Whitestone REIT (WSR) 2014 Q2 法說會逐字稿

Good day, and welcome to the Whitestone REIT second-quarter 2014 earnings 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. Please go ahead.

Thank you, Shannon. Good morning and thank all of you for joining Whitestone REIT's second-quarter 2014 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 important to note that today's call includes time-sensitive information that may be accurate only as of today's date, August 6, 2014.

Whitestone's earnings press release and second-quarter supplemental operating and financial data package have been filed with the SEC and the Form 10-Q 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 second-quarter results and update you on the recent progress of our initiatives. Dave's portion of our call will focus on our financial results and our ongoing progress in Whitestone's operating metrics.

We're happy to report a solid second-quarter 2014 results, led by the signing of 102 leases totaling 221,000 square feet and new expansion and renewals with an average positive leasing spread of 7.5%.

FFO core increased to $0.29 per share in the second quarter, up from $0.28 per share the same period last year and, again, exceeded our dividend at $0.285 per share. Our second-quarter occupancy of 86% increased 20 basis points from the first quarter and 40 basis points from the prior year.

The strategic repositioning efforts we have undertaken represent Whitestone's clear roadmap to sustainable future growth. However, in the short run these initiatives temporarily impact occupancy growth. Given our focus on smaller leases that are more profitable, there will be some variability in our occupancy from quarter to quarter.

At the core of our progress, and what truly has energized us about our highly differentiated community-centered property business model is the fact that it is making a difference in the properties we own and the success of our customers, the businesses that occupy our centers. We take pride in our service culture in striving to meet the needs of our tenants and our ultimate customer, the people living, working and visiting the neighborhoods surrounding our properties.

Through repositioning and redevelopment of our properties we have the properties we acquire in the target high-growth markets at typically meaningful discounts to replacement costs, we are well positioned to turn them into vibrant community centers that drive cash flow.

A case in point here is the progress we've made with our Market Street at DC Ranch, an upscale property in Scottsdale, Arizona. We purchased this 240,000 square foot A Class A center in December last year. In just six months we have driven occupancy to 86% from 80%, a result of signing eight new leases totaling 15,000 square feet.

Our team has restored the vibrancy at the Market Street property with the addition of tenants who serve the needs of the community, providing grocery and dining, education, health and wellness, and services. These new tenants will join our already strong tenant base, which includes Safeway and Fleming's restaurant. As new tenants come on line, Market Street becomes even more attractive to future [prospects.] Furthermore, additional occupancy translates into additional net operating income.

Redevelopment initiatives are illustrated with the work we recently completed at Lion Square, an Asian-themed legacy property in Houston. The redevelopment [this year] (inaudible) are positioning the center to attract additional tenants and compete with newer centers [near it.] Our investment strategy of this renovation was to lease the big box vacancy, upgrade the property to meet the Asian-destination demographic, and attract customers from the high-income office buildings in the surrounding area.

We upgraded the facade and signage and were able to attract a large Asian restaurant. By adding this tenant and filling the vacant space between this new tenant and Teletron, which is a new tenant as of eight months ago, the largest tenant in the center, [who has] successfully filled the vacant box.

We expect [our investment in] this center of approximately $1 million to return a very healthy $300,000 in annual net operating income from the lease-up of the vacant big box space in incremental revenues over the coming years from increases in rental rates as our tenants continue to fill.

Whitestone remains focused on adding value, driven by our [unique] strategy and execution of our business model, resulting in strong organic as well as external growth.

After the close of the quarter, we purchased our first property in the Fort Worth market, Heritage Trace, a Class A community center located in the 18,000-acre Alliance, Texas master-planned community, an area with strong demographics and more than 180,000 people living within three miles. The addition of this property increased our Dallas/Fort Worth area footprint to five properties, with over 600,000 square feet of leasable space and one fully developed [land] parcel, with another 36,000 square feet of potential retail and executive office space to be added.

While this center is 98% occupied, even better [good news] is that due to the near-term lease expirations which have rent bump potential, it dovetails with our value-add operating model.

Our pipeline of (inaudible) market opportunities remains very [substantial] and still (inaudible). We currently have seven properties under negotiation, all within our (inaudible.) Bottom line is that our (inaudible) is enabling us drive traffic to our centers, resulting in increased occupancy, increased rental rates, strong financial revenues, and healthier, more robust tenants.

We also successfully maintain a balance sheet that preserves our financial flexibility and continues to focus on further driving down our cost of capital as we move forward.

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 operating results, followed by a discussion of our balance sheet, or financial position, and then close with an update on our 2014 financial guidance. (Technical difficulty) discuss both our second-quarter and our year-to-date results.

During the first half of the year we have continued to grow our top line, our bottom line and our overall cash flow through solid same-store growth, acquisitions, and judicious expense management.

FFO core for the quarter was $6.6 million, or $0.29 per share. This compares to $4.9 million, or $0.28 per share, in 2013. For the six months ended June 30, FFO core was $13.7 million, or $0.60 per share. This compares to the first half of 2013 when FFO core was $4.2 million (sic -- see Press Release, "$9.4 million") and is a 44% increase over the same period in 2013. On a per-share basis, FFO core is up 13%, or $0.07 per share, for the first six months of 2014.

Total revenues for the quarter were $17.7 million, an increase of 20%, or $2.9 million, from the same period of 2013. Year-to-date revenues are up 24% over 2013. For the first six months of the year, our same-store revenues, which represent 80% of our total revenues, were up 2.5%.

Leasing spreads remained strong in the second quarter on new and renewal leases signed, and were up 7.5% on a GAAP basis. During the second quarter, our leasing team signed 102 leases, totaling 221,000 square feet, in new, expansion, and renewal leases. This compares to 87 leases totaling 208,000 square feet in 2013.

Our average lease size was 2,162 square feet, and the total lease value added during the quarter was $14.8 million. Total lease value added for the year has been $26.3 million, up $5.9 million from last year, or 29% higher from 2013.

Our total property net operating income for the quarter was $11.3 million, an increase of 20%, or $1.9 million from a year ago. Property net operating income for the year was $23.1 million, up $4.7 million, or 26%, from last year. NOI growth is from same-store growth of 2.5% and new acquisitions.

Our interest expense for the quarter was $2.4 million, at an average effective interest rate of 3.7%. Approximately 70% of our debt is at fixed rate, and our average term of all of our debt is 4.6 years.

We continue to see the effects of gaining scale from our larger base of assets on our property expenses and our overhead costs. We remain focused in all of our cost-saving efforts and expect our G&A cost as a percent of revenue to continue to decrease as we grow over time.

We believe that performance-based stock compensation, resulting in significant ownership by Management is the best way to align our team with our shareholders. Included in G&A expense for the quarter was approximately $1.2 million of amortization expense of noncash, share-based compensation. Based on our current financial performance, we expect the expense related to the amortization of noncash, share-based compensation to be approximately $4.2 million for the full year 2014.

Now let me touch on several of our key operating measures. As Jim mentioned, our total occupancy rate was 86% at the end of the second quarter, up 20 basis points from last quarter and 40 basis points from the prior year. 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 consists of 1,232 tenants and our unique leasing strategy continues to be effective, producing increases in occupancy and positive rental rate spreads. We have a diverse tenant base, with our largest tenant comprising only 1.9% of our annualized rental revenues.

As I previously mentioned, our leasing spreads for the quarter rose 7.5% on a GAAP basis, demonstrating the effectiveness of our unique operating model. Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants. Our leases generally include minimum monthly lease payments and tenant reimbursements for payments of taxes, insurance, and maintenance.

Now let me turn to our balance sheet. As of quarter end we have $264 million of real estate debt, with a consolidated debt to EBITDA excluding noncash, share-based amortization ratio of approximately 7 times. Real estate debt as a percentage of our total market cap was 43% as of the end of the quarter, and the Company's EBITDA-to-interest-expense ratio was a very healthy 3.4 in the second quarter of 2014.

Whitestone has 42 (sic - see press release, "43") properties which are unencumbered by mortgage debt as of June 30, 2014, with an undepreciated cost basis of $363 million. The total undepreciated value of the Company's real estate assets was $549 million as of quarter end.

As of quarter end, $176 million, or approximately 70% of our debt was subject to fixed interest rates. We currently have approximately $45 million in fixed-rate, 10-year financing in process, which will bring the fixed rate portion of our debt to over 80%. The Company's weighted average interest rate on all of our debt and fixed rate debt as of the end of the quarter was 3.3% and 3.8%, respectively.

As of the end of the second quarter, Whitestone has $100 million of available capacity under its credit facility, which reflects the fixed-rate financing discussed previously, and $5 million of cash available on our balance sheet.

Finally, let me comment on our 2014 earnings guidance. We are reiterating our previously announced guidance, expecting FFO core per share for 2014 to range from $1.09 to $1.18 per share. Our guidance regarding acquisitions, dispositions, and redevelopment remains unchanged. Once again, if our guidance changes materially we will provide subsequent updates on our quarterly earnings calls and releases.

And with that, let me turn the call back to Jim.

Thank you, Dave.

In closing, I'd like to reiterate that Whitestone's steady progress is a product of staying true to our value-add strategy. We do this by helping our tenants grow their businesses, by rigorous leasing and asset management, by developing on land we own, and by acquiring accretive assets in high-growth target markets.

In closing, I'd like to thank you for your continued confidence and support, and the privilege that I have to lead Whitestone.

With that, I would like to conclude the review of our results and open it for questions. And, Operator, I will turn the call back to you.

Thank you. (Operator Instructions) Jonathan Pong; Robert W. Baird.

How should we be thinking about your capital-raising plans as you ramp up your acquisition activity and fill that revolver? Can you sort of handicap where your bias is right now between the ATM, follow-on equity offering, dispositions and new mortgages? And I guess if the answer is new mortgages, I think around two-thirds of your gross real estate value is unencumbered right now. How low can you see yourselves going on that metric on a run-rate basis?

This is Dave. Let me touch on your question. First of all, we have given guidance for the year of acquisitions in the $40 million to $80 million range. We have reiterated that guidance on today's call and remain confident in our ability to close on acquisitions in that range.

For financing of those acquisitions, as we've always done, we'll continue to access all of our capital sources. We have a credit facility that's $175 million, led by a very strong group of banks. That facility has an accordion option also that can take it to $225 million as well. As I mentioned, we are also doing some mortgage financing, which will free up additional space on that credit facility.

So really, we continue to -- the guidance we've given really reflects our ability to acquire $40 million to $80 million in acquisitions using the debt we have available on our balance sheet, which is a combination of additional draws on our credit facility, as well as securing some really attractive long-term fixed- rate at great rates that we'll continue to do over the balance of the year.

Touching on the unsecured portion, we have continued to grow our unsecured portion of our assets. As we look to grow Whitestone we obviously would like to position us to have a very flexible and attractive balance sheet. And we feel that having a significant portion of our assets unsecured helps us to do that.

I guess maybe between the lines, David, it sounds like you guys are comfortable holding the line balance a little elevated for the time being at least.

Jonathan, let me say, we're never comfortable. We have, just to give you an idea, while we haven't announced many acquisitions so far this year I have looked at, along with our acquisitions team, 29 potential acquisitions. And that's in six months. And these are great properties. And so we're very selective to pick the very best of those great properties.

We'll adjust our capital needs to meet our acquisition need, but we'll do so on an accretive basis. And for the time being, our acquisition strategy is targeted, single, one-off properties with good returns that we think are in markets that we can build a base.

And then just maybe moving to the leasing front, it looks like on a net effective basis you're cash spreads on new leases were flat or maybe slightly down this quarter, after a couple quarters of positive growth. Were there any signings that skewed that number lower? Or how else would you characterize I guess the little bit of deceleration this quarter on that front?

Sure. As you know, when you look at any particular quarter, there's only a small amount of leases coming through for a quarter. And so we tend to look at a little longer period. There was, on a cash basis, just comparing the ending lease rate versus the beginning lease rate, we were down slightly this quarter. As I mentioned, on a GAAP basis or straight-line basis, we're up 7.5% for the quarter, which continues to be very positive.

So we don't necessarily see a trend. One of the things we've had to do is we've given a little bit of incentive on new tenants coming in initially. But we've been able to put very attractive rent bumps in those leases and therefore get an overall effective rate that we think is a good positive. And you can see that in our GAAP leasing spreads.

So I don't think there were any big leases that really skewed that number. But in any given quarter it's a small amount of leasing activity compared to our overall tenant base of 1,300 customers.

Okay. Thanks, Dave. Thanks, Jim.

Paul Adornato; BMO Capital Markets.

Looking at occupancy, a metric that you quoted was physical occupancy, I think, so not including leases signed but not yet occupied. If we look at the other metric, that is, signed by not yet occupied, what would that number be? Do you have a pipeline of signed but not occupied leases?

Jim Mastandrea: We do. Dave?

Sure. So one of the things we do is -- it's very important in this business with the smaller tenants to really maintain a robust leasing pipeline. So with our leasing team we're always tracking the deals that are out there in the pipeline, in all various stages. We do have a significant amount of leases that are signed, not occupied. And we always do. We also in this business have a little bit more roll of our tenants than you do in some of the bigger boxes. But those tenants, those smaller tenants, as you know, are much more profitable.

So at any given time we probably have 50,000 to 80,000 square feet in signed leases that aren't yet opened, which would reflect 1% to 2% of occupancy that's in the queue and just needs to move in over time.

Let me add to that, Paul. A couple things we do is -- while it is physical occupancy, what we do look at is -- and we do this first six months -- is focusing on the rental rates. So we're looking at markets and making sure that we're capturing all the potential revenues. And sometimes when you do that, you sacrifice a little bit of acceleration on the filling of the properties.

A goal we have is to look at year-over-year progress in the enterprise, and with an interim basis of reporting on a quarterly basis. So you'll see, as we've done each year, is we really finish each year fairly strongly and because we do focus on that.

And then the only other thing I'd add on is sometimes, while we still have a number of legacy properties, they do take a little bit longer in markets. And in terms of redeveloping, which includes painting, sometimes physically rebuilding sections of the walls and things like that, takes a little bit longer. But what we're starting to see now is a lot of that ticking up, particularly in the Houston market.

Okay. And if we were to look at the existing vacancy in the portfolio, was wondering if you could characterize that. Is that anchor space, small shop space? What's the breakout between large and small shop sizes?

Yes, good question. Couple areas that -- we have one office building in Dallas, which is a legacy property. We have -- it's always been slow to fill. So that's a chunk of the occupancy that we've carried for a while. It's an office building that we acquired with the property -- with the company originally. And it's adjacent to a cemetery, which is always a quiet place to have offices, but not necessarily a strong place to promote tenancy.

So and then we have one box we've carried for a while down in -- we call Belmont. And then we've had a couple -- and the box there would be like, 40,000 feet. But anything -- those are probably the extent of the large pieces that we have.

We're seeing some real growth in our Asian properties, which we love, because that's an area that we've really had a specialty in and we're starting to see some progress in that. And going from some of the large vacancies there; they're all starting to fill now.

So we've got a few spaces like that that we continue to lug. They're slow. We recognize them, but we work them. We keep working them.

Okay, great. Thank you.

Mitch Germain; JMP Securities.

Jim, you referenced 29 deals that you've underwritten so far this year. I'm curious if you know how many of those deals traded and who are the active buyers in those sort of properties.

Yes. They haven't all -- they haven't come to fruition yet. And they're in markets that are -- only two of those deals -- or, one, two -- four of those deals was in markets that we're currently in. The other ones were in new deals, and they haven't closed yet. Some of them haven't even gone under contract yet. But when we look at them we make a decision to see if they fit within our portfolio. When we're looking at them it's not like we're bidding on them and we lose them.

But my point of referencing that, Mitch, is that we are extremely active in terms of looking at transactions. And we have a little bit of a different approach than most others in our industry. And that is, we are like local hunters, stalking properties. And they come to us and then we spend some time on them. Could be anywhere from two days to two weeks, and we make a decision to see if it fits. We don't look at any deal that we don't think has a potential closing. It's just a matter of -- is the price right? Can our management style really create and add value to the property?

I mean, we're not out looking at properties that are 95% occupied that are just five and six cap rates that are bonds that we can't do anything with. We take a pass on those quickly. I will say that virtually 90% of the properties that I've looked at have some form of grocery anchor or drug store anchor or Starbucks anchor or some element of [credit] in it, which is part of our business model. But we do emphasize that we like to make money on the smaller spaces.

And we happen to have quite a few properties that have Safeways in them, Albertsons in them, grocery stores and that. So it's not like we're just out looking for properties that don't have [legs to them.]

Got you. And maybe just as a follow-up with regards to that function of aggressive pricing in the markets, why not step up your sale efforts?

Step up to -- I'm sorry -- step up to what?

Your asset sale efforts.

We have three under contract right now that are going through due diligence. And I'm sure you're aware that when you have legacy assets that we have you just double the time for someone's due diligence. So we have three sales. We have another property that we're considering in Arizona, one of the first properties that we bought. We think that we've done so much to it that the opportunity for profit in it is pretty significant. It's a small property, though. But we think that once we reach a point where we can't add any more value to it, we will put it for sale.

So we're getting to that stage now. Because it's only been a few years since we did the IPO and started buying these turnaround properties that they're about ready to put some of these on the marketplace. We think you'll see more of that, maybe the end of this year, but for sure next year you'll see some.

Great. Thank you.

(Operator Instructions) Carol Kemple; Hilliard Lyons.

I just wanted to verify, did you all say the pipeline's in excess of $500 million?

That's correct.

And you said you have seven properties under contract, or under negotiations. Can you talk about where those properties are located and what type of properties those are?

We can say some things. We have three -- two properties we expect to go under contract this week in Arizona. We have a third property we expect to go under contract in the next two weeks. And that's in Texas. And then we have one more property, it's a small property, that we expect to go under contract. That's in Arizona. Those are the four that we think will be under contract fairly soon.

Then we have three properties that we have selling, under contract with a potential buyer.

And I would maybe just add a couple comments. The characteristics of the properties we're looking at remain unchanged. So if you look at the acquisitions we've made over the last couple of years, very similar. We look for properties where we don't get in at auction. We look for properties that have a significant value-add component, either from lease-up or adding GLA. So we're really sticking to our strategy, our community-centered property strategy, of identifying acquisitions that aren't being auctioned, are not there in the auction process where the prices are being driven down to ridiculous levels.

So we have a very active pipeline of acquisitions. Obviously, as we go under contract there is uncertainty as to fully closing those properties. But we have a very active pipeline. We have several deals under negotiation that we expect to close. And as I said before, we've given guidance $40 million to $80 in acquisitions for the year. And we remain very confident in our ability to do that.

Okay. So is the $7 million under negotiation you spoke of earlier, was that four that you expect to buy and three you expect to sell? Or were there seven that you expect to buy?

I don't think we've given guidance down to that detail level, Carol.

Okay.

We expect to continue to grow, just as we have in prior years. And so we haven't given -- that's probably a little too much detail on the acquisition levels. As Jim mentioned, we have a pool of three properties that we currently are looking to sell. And then we have several acquisition candidates that are anywhere from letters of intent to contracts where we're doing diligence.

And I would say, Carol, two things. One is the four that we have under -- or will be under contract very shortly, those are very promising. Each of those are in excess of 7% cash-on-cash return. And if you accumulated all of them, we could finance them under our line of credit [as a debt.]

Okay. Thanks.

Michael Diana; Maxim Group.

In the Wall Street Journal this morning there's an article on online shopping with the somewhat dramatic title of -- Shoppers Flee Physical Stores. Could you comment on that, to the relevance of that to your strategy?

Sure. Actually, that article was very nice to read, because we set out way ahead of marketplace in our industry a business model that really focuses on service-based tenants. And I don't know about all the folks on this call, but I get packages every week from Amazon.com. And I think we're seeing people who are going to physically shop someplace deminimizing.

What we are seeing, though, is people love to go to an area where there's a Starbucks, where there's a cigar store, where there's a fountain, where they can hang out with kids, where the traffic is easy to get in and out of, where it's not a place where thieves go through and have smash-and-grab -- in a lot of markets there's a lot of smash-and-grabs that go on today. We protect our shoppers from that.

So we create places that some [would call a third] place, where they can go to a restaurant and spend some time just hanging out. So we think that that has been effective for us. It's a different strategy. It requires working with the tenants that you have, getting to know them, getting to know their customer base, and then accommodating them. I mean, we even before we paint a property, we put sample colors on a wall and let tenants who wish to look at the colors and give us some input on which ones they prefer. So we're doing things that appeal to that shopper that is not coming to buy goods.

Okay. Thank you.

And with no further questions in the queue, I'll turn the call back to Jim Mastandrea. Chairman and Chief Executive Officer.

Well, thank you very much, Operator, and thank you all for joining us on our call. And I would like to invite anyone who would like to visit us here in Houston, or visit us in any of our other markets, that I'd be happy to work out a schedule to meet you there, to show you what we're doing. We love the business; we'd love to take you out and show us our business model. And sometimes after a towering two or three trucks through some of the properties, most people that we showed them to, they say -- hey, I've got it. We like what you're doing.

The other thing I'd like to mention is we think that we've got a fairly robust business model and have almost tripled our size since we did our IPO. But sometimes that doesn't seem like it moves fast enough. Our concern is we're not worrying about how fast it moves. We're just worrying about it being profitable year after year after year. And I think we're beginning to see a lot of traction.

With that, I would like to thank you all for being investors. I thank you for -- and the analysts as well. And thank you for your interest in our company. Operator, that's all I have to say.

That does conclude today's conference. Thank you for your participation. You may now disconnect.