broad based?

David K. Holeman -- Chief Financial Officer

It was broad. I will --- we will tell you that second generation restaurants, great restaurant operator have learned creativity throughout the pandemic, have learned to operate, have built businesses based on takeout and curbside delivery, they might have had before. So we seen a great amount of interest in really good restaurant operators in our markets looking for spaces that they can have here and start their businesses very quickly.

James Mastandrea -- Chairman and Chief Executive Officer

Hi. And in some of our properties we have a product called CUBE Exec, which is an office products and fits right into the retail center. It's about 125 square feet to maybe 250 square feet and what we're finding is that those spaces are close to capacity right now. Because what happens is during the pandemic folks who have moved out of their offices and work-at-home, decided that working at home wasn't necessary the place they wanted to remain, they move into a small space outside of their home, but yet not back in their office, and we've seen an increase in the occupancy in those spaces.

It's really nice to be -- to have that space in a non-traditional environment, being that as an office building and not traditional being that you have restaurants at your fingertips and other services, to be with your family and also work at the same time.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Got it. And just one more from me. I just want to follow up on the acquisition, you expect to close this summer. Is that one of your OP unit deals that might be price closer to NAV. Or are you looking to finance that with a line of credit? Just any color there on source of the capital would be useful.

James Mastandrea -- Chairman and Chief Executive Officer

Yeah, sure.

David K. Holeman -- Chief Financial Officer

Hi, Craig. So obviously we look forward to providing a whole details on closing. At this point we are comfortable with the financing of the property. We are conducting diligence and are very confident in the closure, but right now we're not going to provide a lot of details on the financing structure, until we get it closed.

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Okay. Fair enough. Thanks.

James Mastandrea -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Michael Diana with Maxim Group. Please proceed.

Michael Diana -- Maxim Group, LLC -- Analyst

Thank you. You just raised the dividends. Could you -- and obviously the outlook here looks good for 2021 and 2022. Can you remind us sort of how you look at changing the dividend?

James Mastandrea -- Chairman and Chief Executive Officer

Sure.

David K. Holeman -- Chief Financial Officer

Hey, Michael, Dave. I'll start and Jim will probably add. I think obviously as we've said before, we think rates were largely -- it's a great way for individual investors to participate in real estate, and enjoy the dividend in cash flow from that. We were pleased to raise our dividend in March, which really shows the strength of the recovery. If you look at the dividend, obviously on a regular basis our board looked at -- I think we look at a couple of things, obviously a payout ratio of our cash flow, what percent of that we're paying out, and then appropriate yield for the for the real estate. If you look at most of those measures today I think Whitestone is in the high 4%, close to 5% from a yield perspective, and then our payout ratio is -- would be among the best in the industry, one of the lowest.

So we feel very confident in the the stability of the dividend, and as we continue to execute, we think there will be an opportunity for all shareholders to participate in that increased cash flow.

James Mastandrea -- Chairman and Chief Executive Officer

I might as well that when we, when we reduce the dividend we weren't quite sure how long this pandemic would last, as no one was. We didn't know if it was for one year or three years. And so we lay a fairly significant cut to our dividend, the Board did. And so what we realized that we were -- we really ran a strong collections program and it's been better bridge on the top of the industry and we also found that the artificial intelligence we use is and shows that we produce a lot of traffic to our centers, thereby helping the tenants come back. So we felt that we use the cash that we have saved for two things, one is that we wanted to give something back to the shareholders, because we had great success in terms of our collections. And the second is to show the confidence that we're building within the company. So we felt very good about that. The Board had a long discussion about it and we think it was smarter.

Michael Diana -- Maxim Group, LLC -- Analyst

Great. Thank you.

James Mastandrea -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. At this time, I would like to turn the call back over to Mr. Jim Mastandrea for closing remarks.

James Mastandrea -- Chairman and Chief Executive Officer

Yes. Thank you, operator. One thing I would like to emphasize that we have a positive outlook, as we look through the long-term goals of Whitestone and we've always thought of it as long-term growth and that's why we continue to stay focused. We made decisions though in the short-term that these benefit are long-term goals and we're excited about what we see in the future down the road. Our platform is strong, our business model is proven, our track record is evidence of our success. Our team is passionate, committed and well-positioned to find and execute on future opportunities.

In closing, know that we look forward to moving ahead and tend to stay true to our values, our strategic plan the work unwavering standards as we always have definitely step the way, we know that God's hand is on our shoulders and work is clear as we remain focused on our value adding long-term goals. Thank you all for joining us today.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Kevin Reed -- Director of Investor Relations

James Mastandrea -- Chairman and Chief Executive Officer

David K. Holeman -- Chief Financial Officer

Aaron Hecht -- JMP Securities LLC -- Analyst

Craig Kucera -- B. Riley Financial Inc. -- Analyst

Michael Diana -- Maxim Group, LLC -- Analyst

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