Whitestone REIT (WSR) 2015 Q1 法說會逐字稿

Please standby. Good day and welcome to the Whitestone REIT's First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr Dave. Holeman, Chief Financial Officer. Please go ahead.

Thank you, Taylor. Good morning and thanks all of you for joining Whitestone REITs' First Quarter 2015 Earnings Conference Call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive 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 forward-looking statements due to a number of risks and uncertainties. Please refer to the Company's filings with the SEC including Whitestone'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's also important to note that today's call includes time-sensitive information that may be accurate only as of today's date, May 6, 2015.

Whitestone's first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC. Our Form 10-Q will be filed shortly. All 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, Dave. Thank you all for joining us on our call today. We are pleased to report another strong quarter, highlighted by year-over-year revenue of 22% growth and FFO core per share growth of 10%. This is a result of our forward-looking operating model that continues to drive value accretive acquisitions on value-add properties in high growth markets and maintenance of a balanced and flexible capital structure. Our strategy of acquiring attractive properties in our core market and transforming legacy properties into profitable community centers continues to be successful.

During the quarter, we had one property, City View Village located in San Antonio, Texas for approximately $6.3 million. While small in comparison to the scope of the portfolio, at the time of the purchase it was 17,870 square foot property, it was 100% leased, but what it did with this acquisition was provide the competition -- took away the competition across from The Strand at Heubner Oaks, our 74,000 square foot community center, that we acquired in 2014. Together, they provide us with the dominant two corner positions on a high traffic area, just off the Interstate 10 in San Antonio. Consistent with our previously communicated strategy, Whitestone was a first mover in implementing a business model which recognizes two significant macro level societal changes that have created a paradigm shift in consumer behavior.

First, the greater percentage of households with two wageearners and second, online commerce continuing to transform the way consumers shop. Consumers while facing greater demands on their time are benefiting from the increasing transparency in pricing and product information from the Internet to web-based services that yield far more choices than ever before. Today, consumers make trips to the local retail centers seeking convenience service and unique experience.

Following shifting consumer behavior and preference patterns, Whitestone has crafted its business model and modified its real estate to meet these consumers' underserved needs. Whitestone's community approach was designed to cater to these new purchasing habits on a property level by blending a complementary mix of groceries and restaurants, health, wellness and beauty, education and services.

Our customer centric discipline strives for a tenant mix of small, regional and national tenants that meets the unique needs and preferences of the neighborhoods we serve. Our typical customers are growing businesses that occupy smaller spaces, which produce premium rental rates, they seldom contain restrictive lease clauses such as co-tenancy, approval rights and exclusive uses over our properties and often contain attractive rent bumps and percentage rent clauses. As a leader in this space, our approach and attention to a complementary tenant mix differentiates our business and allows us for continued higher value creation in our communities. Day-to-day our leasing team continues to work to acquire tenants for vacant spaces, drives revenue by releasing our occupied spaces to existing tenants at higher square footage rental rates. And when the leases roll and add replacement tenants to improve the overall tenant mix on an existing tenant does not meet our community service standards.

Our tenant base continues to expand and strengthen as we replace lower paying tenants with higher paying tenants and break down larger bases into smaller ones. The timing of this transition can impact our quarterly reporting physical occupancy rate, as it did in the first quarter when we moved out a 30,000 square foot tenant at our Mercado property in Scottsdale Ranch Center in Phoenix market. The space was occupied by a tenant. When we acquired the property, the tenant was only paying $2 a square foot. We expect to release the space in the near future at a significantly higher rate. Our value driven growth model was designed to balance increasing occupancy and rental rates in each of our community centers that results in the maximizing of individual property and ultimately shareholder value.

Let me briefly touch on our Houston holdings and any impact real or perceived from continued low oil prices. In short, we have experienced little, if any impact. The underlying attributes that brought us to Houston market are still meaningful and intact. Outside of Houston and Whitestone's other Texas markets, San Antonio and Dallas, our business model in particular continues to perform well.

We also continue to believe that our community center property business model insulates us to a large degree from any overall adverse effects of lower synergy prices. With a proven operating model and track record, a substantial acquisition pipeline and strategic development and redevelopment opportunities, Whitestone is strategically positioned to continue to add value as we grow.

Our solid balance sheet and flexible capital structure with available capital from our expanding credit facility and proceeds from our sales of non-core assets to support this growth.

Along with our experienced management team, we believe that we are well positioned to execute our plan throughout 2015 and beyond.

With that, I'd like to turn over to Dave Holeman, our Chief Financial Officer, to discuss our financial results, Dave.

Thank you, Jim. As Jim said, we began 2015 on strong note. Our first quarter revenue grew 22.3% to $21.3 million and FFO Core grew 16.6% over the prior year to $8.2 million. We continue to grow our profitability with FFO Core per share of $0.34 in the first quarter, up 10% from our first quarter of 2014. Our first quarter was marked by a more than 23% year-over-year improvement in property net operating income and positive leasing spreads on a cash and GAAP basis. On a GAAP basis, our spreads were 4.9% and 10.9% on new and renewal leases signed in the quarter respectively.

Our operating model continues to be effective, producing increases in occupancy and industry leading positive leasing spreads. We have a diverse tenant base, minimizing our individual tenant credit risk with our largest tenant representing approximately 2% of our annualized rental revenue.

Our general and administrative expenses for the quarter include $264,000 in acquisition expenses and $1.7 million in expenses related to the amortization of non-cash share-based incentive compensation. As of the end of the quarter, we have 86 employees and our G&A costs, excluding acquisition expenses and non-cash stock expense was 12% of revenues, down from 14% a year ago.

We continue to see the benefit as we gain scale from our larger base of assets on both our property expenses and our overhead costs. We also continue to believe that a performance based compensation program is the best way to align our team with all of our shareholders.

Now let me turn to our balance sheet. Our capital structure remains solid, with one class of stock, no joint ventures, property level debt and corporate level debt. Our weighted average interest rate for the quarter was 3.1% and our underlying debt structure remains sound with a prudent mix of secured and unsecured debt and well-laddered maturities.

This composition gives us significant financial flexibility and the support we need to execute quickly on our growth business model. During the first quarter, we did not issue any shares under our ATM program.

In 2015, we will continue to evaluate all of our sources of capital including usage on our corporate credit facility, further recycling of capital from property sales, public debt issuance and other accretive capital transactions. At the end of the first quarter, we had a total market capitalization of $775 million, producing approximately $58 million in annual net operating income.

Our real estate debt was $403 million and our ratio of debt-to-EBITDA is 8.6 times as of the end of the quarter. We continued to maintain a largely unsecured debt structure with 44 unencumbered properties, with an undepreciated cost basis of $434 million.

Finally, we are reiterating our full-year FFO Core guidance in the range of the $1.25 to a $1.30 per share. We expect to have greater acquisition volume in future quarters and we'll update our guidance, as those acquisitions occur or other factors necessitate.

With that we will -- let me now turn the call back to Jim.

Thanks, Dave. As you can see, our momentum in the first quarter continued to build on the last three quarters of profitable growth. In closing, I'd like to reiterate our commitment to our shareholders to accomplish the following. Increasing overall portfolio occupancy and rental rates enhancing the quality and size of our portfolio through acquisitions, selected development redevelopment and repositioning, driving additional cash flow through organic growth, value add acquisitions and prudent expense management and judicious sourcing of capital from all of our sources including recycling capital through sale of non-core assets.

Thank you for joining us today and for your continued interest and support of Whitestone. And operator, with that I will now be happy to turn over to you to set up to take questions. Thank you.

Thank you. (Operator Instructions) Mitch Germain, JMP Securities.

Just curious about -- obviously the smaller tenants focus in and just would love to get some insight on sentiment, based on your discussions, are you seeing a lot of expansions or things clearly appear to be improving or just whatever you can offer, I would really appreciate it.

Yeah. We are definitely seeing a direction of moving towards small spaces. Let me give you an example, we have a legacy property, that was in the portfolio, when we got involved in the company back in 2006, which has been one of our nemeses, in terms of vacancy. It's 125,000 square foot property, it has 75,000 square feet of occupancy, so it's 50% vacant. And it's an office building in Dallas, Texas and we have struggled with it not because of the quality of building, but the -- the fact that it was built on a cemetery. Now, as within one mile of Texas Instruments and at the time it was acquired, which was before we got involved, it had a greater occupancy and it was brought on the cheap.

Height, I'd say to B plus to A minus quality building, wrong location for tenant use. So we applied our community center business model, making communities out of office space and have copy written, a section of our business (inaudible). And so what we've done is, we've gone in and carved up a space on one of the floors, that's around 6,000 square feet. We did this -- we finished the space less than six weeks ago. We had 13 individual office spaces with lots of security, it's a hitech, it's, it's very much like a Regency on a hitech basis that has all kinds of bells and was whistles in there. And we've already leased 913 spaces in like 6 weeks. So what we're seeing is the smaller you cover up your spaces, the more technology you include, the easier it is, more quickly it leases. The second thing we're finding is that the compatibility of tenants, if you mix the tenants properly, you're going to --it's going to generate its own potential occupancy. Now just -- because I mentioned the Houston property or the Dallas property which I wasn't intending to, our plan has always been to sell it, but you don't want to sell a building that is 40% vacant. So you will see this come up for sale once we fill the property.

Great. I think Peter has one.

Yeah, hi guys, I just want to see if you could kind of comment on the geographic mix that you're seeing in the pipeline maybe deals versus -- Texas versus Arizona for the rest of year? Thanks.

What we're finding is that the -- we're seeing fewer starts in the Houston market. And it's starting to slow down in terms of new starts in the Dallas market. We're also seeing existing deals get very pricey. We're seeing deals that are going in the sub six cap rate ,that have occupancies that are soft above 90% but they're representing a 90 plus percent occupancy, but there is little or no upside. And we're also seeing around the bidding options on those properties, where they represent -- the agents are bidding the prices up too high. I think you saw the premium that (inaudible) sold for. I think they're struggling a little bit now, we're not seeing that as being competitive with us in the marketplace, because they have such a high price on and they have to meet those new conditions.

So we're seeing the strength in San Antonio continue and still opportunities there. We're seeing it in, in its sister area Austin, we're seeing some deals in Phoenix not too many though. So what in this stage in the cycle what we were seeing is that the properties that we bought two years ago, that had residual development land, for example an outparcel for 30,000 square feet or 5,000 or 10, 000 maybe a lot of properties like that we were buying in that down market. We're seeing opportunities to bring that square footage online at a much lower basis, to be competitive with our neighbors, and so we're in that part of the cycle right now.

Peter, this is Dave, the only thing I might add is. We talked about with our business model. Obviously, we get lot of scale and benefit as we grow our market and expand so to Jim's point, the San Antonio - Austin market as well as the Dallas market are markets that we'd like to expand our holdings, therefore we're able to utilize our infrastructure better. So we're seeing opportunities in those markets. And it also fits very well with our plan.

Awesome. Great guys, thanks so much. Thank you, guys.

Thank you.

Carol Kemple, Hilliard Lyons.

Good morning.

Good morning, Carol.

Good morning, Carol.

I know in the past you all talked about interest in a potential new market or it sounds like where pricing is in your current markets, are you getting any closer to entering a new market?

We did make a bid on a property in the market outside of our existing markets earlier this year and it was so pricey, that we just pulled back from. Again, it was a sub 6 cap rate, we thought the opportunity for growth was taken out of it, the way it got priced, it was in a market that we saw is being a potential new core market for us and we decided it was just a wrong time to buy and exercise our discipline to pull back on. So, we still look at these opportunities, we just look at a little bit slower now in terms of what we're looking.

So would you say overall that market just pricey it wasn't just that one asset?

I think what happened is, because of the low interest rates you're seeing, a lot of folks come into the real estate business who don't necessarily have the experience that we may have, but have the availability of raising capital and debt. And that's exactly what we experienced on a lot of the assets that we bought when we were in Phoenix. So as a result, they're buying deals just to do transactions and that's what we're seeing in the marketplace right now. I think that will cool off a little bit, when interest rates begin to rise and we've been through, we've run a business, many businesses with high interest rates and we actually kind of welcome that, because we understand the balance sheet, how to make money in this business. So that's what we're seeing, we're just seeing a lot of buyers who don't have quite the experience in capitalization who are able to raise some capital better this time.

Okay. And then can you quantify the size of your acquisition pipeline at this point. Let us know, if you have anything under contract?`

Yeah. Sure. We have a huge pipeline and obviously when we get to quantify, we got stuck a little bit We follow a lot of assets, but now it's been excess of $0.5 billion as it's been for a while. Our acquisition team tracks assets we told you stories about assets we closed on that we watch for two or three years. The pipeline is still very robust, doesn't mean that all those properties meet our price standards, they all meet our community center standard and so we watched them and we look for an opportunity to enter at the right price. As far as deals we have under contract or LOI, we always have a large population of deals working. We got about $60 million right now in two deals, that are in the process of moving to close. I think they're both there, one is LOI, one is under contract, but one we'll move to contract shortly. Clearly we do our diligence during the contract period, so there is some chance that we would not close. But we have an active pipeline of acquisitions and then behind those two deals we also are looking at other opportunities. So the Jim's comments about seeing competition in cap rates are spot on. We are continuing to see opportunities, we're seeing opportunities just a little higher cap rates, but still with very good economics that match, what we've done in the past as far as a cash-on-cash return or an IRR.

(Operator Instructions) Nate Kennedy, BMO Capital Markets.

I just had a question about your development pipeline and just sort of trying to put a number on that and to get an idea of sort of what size of construction development pipeline, you guys are comfortable with?

I'll kick it off, and Jim you could maybe add some color. I'll do the quantitative side a little bit and Jim can add the color to it. Currently, we have a -- as Jim said, we've over the last few years we've strategically acquired adjacent land parcels to the properties we bought, many of those properties. We have a couple, one in Dallas and one in Scottsdale, and we're currently in the process and expect to break ground this year for two small developments. I think they're roughly 30,000 square feet each and adjacent centers that are at much, much larger amount of GLA. The spend on those two is somewhere in the $10 million to $15 million range and then we've probably got another handful of pad opportunities. We've got several pad opportunities in our properties where we bought properties as far as the value add was, they were over pad, then we had the opportunity to add pad, so I can think of three or four those that are small dollars, but just qualitatively, we've probably got 20 million or so of development and redevelopment activity that we expect to move to on over the next 12 months to 18 months.

Great.

The only part to add to that Nate would be that, we also do some redevelopment like in our Lion's Square property, which we've concluded and redeveloped to and with that I have been able to see rent increases beginning of the 10% to 12% and the retaining of that property. And we have several of the, I'd say at least a half a dozen of the redevelopment opportunities we see that happen.

And the economics on the development will be very good because obviously we acquired these land parcels downtime in the market. Many of them are in the Phoenix market. So we've got several examples where we picked up but, I can think of one, where Pinnacle of Scottsdale property, where we had a parcel of land that has great frontage on Scottsdale Road has a note on it for $4 million and we were able to acquire the land for $950,000. So the economics will be good, we're doing most of these obviously in centers that are at great demand and the occupancy is very good.

So with regard to development, it's interesting because our business model truly resonates in terms of tenants wanting to be in one of our properties. In the real estate that Dave mentioned at Pinnacle of Scottsdale, that's approximately 125,000 square feet center with a Safeway and Subway, a Starbucks cigar store and we're developing 35,000 acres -- 35,000 square feet next to it.

Across the street on the corner in the last 24 months was developed and build a new sprout center and that's approximately 100,000 square feet and it's the same quality as ours. What was interesting about is, we didn't lose one single tenant in the new center. And I think that really a test to the way that we manage our business model. And we train our property managers, not to manage necessarily bricks and mortar, but to be customer service agents.

Great. That was really helpful. Thanks for that. And I had a question about your balance sheet. I notice just quite a bit -- quite large amount of debt coming due in 2018-2019 and after, I'm just wondering if you guys had any thoughts about how you to address that or if you have a strategy for that going forward.

Yes, absolutely. We have at the end of 2014, we expanded and renewed our credit facility. So we did that in November of '14, that credit facility has a term fees as well as a revolving fees, the revolving fees has a four-year life and the term period as the term has a five-year life both of those obviously have extension options. So when you see the big bumps on our debt maturity schedule, they are related to the credit facility, that we just renewed for a four-year period, but comes due in, it would be in 2018 it's the revolving fees and then the term fees in '19. We have historically put in place longer term debts, pulled assets out of our credit facility and put five, seven ten year kind of debt, we'll continue to do that. We were fairly active in that in 2014 and 2013. So we will continue to do that, but we are building our balance sheet to be primarily unsecured, positioning ourselves for ultimately a credit rating in the near future. But we are cognizant of the debt maturities and we'll continue to the latter out maturities also we're aware of the – a good mix of fixed rates and variable rates. Right now our variable rate is probably a little higher than it has been. So I think you'll see us move out. I think we don't feel like we've done a good job of taking advantage of the lower interest rates, obviously we're seeing those move up and we are continuing to ladder out debt.

If you look at our debt on a debt to per square foot makes us, it's very conservative, many of the properties we bought, we bought value add properties that will increase the value over time and so there's a lot of different measures, but our debt per square foot is very conservative.

And there no further questions at this time, I'd like to turn it back to Mr. Mastandrea for any closing or additional remarks.

Well, thank you operator and thank you all for we're joining us on today's call and your continued interest in Whitestone. We continue to be excited about the business in general and particularly Whitestone it's been a enterprise, it's been exciting to build and we think it's got a great future.

We're getting lots of traction now in the -- and not only in the marketplace, but in each and every one of our properties. I think in time, you'll see that the real value of the company will be reflected in the share price. And I think that that's probably not too far in the distant future. We're currently trading at one of the lowest multiples in our segment of the business, which is around 11 to 12 multiple.

Most of our peers that we see as our peers are in 18% to 22% multiple. And we have -- what we've really been able to demonstrate is that our dividend is on fairly solid ground at $1.14 a share, with the results of this quarter and the previous I want say seven quarters of increasing growth in FFO I think you all know that. Thanks again and please feel free to call me or Dave, if you have any questions or if you'd like to tour any of our properties, would love to take you. Thank you all.

This concludes today's conference, thank you for your participation.