Whitestone REIT (WSR) 2011 Q4 法說會逐字稿

Good day everyone, and welcome to the Whitestone REIT fourth quarter 2011 Earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Anne Gregory, Vice President of Marketing and Investor Relations for Whitestone. Please go ahead.

Thank you, operator. Good afternoon everyone, before we begin our prepared remarks, I would 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 F-11 and Form 10-K for a detailed discussion of these risks. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that today's call includes time sensitive information that may be accurate only as of today's date, February 28th, 2012.

The Company's earnings press release and fourth 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 Investor section. Also included in the supplemental package are the reconciliations from GAAP financial measures to non-GAAP financial measures, the Company expects to file its Form 10-K with the SEC this week and this filing will also be posted to our website.

With that let me pass the call to Jim Mastandrea.

Thank you, Anne. Thank you all for joining us on today's conference call. My comments today will focus on the continued execution of our business strategy, which is built upon 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 redevelop 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, rather than on traditional goods oriented retailers. Our tenants tend to occupy smaller spaces typically less than 3,000 square feet, and meet the needs of the individuals and families within a five mile radius of our properties.

Our smaller space tenants account for 72% of our total of more than 900 tenants, and provide 69% a premium per square foot when compared to our larger tenants. Our tenants represent a diverse range of industries, and in each of our centers tend to fall within four categories of retail services, medical, educational, casual dining, and convenience. A typical nearby resident department at a Community Center may drop-off a child for tutoring, visit their dentist, and pick up a pizza for dinner, along with their dry cleaning,then pick up the child all-in-one visit.

Our tenants provide a strong base of revenues in industry diversification, which minimizes Whitestone's downside, as no tenant can impact our revenues by more than 1.5%. Our tenants also provide an investment premium on a square foot rental basis and revenue growth, as their businesses grow and expand. Small space is quoted on an absolute rent dollar basis rather than on a square foot amount, which places the rent into relative perspective in the tenant's business and provides a premium to us. And entrepreneurs by nature are tenants tend to incubate in a small space while they are growing their business. When they decide to expand we provide an expansion space opportunity.

Our acquisition focus is on community centers that ranges from properties that are discounted to replacement cost to high-quality properties with high occupancies, that are under final financial stress, located in large growing cities with culturally divergence and strong demographics. We currently own 43 communities centers and two land parcels for future development in Houston, Dallas, San Antonio, Phoenix, and Chicago. In Phoenix, we continue to see value-add opportunities along with some modest signs of recovery. In our Texas markets where we own 32 of our 43 properties, we continue to see a State leading the nation in job and population growth. In Chicago a market in which we have significant past experience, we own one property that is performing exceptionally well, and are considering two other properties as we continue to watch the market and monitor demographic trends.

Over 80% of our pipeline of potential acquisition properties are off market, and are under some type of financial distress. Based on our financial results, our strategy has yielded year-over-year growth of occupancy revenue and Funds from Operation. Occupancy of our operating portfolio has increased to 87% with revenues growing by 23% or $10 million for the quarter from the same period in 2010. Our property NOI for the fourth quarter was up year-over-year by 31%, with our newest acquisitions contributing only partially in the fourth quarter. Our Funds from Operations also increased in part due to judicious expense management complementing the revenue and NOI expansion, excluding acquisition costs we achieved a quarter-over-quarter increase of 55% in Funds from Operation.

We continue to grow our customer base. A year-ago we had 792 tenants, today we have 915 tenants, an increase of 16% which does take into account some attrition. Our average small space tenants tend to sign shorter team leases, which we prefer due to the ability to go back to the market on rent rates. With an average of three year lease terms for our small space tenants signed in 2011, we have grown our occupancy through increases in our tenant base with new tenants, expansion of existing tenants, and acquisition.

In addition to our overall operations I would like to highlight our value-add re-development acquisition activity. We have redeveloped larger vacant or partially vacant spaces, and divided them into small spaces to accommodate our small business model. We have only two vacant spaces over 40,000 square feet in our portfolio. One is in Houston and one is in Phoenix. We are in the process of breaking the Houston space into four smaller spaces, with one of the smaller spaces under a letter of intent with a new tenant. For the second larger space in Phoenix, we are analyzing a number of carve-up alternatives to break it into smaller spaces, along with leasing options with several interested tenants including a medical group.

Our re-development of Windsor Plaza in San Antonio nears completion with several new tenants and is now fully leased. We divided and leased a former Circuit City space along with other vacancy into several smaller spaces, and we are adding a 4,000 square foot outparcel for the Mattress Firm. We have now moved the center from being less than 60% occupied just after Circuit City filed bankruptcy to being fully leased, and it will now begin to generate incremental cash flow. We expect the project re-development to be completed in 2012. Our value-add re-development projects in Houston include our Asian Center, Lion Square, and a Hispanic Center, South Richey. These are moving forward with new tenants under lease, and we expect construction to be complete by year-end.

Let me now review our acquisition activities for the fourth quarter . During the quarter we closed on approximately $47 million in new acquisitions in the Phoenix Dallas markets. With most of the proceeds spent in the last week of 2011, with the financial benefit beginning to be realized in 2012. In Phoenix we acquired Clinical Scottsdale a 113,000 square foot 100% leased community, Class A community center in north Scottsdale for $29 million.

The Pinnacle of Scottsdale is uniquely located on the northeast corner of a major intersection of Scottsdale Road and Pinnacle Peak Road, with a traffic count of over 55,000 cars per day. While this is a larger purchase than some of our more traditional communities centers, we purchased this due to the great location at a discount to replacement cost, and the long-term value we believe this asset will contribute. The tenant mix at The Pinnacle of Scottsdale, which is 100% leased includes Safeway, Ace Hardware, Starsbucks and Subway, plus a wide variety of smaller local convenience service tenants that are local owners, such a cigar store, a floral shop, and four restaurants.

We also acquired a 4.45 acre parcel of development land adjacent to The Pinnacle of Scottsdale from an unrelated party. The parcel has approximately 400 linear feet of frontage on the prominent Scottsdale Road. That land parcel is intended for re-development of approximately 55,000 square feet of new retail executive office space, and possibly a fitness club, for which Whitestone began pre-leasing efforts in the fourth quarter of 2012. This property also includes an existing two-story garage, and is adjacent and walking distance to our Pinnacle of Scottsdale. Combined they make an excellent acquisition for the trust. This complex acquisition was accomplished through the purchase of a $3.3 million note on the land from the lender for $1 million in cash at a 70% discount, and a simultaneous acceptance of Deed in Lieu of Foreclosure from the owner of the land.

In the Dallas market, we acquired the Shops of Starwood at $15.7 millionin cash. As well as an adjacent 2.73 acre parcel of undeveloped land for $1,900,000 in a separate transaction. The Shops at Starwood, a 98% leased Class A center, with 55,000 square feet of gross leasable area on 1.5 acres of land in the affluent Frisco, Texas was purchased as with our other acquisitions below replacement costs. Frisco has been ranked among the fastest growing city in the USA, and neighborhoods within one-half mile of the Shops of Starwood are among the most affluent in North Dallas exclusive neighborhoods. The value-add potential to another 36,000 square feet of retail, and executive office space in the adjacent development provides a significant upside to this acquisition.

To summarize our acquisition activity in 2011 we took advantage of the opportunity to buy high-quality value-add foreclosed and distressed real estate at discounted prices, and we acquired seven properties at a total value of approximately $80 million. Overall we ended the year with 87% occupancy, and our operating portfolio the quality and quantity of our tenants increased in 2011 versus 2010, and our total enterprise value from our core centers improved along with other key financial metrics. The new acquisitions we have added to our portfolio in our re-development of some of our core community center properties, meet A quality standards investment-grade. We provide an additional hedge against inflation as we continue operating these properties.

Our typical service tenants are engrained in their community, the local communities and we are aligned with their success, as their businesses grow within the surrounding neighborhood, making them less likely to relocate. As our tenants business succeed we expect increased demand for spaces which should result in rental rate growth over time. Our focus on the development and training of our people is key to the execution of our strategy, and allows us to meet our growing needs and effectively service our tenants.

With that I would like to turn checks Dave Holeman, our Chief Financial Officer.

Thank you, Jim. I will review the highlights of our for the quarter and full year operating and financial results. I encourage all of you to read the Company's Form 10-K and fourth quarter supplemental financial package, which have been filed, or will be filed shortly with the SEC, and made available on our website. They contain much greater detail of our business than I will be able to share with you today. First I will review the financial results for the quarter. Funds from Operations core, or FFO core was $3.1 million for the fourth quarter of 2011, a 55% increase from the fourth quarter of 2010, and a 35% increase from the third quarter of 2011. On a per share basis FFO core was $0.25 per diluted share in the fourth quarter of 2011. FFO core for the quarter excludes acquisition costs of $339,000, or $0.03 per share.

Property net operating income increased 31% to $6.4 million as compared to $4.9 million in the prior year. As Jim mentioned, included in property NOI is a partial quarter from our newest acquisitions in Phoenix and Dallas. The increase of $1.5 million in quarterly NOI is attributable to new acquisitions of $800,000, and same store growth of $700,000. Net income attributable to Whitestone REIT was $556,000, or $0.05 per diluted share for the quarter.

Now let me review the financial results for the full 2011 year. FFO core for 2011 was $9.6 million, a 22% increase from 2010. On a per share basis FFO core was $0.89 per diluted share in 2011. FFO core for 2011 excludes acquisition costs of $666,000, or 6% per diluted share, and legal costs of $250,000, or $0.02 per diluted share.

Property NOI increased 12% for the year to $21.6 million. Included in 2011 property NOI is a partial year for all of our 2011 acquisitions. The increase of $2.3 million in annual NOIs is attributable to new acquisitions of $1.4 million, and same store growth of 5%, or $900,000. Interest expense for 2011 was relatively flat year-over-year, reflecting an overall decrease in our effective interest rate to 5.3% from 5.5% in in 2010.

General and Administrative expenses from $6.6 million for 2011, an increase of approximately $1.6 million from the prior year. This increase is primarily attributable to acquisition-related expenses, increased staffing in our Phoenix region to lease and manage our new properties, and public company related professional fees. Net income attributable to Whitestone REIT was $1.1 million, or $0.12 per diluted common share for the year.

We remain very focused on our cost saving efforts. As we continue to expand our portfolio, we expect to experience leverage on our G&A costs across a larger asset base, and we expect our G&A cost as a percent of revenues to decrease over time. 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. Let me now turn to our operating portfolio occupancy rate which was 87% at year end, which is an increase of 1% from the prior quarter, and also 1% from the prior year.

I will also remind you that our reported operating portfolio occupancy represents physical occupancy and does not include tenants under lease which have not yet moved into our properties. During 2011 the Company signed 312 leases totaling 767,000 square feet in new and renewal leases. These leases were primarily with tenants that require less than 3,000 square feet in multi-cultural neighborhoods. Our approach to leasing is quite unique and effective.

Typically we seek shorter leases on our smaller spaces which gives us greater tenant diversification and also 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 also able to take advantage of their growth, and adjust rental rates more frequently. Our marketing and leasing teams continue to have robust pipelines of potential tenants, and we remain confident in our ability to increase occupancy in our Arizona and Texas markets.

Now I will turn to our financial position. Yesterday we announced entry into a new three year $125 million unsecured revolving credit facility. The new facility will replace the existing $20 million facility. The Company plans to use the new facility for general corporate purposes, but primarily for acquisitions and re-development of existing properties in our portfolio. The new facility will provide Whitestone with increased financial flexibility to execute and close quickly on new acquisitions. The pricing on our new facility will allow us to increase our overall returns, by judiciously adding debt to our capital structure.

We are extremely pleased with BMO Capital's leadership role and the impressive group of banks including US Bank, Wells Fargo, Capital One, and Mid First Bank, in our new and expanded credit facility. The strength of our bank group, the size and pricing of this credit facility, enhances Whitestone's financial positions and will allow us to execute on our strategy, closing quickly on accretive acquisitions, and completing select re-development opportunities. As we continue to focus on increasing revenue, net operating income, FFO, and FFO per share, we expect shareholder value to be enhanced as we continue to grow.

Our overall financial position continues to strengthen with real estate assets with a low cost basis well below replacement costs, with conservative debt leverage with 19 unencumbered properties, 71% fixed-rate debt, and manageable debt maturities, and the financial flexibility from our new $125 million unsecured credit facility. With that let me pass the call back to Jim.

Thank you, Dave. In summary I would like to highlight a few items from our call. Our Community Centered property business model has resilience because of our tenants, they provide the necessary services to 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, and we believe that our strong leasing we achieved in 2011 is driving occupancy, which in turn increases cash flow in 2012 and beyond.

In 2012 we will continue to build on our platform of community center property business model, and we expect our internal growth opportunity to remain robust, given our head room and occupancy, our re-development opportunities, and our shorter-term leases. Our substantial acquisition pipeline offers opportunities for affordable external growth, and our balance sheet continues to strengthen, providing us with the flexibility to grow, and the opportunity to further enhance our returns through lowering our overall cost of capital. 2011 was another year of solid growth for Whitestone. We will continue to make decisions and execute on our strategy to the benefit of our shareholders.

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

Thank you. (Operator Instructions). And first we will go to Paul Adornato with BMO Capital Markets.

Thanks. Goods afternoon. Jim, about a month ago you announced some new leasing professionals had been added to the team. Was wondering first, if you could comment did you expect to add any additional folks, and second, what is the current outlook for leasing in your key markets of Phoenix and Texas?

Thanks, Paul. We did hire two folks. A director of leasing in Houston, and a director of leasing in our Phoenix operation as well. Both are what we call mid level managers and directors, and we are looking at instituting a program to really address more precisely some of the leasing that we have been doing, and enhance it some more, we expect to maybe add two leasing people this year, and we think that would be adequate and we look at it in a way that if we continue our acquisition pace throughout 2012, then we will just look at when it is the right time to add more leasing people.

We try to focus on how much income they like to make, in a compensation package that includes a base salary, commissions, and then also some stock participation. So we have programs that are in built in for really strong leasing people that like to eat what they kill, to really do well with our Company. So that is our plans for this year.

Okay. Great. And switching to the small tenants focus, I appreciate the information in the supplemental, but was wondering if we do drill down and just look at the smaller tenants?It looked like overall the new leases on a straight-line basis were up, but on a cash basis were slightly down and so I was wondering if we could look at those same statistics perhaps on a size of lease basis?

Sure. Dave you want to.

Sure. Thanks, Paul. Yes. I think you pointed out in the supplemental data there is information regarding renewals and comparable leases from a total comparable lease standpoint, year-over-year we saw a 1% increase in our straight-line basis revenue per square foot. On a cash basis which compared kind of the ending rental rate with the beginning rental rate, we saw about an 8% decrease, but we are being able to gets the rates back. We are just having to give a little bit of concessions up front. I apologize, Paul. I don't have that broken down on a small space versus big space basis. Maybe we can work to get that information, but right now we just have that on a total Company basis.

Okay. And what is the outlook, what is the just the gut feel in terms of the health of the smaller tenants?

One of the things if you look at our tenant base no one tenants makes up more than 1.5% our revenues, so we really kind of think of all of our tenant as smaller tenants, but I think the overall health of the tenants is good. We have seen a renewal rate over the last three years that has been very constant at about 80%, and then we have seen some fairly favorable bad debt trends as well.

Paul, I would like to add to that. From a market perspective in the Phoenix and the Texas markets, we continue to see a fairly good volume of prospective tenants, and what we have we find is that they take a little bit longer, and by that I mean maybe an extra week or so to get them to an LOI. But once they are in at an LOI, they usually end up signing a lease.

We probably have about 2% of leases that are executed and not booked as occupancy yet, because the tenants haven't moved in yet. So we like to have at least 2% to 3% backlog where we are planning on tenants moving that will increase the occupancy. What we can't count on is usually the attrition. We have had as much as 5% or 6% backlog, but sometimes you get some attrition. Once the end of the year clears out, we usually pick up that backlog.

Okay. Great. Thanks.

(Operator Instructions). We will move on to Carol Kemple with Hilliard Lyons.

Good afternoon.

Hey Carol.

Hey. What led to the increase in other revenue in the quarter?

Primarily was a result of reimbursement of expenses for the year, so we had a little larger amount in the quarter that was related to our tenants paying their share of our common area maintenance taxes and insurance. It was all related to 2011, but a little bit higher amount in the quarter but primarily related to that. but that is the biggest item I can think of.

Is the run rate for the fourth quarter this year, do you think that is a good run rate for the fourth quarter going forward, because it is quite a bit higher than we saw in the third quarter?

Yes. The fourth quarter had a little bit higher in it that it will be the first quarter, like I said it is related to 2011 but a little bit of the billing for the year was heavily weighted in the fourth quarter, so the run rate for the first quarter will be a little lower on the tenant reimbursement line.

Okay. And then I think on the last call we talked about the Chicago market, and I know you all productivity really excited about it from a business perspective, or maybe legal with some of the tougher laws and stuff of operating a business up there. What has made these two properties you are interested in up there so attractive?

Hi Carol. This is Jim. One property is not far from the property that we own, and we have known the seller for 20 years. He now has approached us about buying the property from him. He also is in a position possibly to consider taking some operating partnership units, because he has a tax recapture problem. We could acquire something like that and manage it at a fairly low cost with the existing resources we have in the Chicago market.

The second property is what we would call an irreplaceable location and asset, in a very high income location, and it is again, it is an individual who owned the property for 30 years, and he's now, I think he is either in his eighties or his late seventies, and he is considering operating partnership units or a fraction of the price. It is just the quality of the properties that you can compete in that market, if you have certain irreplaceable locations, and if they do fit the Community Centers like that, so we are at least looking at them, and I wouldn't see anything happening on those deals in the first or second quarter. It is just that far away.

So we think it's important to telephone to look at deals like that, even though we think the taxes are higher, we think that Illinois has some adjusting to do in its overall political situation, but we gear the Company and the way we operate it overall, as if there will not be any political changes in office in November, and that is our thinking. Not this that will happen but that is how we tend to operate the business, which is a little more conservative than thinking that it might change.

Okay. And at this point are you also all still comfortable with the current dividend level?

Yes. Our Board quarterly looks at our dividend level we are very comfortable with the growth we have made in our operating results, and while we are not at this point quite covering our dividend, we are very comfortable in the progress we have made and very comfortable in that level.

Okay. Thank you.

And I won't say this in addressing the dividend, but there are two properties that we closed in December, which is the last two days of December, do throw off a considerable amount of cash, and none of that was recorded in the fourth quarter other than about two days of cash.

Okay. Thanks.

I think that is very supportive.

(Operator Instructions).

Thank you, operator. I think that concludes our call.

Yes. Thank you very much. I would really like to thank everybody who took the time to participate in our call, and particularly thank you for the support and confidence that you give us. We are very comfortable with our business model and we are really very optimistic about 2012.

We have worked hard to strengthen the Company's balance sheet, we have plenty of cash available, and we have liquidity, we have got a new larger line of unsecured credit, which we will judiciously use to acquire property, and we are very focused on driving additional growth. If any of you would like to call us afterwards, or call me, please feel free to do so. And with that, Operator I will conclude our call, and thank you all once again.

This does conclude today's conference, we do thank you all for joining us.