Whitestone REIT (WSR) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Whitestone REIT First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Reed, Director of Investor Relations. Please proceed, sir.

Thank you, LaTanya. 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 5th, 2021. The company undertakes no obligation to update the 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.

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 the first quarter. Then, we will follow with question and answers. This quarter's results benefited from the decision to locate our portfolio in some of the country's fastest-growing Sun Belt markets, where we are leading our nation's reopening. This is contributing 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 .5% from last quarter and down only .6% from a year ago. Our rent collection versus billings continues to put us at the top of our industry peer group. During Q1, our collections remained strong, approximately 95% of our rents for the quarter and for the month of April. Our new lease count was 46 for 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's 6.8%. And our same store net operating income decreased 4.3% [was] flat last quarter, yet among the best in the industry. Eventually in Q1, we increased our quarterly dividend by 2.4% and have paid a monthly dividend to our shareholder for 120 consecutive months.

Our employees are back working safely at our properties, and our tenants' 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 to flow into our markets. Our targeted geographic portfolio is comprised of institutional quality, open-air real estate with predictable cashflow. 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.

I remind our shareholders that Whitestone was built during the recession of 2008 to 2010, and many of the lessons that we learned during that time were incorporated into the fiber of the company. Our company was built by acquiring properties that were located in business-friendly states, fast-growing and [heavily] populated cities in high-income communities by creating an internet-resistant business model that focuses on the services and essential needs of consumers, by creating a diverse portfolio of entrepreneurial tenants, by structuring leases with tenant/owner recourse and minimal cotenancy approval rights, by providing annual rent increases of 2 to 3% while passing through triple net expenses, and by keeping our focus on training and developing our people for continuity. Our swift response to COVID-19 12 months ago strengthened our balance sheet, liquidity and financial flexibility to successfully navigate the economic impacts of the pandemic.

Fast-forward to first quarter of 2021. We are 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 dividend, and we are continuing to scale our infrastructure. Our history has been to grow our portfolio by making single off-market value-add acquisitions in 4 specific markets: Boston, 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 portfolio of properties. In fact, we're 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 will be immediately accretive 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 original 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 through the year.

Moving forward at Whitestone, we are well-positioned with an improving balance sheet, enhanced liquidity, a laser focus on driving occupancy and revenue growth, and 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?

Thanks, Jim. First, I would like to provide a little more perspective on the strength of our markets. Our targeted geographic focus on top [MFAs] 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 country. 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 3-year period and 21% higher than the highest quarter over the past 3 years. On a total lease value basis, this quarter was more than double our average quarterly lease volume for the previous 3-year period and 38% higher than the highest quarter over the past 3 years.

Regarding occupancy, our operating portfolio occupancy stood at 89.1%, up one half percent from the fourth quarter and down only 6.6% from a year ago, with our Austin market leading the way with an almost 4% increase in occupancy from Q4. Leasing spreads on a GAAP basis have been a positive 9% over the last 12 months. And first quarter leasing spreads increased by 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 is 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 collections continue 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 leased square footage continued to perform very well, paying 95% in the quarter. And we also saw positive movements in some of our more 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 0.5% 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 uncollectable revenue was $529,000 or 1.8% of revenue, down from 4% of revenue in Q4. To put this into further perspective, our first quarter reserve equates to only 9% of 2020's 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 supp data is a breakdown of our tenants by type. All of our tenant categories were above 89% collection in Q1 with the exception of entertainment, which I previously discussed. Our 3 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 on our corporate credit facility. Currently we have $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 covenants 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 re-engaging our growth strategy and our continued delivery of value to all of Whitestone's stakeholders.

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

(Operator Instructions)

Our first question comes from Aaron Hecht with JMP Securities.

Jim, Dave. So it sounds like the increased leasing volume is very encouraging. Just wanted to get your take on what 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 dwindle in short order?

Thanks, Aaron. This is Dave. 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 lower on the beginning rent versus the ending rent. Some of that is just a result of obviously over the last 12 months, it's been some businesses ramping up and learning to operate differently. So giving them a little bit of a headway as 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 the last 2 quarters. But we're very pleased with the lease-up. 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. I looked back 3 years, and well above our highest quarter over the last 3 years.

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

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

Aaron, we've also seen strong migration into both Texas and Arizona from outside of those states. And of course seeing it in the housing demand. And our communities are in great locations. And so, the homes in those areas, those that we're making and filling, are reselling very quickly. And I think it's creating a lot of confidence for the prospective tenants that we're working with.

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?

Well, I'll start with the redevelopment. We have approximately $240 million plus for opportunities within our portfolio. And we're beginning to activate those. We don't do it all at one time. We do it over a period of time. With regard to the properties that we have under contract, I will say we're under a confidentiality agreement with the seller. But I can say that the lease is an 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 it is we add properties now, we do have the full team in place. And when you add someone -- another person, it's like adding a property manager and a maintenance person. Other than that, we have no additional cost, and we'll be able to leverage our infrastructure.

What I'm trying to get at, at a higher level is, have cap rates 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 have you not seen that as much in your sector and your -- in assets that you'd be interested in?

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. But what we've seen coming through COVID is that there are some people who are older in age and have owned retail properties for a long time, and they've realized that they don't want to go through what they had to go through this past year. And so now they are putting their properties quietly, not necessarily on the market, but knowing that we're a candidate to acquire.

We also are in discussions on properties using our OP structure, with a price that would be more commensurate with our net asset value. We've done that in the past. We've done 3 or 4 deals like that. So we're seeing some activity in the marketplace. In particular, the activity is the kinds of small, entrepreneurial tenants we like. This particular property is adjacent to a very well-regarded grocery store. And it just feeds into the property we're buying. We actually looked at it a year ago, and when the pandemic hit, we put it on ice. We went back to the seller and reincarnated the deal. So we like it very much.

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

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

Yes, so entertainment on, like I said, I think Page 27 of our supp data, we provide tenant categories. 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, just 1 movie theater, large movie theater in our portfolio. We have some venues like activity centers, like for birthday parties, that sort of thing. So a small group. We have one theater in Austin that's probably half of that total, and they're reopening and doing better.

Got it. So are there any bank -- 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 are close to filing?

The tenant that I mentioned, there is one tenant in -- one movie theater in Austin that is in reorganization bankruptcy. At this point, our theater is one of the best performing in their chain and it's not listed as a potential closure. But there is one bankruptcy in that group with the theater we have.

Got it, and I just want to talk about the lease in 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?

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

In some of our properties, we have a product called Cubexec, which is an office product, it fits right into the retail center. It's about 125 square feet to maybe 250 square feet. And what we've found is that those spaces are close to capacity right now, because what happens is during the pandemic, folks that have moved out of their offices and worked at home, decided that working at home wasn't necessarily the place they wanted to remain. So they moved into a small space outside of their home, but yet not back into their office. And we've seen an increase in the occupancy in those spaces. It's really nice to have that space in a non-traditional environment, being that of an office building, nontraditional being that you have restaurants at your fingertips and other services, and it's easy to be with your family and also work at the same time.

Got it. And one more for 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 priced closer to the NAV, or are you looking to finance that with a line of credit? Just any color there on sources of capital would be useful.

Yes, sure. [Do]...

Hey, Craig. So obviously we look forward to providing a whole lot of details on closing. At this point, we're 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.

Our next question comes from Michael Diana with Maxim Group.

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

Hey Michael, Dave, I'll start, and Jim will probably add. I think obviously, as we've said before, we think REITs were largely -- it was a great way for individual investors to participate in real estate and enjoy the dividend and cashflow from that. We were pleased to raise our dividend in March, which really showed the strength of the recovery. We look at the dividend, obviously, on a regular basis, our Board looks at it. I think we look at a couple of things. Obviously, a payout ratio of our cashflow and what percent of that we're paying out and then an appropriate yield for the real estate. If you look at both of those measures today, I think Whitestone is in the high 4%, close to 5% [real] perspective. And then our payout ratio would be among the best in the industry, one of the lowest. So we feel very confident in the stability of the dividend. And as we continue to execute, we think there's going to be an opportunity for all shareholders to participate in that increased cashflow.

Mike, what I'd add to that, when we reduced the dividend, we weren't quite sure how long the pandemic would last, as no one was. We didn't know if we'd have a 1 year, a [2] years. And so we made a fairly significant cut to our dividend, the Board did. And so what we realized that we really ran a strong collections program and it's been very, very strong, in fact in the top of the industry. And we also found that the artificial intelligence we use showed that we produce a lot of traffic to our centers, therefore helping the tenants come back. So we felt that we would use the cash that we had saved for 2 things. One, is that we wanted to give something back to the shareholders because we had great success in terms of our collections. And 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 warranted.

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

Thank you, operator. In closing, I would like to emphasize that we have a positive outlook as we look to the long-term growth of Whitestone. We've always thought of it as a long-term [move] and that's how we continue to stay focused. We make decisions though, in the short term that do benefit our long-term goals, and we're excited about what we see as 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, they're committed and well-positioned to find and execute on future opportunities.

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

This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.