Whitestone REIT (WSR) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Whitestone REIT Fourth Quarter 2020 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, Kevin Reed, Director of Investor Relations.

Thank you, operator. Good morning, and thank you for joining Whitestone REIT's Fourth Quarter and Year-End 2020 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-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, February 25, 2021. The company undertakes no obligation to update this 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 this 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.

Thank you, Kevin. And thank you all for joining us on our fourth quarter and year-end 2020 investor call. We continue to hope that all of you, your families, your businesses remain healthy and are doing well as we continue to navigate these most unusual times.

Let me discuss the many positives that can be derived from the last year of challenges and how our unique business model that we've designed successfully passed a gauntlet of stress tests over this past year. The proof of Whitestone's concept has become a reality. Long before COVID hit, in the previous investor calls, we've often talked about the necessity of being local, the essentials of convenience, leasing to well-capitalized tenants that have skin in the game, and the evolution of retail to smaller, more flexible spaces.

From its inception, Whitestone has differentiated itself from our competitors with our avoidance of big boxes and hard and soft goods-selling national retailers and have favored the smaller-footprint, service-based entrepreneurial tenants. Our tenants are triple net, and during normal times, in the real estate world, a disruptive contrarian concept like ours would take years to play out. What we have witnessed, however, is in the real estate industry, 10 years of disruption was condensed into 10 months.

The results. We make this statement given the results of our team -- has been able to achieve in facing such difficult headwinds this past year. I would like to highlight 6 key factors in achieving our results. First, we had strong cash rental collections. Over the past year, Whitestone has consistently been near or at the top of the shopping center industry regarding quarterly cash rental collections. In the second quarter, we collected 81% versus an industry average of 73%. In the third quarter, we collected 90% versus the industry average of 88%. And in the fourth quarter, we collected 95% versus the industry average of 93%. We are pleased to see the continued upward trend and are happy to announce 96% collections for the month of January.

And second, solid tenant leasing. Our leasing team was extremely productive, and our leasing spreads were quite strong as we ended the year with blended leasing spreads of 8.9% for new and renewal leases. This productivity underscores the quality and desirability of our properties and the well-coordinated work of our leasing team. With any time of distress and uncertainty, tenants exhibited a flight to quality and signed leases where they knew their businesses would thrive.

Third, we have steady occupancies. It is a testament to the quality of the tenant mix we strategically crafted and how our occupancy has held consistent over the past 3 quarters. We have maintained levels between 88% and 90% and ended the fourth quarter with an occupancy level of 88.2%, roughly just 2% below Whitestone's 2019 year-end occupancy. We consider the upside of bringing our occupancy into the 90% to 95% range very doable, and we will report our progress during 2021.

We had minimal tenant bankruptcies. Another example of the sustainability of our tenant mix is we have less than 0.5% of our annualized base rent, ABR, or only 6 out of almost 1,400 tenants that are in bankruptcy. Our diversified entrepreneurial tenant base brings stability to our cash flows without these interruptions.

Fifth, our foot traffic. One of the most encouraging signs from these actions and a good harbinger of things to come is the significant foot traffic we are seeing at the properties. A December article by S&P Global highlighted Whitestone's #1 ranking for the shopping center industry in foot traffic recovery on Black Friday with an 81% year-over-year recovery. This far outpaced the industry average of only 48%. It also supported and confirmed our internal research using third-party artificial intelligence software that showed over 80% year-over-year recovery at the properties for the entire month of November.

And sixth, we had uninterrupted monthly dividends. As one of the few monthly dividend-paying public REITS, we are very conscientious of the importance of the monthly dividend to our shareholders, albeit at a reduced rate during COVID. We continued with a monthly dividend while many others suspended distributions. With the strength, stability and predictability of our cash flows, we continue the uninterrupted payout. We're now going on 126 consecutive months.

As we navigate this pandemic, I have often said we are not looking to win the pandemic, but we are looking to win the recovery. These results are putting us in a great position to do so.

Highlighting the success of these 6 factors gave us the ability to do 3 things. First, we increased the dividend. Most recently, our Board decided to raise the dividend by 2.4%. This increase underscores the team's confidence in the consistency of our operations and the ability to enter 2021 with a winning recovery and profitably go with our base of high-quality properties in the future.

Second, we repaid the $30 million of COVID borrowings. Again, I reiterate that the strength of our operations have mitigated the need for our precautionary $30 million drawdown of our credit facility availability during COVID. By year-end, we had repaid the entire $30 million of borrowings and strengthened our balance sheet.

And third, we published our inaugural corporate responsibility report. With a look to the future and our continued enhancement of our ESG efforts, we published our inaugural Corporate Responsibility and Sustainability Report in December. We view ESG as an integral element to Whitestone as we continue forward.

Taking a step back at all these results, in aggregate, one will realize it is a true testament, the uniqueness of our business model, our forward-thinking management team, our high-quality properties in the high-growth markets we specifically chose to be in. The nature of our business model begins with owning properties located in areas with high-household income neighborhoods in fastest-growing MSAs in business-friendly states.

One of the key differentiators that separates Whitestone is we own the properties in places where people want to live. COVID has accelerated the pace of migration already in motion out of the regulatory and tax burdensome states and into the business-friendly states of Texas and Arizona where we presently concentrate our work.

Another key differentiator and further proof of Whitestone's small footprint concept is that we own the right sized retail. A recent article published by Forbes in September discusses the acceleration of national retailers like Target, Kohl's and Macy's transformation is to get smaller. The obsolescence of the larger big-box retailers and malls continue to move ahead as we continue to benefit from this shift of traditional mall tenants out of malls and into open-air shopping centers.

The essential convenience of our community center properties was never more evident than it has been during the pandemic. 99% of our businesses are open as of year-end. To press upon this important fact even further, year-over-year foot traffic continues to increase at some of our properties. We eagerly anticipate getting back to our growth value-add strategy that includes our $250 million of internal intrinsic value opportunities and $500 million of an external acquisition pipeline prospects. We have a proven model, a stronger platform with greater financial flexibility and a leaner, more cohesive team to scale our business.

The performance of our team and the execution of our business model is deeply rooted in Whitestone's culture. Throughout this past year, I have been often reminded of a classic book titled The Little Engine That Could. This inspiring story illustrates the human determination displayed at Whitestone. Despite our current size, we continue to deliver large returns with a purpose and a mission to serve our shareholders regardless of the challenges we may face ahead.

I am very pleased with the dedication of our management team and what they displayed in navigating this crisis. I am proud of how Whitestone's operations team stepped up, met the daunting challenges head on, ignored the naysayers and overwhelmingly exceeded expectations. Given these results and staying true to our values, I remain very optimistic for the future and the potential to create increased value for our shareholders.

With that background, I would be pleased to turn the call over to Dave Holeman, our Chief Financial Officer. Dave?

Thanks, Jim. First, I would like to echo Jim's comments regarding the strength of the economic recovery in our markets and properties. Our foot traffic recovered strongly, and our cash collections continued to build toward pre-COVID normal levels. Our occupancy has been impacted but only by about 2%. Our leasing activity has rebounded to pre-COVID levels, and leasing spreads have remained strong throughout 2020. We have a highly dedicated team that works every day to create local connections and communities that thrive. We continue to see the strength of our geographic focus and our forward-thinking, well-crafted tenant mix.

Despite having a significant amount of our tenant businesses impacted, we only had a handful of tenants closed for good, such that the portfolio occupancy rate held up well, ending the year at 88.2%, down 2.1% from last year or approximately 100,000 less leased square feet, representing the net loss of only 9 tenants year-over-year. Also, our annualized base rent per square foot at the end of the quarter was $19.43 and $19.58 on a cash and straight-line basis. This represents less than a 1% decrease on both a cash and straight-line basis from a year ago. The change on a straight-line basis is largely related to the conversion of 102 tenants to cash basis accounting and the associated write-off of accrued straight-line rents. During 2020, the impact to funds from operations from these cash basis conversions was approximately $3.5 million or $0.08 per share.

At year-end, we have 54 tenants on a cash basis, representing 4.2% of our gross leasable area and 4.6% of our annualized base rent. Cash basis tenants paid 65% of contractual rents in the fourth quarter, up from 63% in Q3 and 41% in Q2. Our square foot leasing activity was 10% higher than the fourth quarter of 2019, and our blended leasing spreads on new and renewal leases on a GAAP basis was a positive 8.9% for the year.

As Jim mentioned, for the quarter, we collected 95% of our rents. This includes base rent and triple-net charges billed monthly. Our deferred rents for the quarter were 2.6% of our total contractual billings. While we are encouraged by how things are progressing, the pandemic has had an impact on our full year 2020 financial results.

Funds from operations core was $0.24 per share for the fourth quarter and $0.93 per share for the full year. Same-store net operating income was 4.2% lower for the quarter and 4.4% lower for the full year. The impact on FFO core for the quarter and year from incremental COVID reserves was approximately $0.02 and $0.13, respectively.

Let me provide some further details on our collections and related receivable balances. Included in our supplemental data package is the breakdown of our tenants by type. All of our tenant categories were above 90% collections in Q4, with the exception of fitness representing 4% of our revenue at 82%, and entertainment representing only 2% of our revenue at 48%. Our largest tenant categories, restaurants, grocery and financial services, were at 96%, 99% and 99%, respectively.

At year-end, we had $23 million in accrued rents and accounts receivable. Broken down, the components of the $23 million consist of $16.3 million of accrued straight-line rents and other receivables, $20.7 million of billed receivables, $2.2 million of deferred receivables, offset by a bad debt reserve of $16.4 million.

Since the beginning of the year, our billed receivable balance has increased $4 million, and our deferred receivables have increased $2.2 million for a total billed and deferred receivable balance increase of $6.2 million. Against this increase, we have recorded an uncollectible reserve in 2020 of $5.6 million or 90%.

Turning to our balance sheet. Since March, we have implemented various measures to strengthen our liquidity and navigate the economic pressures caused by the pandemic. Our liquidity, representing cash and availability on our corporate credit facility, stands at $44 million at year-end, down only 6% from $47 million at year-end 2019.

During the fourth quarter, we paid off all COVID-19 liquidity borrowings, and our total net real estate debt is down $12 million from a year ago. Currently, we have $131 million of undrawn capacity and $18 million of borrowing availability under our credit facility. We are in full compliance with our debt covenants and expect to remain so in the future.

2020 has been an unprecedented year in which our team has worked together through this ongoing crisis. And our shareholders will reap significant future benefits through greater collaboration, a more robust exchange of ideas, better and more effective communication and improved systems and processes that provide Whitestone new actionable data and allow us to more efficiently scale our infrastructure. Whitestone operates in many of the most highly desirable growth markets in high-population-growth states, and we expect these markets to continue to lead the country in economic recovery from the pandemic.

And lastly, regarding guidance, it is our intention to resume providing guidance later in 2021 as the pandemic and macroeconomic uncertainty continues to dissipate.

And with that, we will now take questions.

(Operator Instructions) Our first question is from Aaron Hecht with JMP Securities.

I wanted to start with Texas. Obviously, the weather has been really tough there over the last week or so. Wondering if there's any damage that's occurred at the properties, any sort of impacts you believe to Whitestone from the weather conditions in Texas.

It's Dave. Thanks for your question. Yes, it's been a strange week. So we had some unprecedented cold weather in Texas. Whitestone has done very well, had minimal damage to our properties, a couple of small pipe breaks but nothing significant. But a lot of folks in the area have been impacted, but Whitestone did very well throughout it.

Okay. Good to hear. And then on the demand side, it sounds like the foot traffic is really starting to pick back up, which is good. Looking at the new leases and the renewals, it looked like new leases were down about 5%, renewals up double digits, pretty big divergence there. Any sort of takeaways between the new leases and the renewals to give us better insight into what's going on? I mean is it a certain group of tenants that have lower demand for their products moving out and the higher-demand tenants wanting to renew that's causing that? Just any sort of insight there.

Sure. It's Dave again. I'll start off, and Jim might have some comments as well. But one of the things we do obviously is try to give some transparency as to the leasing spreads. I will tell you, we like to look at it more on a 12-month basis than an individual quarter because in any given quarter, there's only -- not that many leases that come through. So our leasing spreads, as you said, for the quarter were a little lower on the new leases. I think the renewal leases were kind of consistent.

There really isn't any trend we've seen. We saw a couple of little shorter leases where we were doing a smaller amount but not a trend. I think historically, our -- we've been around the 10% kind of level with blended spreads, and that's where we are for the 12 months.

So we're very energized by the activity we're seeing. We're seeing a lot of demand. I think one of the things we've talked about a little bit on the call was the migration. And I think in our markets, with the amount of population migration as well as some business migrations, we're seeing very good activity.

Yes. This is Jim, Aaron. Thanks for asking the question. Company-wide, we're seeing a lot of enthusiasm from the leasing team. We've got -- we meet once a week at -- we meet once a week in -- for about 2 hours with every single leasing person. And we screen the deals and the letters of intent and leases that are out for signature. And so we're seeing a lot of activity in that regard.

And it's interesting, too, at these meetings, we learn things. And this is something that, earlier in our remarks, we talked about the migration into Texas and Arizona. We learned this past Monday that one of the large homebuilders in Arizona is now in the lottery system for selling lots. They've separated the sale of the house from the lot. And so you can buy a house, but then you have to go into a lottery system for a lot. And that's part of the reason, is the influx from California into Arizona. So that in effect will triple over -- trickle over to the demand for our centers. We're seeing that very closely. So you're going to see those numbers change a bit in the future.

(Operator Instructions) Our next question is with Craig Kucera with B. Riley Securities.

Dave, I'd like to talk about your bad debt assumptions. I think we've seen bad debt fall in half from the second quarter, but it didn't materially change from third quarter. As we're sort of midway through the first quarter, you're looking at collections that are relatively flat, maybe modestly improving, kind of what are your thoughts there as we move through first quarter and the first half of the year?

Yes. It's Dave. Thanks for the question. Obviously, it's been a year of assessing collectibility on our tenant base. We've done that at a very granular level, really looking at the tenants, understanding their financial position. We've converted about 104 tenants to cash basis. You're right, I think our highest bad debt quarter was the second quarter obviously, and we've seen that come down in the third quarter. And then fourth quarter was fairly consistent with third quarter. We do expect obviously to see that dissipate in 2021, but there's a lot of continued uncertainty with the pandemic and the impact.

But our collections are improving. 96% in January, we're very pleased with. And so I do think you'll -- for the year, we recorded about $6 million in kind of reserves for COVID collectibility. And I think with the increasing trends in our collection rates, we should see that obviously improve in '21.

Okay. And we're hearing that there's an increasing amount of money looking to buy shopping centers here in early '21. Given your leverage, are you considering at all maybe selling some assets to possibly deleverage the balance sheet? Or is that not a consideration at this point in time?

As prudent owners of real estate, we're always looking at business investments. We do think there's a lot of benefit to Whitestone from continuing to scale our platform. One of the things Jim mentioned is we are seeing some opportunities out there from the acquisition side. We're going to be very prudent with our capital allocation. But right now, we always look at the individual assets and look at what's the best way to get a return to our shareholders from owning those assets.

Yes. Craig, this is Jim. There's a lot of -- there's always a right time to sell properties. We've got some really terrific properties that we've handpicked, and we're in the process of getting those to what we call a stabilized level. We consider a property stabilized when it's at a 95% occupancy and when the rents are equal or greater than the market rents in the surrounding 3- to 5-mile area. So each property we buy, usually they have some turnaround features in them and some value-add features. And so we like to really get them to the point of where they match that stabilized characteristic.

We are in the market looking on the other side to buy properties. We think there's -- we have an enormous pipeline, about $0.5 billion, we mentioned in our remarks. We're seeing some really good opportunities, mostly from sellers who may not have wanted to sell their properties before but, since COVID, realized that life is getting too short. And we've had -- we've been reintroducing some properties we've carried in our pipeline for some time. So we're looking at some really terrific deals right now.

Craig, I might just make one further comment. I think you mentioned the debt. I am very pleased that we were very positive in reducing our leverage this year. Even given the collectibility issues of COVID, we brought down our total net debt about $12 million year-over-year.

Right. And one more for me. I know you've got about 16% of your leases expiring this year. Can you give us a sense of kind of how many of those are maybe month-to-month, roughly?

Yes. So we historically -- if you look at our leasing activity this year, we signed, let me see, about 900,000, almost 1 million square feet. So we're very comfortable with the level of leases we have expiring in '21, which is about 800,000. So historically, we've done that level.

We do have -- on the month-to-month side, I'm going to -- I don't have a number there, Craig. It's a small amount of the square feet. We typically roll tenants over. When they go to month-to-month, we roll them over to leases. So we don't have a significant amount of month-to-month leases in that. We're also very comfortable with that.

And then if you look at the square foot price of those leases, they're around $17, so a little below our portfolio. So very comfortable in our lease roll, very comfortable in the leases that are maturing in the next year.

Got it. So it doesn't sound like there's any known large move-outs in '21 that you're aware of?

That's right. No. You know our tenant base very -- we have great diversification of a tenant base with our largest tenant making up a little about 3%. But we have no known significant move-outs at all coming up.

Nothing large. And our average size tenant is 5,000 square feet. So when a tenant moves out, we can absorb that very quickly and then re-lease it to a new tenant.

Our next question is from Michael Diana with Maxim Group.

Okay. You said you expect to increase your occupancy to 90% to 95%. You already talked about the role that migration from California may play in that. What sort of assumptions are behind that in regard to opening of the economy and just general growth in Texas and Arizona?

In terms of how we see our occupancies increasing, one of the key factors is adding people, and we've added 3 new leasing people to our team. We have a very specific business model that requires certain characteristics in our leasing effort. And so by adding new people, we will be able to fill more of the vacancies that we've had. I think that's one of the assumptions that we've been working with.

The second thing is that we have a large space in Terravita. It was an Albertsons that went empty. And that's now -- and that was approximately 60,000 feet. And we're now about 2/3 of the way under lease contracts to get that occupied. So we have a couple of holes like that that we're filling, and we see those fill up very quickly. And then just a matter of a lot of small spaces that we got to fill, but we're very optimistic at the opportunities we have this year.

And I can touch on the market conditions. Obviously, geographically, the recovery is, I think, happening at different levels throughout the country. We said -- as we said, 99% of our businesses are open today. And then really in Texas and Arizona, they're largely able to operate at pretty close to pre-COVID operating levels with a little greater distancing and spacing. So we anticipate that the economy in our markets will continue to improve, but we're pretty well along today probably compared to some other parts of the country.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jim Mastandrea for closing remarks.

Well, thank you. Thank you all for being here. I'd like to close by reiterating Whitestone's proof of concept. Our business model is focused on the necessity of being local; the essentialness of convenience; leasing to credit tenants, as we've said, that have skin in the game; and the evolution of retail to smaller, more flexible spaces. These small spaces have really captured the delivery process directly.

Our work has served us and served our shareholders very well by stabilizing our business quickly in the early days of the pandemic. We've delivered solid results in significant headwinds, and this has enabled us to really refocus on our pre-COVID goals of targeting accretive acquisitions and extracting the significant embedded intrinsic value in our properties and then to further scale our platform.

Along with the Board, we're pleased to recognize the quick stabilization and momentum of our business and the confidence to increase our dividend earlier this month to prioritize the people we ultimately serve, and that's our shareholders. As we continue to serve our shareholders, employees, tenants and all of our stakeholders, we know that God's hand is on our shoulders. And we truly thank you all for your continued confidence and support in our efforts.

With that, I'll close. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.