Whitestone REIT (WSR) 2011 Q2 法說會逐字稿

Greetings and welcome to the Whitestone REIT second quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my please to introduce your host, Ms. Anne Gregory, Vice President of Marketing and Investor Relations at Whitestone REIT. Thank you, Ms. Gregory. You may begin.

Thank you, operator. Good afternoon, everyone. Before we begin our prepared remarks, I'd like to just remind you that this call is being recorded and is the property of Whitestone REIT. Leading the call today is 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 indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to the Company's filings with the Securities and Exchange Commission, including the Company's Form S-11 and Form 10-Q for a detailed discussion of these risks.

Acknowledging the fact that this call may be webcast for a period of time, it's also important to note that today's call includes time-sensitive information that may be accurate only as of today's date, August 8, 2011.

The Company's supplemental fourth-quarter operating and financial data package was filed with the SEC today on Form 8-K. The filing will also be posted on www.whitestonereit.com in the Investor section. Also included in the supplemental data package are the reconciliations from GAAP financial measures to non-GAAP financial measures.

And with that, let me pass the call to Jim Mastandrea.

Good. Thank you, Anne, and thank you for joining us on today's conference call. My comments today will focus on our business strategy, which is built and operates around the Community Center Property model. Dave's portion of our call will focus on our financial results and the overall strong financial condition of Whitestone.

While we are operating in an environment of economic stagnation, coupled with government policies that create uncertainty, particularly with the news we have all seen in the last few days and the market's response, our small, entrepreneurial tenants continue to provide stability and revenue growth to Whitestone. We service our tenants and our properties, and they, in turn, serve the needs of the surrounding communities.

Specifically, our strategy is as follows. We acquire and own value-add properties that range in size from 50,000 square feet to 200,000 square feet. We focus on large growing cities with cultural diversity. We lease primarily to small, service-oriented tenants that provide needed services within a five-mile radius of our respective properties. We concentrate on the underserved and unique markets in various types of ethnic communities in which we own, lease and manage. And we maintain a corporate-wide tenant mix, so that no single tenant can materially impact our revenue stream. Currently, no one tenant makes up more than 2% of our revenues.

We remain nimble and quick with a strong balance sheet, financial flexibility and a disciplined management team. Whitestone is headquartered in Houston, Texas; operates in five major cities, Houston, San Antonio, Dallas, Phoenix and Chicago.

Since our IPO in August, we have strengthened our infrastructure in the Phoenix market, and in the second quarter we added leasing and operating associates to service our increased volume of value-add acquisitions. In July, we began to recycle our capital by selling our Greens Road property, a noncore Houston asset, for approximately $1.5 million, and intend to invest these proceeds in new acquisition.

Today, we announced our acquisition of Terravita Marketplace, a fully leased, 103,000 square foot community center in North Scottsdale in an all-cash investment of $16.1 million. This off-market transaction became available as the seller's debt matured -- faces maturity in September of 2011. The property purchased below replacement cost has strong, in-place cash flow, and we expect it to increase in value as we execute our business model.

This is our second community center acquisition since our recent offering in May and our fifth community center property we acquired since our IPO in August, for a total of six that we now own in Phoenix.

In late June, we announced our acquisition of Gilbert Tuscany Village, a 50,000 square foot community center in Gilbert, Arizona, which we purchased out of foreclosure from a private lender in an all-cash investment of $5 million. This off-market transaction became available through our relationship with an entity that serviced the foreclosure.

Gilbert Tuscany was initially 57% preleased during construction, demonstrated tenant demand as developers spared no expense in construction, estimated at a cost exceeding $16 million. While the current occupancy is less than half of the preleasing rate, we expect from our discussions with prospective tenants and our ability to fund tenant build-out to increase the occupancy and the value of this community center in the coming years.

We expect to close on our seventh property by the end of this month, bringing our total investments in the Phoenix marketplace to approximately $60 million, including our estimated redevelopment and stabilization costs. We are currently in due diligence with this value-added property where the seller's loan is currently in default. Upon the completion of our satisfactory due diligence, we will anticipate closing in August.

We have a pipeline, which exceeds $500 million of off-market opportunities, which are in various stages of analysis, due diligence, letters of intent and contract negotiations. We continue to have a competitive advantage in purchasing off-market properties in Phoenix because of the relationships we have established and our ability to close quickly. We also have a strong operations team, with bench strength to manage and increase property occupancies and revenues once we take ownership.

I will discuss more about the community center business model following Dave Holeman's review of our financial statement.

With that, I'll turn it over to Dave. Dave, please.

Thank you, Jim. I will review the highlights of our second quarter operating and financial results. I encourage all of you to read the Company's Form 10-Q and second-quarter supplemental financial package, which have been filed or will be filed with the SEC and are available on our website. They contain greater detail of our business than I will be able to share with you today.

Funds from operations core, or FFO core, for the second quarter of 2011 was $2 million, a 5% increase from the second quarter of 2010. On a per-share basis, FFO core was $0.20 per common share and operating partnership unit, as compared to $0.37 per share in the second quarter of 2010. The decrease in FFO core per share is directly related to the increase in shares from our initial public offering in August and secondary offering completed in May, and the related timing of acquiring stable -- and stabilizing income-producing acquisitions.

NAREIT's definition of FFO includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. For the quarter, these items include acquisition expenses and certain legal and professional fees. I will touch on both items in greater detail shortly.

In the second quarter, our total property revenues increased approximately 3% or $200,000 over the second quarter of 2010. Revenue for the 2011 quarter included approximately $400,000 from properties acquired subsequent to the second quarter of 2010. Same-store property revenues decreased approximately $200,000 or 3%, as compared to the second quarter of 2010.

Property expenses for the quarter were up approximately 2% from the prior year, primarily as a result of higher property taxes and an increased number of properties in our portfolio. Same-store expenses were down approximately 3% as compared to 2010, primarily as a result of lower bad debt, property maintenance and labor costs.

Total property NOI increased approximately 2% or $100,000 for the second quarter, as compared to the prior year, with most of the increase coming from new acquisitions. Same-store NOI was relatively flat year over year.

The Company continues to seek lower property tax valuations. While we had an increase of approximately $100,000 on a same-store basis in our second quarter relative to the same period of 2010, we will continue our efforts to aggressively pursue further reductions, which ultimately may result in tax refunds. The timing of these tax refunds is somewhat out of our control, resulting in quarter-to-quarter volatility in this number.

We continue to have a very lean organization, with a portfolio of approximately $3.4 million square feet, managed by a dedicated team of 59 full-time employees.

Our second quarter G&A costs increased approximately $500,000 to $1.8 million, as compared to the same period in 2010. The majority of this increase relates to acquisition expenses and legal and professional fees. The acquisition expenses for the quarter relate to our Desert Canyon, Gilbert Tuscany and a small portion to our Terravita Marketplace acquisition. The legal and professional fees related to litigation with a contractor at our Windsor Park Center in San Antonio, and litigation with two former tenants regarding damages to our properties.

We are the plaintiffs in all three of these cases. No potential benefit from these legal efforts has been included in our operating results for the quarter. And should we be able to prevail in these matters, the benefit and potential recovery of our legal and professional fees will be recorded when it is determined.

We remain very focused in our cost-saving efforts, evidenced by our ongoing, companywide moratorium on any wage increase, in effect since March of 2008. Also, I will remind you that the Senior Management Team voluntarily reduced salaries by 12.5% in October of 2009, and these reductions also remain in place. As we continue to expand our portfolio, we expect to continue to leverage our G&A costs across a larger asset base, and expect to see our G&A costs as a percent of revenue decrease.

Whitestone is a young Company, having completed our IPO only last August. As we continue our rapid growth, we expect that we will continue to have non-operating expenses related to property acquisitions and have some volatility quarter to quarter in this ramp-up phase that will level off as our in-place infrastructure provides economies of scale.

We have spoken about this previously, but one of the tools in our arsenal that contributes positively to our results is our technology platform, which helps us to control costs and effectively manage the business. At the property level, the system enabled our leasing and property management teams to have the necessary tools to produce attractive returns without sacrificing customer service or property maintenance standards. Additionally, our systems provide our leasing teams with the information necessary to proactively anticipate potential issues.

Let me now turn to our operating portfolio occupancy rate, which was 84% at quarter end. 84% represents our portfolio being flat to the first quarter of 2011 and a 2% improvement from the second quarter of 2010. Due to the relative size of our portfolio, the overall occupancy rate can be impacted quarter to quarter by the timing of individual leases ending and new tenants moving in.

I will also remind you that our reported operating portfolio occupancy of 84% represents physical occupancy and does not include tenants under lease which have not yet moved into our properties.

The Company signed 77 leases, totaling 266,000 square feet in new and renewal leases during the second quarter of 2011, primarily with tenants that require less than 3,000 square feet in multicultural neighborhoods.

As of the end of the second quarter, the Company had approximately 87,000 square feet of leases that had been executed by tenants but had not yet moved into our property. During the second quarter of 2011, the leases signed represented a 42% growth in the square footage of new and renewal leases signed, versus the second quarter of 2010.

Our approach to leasing is quite unique and effective. Typically, we seek shorter leases on smaller spaces, which gives us greater tenant diversification and provides a premium rental rate. Our typical tenant tends to become ingrained in the neighborhood in the three to five miles surrounding our center. And other than growing within one of our community centers, they tend not to relocate. With shorter leases, we are able to take advantage of their growth and adjust rental rates more frequently.

This process is proving to be effective and more profitable for us than traditional long-term leases. The rental premium we receive on spaces that are less than 3,000 square feet further validates our community-center property business model is working by driving margin improvements. The leases we sign with small space tenants carry a 57% premium when compared with the average rent for spaces larger than 3,000 square feet. While the leasing velocity has been slower than we would prefer, we have strengthened our teams in many of our key markets, most notably in Arizona.

We expect with this strong team fully in place, we will be able again to see greater leasing velocity in the second half of the year. Our balance sheet remains quite strong with 16 unencumbered properties with a non-depreciated cost basis of approximately $73 million, providing additional financial flexibility. At the end of the second quarter, the Company's un-depreciated real estate assets were $260 million, and our total property debt was $103 million.

We have no debt maturities until late 2013, and as of the end of the second quarter, 76% of our debt is at fixed rates. Our total blended interest rate on all of our debt at quarter end was approximately 5.6%. Our second quarter interest coverage ratio, excluding acquisition expenses and the legal and professional fees previously discussed, which we define as EBITDA divided by interest expense, was 2.5 to 1.

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

Thank you, Dave. Our Community Center Property business model has resilience because of the tenants. Tenants provide primary, necessary base services to their local community. As I mentioned, no single tenant can negatively impact our revenues more than 2%.

We are managing our business with the expectation that the economic recovery and job growth will remain sluggish throughout this year, and are hopeful that positive changes for the entire country will emerge in 2012. And once again, as a country, we will become business friendly. When this occurs, we believe our entrepreneurial tenants and different cultural groups will flourish and in the growth markets in which we operate.

Specifically, small businesses who make up the lion's share of job generation in the country continue to slowly but steadily add jobs, 58,000 in July. We monitor this sector closely. Jobs in the service-related businesses rose for the 19th consecutive month in July by 121,000; whereas, jobs in goods producing and manufacturing firms have declined over the last several months.

Whitestone's unique approach goes beyond owning an asset. Our business model is one that is effective in good economic times and is proven to be resilient during the sustained, slow economic recovery. In most cases, we focus on the underserved, culturally diverse populations within our markets.

Our pipeline of potential acquisition is substantial. We expect to increase our pace over acquisition -- of acquisitions in the second half of the year in high-growth markets where the real estate values remain suppressed, and we have the opportunity to purchase properties at prices below replacement costs. We're quite excited about the opportunity in front of us, and we look forward to sharing with you the progress we make over the balance of the year on our next call.

This concludes the review of our final -- of our results. And Anne, I'll turn it back over to you.

Operator, we will now take questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of Paul Adornato with BMO Capital Markets. Please go ahead.

Hi. Good afternoon.

Hey, Paul, how are you?

Hey, Jim, obviously the market was quite volatile today, and was wondering if you could perhaps give us a little bit of perspective on similar periods in the past. You know, just a couple of years ago we went through a similar market volatility. What's the reaction, both in terms of the leasing environment and also the -- a few months from now, what do you think the implications will be in terms of the credit quality of the existing tenant base?

Good questions, Paul. One of the things that we do is we really focus on the real estate first, and then the overall, you know, how the market, as we call it -- meaning the Dow Jones and the whole market interplay, how that really impacts our business. We really focus on the entrepreneurs in our business, and we're very entrepreneurial ourselves in that regard.

We look at the need-driven tenant businesses and how they support the local community. You know, for example, in a property, one of our particular properties we had a fairly lengthy discussion about a tenant who was looking for a reduction in rent, and it's one of the best locations in the property, and it's a cleaners. And we think it really should be a Paradise Bakery. So we look at the needs in a particular property; property by property, we go through it. We like to feel that because no one tenant impacts us by more than 2% that we're really positioned in the growth market.

We do feel that the credit is hurting the tenants, more in their perception than reality because what we find is that the tenants that we have, a lot of them from different ethnic backgrounds, tend to be very scrappy, and they tend to look at their ownership of a business, not to go out and create a business to make millions and millions of dollars in some roll-up strategy, but to go out and replace what would normally be an income and do something a little bit better than an income. For example, if they think they can make $75,000 or $100,000 a year, by having their own business, they might look at $150,000-a-year income.

The second thing we find is that they tend to look at --- and they look at it as an opportunity to bring other family members into the business, so they have a much lower cost of operating in a number of these small entrepreneurial businesses and tenants that we have, yet their balance sheets are strong. They keep a fairly decent amount of cash, relative to total assets on hand. And they tend to pay their rent unless things just get so poorly rundown that they just walk away from it.

So we're -- and Dave, you can jump in if you like to add to that. So that's what we've been experiencing. And we just find that there's a lot more caution right now, and there's been throughout the summer. And we're hopeful that rolling into next year that we will see a little more optimism overall.

Dave, would you like to add something to that?

No, I guess I'd just -- the one point I might pop out a little bit is the service-based tenants we have tend to be -- have less need for capital than your goods providers. Our tenants typically don't carry inventory. So potentially a little less impacted by rising capital costs or difficulty to get capital with the service-based tenants.

Okay. And don't know if, Jim, if you talked to any banks today and if -- was wondering if you could look out perhaps and see what the potential pipeline of potential acquisitions might look like. Again, you know, looking at a slower economy, less credit, et cetera. Should that be a moderate positive, a moderate negative? What do you -- what's your best guess?

We've maintained a pipeline that we have really started developing in '06, and what we found is, for example, we closed a property today with a seller, and they were just very, very pleased at the 30-day due diligence, 15 days to close process we went through. We don't go back, and we [re-trade]. We think that when we -- when the price is fixed that we live with that. And we feel that we're precise enough that we think we can target things fairly closely.

So we have -- what's interesting is we have a few more opportunities that are coming to us that have multiple properties in them, and those are bank deals. We have one particular deal we're working on with a bank that they keep lowering the rate. They want us to do -- is they want us to raise the price just marginally, but they want us to take debt instead of doing a fully funded all-cash deal. And they keep lowering the rate, and they're down in the 3.5% to 4% range right now to encourage us to take some debt.

What we expect to do is we expect to have all of our capital fully deployed by yearend, and I would look to have that all deployed in the Phoenix marketplace. Then as we roll into next year, what we expect to do is draw down on our line of credit or even some third-party financing and leverage the returns that we did, because when we look at a property and we assess it, we usually -- we analyze it all of the time on the purity of the real estate. In other words, what's the pure returns that that property sends off, and then how do we leverage that to improve.

And we're looking in some reasonable cap rates in that 8% range right now, some in the 9%, if we look at cap rates, but primarily we're looking at discounts in that asset value.

So we see that banks are -- I haven't talked to any today, but what we find is that the banks that are selling us properties, they seem to still be plentiful out there. We're not seeing as much competition as we thought we'd see, although we are starting to see some. And what we are beginning to see though is that the square foot purchase price has been creeping up on us. That's kind of what we've been finding so far.

Okay, thank you. Appreciate the color.

Thank you.

Thank you. Our next question is from the line of Mitch Germain with JMP Securities. Please go ahead.

Jim, Dave, Anne, how are you?

Hey, Mitch, how are you?

Hi, Mitch.

Hi, Mitch.

Just back to acquisitions with regards to your strategy, Jim, is it going to be kind of one value add, one stable to kind of maintain the cash flow?

Well, I don't know if it's a one on one like that. I think what we've done is we've made some terrific value-add opportunities in the frontend, and we've committed to cash flow, and we understand, and we've promised our investors certain returns. But we're finding properties that are fairly high in terms of occupancies now that still have some discount left to them.

For example, the property we closed on today is 92% occupied, 98% leased. And -- but we still see opportunity and value add in that because we feel that the quality of the asset is positioned so that in two or three years, as the economy begins to experience some inflation. And I'm convinced that we will and I would assume that most people on this call are convinced in a similar way, that our properties with the shorter-term leases and the quality of the locations and the bricks and mortar, we'll be able to turn those leases and pick up the upside in terms of adding some value with those, and keep up or ahead of whatever inflation we occur.

So it's not a matter of one and one. It's a matter of we look at our overall balance in the terms of where we want to be. You know, and our business model says that by yearend, rolling into the first quarter, we want to be well positioned in terms of our cash flow, relative to our FFO, relative to our dividend.

We had a very long discussion on this at our Board meeting last week, and we -- and our trustees, as you know, are very much involved in the business. And that's when we made the decision to sustain our dividend over the next three months because we didn't feel uncomfortable with that at all.

And it seems like the size of your acquisition pipeline came down a bit. Is that just a function of deals that closed that didn't -- either priced higher or strategically didn't fit Whitestone, or has product been taken off the product because of concerns of the economy?

I think our size is at or maybe above where it was before. I think what we do is a velocity of working deals. We're very comfortable closing two deals a month. We can close up to about four. And what we find is that we straddle that -- the balance between how many deals we had under contract and how many deals we can close because we're using -- there's a crossover between our acquisitions team and our operating team because we want to make sure that when we close -- like, for example, we closed this afternoon. Tomorrow we'll have signs on the property. We'll have certain things in place with the new tenants. We'll have welcoming letters, things like that, so that we're getting much faster in terms of preparing to be onsite on the property.

So what we've done is that we've just now focusing and drilling down on particular properties that we really like in the pipeline. So I don't see it being any smaller. We do see some competition. We have had a couple properties. For example, when we did our secondary offering we had four properties under LOI. We let three them of them drop out, and we -- the one we closed on today is one of them that we decided that we wanted to keep. So we spent probably 30 or 45 days on those other three. We let them drop out because we didn't think they were the right kinds of investments that fit our business model.

So we think that we've got a really great size in terms of the pipeline. We're also seeing some properties right now. We have a group of assets that came to us off market that is about 900,000 square feet of properties that we haven't included in the pipeline yet because we just became aware of it this week. And our lead person on the acquisitions team has just been out looking at them, and he started showing them to me this week.

So you'll probably see that change from time to time. I think if it drops under $500 million I would be concerned about it, but it's probably closer to $1 billion right now. So that varies.

Is there a certain amount of size in Phoenix that you're looking, and then certain maxing out? And then where's the next destination possibly?

Yes, we like the Phoenix market real well. Right now we see a surplus of properties that are relatively new in construction. And our -- while our business model is to take properties and redevelop, we like the newness of some of the inventory we're seeing, which means that once we close on it, we have relatively little maintenance costs over the next five years.

We'd like to see this portfolio here be equal to the Houston portfolio in terms of size. And then we'll begin to look at other areas that we think offer some really significant economics. For example, Dave talked about building our infrastructure here. We have -- the Senior Management team hasn't changed at all. It's just strong. They're just getting more experience and better than ever. What we've done is we've added the staff below them.

For example, in Phoenix, we have a Director of Leasing, and then we have two very experienced leasing personnel and then one trainee that's in Houston training right now. And of the four people, two of them speak fluent Spanish. We have a Property Manager who is American Indian by background. And then we have a construction person here because we have a lot of -- you know, when you're dealing with some of the value-added properties, we've got construction going on in multiple properties at one time.

So what we're -- what we do is we feel this staff here is now built up where we can handle a significant number of properties, and then what we want to do is after we fill up the Phoenix market place, spread our capital across several markets and create some balance.

We still like larger cities. We still like access through commercial airlines, so that it's a quick flight, and that we can rent a car, look at a number of properties. And as you know from your trip here, you can see a lot of properties, take you back to the airport, and then you've got to get perspective of what we're doing. So that's how we kind of see things spreading around.

Great. And then just my last question. The South Richey property, how is the activity?

South Richey, good question. That's a property where the tenant exiting did not want us to put in any competition because they moved down the street. That was a large spot. And as they moved out, they felt that selling the equipment that they put in, included attachments like all the copper plumbing to the walls and things like that, and that's why you saw some expenses go up in terms of our litigation. We had to put a temporary restraining order on them because otherwise we would have had a building that would have been down to really a shell with all the plumbing taken out of it.

And the grocer is -- we have a Latino grocer who is going in to replace that tenant, and it's progressing right now. They're meeting one of the last requirements, which is to post either a letter of credit or show a significant amount of cash in an account to put in their portion of the TI. So, so far, that's still progressing. It's slow, but it's progressing.

Great. Thank you, guys.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question is from the line of Bill Acheson with Ladenburg Thalmann. Please go ahead.

Hey, good afternoon, everybody.

Hi, Bill.

Hi, Bill.

Maybe I can ask Paul's question a little bit differently. Everything else equal, do you expect the events of the last few days to perhaps flush out a few more distressed acquisition possibilities, you know, people who might have been hanging on hoping for better times, but now probably a little bit more willing to give up the ghost?

You know what, that's a good question actually, Bill. What I am -- what I suspect is going to happen -- and I haven't proven this yet -- but I suspect some of the deals that were closing with debt on them, they fall out of escrow and we get calls back on some of the ones we looked at. That's very -- we're already seeing that in the residential market. Over the last 30 days here we've seen a couple of deals that we were aware of fall out of escrow. And I think we might see some things fall out of escrow. So we're there.

We have one particular property that we liked, and we put in an offer on it. And we normally don't get involved with the major brokerage houses, and the LOIs where they say -- where they put you in a final round, that's not our style. But we happened to like this property because it's like within a half a mile from another property we own. And we came back and we said you're right on target where we think it should sell, and we want to come back and interview you and Jim. This is Bradford and me.

So we interviewed with them, and they came back and said we really like you guys. We think you can do everything you're going to say you're going to do, and they said we'll get back to you in a week. They called us back and said we can't believe it, you guys hit our number, and somebody else came in on an offered $2 million more. And they weren't baiting us in any way. They just -- they said we have to follow through and see if they can close, so we don't know if they will or not.

And we just said that's fine. We're not going to increase our price. We have plenty to look at.

So that's what we're experiencing, Bill.

In terms of pipeline, you used to talk about $137 million pipeline that was either under LOI or in serious discussions. Have you updated that number?

We haven't updated it, but we probably have three -- almost four LOIs right now, but we can update it and send it out.

Okay.

Hey, Bill. It's -- the amount of deals that are in LOI has not significantly changed. You know, one thing we're finding now is a couple of deals we've gone -- went straight to a contract instead of going to LOI stage. So a little bit of that. And our reporting it has just been in the way the negotiations are going. But I would tell you that the amount of deals in detailed discussions is very similar to what it's been, and the pipeline is very robust.

Okay. So you've got a lot of money available for acquisitions, and, you know, the acquisition fees are going to go into G&A. I assume it's safe to say that the $1.8 million quarterly G&A figure, that's probably the low end of the range going forward, if you're going to invest, you know, $55 million before the end of the year?

Let me touch on G&A. I think G&A's got a couple of items in it that we talked about that are a little bit unusual. The first was the legal and professional fees related to the litigation where we're the plaintiff. There's three specific cases, one with a contractor and two with former tenant. All three of those will kind of wind down over the next couple of quarters, and the expenses will go away. And any potential benefit we get might come back to us.

So included in the second quarter is just a little under $300,000 in legal and professional fees that will wind down by yearend. And also included in this quarter is $145,000 in acquisitions expenses. Those will continue as we acquire properties. We'll continue to have the cost that are required to be expensed. So the acquisition expenses should continue while we're in our acquisition period, and then the -- kind of the extraordinary legal fee and professional fees should wind down over the next couple quarters.

Okay. Not to get too picky, but acquisition fee, would that be about 1% of whatever the transaction value is or maybe a little bit less than that?

You know, I can follow up with you, Bill, but it's typically -- you know, it's going to be your legal costs, your -- just your direct cost of acquisition. The $140,000 we had this quarter related to Desert Canyon, Gilbert Tuscany and to a little bit Terravita, so those three add up to about $25 million in acquisitions.

Okay.

But maybe that'll help.

Real quickly, bad debt to revenue ratio in the quarter, David?

A little over about 1.8% for the quarter. For the year we're right at 1.3%, which is lower than -- it's just slightly lower than last year, so we have seen our bad debt pretty well flat with last year. It's been about in the mid 1% range.

On leasing, let's see here, there was a big difference between renewal cash leasing spreads and straight line. I'm assuming that that's because you have incentives and step-ups over the course of the lease?

That's correct. You know, what we've seen in our spreads on new tenants as well as renewal tenants is we have seen pressures, just like everyone. If you look on a cash basis, we've had about a 1% decrease in rental rates per square foot. When you look on a cash basis, we are having to give new tenants and renewal tenants incentives upfront, so we are being able to get those dollars back over the life of their lease.

And if you remember, our leases tend to be shorter term, so even though we're getting it back over the life of the lease, that's still not a long time.

Right. It was sort of a reverse situation on the new leases where the cash spread was higher than the straight-line spread, and the average term was 8.8 years, which is kind of unusual for you guys. What was going on in there?

We have one large lease in there. You know, we've talked about the broad -- the Hispanic market lease at South Richey was executed during the quarter. That tenant has been counted in occupancy but it has not moved in. There's still some contingencies to cover, but we had one large lease that was for multi-years.

You'll notice the numbers, you know, with the relative size of our portfolio, not a lot of transactions. There were only, you know, 77 leases for the quarter. So but there was one lease in there that skewed the term as well as the TI per square foot.

Okay. So it was -- that's why the cash spread was higher?

That's correct.

Okay. Let's see here. If I heard you right, you know, you guys were talking about dividend in relationship to FFO and dividend in relation to AFFO. And in particular, I mean, you sort of indicated that by the end of the year, if you invested most of your cash, you should be closer to covering a dividend on an AFFO basis. I know you guys don't give guidance, but did I hear you right?

You're right. And then we do not give guidance. We -- our Board quarterly evaluates our dividend levels. They did so just recently, and we announced our dividend for the next quarter. The dividend level that was set by the Board was done so back in August of '10, really in anticipation of all the raising of equity we've done. We've set that dividend level at a level we believe would be supported by the new acquisitions. We still believe that.

We believe the new acquisitions will provide the cash flow necessary to pay our dividend out of cash flow. I think we've said that we also expect that we will invest the remaining equity by yearend, and that the -- and we still expect our properties to ultimately carry the dividend out of cash flow.

Okay. One last question. Are you releasing the cap rate on Terravita?

We have not. It is a -- it's a fully leased center. It's at a nice cash flow, great in-puts, cash flow, but we have not released the cap rate.

Okay. Thank you, gentlemen.

Thank you.

(OPERATOR INSTRUCTIONS) And we do have another question from the line of Paul Adornato with BMO. Please go ahead.

Thanks. I was wondering if you could just refresh your thoughts on cap rates for the most recent acquisitions, as well as those in the immediate pipeline.

Yes. Paul, this is Jim. What we have been -- the procedure we've been following is we've been looking at the cost -- the acquisition cost compared to replacement cost. And up until this point, we've been buying properties that we feel have been discounted to replacement costs.

So we've not induced a cap rate or, you know, implied any cap rate, so we feel that as long as we're in that range or below what we think is replacement cost, that's how we've been doing evaluations.

We do -- Dave, you're welcome to add on to this if you'd like to. But we do like to look at the cash on cash return going in, and we also compare that to our overall cash flow in the enterprise. And at some point in time we'll flip over in a different part of the economic cycle. We'll start looking at what it is on a cap rate basis.

I know it's easier for you all as analysts to look at it on a cap rate basis, but when you're buying properties that are on the redevelopment side or a value-add side, it's much more significant to us to look at it on that basis.

Dave, you want to add something to that?

I just -- the only thing I'd add to that is we clearly are looking to balance the portfolio of, you know, value add (inaudible) the greater discount properties with those of more in-place cash flow. Terravita is one that we just acquired, and it has greater in-place cash flow. So, you know, while we don't quote cap rates, the goal is to build a portfolio of properties that will clearly meet our dividend requirements and the yield of that dividend.

Okay. Thank you.

Thanks, Paul.

We have no further questions in queue at this time. I would like to turn the floor back over to Management for closing comments.

Well, thank you very much, and thank you all for joining us. And thank you for your ongoing support of Whitestone. We're looking forward to keeping you updated on our progress and our next call. And with that, I'd just like to wish you all a great day, particularly with this market that's going on. And that we're confident that at some point in time, it'll come back as I'm sure you all are as well. And thank you very much for your confidence and support in us.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.