Whitestone REIT (WSR) 2012 Q1 法說會逐字稿

Good day. Welcome to the Whitestone REIT first quarter 2012 earnings conference call. As a reminder, today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Anne Gregory, Vice President of Marketing and Investor Relations for Whitestone REIT. Please go ahead.

Thank you, Operator. Thank you.

Good afternoon, everyone. Before we begin our prepared remarks, I'd just like to 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 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, May 9th, 2012.

The Company's earnings press release, first quarter supplemental operating and financial data package, and Form 10-Q have been filed or will be filed with the SEC by tomorrow morning. The filings 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.

Great. Thank you. Thank you, Anne. And 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 a 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, and manage, and redevelop Community Center properties, which we define as physically located properties in established or developing culturally diverse neighborhoods in our high-growth target markets. We focus primarily on service providing tenants rather than traditional goods oriented retailers. This tactic drives cross traffic into our centers.

Our tenants provide a strong base of revenues, which minimizes Whitestone's down side as no single tenant can impact our revenues by more than 1.5%. Our tenants tend to occupy smaller spaces, typically less than 3,000 square feet, and meet the needs of individuals and families within a five-mile radius of our properties.

We continue to grow our customer base. A year ago we had 788 tenants, today we have 941 tenants, an increase of 19%, which does not take into account some attrition. Our average small space tenant tends to sign shorter term leases, which we prefer because it gives us the ability to go back to the market and raise rental rates, with an average of three-year lease term for our small space tenants signed in the first quarter.

We have grown our occupancy through increases in our tenant base and new tenants, the expansion of existing tenants, and acquisitions of new Community Centers. Small space tenants account for 72% of our total tenants and provide a 68% premium per square foot rental rate when compared to our larger space tenants.

Our small space tenants also provide an investment premium on a square foot rental basis, and our 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 a square foot amount, which places the rent into relative perspective to the tenants' businesses and provides a premium to us.

And entrepreneurs by nature, our tenants tend to incubate their businesses from a small space while they are growing their businesses. When they decide to expand we are positioned to provide the expansion space opportunity for them.

Our tenants represent a diverse range of industries and each of our centers tend to fall within four categories -- retail services, medical, education, casual dining and convenience. A typical nearby resident in 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, if they didn't forget, pick-up their child, all in one visit.

Overall, we ended the quarter with 87% occupancy in our operating portfolio, a 3% increase over a year ago. The quality and quantity of our tenants continue to increase, and our total value from our centers improved, along with the other key financial metrics. Revenues grew by 29% as compared to the prior year, to approximately $10 million. Our properties' net operating income or known as NOI for the first quarter was also up year-over-year by 33%, and funds from operations, often referred to as FFO, increased by 48%, in part to the judicious expense management.

We currently own 45 properties, of which 43 Community Centers are built and two are land parcels, which we inventoried for future development. Our properties are located in Houston, Dallas, San Antonio, Phoenix, and Chicago.

In addition to our overall operations, I would like to highlight our value-add redevelopment acquisition activity. In order to maximize value of development and redevelopment opportunities we added a Director of Real Estate Development to the Team in the first quarter. Our Team is focused on value-added transformation and development of adjacent land and out parcel projects within our current portfolio.

We will develop and construct new space for lease on our two expansion parcels that we purchased in late December of 2011. These projects are expected to begin mid to late 2013 and include a four-and-a-half acre parcel, a Phase II, for Pinnacle of Scottsdale, and North Scottsdale, and a 2.7 acre parcel adjacent to the Shops of Starwood in Frisco, Texas.

Our focus remains on small space tenants. We have developed and redeveloped centers we owned with larger vacant or partially vacant spaces and divided them into smaller spaces to accommodate our small space business model. We have only two vacant spaces that are over 40,000 square feet in our portfolio. One is in Houston and another is in Phoenix. We are in the process of breaking the Houston property space into four smaller spaces, with one of those spaces under letter of intent. The second larger space is in Phoenix and is currently under a letter of intent with a national retailer to occupy the entire space.

Our redevelopment plan for Windsor Park, it's a 200,000 square foot Community Center, which is essentially complete. The property is located in San Antonio, and the overall redevelopment is near to completion with several new tenants and is fully leased and will be fully occupied by the end of summer.

We divided and leased a former Circuit City space along with the other vacancy into several smaller spaces, and we are adding a 4,000 square foot out parcel for a mattress firm. We have now moved the current center from being less than 60% occupied to being fully leased and expect to begin to generate incremental cash flow. We expect the property redevelopment to be overall totally completed by the end of the year.

Other value-add redevelopment projects we have are in Houston and include our Asian Center, Lion Square, and a Hispanic Center, [South Ritchie]. These redevelopments are moving forward with new tenants under lease and we expect construction to be completed by yearend.

Let me now discuss our dual acquisition focus. We pursue a balanced mix of value-add Community Centers that are significantly discounted to replacement cost, with greater lease-up opportunity and stabilize centers with proportionately higher in-place cash flow. All of our acquisition targets are located in large, growing cities, with culturally diverse and strong demographics.

In Phoenix we continue to see value-add opportunities, showing some modest signs in recovery. In our Texas markets, where we own 80% of our properties, we continue to see the State lead the nation in job population growth. In Chicago, a market in which we have significant past experience, we own only one property that is performing exceptionally well and we continue to evaluate market trends and opportunities that could fit our strategy for Chicago.

Based on our financial results, our strategy has yielded year-over-year growth of occupancy, revenue, and funds from operation. During the first quarter we remained very active in pursuing deals from our extensive pipeline of over 500 million in primary and off market properties.

In Phoenix, our focus growth market, we continued to see opportunities to acquire quality properties in one-off deals from sellers who are experiencing financial stress, as well as through the service relationships we have cultivated in the market over the last few years that lead us to opportunities. We remain committed to acquiring properties at the right price that are accretive to Whitestone's shareholders on a value per share basis. We also are committed to strict underwriting and due diligence standards in our acquisition process. We will not do a deal simply to do a deal.

In the first quarter, while we did not close any acquisitions, we continued to work through each acquisition opportunity, seeking to close on the best one for long-term interest of our shareholders. We currently are in discussions with several potential property sellers and expect the phase of our acquisition activity to accelerate over the next few months. Our focus on the development and training of our people remains a priority 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 things over to Dave Holeman, our Chief Financial Officer. Dave?

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

First of all, I will review the financial results for the quarter. Funds from operations, or FFO, for the quarter was $3.1 million, a 48% increase from the first quarter of 2011, and an 11% increase from the fourth quarter of 2011. On a per share basis FFO was $0.25 per diluted share in the first quarter of 2012.

Net income attributable to Whitestone REIT was $793,000 or $0.07 per diluted share as compared to $185,000 or $0.03 per diluted share in the first quarter of 2011.

Property revenues for the quarter were $10.4 million, an increase of $2.3 million or 28% from the first quarter of 2011. Property NOI also increased 31% to $6.4 million as compared to $4.9 million in the prior year. The primary reason for these increases in property revenues and NOI was the addition of eight new Community Centers in 2011.

Interest expense net of interest income was $1.6 million as compared to $1.3 million in the prior year. This increase was a result of an increase in our average property debt of $29 million, offset by a decrease in our overall effective interest rate from 5.5% in 2011 to 5.2% in the first quarter of 2012.

General and administrative expenses were $1.6 million for the first quarter of 2012 or 15% of revenue, a decrease from 18% of revenue in the first quarter of 2011. We remain very focused in our cost saving efforts, as we continue to expand our portfolio we expect to experience leverage on our G&A cost across a larger asset base and we expect our G&A cost as a percent of revenues to continue 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.

Our occupancy rate represents physical occupancy and does not include tenants under lease which have not yet moved into our properties. We produced growth of 3% from the first quarter of 2011 to 87%, which was flat with our yearend 2011 occupancy. Our overall occupancy rate, including all properties, was 85%, also an increase of 3% from the prior year and 1% from yearend 2011.

During the first quarter the Company signed 90 new and renewal leases totaling 159,000 square feet. Our average lease was approximately 1,800 square feet, with a term of three years. Our approach to leasing remains quite unique and effective. As Jim mentioned, we typically seek shorter leases on smaller spaces, which gives us greater tenant diversification and provides a premium rental rate per square foot.

Our typical tenant tends to become ingrained 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, usually to our benefit. Our Marketing and Leasing Teams continue to have robust pipelines of potential tenants and we remain confident in our ability to increase occupancies in all of our markets.

Now I will turn to our financial position. Our overall financial flexibility continued to strengthen in the first quarter with the addition of our new three-year $125 million unsecured revolving credit facility. The new facility replaced an existing $20 million facility and provides Whitestone with increased stability to execute on our strategy, close quickly on accretive acquisitions, and complete select redevelopment opportunities. We are very pleased with our group of banks, the impressive group of banks in our new credit facility, the strength of our bank group, the size and pricing of this credit facility, all enhance Whitestone's financial position and will allow us to continue to increase revenue, NOI, FFO and FFO per share.

We continue to be very well positioned with a solid base of Community Centers, with a low-cost basis, well below replacement cost. We have a conservative debt structure with manageable debt maturities and a leverage of debt to undepreciated book value of 43%. We have 19 properties that are unencumbered from debt, that have an undepreciated book value of approximately $115 million, and we have availability of approximately $107 million from our unsecured revolving credit facility.

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

Great. 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 for the local community. We continue to see significant growth opportunity for Whitestone through the acquisition of high quality accretive properties. We remain focused on some of the highest growth markets in the country and the strong leasing we achieved in 2011 and the first quarter of 2012 is driving occupancy, which in turn will increase cash flow in 2012 and beyond.

We will continue to build on our platform of this concept, the Community Center property business model. Our total growth opportunity remains robust, given our head room in occupancy, our redevelopment opportunities, and our shorter term leases.

Our substantial acquisition pipeline offers opportunities for additional external growth, and our balance sheet continues to strengthen, providing us with the financial flexibility to grow and the opportunity to further enhance our returns through lowering our overall cost of capital. We will continue to make decisions and execute on our strategy to benefit our shareholders.

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

(Operator Instructions)

And we'll take our first question from Mitch Germain with JMP Securities.

Good afternoon.

Hi, Mitch, how are you doing?

Hi, Mitch.

Great. Jim, just some thoughts on acquisitions here. I mean get that they're a bit lumpy, did you guys lose out on several during the quarter? Did the pipeline slow down a bit? Is there not as much product out there? Just if you can provide some color I'd really appreciate it.

Just the opposite, Mitch. That's a good question. The pipeline is still as significant if not more than it has been. We exercise just a lot of discipline. I mean there are some transactions that we had under LOI in the first quarter that in some cases because our -- unfortunately, our reputation is getting to be known a little more throughout the marketplace and we find some competition, and we won't chase deals.

And the competition, in effect, is such that we find there is really two buyers that are coming into some of the deals we're seeing. One is Canadian firms, which is money out of Calgary, and the second is Canadian firms with money out of Vancouver. We think it's Asian money. So we're seeing them coming in and bidding up prices higher than we think would be the right kinds of deals for our shareholders to own.

With that said, we've probably had more LOIs out in the first quarter than we did the last two quarters of last year, but so we look at a lot of deals and we still feel very confident of what we will accomplish this year.

I can add just one thing to that, Mitch, and this is Dave. And I think you commented on it, though, our deals, acquisitions, the timing of closing acquisitions many times is not fully in our control and there is some lumpiness. If you look back to the last year we closed on a little under $100 million and that wasn't all evenly spread throughout the year. I think we helped close a significant portion of that in the fourth quarter, so we still feel very good about the activity level. We feel very good, it's just been a little lumpy right now.

And then the impact on earnings is a way to look at it, $0.25 a good run rate going forward, and then any acquisitions would be accretive to that? How -- Dave, give us some thoughts on -- I know without providing guidance maybe just some thoughts on directionally where you think the numbers are headed?

Sure. As you mentioned, as a Company we have not given guidance, but I think we've become fairly predictable. We were $0.25 a share in FFO this quarter, which is up slightly from the last quarter, really mainly from acquisitions. The infrastructure that's in place is, will not change significantly so the cost related to running this business is fairly flat.

So to your point, as we add acquisitions those acquisitions will contribute and drop directly to FFO. We did add a credit facility in the first quarter, which had -- which is a great rate and will give us a great ability to add some leverage and drive profitability, but there is a little cost to that facility that will have a full quarter worth of in the second quarter and the rest of the year.

With that said, we expect to increase the number of acquisitions we close on throughout the year, and those will contribute to our operating results, primarily in the second half of the year.

Mitch, let me -- this is Jim, Mitch -- let me just give you a little idea of a range of what we're seeing in terms of the deals in the pipeline and also say that deals when we bid on them and we -- someone else wins the bid, we've found them two of them now have come back to us, which we're looking at again, because the $3 million or $4 million price higher than we offered when they went through due diligence it got kicked back.

What we're seeing is property or what we're looking at because we're -- these are just the ones we end up narrowing it down to, we're looking at properties that have anywhere from 60% occupancy to about 90% occupancy.

The cash on cash going in, where we're making offers, are anywhere from about 6% cash on cash to about 9% cash on cash. So if a property is 60% leased the in-place cash might be equivalent to a 6% purchase price with the up side of being leased. And I'm just saying just in general this is what we're seeing.

Now you can offset that by we're looking at our line of credit which we're using to draw down to buy these, which was the plan, and our cost of funds in the line of credit is about 3%. So the deals that we look at we try to consider, we talked earlier in my remarks about the balance of what we're acquiring, we like to have that spread going in. And you can do the math on it, you know, what we expect to purchase sometime in the next -- I won't give you a date or a time because these things are lumpy, as Dave said, but we expect to at least do what we did last year in terms of new acquisitions.

And so if we're buying those out of our line of credit I think you can get some idea of what it looks like to us on the inside. That's really how we look at it. I mean we're pretty easy to predict. We're kind of programming it out. It's just a matter of the right properties at the right time, and what we do like is we put an infrastructure in place, which we have in place now. So we not only buy them, we acquire them, but we're one of the few operators that are in the market buying as opposed to financial buyers.

Great. And then I saw new lease volumes decline in the quarter, is that a trend in terms of potential customers not looking to start businesses in the quarter? I'm just trying to see if more if that is just a function of mix and you're not seeing any real change in the composition of customers that are -- that you're discussing leases with today?

Some of that is seasonal, some of it is the nature of the political environment that we're going through, as well. There's some hesitation, which is surprising, and I don't like to interject politics but we're seeing that come into play because there's a lot of uncertainty in the marketplace right now as to who is going to be leading this country in November. And I think we can all make our own guesses and probably half of us would be right and half of us would be wrong. But that actually has more of an impact on what's going on that we've found this year than it had last year.

Dave, you want to add to that?

Yes, I was just going to -- maybe just to make sure we're clear on some things. So during the quarter we closed on -- we signed 90 new and renewal leases, that volume is actually higher than any of the previous three quarters. So I think we saw a good activity on the leasing side, leased about 200,000 square feet for the quarter, which is similar to prior quarters. We did a little more smaller tenants, which is the core of our strategy.

So I think we've -- I would not say that our leasing activity has decreased, I would say that it's continued to perform well. We've had a 3% increase in occupancy year-over-year so I think we feel like we're seeing good activity on the leasing side.

Great. And then my last question, two of your top 10 tenants are scheduled to roll this year -- Rock Solid and Eligibility -- any update on that, please?

I'll just remind you even though they are on our top tenant list they are both less than 1.5% of revenue. Our top 15 tenants make-up about 10% to 12% of revenue. So I don't have any update on those tenants, but obviously they're a small percent of the revenue and I don't have any reason to be concerned about those tenants.

No. usually what we do, Mitch, is we start working leases that are going to expire somewhere when they get under 12 months, and our leasing folks start calling on them. And very often we never know whether a tenant is going to stay or go up until about 60 days before their lease is due. And that's just fairly normal for what we find.

And so what we usually do is if we don't have some kind of indication anywhere from six to four months before we'll start talking to other tenants about the space in case it doesn't remain with the tenant. So you're always going to lose some tenants like that, but we don't have any solid knowledge to give you right now on either one of those two.

Thank you.

Okay. Thank you. Good questions.

And we'll now go to Carol Kemple with Hilliard Lyons.

Good afternoon.

Hi, Carol, how are you?

Good, how are you all?

Fine, thanks.

On page 23 of the supplement you have three properties that you have in your development portfolio, have you had any updates on the occupancy since the end of the first quarter, any improvements there?

Yes, good question. So I'll just talk to those three properties and let Jim, as well. So there are three properties which we currently classify as non-operating because they were new acquisitions and there was a stabilization period.

Desert Canyon, the first property we acquired, had about a 60% occupancy at the time we acquired it. Through the first quarter we've leased that up 17 points to 77%, and I think I saw an activity listing that has that getting into the low 80s, so we're doing well at Desert Canyon and continue to have success specifically with some small space, office tenants at that center.

Gilbert Tuscany was 16% when we acquired that property in 2011. Through the first quarter it was up to 28%, and I believe I've seen leases at about a little over 40% that are leases signed but have not yet moved into the property. So we are moving in the right direction there.

And then the last one, Marketplace at Central, is the property in Phoenix that has the large box vacancy, and I think as Jim mentioned in his comments we are under a letter of intent with a national retailer for that 42,000 square foot box in that center.

And, Carol, I would just add to that with regard to the LOI that we have on the large box in Phoenix, there is a national tenant in there which will remain unnamed that has an operating covenant, and when we purchased this property the box was empty. And so they had dropped down to their percentage rent of revenue status in their lease.

If we are successful in converting this LOI to a contract, which I'm not -- I don't see any reason why we shouldn't be, but if we are successful then that will not only provide us revenues on the vacancy, which is 42,000 square feet, but we'll also list the rents back to what the stated rent was in the lease on the national tenant. So the new tenant we're talking to qualifies to do both.

Okay, and then I know I think it was on the last conference call you all talked about an opportunity in Chicago as far as acquisitions were concerned, are you all still looking at that property?

We are and it's near our other property. One of the things that we haven't moved forward too quickly on it, it's about the same size as one we have. It'd be very easy to manage with the people and infrastructure we have in place, but it's more of a redevelopment, early redevelopment as opposed to just leasing.

Our focus right now is on more of the cash flow properties, and as we complete one or two more deals with cash flow on them we'll then go back to looking at some of the properties that have less occupancy but we can actually develop them in the pipeline. We just think there's an opportunity, but the discussions are going on, we haven't entered into an LOI yet, and it still looks promising.

Okay, and at this point are you still comfortable where the dividend is since acquisitions are getting onboard a little slower than we might have expected?

We're both happy, yes we are.

Yes, I think as we've talked we set the dividend level, we said that we would grow into that level, which we believe we have, and we made significant progress this quarter with FFO growth over the prior quarter. So we are very confident that we will, in the progress we've made toward dividend coverage and we're confident in that dividend level.

Okay, great. Thank you.

Thank you, Carol.

And we'll now go to [Josh Pattington] with BMO Capital Markets.

Hi, good afternoon.

Hey, Josh, how are you?

Good. On the acquisitions, with the current platform and business model in place can you give us a sense of how much you can do, both number of properties and a dollar range?

Unlimited.

Limited?

Unlimited.

I'll add a little to that and then we'll go back to Jim. Hey, Josh, you know, we have not given guidance and we haven't even given guidance on level of acquisitions. That said, you know, we did $100 million of acquisitions last year. Our pipeline today is more robust and active than it was a year ago. Many of the properties are continuing to be in the pipeline and work through the financial stress. So we're more confident today than we were six months ago in our ability to do acquisitions. We have infrastructure in place and we remain very confident in the ability to do a significant amount of acquisitions, primarily in the second half of this year.

Okay, on the -- on some of the occupancy gains, it looked to me like they were in the newly acquired properties, if I'm reading it right? Is the same store portfolio approaching stabilization now or do you expect more up side there?

I think there is up side in the same store portfolio. You're correct in that some of our occupancy increase was from acquisitions. Our same store properties I believe also increased about 1% year-over-year, so we did have occupancy increases in the same stores. There is head room there, with an overall occupancy rate of 85%, we feel like we've got some significant value creation that can come out of leasing the properties we have in the portfolio. And many of the properties that we acquired last year in Phoenix are lease-up value-add properties that we've done well on, but still there is significant room to increase leasing there.

Okay, and then just a quick question on the $131,000 legal settlement, I see back out of core FFO, what was that?

You bet. So back in 2011 we had had some legal costs related to a former tenant, and so we had classified those legal expenses as taking those out of FFO because they were indicative of our normal operating results. So we were able to reach a successful legal settlement during the quarter for recoupment of those legal expenses. So what's shown is an adjustment to FFO into FFO-core was the settlement that the other side, you know, the expense for those was shown in '11.

And, Josh, if I can just add a little bit to that, like we do not consider us a Company that enjoys or relishes in any way litigation, particularly with some tenants. This happened to be a large tenant that moved out and when they moved out they decided to auction off the equipment and I'm saying a large tenant, like 40,000 feet, auction off the equipment. And for some reason they and the auctioneer thought the attached copper plumbing and all of the lines and everything was part of what they owned. And so that's why, the only way we could get their attention was to tell them they really didn't own it and they had to pay us back, and that's what that was all about.

Okay, all right, very good. And then, lastly, more of a general question. We've recently seen a lot of positive data on Phoenix housing market, are you able to use this sort of as a leasing punch in your discussions with retailers there, I'm just curious to know?

Well, what happened there, what you're seeing is the housing is really some hedge funds and I think if you saw in today's Wall Street Journal Reese came in with a joint venture, they formed a REIT to buy housing out of foreclosure. So the activity, what you're really seeing is there are financial players coming in to buy up housing and lease it. On an ongoing basis we're seeing sales running at about a 10,000 or 11,000 units a month, which is good for Phoenix. So the inventory is really starting to be consumed, but not all the inventory is going into people with ownership.

What that's doing is it's creating an opening for some of the commercial properties that will flow through this whole process of banks foreclosing on them now because that's now, you know, that now becomes more activity. But where we have an advantage is when we buy properties we have the infrastructure in place that can, and we also have the capital in place to provide the tenant improvements and bring the tenant into the space. So the housing sales aren't necessarily driving more activity for us, it's really people becoming aware of the properties that we own and that we are willing to spend some money on tenant improvements.

We also -- we're acquiring our properties, we're trying to acquire them in patterns, geographic patterns, so that in some ways instead of owning a concentration of one property at one location we're trying to own four or five within a fairly large rectangular area so that if a tenant wants to leave we really have them captured in the marketplace and if their business really thrives in that marketplace. So we have a certain pattern to how we're acquiring properties, and if we look at a map five years out from now we'd like to see that pattern evolve in about seven or eight different concentric markets around the Phoenix area.

Okay, so if I'm understanding you right a lot of the home buying is investors and that might not correlate directly to consumer sales?

Yes, that's what we're seeing right now.

Okay, thanks.

And we'll now go to [Jeff Langbaum] with [Ladenburg Thalman].

Hey, good evening, guys.

Hi, Jeff.

How are you?

Pretty good.

So on the acquisition side, I don't want to get too deep into this since we've already talked about it plenty, but you mentioned your preference right now for more stabilized deals rather than the value-add type deals. Is that just because of kind of from a strategic operating perspective you feel like it fits better with the portfolio or does that have something to do with pricing and with kind of where the competition that's coming into the market is looking for properties, or how would you characterize that?

It really gets to the deliverability. And it's sort of like we're watching these mini cycles where if the lenders decide to start foreclosing on a fairly larger property that's stable it's because the owner has some properties, other properties that are in trouble and they need the cash flow. And if that kind of deal comes to us that's what we start focusing on. If a deal that comes to us or it might not actually come to us, we really search these out, if a deal that we search out has less occupancy but it's a bank that wants to close on a deal we find that that attracts our attention there, as well.

Just part of the cycle that we've experienced, not just in this market but any market is that the -- if you start -- if you're focusing on -- there's foreclosed properties, there's distressed properties, there's the early stage sales where the developer or the owner is trying to get out of it before he gets crunched, you'll see more foreclosed properties come up towards the third month in the quarter, you'll see more note sales come up at the end of the second month in the quarter.

And we see tons of note sales that we could buy and foreclose on, but we're really restricted under our line of credit to use our line of credit to buy notes and then foreclose. So we sort of -- and there's some different kinds of bargains there, and also there's a litigation element that goes with buying notes and foreclosing, which we just chose to stay away from.

So it's just different in the different cycles. I mean it depends on which deals we're looking at. We also have four or five -- I'm in Phoenix every other week, and I meet -- Bradford shows me what he has, what he's working on, and I look at all the properties, and it's just depends what we see that day. And or that week and what we think we want to queue up and put an LOI on it.

Okay, so that preference just happens to be right now, but it could move around depending on kind of what the pipeline looks like.

Yes.

Okay, got it. All right, and one other, I notice that Citadel moved out of the development portfolio and into the operating portfolio, but its occupancy actually ticked down in the quarter, is there anything specific going on there, anything that you want to talk about on kind of the prospects for that? I mean I realize it's a small property, but just it seemed interesting.

I'll talk about the classification and maybe we can, Jim or we can both talk about the property. So when we defined new acquisitions we made a definition that said if the property was less than 90% occupied we would classify it as non-operating for 18 months, and so Citadel we've now owned for 18 months, and so because of that definition we now consider it in our operating portfolio, but that's really from a classification standpoint. A new acquisition will have 18 months, the earlier of 90% attainment or 18 months and then we'll reclassify it into our operating portfolio. As far as the property?

From a tenant perspective I can tell you that we moved in a tenant that presented themselves to offer a particular style of business that we thought matched what we were doing and wanted in the property only to find out after they opened they were really a little different, lower end type of business and it didn't necessarily conform with the use, but going in we thought they conformed with the use. And we pointed that out to them and, of course, they then decided to leave the property.

Okay, but as far as the outlook going forward, how do you think -- is everything still with the restaurant everything is still kind of on plan?

We're on track to open the restaurant. We had a meeting last Saturday. We have another meeting this Thursday and Friday to get -- it's about 95% complete. There was a delay in terms of getting the liquor license on it, and there's a team meeting with the owner and all of the owners contractor. The restaurant is called B.J.'s, and there's a team meeting on it Thursday and Friday, so everyone is coming into town on it.

And at this time their schedule is to have a soft opening in August and then they work out their bugs, their people, the synchronization, all that. If that all happens, which we're not -- we don't see any reason why it would not happen, although there's always problems you don't expect, then in that particular property it'll impact the seasonal folks who visit Scottsdale. In that particular area it's a very high end area and the restaurant matches the demographics perfectly, and so you'll see people starting to come back into town that would be users of that restaurant. But it, from a physical perspective it's absolutely beautiful and it's lien free, and we've got all the makings of it, it's just a matter we've got to get somebody in there to start cooking. So that's the schedule so far.

Okay, great. I appreciate it. Thanks.

Thank you.

Thank you.

(Operator Instructions)

And we'll now take our last question from Merrill Ross with Wunderlich Securities.

Hi, thank you. My question relates to leases signed but not in occupancy. On page 20 there's a breakdown of those 90 leases, Dave, that you mentioned, and 42 of them are new. I assume that most of the renewals are already in place so that, you know, but they may not have been renewed for the whole quarter. In other words, the earnings run rate for the quarter might be a little understated. I just wondered how many of those new leases, in particular, were in occupancy at quarter end?

With the small leases and the lease activity we have at the end of any quarter there's a certain amount of leases that have been signed and not yet in results. We do have some bigger leases coming in in '12. I think we've talked before about Windsor Park, and at Windsor Park we're adding a Ross Dress For Less and we've got a mattress firm that our leases have been signed that will come in '12. But really from a leases signed that have not moved in, there's not a significant number of those that are different than any other quarter, they're kind of our normal run rate.

Okay. Thank you.

All right. Thank you, Merrill.

This concludes our question and answer session. I'll now turn the conference back to Mr. Mastandrea.

Yes, thank you, Operator.

I'd just like to thank everyone for attending our call today. We really appreciate it. We do have a unique Community Center property business model, and we like it for a lot of reasons. And, as you know and as you can see from our track record, it really has an impact in the marketplace.

Just to remind our investors and our callers is that we have cash, we have significant financial flexibility, and we have a significant acquisition pipeline. But, most importantly, I think that we have a Team committed to working together and to execute our business plan.

And, with that, I'll say good day, and thank you, Operator, and turn it back to you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.