Whitestone REIT (WSR) 2013 Q4 法說會逐字稿

Good day and welcome to the Whitestone REIT fourth-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Suzy Taylor, Director of Investor Relations. Ma'am you may begin.

Thank you, Jamie. Good morning, and thank all of you for joining Whitestone REIT's fourth-quarter 2013 earnings conference call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive Officer, and Dave Holeman, our Chief Financial Officer.

Please note that some statements made during the call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those indicated by the 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 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 is also important to note that today's call includes time-sensitive information that may be accurate only as of today's date, February 27, 2014. Whitestone's earnings press release and fourth-quarter supplemental operating and financial data package have been filed with the SEC, and the Form 10-K will be filed shortly.

All are or will be available on our website, whitestonereit.com, in the Investor Relations section. Also included on the supplemental data package are the reconciliations from GAAP financial measures.

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

Thank you, Suzy, and thank you all for joining us on our call today. Today we're going to review our fourth-quarter and full-year results, and update you on the recent progress of our initiatives. Dave's portion of our call will focus on our financial results, strong positive trends in Whitestone's operating results and financial position, and our financial guidance for 2014.

We remain focused on increasing long-term shareholder value per share. We do this by extracting the intrinsic value from the assets that we own by leasing, redeveloping, and selectively developing adjacent land parcels while helping our tenants grow their businesses; by acquiring accretive assets in high-growth target markets, by leveraging our infrastructure over a larger base of assets; and finally, by lowering our overall cost of capital.

Now let me review some of the progress we have made, and highlight our accomplishments. Whitestone wrapped up 2013 with an excellent fourth quarter, resulting in another year of significant growth and progress towards our financial and operational objectives.

In the fourth quarter, we grew our asset base with value-add acquisitions. We increased our occupancy through the addition of high-quality tenants, we lowered our overall cost of capital and strengthened our capital base through debt refinancing, and we produced both strong, top-line and bottom-line cash flow results.

I would like to briefly touch on each of these. Growing our asset base in the fourth quarter with over $60 million in acquisitions and two value-added community centers in Phoenix, one fully-developed land parcel adjacent to a current property owned, and the high growth area of the Woodlands submarket in Houston.

We increased our total occupancy to 86.8%, up 2% from a year ago, through the addition of high-quality tenants. Our overall occupancy was a result of same-store growth of 1.4% and the positive effects from our 2013 acquisitions. Our Phoenix market led the way and delivered a 7.4% increase in occupancy for properties that were owned for the entire year of 2013.

Also during the year, we successively leased two of our larger spaces, one in Phoenix to a Walmart neighborhood center, a 44,000 square box that was vacant when we acquired the property, and one in San Antonio to Burkes Outlet Store, a 22,000 square foot store.

The addition of these new tenants will contribute significantly to our 2014 revenues and result in additional revenues from adjacent tenants in both locations by returning to full market contract rents due to being on lower alternative rent from when we acquired the real estate. This was accomplished through satisfying the co-tenancy requirements.

We lowered our overall cost of capital and strengthened our capital base through the debt refinancing and accretive capital raises. During 2013, we refinanced $106 million of property level debt at a weighted fixed average of 4.2%, and a weighted average term of 8.1 years, with maturities laddered over the next 10 years.

Also in 2013, we raised approximately $64 million from the sale of 4.9 million common shares in an overnight offering and through utilization of our ETF program. The weighted average issue price was $13.66 per share.

We produced strong top-line and bottom-line results by growing our annual revenue by 33% from the prior year, and our annual FFO Core by 51% from the prior year. FFO Core on a per-share basis was $0.28 in the fourth quarter, our second quarter in a row to achieve $0.28; and $1.10 for the year, up from $0.95 in 2012. Fourth-quarter FFO per share annualized is equal to our annual dividend of $1.14 per share per year.

Whitestone's strategy to increase long-term shareholder and enterprise value per share remains focused on increasing the value of the community centers we own. We do this through tenant mix, which is focused on leasing and selective development and redevelopment, disciplined grow through opportunistic accretive acquisitions in high-growth markets, and further leveraging our strong infrastructure of talented people, efficient and effective customer-focused processes and systems over a larger base of assets.

Our portfolio management approach remains focused on improving the quality of our Community Centered Properties. And to this end, we strive to assemble a complementary tenant mix that have initiated selective development projects to help tenants grow their businesses and better serve the surrounding communities.

This approach allows us to drive traffic to our centers, resulting in increased occupancy, increase rental rates, and strong financial revenues.

Let me touch on two final points, our dividend philosophy and our 2014 objectives. First, our dividend philosophy. At our recent board meeting our trustees voted to continue paying the quarterly dividend at $0.285 per share. It is our expectation through our value-add growth strategy to continue to drive cash flow higher each year, resulting in a well-funded dividend over time. We believe the positive impact from this strategy is evident in our 2013 results.

Lastly, our objectives. We will remain focused on our value-add growth strategy, continue our geographic diversification into business-friendly markets were we can obtain scale and apply our unique acquisition and operating model. We will continue to recycle capital through divesting of our properties that do not meet our core business parameters or do not have significant value creation potential.

We plan to continue to mine our pipeline of off-market acquisition opportunities which remains robust, actionable and financially attractive; plan to develop land parcels that we acquired and are adjacent to our existing community centers, adding low-cost square footage. And we plan to focus on achieving high returns on a property rate property basis on existing capital.

We expect to maintain a balance sheet with judicious leverage and financial flexibility, and continue to lower our overall cost of capital as we grow.

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

Thank you, Jim. I will start by reviewing our balance sheet or financial position, then turn to a review of our key operating results and conclude with a discussion of our initial 2014 financial guidance. Throughout my comments, I will discuss both our fourth-quarter results and our annual results.

During the fourth quarter and throughout 2013, we strengthened our financial position through acquisitions of high-quality community centers in the Phoenix and Dallas markets; through long-term fixed rate debt financing at attractive rates, through movement toward a more unsecured debt structure, through strengthened relationships with capital sources, and through improved overall financial operating results and metrics.

In the fourth quarter we added over $60 million in high- quality community centers to our portfolio of properties, bringing us to $131 million in acquisitions for the full year. $131 million in acquisitions represents a 21% increase in our acquisition volume over 2012.

As of year-end, we have 54 community centers and 6 future development land parcels, with a cost basis of $546 million. We now have 5 million square feet of gross leasable area, including nearly 2 million we have added in the Phoenix market over the last 3 years.

Throughout 2013, we have capitalized on the favorable interest-rate environment and further strengthened our balance sheet by refinancing $106 million of our property level debt, with $60 million refinanced in the fourth quarter. The weighted average fixed interest rate of our fourth-quarter refinancings was 4.1%, with a weighted term of 7.6 years. The weighted fixed interest rate of all of our 2013 refinancings was 4.2%, with a weighted term of 8.1 years.

In 2013, we also continued to move toward a more unsecured balance sheet, with secured debt as a percentage of the cost basis of our real estate decreasing 7% to 23%, from 30% in the prior year. Our unencumbered asset pool -- that is properties without secured mortgages -- is now 41, with an underappreciated cost basis of $357 million at year-end.

Our debt leverage as a percent of total market capitalization of $560 million was 46% as of year-end, and our ratio of interest expense to EBITDA was 3.3 times for the most recent quarter. As of year-end, 68% of our debt was at fixed rates, with a weighted average interest rate of 3.9%. The weighted average interest rate on all of our debt as of year-end was 3.4%.

We expect to replace approximately $40 million of our variable-rate debt with fixed-rate debt over the coming quarters, resulting in over 80% of our debt being at fixed rates.

During 2013, we continued to strengthen our relationships with capital sources through the addition of Bank of America to our credit facility, and the addition of Wells Fargo as the lead bank for our ATM program. We expect to begin to recycle capital over the next few quarters through the selective sale of lower growth properties. We expect the additional source of capital to be redeployed in the higher growth community centers.

Now let me turn to the operating statement. Funds from operations Core for the quarter was $6.2 million or $0.28 per share, which is an increase of 40% on an absolute dollar basis and 17% on a per-share basis over the prior-year fourth quarter. For the full year 2013, FFO Core was $20.8 million or $1.10 per diluted share, up 51% on an absolute dollar basis and 16% on a per-share basis over 2012.

Total revenues for the quarter were $17.2 million, an increase of 27% or $3.7 million from the same period of 2012. For the full-year 2013, total revenues were $62.1 million, up 33% or $16 million from the prior year. 2012 and 2013 property acquisitions were the primary drivers of the revenue increase.

For the year, same-store revenues were 70% of the total revenue and were up 3% from 2012, excluding approximately $800,000 in termination fees received in 2012. Leasing spreads on new and renewal leases signed during 2013 were up 2.2% on a straight-line basis per square foot.

Total property net operating income for the quarter was $10.7 million, an increase of 28% from the same period last year. Property NOI was up $1.2 million or 13% from the most recent third quarter of 2013. For the full-year 2013, total property NOI was $38.6 million, up 34% from 2012.

Same-store property NOI was up approximately 1% from 2001, excluding the termination fees received in 2002. Our interest expense for the quarter was $2.5 million, including $170,000 of early debt extinguishment cost. Excluding this amount, interest expense decreased 4% from the prior-year quarter. This decrease was driven by a decrease in our effective interest rate of 1.5% as compared to the prior quarter, as a result of our 2013 refinancings.

Our interest expense for the year was $10.2 million, and excluding the early debt extinguishment charge, interest expense increased 14% or $1.2 million from the prior year. This increase was the result of increased debt levels used for acquisitions, offset by a decrease of 1.4% in our effective interest rate, as a result of our refinancing efforts.

We continue to see the effects of scaling our general and administrative expenses across a larger base of assets and revenue. In 2013, our employee headcount remained flat at 68 people, while our annual revenues increased by 34% or $16 million. Included in fourth quarter's G&A expense, our acquisition expense of $398,000, and $783,000 of expense from the amortization of performance-based restricted stock granted over the last five years.

The amortization of share-based compensation relates to the expected vesting period and does not reflect actual payments made. As of December 31, 2013, there was approximately $1.9 million of unrecognized, non-cash share-based compensation expense, which we expect to amortize throughout 2014.

Our G&A expense for 2013, excluding acquisition expenses and the amortization of share-based compensation, was 12.3% of total revenue as compared to 13.3% a year ago. We remain focused in our cost savings efforts and expect our G&A costs as a percent of revenue to continue to decrease as we grow over time.

Now let me touch on some of our key operating measures. As Jim mentioned, our total occupancy rate was 86.8% as of the end of the year, up 2% from year-end 2012, and up 1.8% from last quarter. I will remind you that our total occupancy represents physical occupancy, and does not include tenants under lease which have not yet moved into our properties.

Our tenant base is approximately 1250 tenants, and our unique leasing strategy continues to be effective, producing increases in occupancy and positive rental rate spreads.

Finally, let me provide more details on the 2014 earnings guidance. Progressing toward enhancing our disclosure and increasing our transparency, we are providing FFO Core per share guidance for 2014. We expect FFO Core for diluted share for 2014 to range from $1.09 per share to $1.18 per share, and full-year FFO to range from $0.88 to $0.97 per share. We expect full-year 2014 EPS to be $0.22 to $0.30 per diluted share.

The range of the Company's initial 2014 earnings guidance assumes acquisitions of $40 million to $80 million, and dispositions and development of $10 million to $20 million each. Acquisition and development volume reflect the amount we expect to fund from debt and proceeds from asset dispositions.

The impact to our 2014 FFO Core range from projected 2014 acquisitions and dispositions is approximately $0.03 to $0.05 per diluted share. The 2014 guidance also reflects same-store NOI growth of 4% to 7% and same-store ending occupancy in the range of 87% to 89%.

The 2014 guidance assumes our 2013 year-end share count, plus a 5% increase in our weighted average shares from the dilution of performance-based restricted shares issued under our long-term equity incentive program. If our guidance changes materially, we will provide subsequent updates on our quarterly earnings calls and releases.

Our supplemental data package provides additional information on the Company's 2014 guidance and includes reconciliations of FFO Core per share to FFO and net income per share. Also included in the supplemental data package is a reconciliation from 2013 FFO Core per share to our 2014 guidance range.

With that, I'll let me turn the call back to Jim.

Great. Thank you, Dave. I would like to conclude by highlighting significant strengths of Whitestone. Our operating cash flow is strong and continues to grow on a per-share basis. Our capital improvements are progressing, and we are meeting funding requirements relating to the value-add portion through debt refinancings at our corporate credit facility and from the increase in the value of our properties.

Our properties have significant upside, with an overall cost basis on 5 million square feet of space of slightly over $100 per square foot, which we refer to as the intrinsic value which is being extracted as we redevelop, reposition, lease and move in new tenants.

And last, we believe shareholders who invest in a value-add business like ours should be rewarded while they are waiting for the inherent intrinsic value to be harvested, which our stable dividend policy continues to support.

With that, I would like to thank you all for your time. Operator, I would like to turn it over for questions.

(Operator Instructions) Jonathan Pong, Robert W Baird.

Good morning, guys. Looks like you've got a pretty solid market opportunity with 23% of your rent turning over in 2014. What are you guys baking into guidance for your blunted leasing spreads next year? And then maybe on a quarter-to-date basis, can you talk a little bit about what you are seeing out there? Do you expect to see continued positive cash spreads like you saw in Q4?

Jonathan, thanks for your question. As far as the role of our square footage, I think it is consistently in that range that we have rolling next year. As you know, we tend to have shorter leases, 3 to 5 years, and with that have roll and opportunity to increase rental rates.

I think you saw in the fourth quarter we had nice positive results in our leasing spreads. It is probably prudent to look over a little more time than just one quarter, but for the year we have had a positive spread of 2.2%. Built into the same-store growth next year is approximately 3% leasing spreads, and then approximately 2% lease-up.

Jonathan, let me add that. Cash is generated from our leasing at filling our properties. And when we start with value-add properties and we are acquiring these, they initially have significant more vacancy than stabilized properties. So our business model works through that by filling the property first.

And then as the ban for the property continues to grow because we are filling the space and the supply shrinks, then we are able to keep short-term leases and then roll the rents higher as we roll over the tenant. So that has been very effective for us, and that is beginning to start to show some traction now.

Great, thanks for the color. And then maybe on the $15 million at the midpoint development guidance that you're putting out for 2014, is that more redevelopment geared or is that going to be more of a ground up on an empty pad site type of development?

As we have been purchasing properties, what we look for is a segment of each property we have acquired where there's some potential to add square footage. So what we're looking at is those pads. For example, we call the Pinnacle pad we have which is adjacent to a center that we have on the corner of Scottsdale Road and Pinnacle Peak. We will be developing and adding about 35,000 or 40,000 square feet there, ground up. And then we have several other pads like that.

So what we see in that redevelopment is really to enhance the properties we already own. In some cases, we are looking at properties that just the use is no longer income driven. And we may look at replacing a property or two in our Houston portfolio where we have a totally different use closer to the community center model, and there might be some development there.

Great, and last question. Just on the G&A side also for guidance, what's driving the $0.04 to $0.05 impact on core G&A for 2014? It looks like most of the headcount you had or you have today was already in place a year ago. Just wanted to see if there was anything maybe more one-time in nature.

No, it is a little bit of, as we have grown a little bit, there is a little higher legal and public Company cost. Our headcount has remained fairly flat, but just a slight increase in heads as we grow, obviously, in scale over operation.

So nothing significant in there, other than just a little bit of G&A growth as we get bigger, but obviously continuing to reduce the percent of revenue.

All right, thanks for the color, guys.

Mitch Germain, JMP Securities.

Good morning, guys. Jim, do you still see the same level of distressed sort of investment activities out there, or is that really kind of minimized at this point?

They are harder to find, but we are seeing them. And what is interesting, Mitch, we are finding deals where they were renegotiated 5 years ago with the lenders, and they were sort of extend and pretend type deals with lenders. And what has happened is the developers, because the developers didn't really have quite the incentives, they still weren't able to turn around the properties. So we are seeing some of those that are coming to us right now.

For example, one of our most recent acquisitions in December was a 5-year restructure plan that was in -- it's almost in its fourth year. And for lack of brevity, we could call that a prepackaged short sale made 5 years ago. So we are starting to see some deals like that.

And what is interesting is because of the credibility and reputation we have within the industry, both in Houston and in Phoenix, we are having deals come to us where people don't want to publicize that they have a distressed situation, so that we can take and then roll it out and into our portfolio. And we have, right now at this time, we have a couple of letters of intent out on properties just like that.

And when you look at your deal pipeline, is it still mostly Phoenix? Or are you kind of shifting now your growth away back into markets like Dallas and Houston?

We have spent some time in San Antonio. We have spent some time in Dallas and we have spent a lot more time in Houston. And I would say we are spending some time in Phoenix, properties that come to us. We are not out scouting as much as we were scouting before.

So we are starting to look at -- we think that we want to grow the base of assets that we have in Phoenix, and we have got a great staff here to really operate. I mean we've got actually a terrific staff here, and as you have seen from our results. We think it is now time to fill in some of the Texas markets. Both states are excellent to add new acquisitions in.

Great. And I think -- I might have missed Jonathan's question about your lease expiration schedule. It seems like average size is about 2500 square feet. It seems like that is kind of in your forte of small tenants. Is there anything lumpy in there, and are there any no move-outs that we should know about?

No. I think if you look at the role as I said, it is typical next year to what we tend to see. We like with the ability to manage those tenants. No, no known lumpiness in our move-outs, just the normal roll of our small tenants which we have been very successful in renewing and being able to increase rates as well.

Thank you.

(Operator Instructions) Carol Kemple, Hilliard Lyons.

Good morning. On your acquisition pipeline, can you quantify the amount? I know you have done that in quarters past.

We have, any time -- we've always managed to maintain about $0.5 billion worth of deals in and out of that pipeline. So we've still stayed within that range. One LOI that we just submitted was in the, I want to say, in the mid-70 range. And we are just waiting to see if that is something we want to negotiate to put it together into a contract.

So it doesn't take a lot of deals to add up to that. But we are probably in that $0.5 billion or $600,000 range.

Okay. And then on your guidance, from your adjustment from FFO to FFO Core, it is about $0.21. What is that made up of? I figure it is the $1.9 million non-cash share-based compensation, and then acquisition expense. Is there anything else I am missing?

The three big differences between FFO and FFO Core for us, which we exclude for FFO Core because we think it gives greater comparability to other REITS as well as other quarters, are acquisition expenses. So acquisition expenses come out of FFO Core. The amortization of the share-based performance stock-based compensation program, and then we have a small amount of rental support payments from sellers that we also add back to FFO Core.

So in the range, the biggest piece for 2014 range is the share-based compensation is approximately $4 million of that amount, and then the acquisition cost is approximately $600,000 and the rental support payment is about $200,000. I'm close on my numbers there, Carol.

Okay, that helps. Thanks.

It appears there are no more questions at this time. I would like to turn the conference back to Jim Mastandrea for any additional or closing remarks.

Well, thank you, Jamie. And I'd like to thank you all for joining us today. As you can tell, we continue to work very, very hard and we really appreciate all of your confidence and support in everything that we are doing.

We would like to invite you at any time to visit us, either in Houston or in Phoenix, and have the opportunity to show you some of the properties that we own or, in fact, you own; and walk you through some of the exciting things that we have been doing and expect to do in 2014.

With that, I'd like to say thank you, and we will look forward to our next conference call.

Thank you for your participation. This does conclude today's call.