Whitestone REIT (WSR) 2011 Q3 法說會逐字稿

Good day and welcome to the Whitestone REIT Third Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Miss Anne Gregory, Vice President of Marketing and Investor Relations for Whitestone REIT. Please go ahead ma'am.

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 it is the property of Whitestone REIT. Leading the call today 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 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 today's date November 7th, 2011.

The Company's Form 10-Q and third quarter supplemental operating and financial data package were filed with the SEC today. The filings will also be posted on www.whitestonereit.com in the Investors 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.

Thank you, Anne, and thank you for joining us in today's conference call. My comments today will focus on the continued execution of 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.

We acquire to own, lease, manage and redevelopment community center properties, which we define as visibly located properties in established or developing culturally diverse neighborhoods in our target markets. We focus primarily on service-providing tenants that meet the needs of individuals and families within a five mile radius of properties we own.

Our service-providing tenants tend to occupy smaller spaces, less than 3,000 square feet, and traditional good oriented retailers. Our smaller-spaced tenants account for 71% of our total number of tenant's that provide a 57% premium per square foot when compared to our larger tenants.

Our tenants provide Whitestone with down-side stability and investment premium on a square-foot rental basis and revenue growth. The reasons are no one tenant can impact our revenue by more than 2%.

All space is quoted on an absolute rent dollar amount rather than on a square foot amount, which places the rent amount into relative perspective to the tenant's business and provides a premium to us. And entrepreneurs by nature, our tenants, tend to incubate in a small space while they are growing their business. When they expand, we provide the expansion space.

Our acquisition focus is on community centers that are discounted to replacement cost located in large growing cities with culturally diverse and strong demographics. We currently own 41 community centers in Houston, Dallas, San Antonio, Phoenix and Chicago.

In Phoenix we continue to see value-add opportunities along with beginning signs of recovery. In Texas market, where we own 33 of our 41 properties, we continue to see the state lead the nation in job and population growth.

In Chicago, where we own one property that is performing well, we watch the market closely. We are cautious as the unemployment rate has increased since the state personal and corporate taxes have increased.

We believe we have a competitive advantage because other public traded REITs seek to acquire larger properties and we find none bidding against us for acquisitions. Private buyers bidding against us take longer to close. We typically allow 25 days due diligence and 15 days to close.

Our operating partnership unit structure provides us an opportunity to purchase notes and exchange OP units as well for example, to a defaulted borrower who may be fighting with a lender to avoid a tax or recapture with a forgiveness of debt. Over 80% of our pipeline of potential acquisition properties are off market and are under financial distress.

As you can see from our financial statements, our strategy has yielded results with increased occupancies, revenue and funds from operation. Occupancy has increased to 86% and revenues increased $8.8 million for the quarter.

Our newest acquisitions began contributing to revenues with only partial recognition in the third quarter. Our funds from operations increase follow the increase in revenues, along with judicious expense management. We achieved a 15% year-over-year and quarter-over-quarter FFO growth.

In addition to our overall operations, I would like to give you a redevelopment and acquisition summary of our activity and then turn the financial report over to Dave.

We continue to grow our customer base. A year ago we had 770 tenants. Today we have 850 tenants, an increase of 10%, which does take into account some attrition. We have grown our occupancies through increases in our tenant base with new tenants, expansion of existing tenants and acquisitions. We've also taken larger vacant or partially vacant spaces and divided them into smaller spaces to accommodate our small-space business model.

Last year at this time we had five vacant big boxes, each over 40,000 square feet, four in Texas and one in Arizona. Today all but two are filled and we're getting close to signing a new lease on one of those.

As an example, in Windsor Plaza, San Antonio, we have divided and leased the former Circuit City space along with other vacant spaces to Sketchers, Ross Dress For Less plus the University of Phoenix, which began operating in late 2010, and Mattress Firm will develop 4,000 square foot out parcel on the site. When Circuit City filed bankruptcy in 2008 this center was less than 60% leased. It is now near fully leased and will begin to generate incremental cash flow throughout 2012.

Wyatt Square in Houston International Management District is now home of two tenants that split a former Kroger space. [Deltron] is a Vietnamese electronic store that will open in December next to Best Savings in international market. An all new façade is in process as we renovate the entire center with an agency architectural look and feel to complement the cultural nuances of our mix of Asian tenants, which includes a very unique tea room and several restaurants.

South Richey Community Center, an Hispanic theme community center located in Houston-Pasadena suburb, will anchored by Bravo Ranch Supermacado, which is taking a space formerly occupied by Kroger, who left in February of this year. Here we will develop an additional 4,500 square foot pad along with an entirely new façade simultaneously redeveloping and fashioning the tenant mix to complement the ethnicity of the local market. Our new tenant, Bravo Ranch, comes to us with a history of operating successful Hispanic grocery stores.

South Richey is one of our eight Hispanic theme community centers in Houston and surrounding Harris County, where the 2010 U.S. census shows the Hispanic population increase from about 33% to 40% of the area's total population since 2000.

Let me now review our acquisition and disposition activity. In July we began to recycle our capital by selling our Greensboro property, a non-core asset, for approximately $1.8 million. We will invest these proceeds in a new acquisition. We recorded a gain of approximately $400,000 from this sale in the third quarter.

During the third quarter we purchased two off-market Class A community centers in Phoenix market for approximately $25 million. Terravita Marketplace, a fully leased 103,000 square foot community center in North Scottsdale, was an all-cash investment of $16 million. This off-market transaction became available as the sellers debt faced maturity in September of 2011. This center is occupied by a diverse base of 16 primarily service-providing tenants.

Ahwatukee Plaza, a 97% leased, 73,000 square foot community center in Phoenix, was acquired in an all-cash transaction for $9 million. The property was purchased below replacement costs and has strong in-place cash flow. This center is extremely well located and has 15 tenants who provide services to the surrounding communities.

Both of these income producing acquisitions only partially contributed to earnings in the third quarter. We expect them to begin contributing fully in the fourth quarter of this year and increase in value as we execute our community center property business model.

Since our IPO in August of 2010, we've acquired six community centers, all the Phoenix markets, which bring our total holdings in the Phoenix market to seven community centers and approximately 0.5 million total leasable square footage. We expect to close two additional properties by year end bringing our total investment in new properties, including our estimated redevelopment stabilized costs, to approximately $90 million since our IPO.

Our acquisition pipeline continues to exceed $500 million in off-market opportunities that we're working through in various stages of analysis, due diligence, letters of intent and contract negotiations. One property, a $28 million acquisition, is in escrow with an executed contract. This property includes a $14 million assumable loan for which we are waiting for approval by the CMDS loan servicer. We are hopeful to complete this loan assumption and close this property by year end.

Our deal sources are from banks, special services, servicers, receivers and some defaulted borrowers. Acquisition prices we've found are beginning to increase depending on the local community. However, due to our substantial pipeline and deal sources, we're still able to acquire at below replacement costs.

The upward pressure on prices we're seeing now seems to stem from more foreign investment in Phoenix market and the fact that the special servicers are beginning to release assets for sale but they're doing so in auction pools. However, our acquisition approach remains on a one-off transaction basis and we are working directly with principal owners not competing in the large auction pools.

Our balance sheet remains strong and our leverage levels are below our public peers. We have capacity with a $20 million unsecured line of credit, which is expandable to $75 million, and it remains fully available. We expect to begin judicious utilization of this facility for additional acquisitions from our deep investment pipeline in the coming quarters.

The new acquisitions we have added to our portfolio and our redevelopment of some of our core community center properties meet the end-quality investment grade standards, which provide an additional hedge, we believe, against inflation. When service tenants are embedded in a particular under served community, the properties are well maintained and the landlord is aligned with their success interest, the tenants tend to perform well and become ingrained in their local community, which means they are less likely to relocate when there's slightly upward pressure on rents.

We continue to develop and train our people to meet our growing needs and service our tenants. And finally, as we execute our strategy to add value within each of the community centers to be strong lease up in re-development and our tenant businesses to succeed, we expect to increase demand for spaces, which should result in rental rate growth over time.

With that I would like to turn things over to Dave Holeman, our Chief Financial Officer. David.

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

Funds from operations core or FFO core for the third quarter of 2011 was $2.3 million, a 15% increase from the third quarter of 2010 and also a 15% increase from the second quarter of 2011. On a per-share basis, FFO core was $0.18 per common share and operating partnership unit in the third quarter of 2011.

The 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 of these items in greater detail shortly.

In the third quarter our total property revenues increased approximately 12% or $900,000 over the third quarter of 2010. Revenue for the third quarter included approximately $800,000 from new properties and $100,000 from comparable properties. An increase of 2.4% in average occupancy offset by a decrease in the average rental rate of approximately $0.19 per square foot accounted for the increase in same store revenue.

Property expenses for the quarter were up approximately 19% or $600,000 from the prior year with $400,000 coming from new properties and $200,000 coming from comparable properties. The increase of $200,000, or 7% in property expenses coming from comparable properties, is primarily a result of higher property taxes in our Houston properties.

Total property NOI increased $400,000 or approximately 7% for the third quarter as compared to the prior year with most of the increase coming from new acquisitions. As Jim mentioned, included in property NOI is a partial quarter from our two newest acquisitions in Phoenix, Terravita Marketplace and Ahwatukee Plaza. Same store NOI was relatively flat year-over-year.

The Company continues to focus on maintaining low property tax valuations. While we had an increase of approximately $160,000 on a same-store basis in our third quarter relative to the same period of 2010, we will continue our efforts to aggressively pursue further reductions, which may ultimately 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 actively manage our property and corporate expense structures to have a very lean organization with a portfolio of approximately 3.4 million square feet managed by a dedicated team 61 full-time employees.

Our third quarter general and administrative costs excluding acquisition expenses decreased approximately $245,000 or 15% from the second quarter of 2011. The majority of this decrease relates to the reimbursement of legal expenses received in the quarter due to the settlement of litigation with a former tenant.

During the quarter we had acquisition expenses of approximately $100,000 related to the acquisitions of Terravita Marketplace and Ahwatukee Plaza.

We remain very focused in our cost-savings efforts evidenced by our on going Company wide moratorium on wage increases. As we continue to expand our portfolio, we expect to continue to leverage our G&A costs across a larger asset base and I expect to see our G&A cost as a percent of revenue decrease over time.

Whitestone is a young Company having completed our IPO just over a year ago. As we grow we expect that our non-operating expenses related to property acquisitions will continue. This will create some volatility quarter-to-quarter in this ramp up phase that we expect to level off as our revenues increase creating economies of scale for our infrastructure.

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 help us to control costs and effectively manage our business. At the property level the system enables our leasing and property management team to have the necessary tools to produce attractive returns without sacrificing customer service or property maintenance standards.

Additionally, our systems provide our leasing team with the information necessary to co-actively anticipate any potential issues.

Let me now turn to our operating portfolio occupancy rate, which was 86% at quarter end which is an increase of 2% from the second quarter and a 3% increase from one year ago. I will also remind you that our reported operating portfolio occupancy of 86% represents physical occupancy and does not include tenants under lease, which had not moved into our properties.

During the quarter the Company signed 67 leases totaling 152,000 square feet in new and renewal leases. These were primarily with tenants that require less than 3,000 square feet in multi-cultural neighborhoods. As of the end of the third quarter the Company had approximately 80,000 square feet of leases that had been executed by tenants but had not yet moved into our properties and are not counted in our quarter-end physical occupancy.

Our approach to leasing is quite unique and effective. Typically we seek shorter leases on smaller spaces, which give us greater tenant diversification and provides a premium rental rate per square foot. Our typical tenant tends to become engrained in the neighborhood surrounding the 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 continuing to prove to be effective and more profitable for us than traditional long-term leasing. The rental premium we receive on spaces that are less than 3,000 square feet further validates our community center property business model. It's 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 our leasing velocity has been slower that we prefer, our end market leasing teams continue to have robust pipelines of potential tenants.

Our balance sheet remains quite strong with 17 unencumbered properties with a non-depreciated cost basis of approximately $100 million, providing additional financial flexibility.

At the end of the third quarter our un-depreciated real estate assets were $241 million and our total property debt was $102 million. We have no debt maturities until late 2013 and as of the end of the third quarter 76% of our debt is at fixed rates.

Our total blended interest rate at the end of the quarter was approximately 5.6%. Our third quarter interest coverage ratio, which we define as EBITDA divided by interest expense, was three to one.

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

Thank you, Dave. In summary, I just wanted to highlight a few items from our call. Our community center property business model has resilience because of our tenants. They provide necessary services to the local communities. We continue to make progress putting our cash to work with high quality accretive acquisitions.

We remain focused on some of the highest growth markets in the country. Our strong leasing in 2011 is driving occupancy that will increase cash flow in subsequent quarters. Our internal growth opportunity remains robust given our head room in occupancy, our redevelopment opportunities and our shorter-term leases. Our $500 million plus pipeline offers substantial opportunities for additional external growth and our balance sheet is solid providing us with financial flexibility to grow and the opportunity to further enhance our returns through lowering our overall cost of capital.

This concludes a review of our results and, operator, I will turn the call back over to you.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). The first to Paul Adornato with BMO Capital Markets.

Looking at the leasing activity, rent spreads are on a cash basis are still negative. I think I saw a negative 11% or so. Was wondering if we could look forward into 2012 expirations, what's your best guess as to possible rent spreads next year and do you have any known, large move outs in 2012?

Paul this is Jim. Thanks for the question. Let Dave and I both answer it. We have no surprises on the calendar that -- of course, if there were surprises we wouldn't know about it, but we don't have any large spaces. We have of the five boxes that we have we have two that, as we mentioned, we have two remaining. One is in Phoenix, which we have a lease that is being negotiated right now but it will have contingencies on it. And then we have one in Houston that we have discussions have begun with two tenants. And that's really all we have on the large space side.

We've had a 1% overall decrease in our rent rate, which is surprising low considering what's going on in the marketplace, but we have also seen our overall occupancy lift up. Dave, would you like to add something as well?

Sure let me, Paul, thanks for your question. Let me just briefly touch on leasing spreads. We, as a small Company, we renew leases regularly and in any quarter there may be, due to the mix of leases, may be a little different than in other quarters so it's always important to look at a little bit longer period of time. If you look at our annually, you're right on that we've seen about a 9% decrease in our cash basis spreads and about a 2% decrease on a straight line basis. That's consistent really with what we seen throughout our portfolio.

As we look out to 2012 and we look at our leases that are expiring in 2012, the blended rate on those leases is slightly below the portfolio as a whole. So I think our expectation is that we would be able to renew those leases at flat or hopefully maybe a little bit of an increase. But those leases that are turning in '12 are at an overall rate that's slightly below the portfolio as a whole.

Okay and switching to acquisitions, Jim, you mentioned that there are some pools in the market of coming from the special servicers, was wondering if you could just talk about the size of these pools and if they would have any appeal to you but for perhaps price.

Paul, we've seen pools that might have -- they're smaller -- might be two to six properties in a pool so we haven't been looking at any. What we've been primarily focused on are the relationships that we've been building with the what we call the regional banks and the receivers and some of the title companies for access. But what we find is that some of the properties we looked at that came from -- in the past that had come out of some of these pools are starting to come back to us.

There was a buyer in town that was proposing that they were putting a REIT together and they were filing an S-11 and they had tied up about $250 million worth of properties and what we've learned is that they were speculating that they'd have their offering done before year-end and some of those properties were pushing the prices up on a couple of properties that we looked at and we found that that buyer has been backing off of some of these deals and those properties that we once bid on are coming back to us. And they're really coming back to us at some lower prices but what we're seeing is there's a tendency to see some international buyers, and when I say international it's really North American buyers outside of the U.S. coming into the U.S. and actually quite a few Canadian buyers are coming down into phoenix, and so we're starting to see a little more activity around the properties.

We -- what we like seeing though is that we're nearing year-end and some of the banks that we've been dealing with a want to clear out their portfolios. We have what we're -- an indication that we're getting, Paul, is that some of the developers -- well let's call them borrowers -- have been -- have cleaned up their own financial positions in their portfolios but they still have a couple of [tag end] loans outstanding with banks. We've had two particular deals where the -- and they're different lenders and different borrowers -- where they've come to us and talked to us about buying the note that they had an opportunity to buy at about a 60% decrease from its face value from the lender.

And the reason that they wanted to have us get involved in the transaction was twofold. One was that they could avoid the recapture. The second, which seemed to be a more important element that's surfacing, is that they're concerned that these loans towards the end of the year might be sold as a pool, as pool buyers in loans, and that they may not be able to escape their deficiency because buyers tend to go more after the deficiency and each of them had indicated to us that they would recommend us as the buyer of the debt provided we would give them a provision that says that we won't go after them on the deficiency. So we're seeing some of that toward the year-end.

Okay great; that's helpful. And finally, I realize it's a Board decision but has the Board -- is the Board still comfortable maintaining the dividends at these levels for now?

Paul, this is Dave. As you know, quarterly our Board reviews our cash position, our operating results and approves the dividend. That process will be in December. That's when our regularly scheduled Board meeting is. We continue to look at this business and expect that we'll get new FFO from our acquisitions. The leasing activity this quarter that was up, the increased occupancy will produce additional cash flows and stuff to the quarters and we also hope to see some increases in our core portfolio so our Board will go through their normal process in December, which is declaring the quarterly dividend and we continue to execute on our strategy, which we feel will produce the cash flow necessary to support the dividend.

Okay thank you.

Mitch Germain, JMP Securities.

Just curious about your small tenant activity, Jim, I mean last question you talked a bit about small tenant slowing. You saw a sequential decline in leading volumes and activity so I was just curious if there's any relationship between those two.

Mitch, let me understand the question again. The small--

Small tenant activity.

Yes and the correlation between what?

Between the fact that you had mentioned a slowdown last quarter and clearly this quarter we saw a sequential decline in leasing volumes.

Just in our leasing volumes, right, we have seen about -- I think we did 157 leases for the -- let me get my numbers right here, Mitch, for this quarter, which was slightly down from last quarter, when we look at our leasing pipeline there's about 80,000 square feet of leases that have been executed but haven't taken occupancy yet so we really haven't seen any what I'd characterize as a leasing slowdown. Some of that's just the timing and executing leases. From a small tenant perspective, we've continued to see our small tenants provide the premium rental rate. We've continued to see our renewal rate on those tenants be in the 75% to 80%.

A couple things happened on a tenant specific basis and we've talked in the past about the Census Bureau space. The census bureau used to lease about 10,000 square feet from us. We have during this quarter we leased probably 75% of that space to small tenants so I think we've continued to see the small tenant model provide that traction we need. The renewal rates are good. The leasing premium versus the other tenant continues to hold and the bad debt levels as well on those tenants continue to be very consistent.

If you look at our term of our leases, tended to be for the -- they tend to be in that 3.5 year range so we still see a lot of traction on the small tenants.

Good, Dave. What we find though is that the time it takes to complete the leases with the smaller tenants is taking a little more time. Part of that's year-end; part of that's really uncertainty in terms of the economy and I think it's nothing new to any of us that we do see the uncertainty that's out there and when we're dealing with entrepreneurs they're looking. There's still a lot of cash on the sideline that we see but these people are looking to start businesses. What we've seen in terms of as we redevelop properties we're -- every time we redevelop a property we see an increase in the interest that is developed in it.

Whenever we put in some spec space we find the tenancy to lease it faster. For example, we're starting to fill our property up at Pima Norte, which is up in north of Scottsdale off in Carefree and we're starting to see those small spaces starting to fill in. With an increase up to 86% that's actually up five percentage points since we did our IPO, which is fairly significant but it's 5% in terms of I would say a better quality of investment leases because it is small and we don't have the down side that we might have had.

We have had a pickup in terms of getting the San Antonio property near completion with the signing of the Ross's lease and Sketcher's lease and Mattress Firm, we're now -- you know, we just have those two remaining big boxes then the rest is really a small space and breaking it up so we're seeing some very solid leasing activity given the marketplace where we are. We were happy with the Bravo Ranch that took a significantly long time to put that deal together.

If you recall, the Kroger space was -- went vacant in February. That took us some time to get the Bravo Ranch deal pulled together but we're happy the way it came together and overall we look at our portfolio and no single tenant, and the number still remains about the same as it did a year or so ago, but no single tenant can impact our revenues by more than 2% where -- and I think I've shared with some of you before, when Circuit City filed bankruptcy that was a very significant hit on our overall occupancies but we have no tenants now that can hurt us in that kind of fashion.

Dave, do you want to add anything to that or--?

The only thing I might point out, Mitch, is if you look at the lease activity we have seen three sequential quarters of increases in our leases with new tenants. The timing of lease renewals sometimes just varies with the tenant and so in the third quarter our lease renewals just reported were a little lower than prior quarters but the new tenants we have had three quarters of increasing amounts of square footage signed on new leases.

Great and, Dave, can I just get an update on your plan for the maturities? I know that we're looking at 2013 but I guess you in the past have mentioned that you'd started some discussions with the lenders, correct?

We have. We have $100 million of debt outstanding. That debt, as we've talked about before, is with three insurance companies and a couple regional banks. Our overall leverage level is less than 40% and then of that $100 million about $60 million comes due in October of 2013. That was debt that was put in place back in '08. We have had discussions with two of the three insurance company lenders. We've had discussion with Nationwide Insurance and Jackson Life. Both are more than willing to look at renewing that debt.

The interest rates that are out there today are a little less than what we have in place but they both think it's a little early, given that that debt is late '13 so we've begun the discussions but I don't anticipate that we would close any of those extensions in the near term. But I don't anticipate any issues with that. And as we continue to grow and add properties and draw down our line of credit, that $60 million in '13 will be a little more [scattered]. Right now it looks to be at the higher percent of our debt than it will as we grow a little bit.

Great and last question for Jim or Dave, have you guys adjusted your underwriting? I mean we clearly have seen a notch down in economic growth forecasts so over the last 90 days have you made adjustments in kind of lease up and rent growth assumptions in the properties you're looking to acquire?

Well, what we did in our underwriting is that we did have two properties under contract and we made the choice to -- and it's the first one that we went under contract with we made a choice to abort and the reason was that we felt that -- and it was going in it was about a 9.9% cash-on-cash return. But we had -- it hit the quality range in kind of the D- range and what we decided is that there still are a lot of properties in the size and in the sweet spot that we look at that are in that A quality range and we felt that they endure much better when you go through of a cycle of inflation, which we think we'll be going into. And so we did take a pass on that and the result of that is some of the anticipated FFO that we thought we'd have in the third quarter fell off but we've already quickly replaced it with another deal that we think will fall in place before year-end.

So far we're very comfortable with the progress that we've had and we think that we're really right on track.

Great and just actually one last question, you talked about the $500 million pipeline. Geographically is that mostly situated the phoenix area?

It's probably in excess of $500 million but I would say a solid $500 million is in the phoenix marketplace. We have one deal that we're under letter of intent in Texas that we like very well and it fits into our business model very nicely and that would fall into our Texas region. And but the majority of the deals we still look at in the phoenix market -- and there is -- there are a couple of reasons for that but one is that most of the properties that we find in phoenix that are in the solid locations, are relatively new and what they did is they came under some financial stress with the borrowers, particularly because a lot of the borrowers had multiple properties.

And we find that having properties that are relatively new there's no deferred maintenance and what it really is it's just a matter of what question is some of the empty space is in, whether it's a brown box, grey box or just a renewal space we're finding that that's really meets our criteria really well. We still like phoenix. It's the fifth largest city in the United States and it's growing. Amazingly the average age has shifted to like 42 years old. It's no longer thought of as a retirement community or an alternative to Florida like it used to be.

The newer property acquisitions I mentioned we like those. The debt stress is still there and we can work through that. The neighborhoods still have a lot of people with the needed services. Remember our business is the services that our tenants provide you really can't buy on amazon.com and you can't get your shirts cleaned on Amazon. You can't get a haircut. You can't go to Subway, those kinds of things. But we still see a significant discount to replacement cost and that will probably change as more and more of these properties are taken off the market but there's still some inventory there and we haven't exhausted our pipeline yet.

Great thanks for taking my questions.

Carol Kemple, Hilliard Lyons.

I just have one question; since you all like phoenix so well, have you looked at any of the other Arizona markets, Tucson or anywhere else or is it just going to be phoenix for now?

Good question, Carol. We have looked at Tucson. We've looked at Sedona. We -- what we have done is that we've built an infrastructure in phoenix and rather than doing rifle deals in a lot of different locations, we've taken and moved one of our key Senior Vice Presidents, who has now relocated to phoenix, and under her we have built a relatively small staff for the number of properties that we own. But we have a person who heads up our construction and our property manager and then we have some leasing associates so with that unit in place and we also occupy space in one of our properties.

We can move fairly quickly and it took us a few extra months to get the people that we wanted there to staff that under Valerie and I think you'll start seeing more activity. We find that what we like about it it's a large city, one of the drivers we have is you can get a flight out of Houston into phoenix in 2.5 hours. To go to Tucson might be an extra two hour drive so at least for the time being we can try to fill in the holes, for example, that we think are out there. For example in Goodyear it's a little further west but there's more properties available in towns like Goodyear, like Gilbert and Mesa even certain parts of Mesa we like and Scottsdale that there are still a few.

We're very comfortable with what we have in Scottsdale and even in phoenix and when you're there for a while and you become a buyer we like to stay off the radar but somehow we're starting to pick up a little more awareness for the local people as well. Then you begin to develop the relationships with like the Mayor of phoenix and some of the other communities there and they're more cooperative.

To give you an example, in Gilbert, Gilbert Tuscany's property I don't want to say to our surprise but I will say that, we just received the approval from a very large digital electronic sign, which just enhances the property and we can also generate significant revenues off that sign. And that's because of the awareness people are having of ourselves that when we come into a town that we really do come in with a presence of adding value to a community.

Okay and do you all still like the Chicago market? Is it just looking too expensive right now or what are your thoughts on that area?

Chicago we still own a property that's doing exceptionally well there. We have a couple of things that we're watching. For example, the phoenix -- first of all the Texas and the Arizona, the States, are owner friendly and we could take -- if we have a problem with a tenant we can actually lock them out in five days so if they haven't paid their rent and if we felt that this -- we were building up to this, we can actually lock them out and take over the space.

In Illinois it's different. It's a tenant friendly state and it takes us 90 days to remove a tenant and usually we have a lawsuit that has to be filed to do so and that's happened to us from time to time, at least my history and I know Chicago exceptionally well in terms of the properties and markets and the opportunities there. So we like the business opportunities we see in the west versus the Midwest. We have -- what we have noticed since the state has a new democratic governor is that we've watched the state income taxes increase and we've watched the corporate income taxes increase and that the one property we have that's in our operating partnership we've seen the general partnership ownership tax has increased on it so what we've decided internally here is that we still like the Chicago marketplace. We think it adds a level of diversification that's important to a company like ours.

We think on a relative basis we own a property or two there as long as we can buy it right we're fairly competitive as a company wants from an operating point of view. We do like it but right now, as long as we can find the kinds of terrific opportunities we're finding in phoenix that we think we're going to stay focused there. And you know, because of our size, roughly $250 million in assets, our ability is to really buy about 10 properties a year on a cycle and we also do all our transactions on a one-off basis and so we can comfortably close four deals a month but I shouldn't say comfortable. We're stretched at four but we can comfortably do two deals a month and we kind of like that pace and so we're not a portfolio buyer at this time. We're more of a transaction buyer so we still have Chicago on our plans but we have more properties to buy right now in phoenix and even maybe we'll diversify a little bit in -- not diversify but add a couple to our Texas operation.

Okay thank you.

(Operator Instructions). [David Stavelin], [Weintraub Kessle].

So Gilbert Tuscany can you just talk if you've had success in leasing that property up?

Sure. Gilbert Tuscany was a property we acquired in July of this year. As you know, it's about a 50,000 square foot property, was built with a cost of approximately $16 million and we were able to acquire that property for right at $5 million so a really nice asset that was acquired at significantly below replacement cost. The asset had been 60, roughly 65% pre-leased and then when the developer ran into some financial trouble those tenants fell out. We have -- when we acquired the property it was approximately 16% leased. We currently have a pipeline in that property that is made up of a coffee company. We have a hardware store and then we have an OB GYN that's looking at the space as well, so from a leading activity perspective we haven't signed too many leases but we have a pipeline that we're very hopeful will come to execution in the fourth quarter. I don't know if that helps.

Yes okay and the Citadel in terms of the restaurant opening, is that still on schedule for December of this year?

The Citadel, the restaurant should be completed in December in this year and they will begin operating but not to the public in December. They go through a period where they bring in and train people and serve and so they have a number of events that they have planned for that but they expect to be opening January 1st. We would have like to seen them open earlier but we want to make sure they did it right. They've done a spectacular job. I mean the space I think you had a chance to see it, Dave.

Yes.

You're going to really like what you see out there and the signage is on the building now. We have the name, The Citadel is on the side. The landscaping is coming in really well. We are close to signing a lease. We've got an LOI out on it. Actually it's a lease out for signature for an interior designer that her clients are international, are people who own homes in Northern Scottsdale and they may also own a home in Telluride or an apartment in New York City and so we're getting those kinds of tenants there, which really does meet the community needs. So it's kind of a -- we're excited about that property. We think it's going to really (inaudible).

And do we start getting rent when the property is completed or when they open?

We will start from the restaurant you're talking about, David?

Yes.

Yes we -- they're actually under lease now. There is a period of free rent and they will begin paying cash rent in early '12.

Great thank you very much.

And once again, ladies and gentlemen, I'd like to give everybody a final opportunity to ask a question today. (Operator Instructions). There are no questions in the queue, Mr. Mastandrea. I'll turn the call back over to you for any closing comments.

I'd just like to thank everyone for attending and just if I may take a second just to recap what we think are the highlights of the call today and also points we'd like to leave you with this with our Company.

We do have unique community center property business model and we like it for a lot of reasons and, as you can see from our track record, it does really have an impact in the marketplace and when you're providing necessary services to local communities and you're doing it one-by-one-by-one it certainly has meaningful and hopefully we're beginning to show that to you, our investors. We've been continuing to make progress. We've put all of our cash or we've been putting all of our cash to work on acquisitions and not going to anything other than acquisitions and also the -- some redevelopment but they're getting high quality properties that we're buying.

We still stay focused in the highest growth markets in the nation. We feel that that's still a really good market and our infra costs, infrastructure cost, is relatively low compared to what we've been able to do with our investment capital in these markets. Our strong leasing in 2011 is driving occupancy and that will increase cash flow in the subsequent quarters and the free rent periods will be burning off in the subsequent quarters as well. Our internal growth opportunity still remains robust. We still have some properties that we're redeveloping within the existing portfolio giving our headroom for the occupancy and redevelopment opportunities and the short-term leases, which we think have a real advantage to us.

I've told some of you that I've met personally that we really function in many ways like an apartment model but in many ways it has a lot of advantages over that and so we see that continuing to gain traction. Our $500 million of pipeline properties has opportunities. In fact, I'll be out there again this week looking at some deals that our acquisition group has lined up for us to look at and our balance sheet remains solid. We have cash. We have liquidity. We have an unsecured line of credit that we haven't tapped yet. We have properties that have no liens on them so we're very, very conscious of how we maintain a strong balance sheet, particular in the times that we're facing today.

So with that, Dave, if you'd like to add anything? Then we'll just thank you all for joining us today and, as in the past, please feel free to call Dave or myself or Anne and if you have any questions and we'll look forward to talking with you during the next quarter.

And, ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.