Whitestone REIT (WSR) 2016 Q2 法說會逐字稿

Good day and welcome to the Whitestone REIT second-quarter 2016 earnings conference call. Today's conference is being recorded. Following the prepared remarks, we will conduct a questions and answer session and instructions will be given at that time.

At this time, I would like to turn the conference over to Mr. Bob Aronson, Director of Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, and welcome to Whitestone REIT's 2016 second-quarter conference call. With us on the call this morning is Jim Mastandrea, Chairman and Chief Executive Officer, and Dave Holeman, Chief Financial Officer.

Please be aware that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from these 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 the factors and risks that could adversely affect the Company's results.

It is also important to note that today's call includes time-sensitive information, accurate only as of today, July 28, 2016. Whitestone's second-quarter earnings press release and supplemental operating and financial data packets have been filed with the SEC. Our Form 10-Q will be filed shortly. All of these documents will be available on our website, whitestonereit.com in the Investor Relations section.

Today's remarks include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings press release and supplemental data package.

With that said, I would like to turn the call over to Jim.

Thank you, Bob. And thank you all for joining us on our call this morning. I'll begin the call with a discussion of some of the key financial trends we monitor, including operations and acquisitions to measure and guide our day-to-day decisions towards achieving our long-term objectives. Dave will follow with a more detailed review of our second-quarter financial results.

Overall, our value-add internet-resistant business model is successfully driving increased net asset value per share. The foundation of our model is acquiring and operating Class A quality retail properties in markets with high household incomes, a highly educated workforce, and strong population growth that leads to greater discretionary spending, specializing in service-oriented tenants such as dining, health and wellness, entertainment, education, and specialty retail, and meeting the needs of the communities we serve and linking our tenants directly to the neighborhoods.

This quarter marks our 23rd consecutive quarter of year-over-year growth in revenue and net operating income with increases of 14.4% and 16.6% respectively from Q2 2015 to Q2 2016.

Core to our business is our people. As a team, they advance our innovative business model, sustain and grow our profitability through increasing occupancies and retaining a large portion of our tenants through releasing, while attaining additional scale through development, redevelopment, and acquisitions.

We were early to innovate an internet-resistant business model in the retail space with smaller, service-based tenants, currently accounting for over 80% of our annualized base rent. Since our IPO in 2010, the trend of our financial metrics has been positive. This quarter, our leasing of small space has driven a same-store net operating income increase of $559,000, or 4%, for 2Q 2016 over 2Q 2015.

We approach leasing by proactively targeting specific potential tenants that meet the needs of the community. The art of our leasing is our targeting efforts as we seek to fill vacancies rather than just sitting back and waiting for incoming calls from brokers or prospective tenants. As our tenants' businesses grow and occupancies rise, our revenue and net operating income increase.

During the quarter, we signed 101 new and renewal leases totaling 309,000 square feet, and retail occupancy expanded to 89.6% from 87.9% in 2Q 2015. Further more, our overall occupancy increased to 87.2% from 86.4% during the same period.

As we lease vacant space and release to our existing tenants, our revenue also rises. This quarter as compared to 2Q 2015, we had a 6.6% growth in annualized base rent, which helped drive our 14.4% increase in revenues.

To support our innovative internet-resistant model, we build systems and add processes to scale as we expand our properties through development and redevelopment along with making accretive acquisitions.

In late 2016 to early 2017, we expect to complete approximately 63,000 square feet of new development currently under construction in properties located in affluent North Scottsdale, Arizona and Frisco, Texas. The land for these two developments was acquired with the original purchase of the respective properties. Our land cost was minimal as it was generally not entitled at the time of acquisition and was considered residual to our purchase price of these two properties.

We will be increasing Pinnacle's leasing space, the Scottsdale property, by 24% and Starwood, our Frisco property, by 64%. Combined, the additional space is projected to produce incremental net operating income in excess of $1.8 million on a total investment of approximately $19 million, representing an estimated IRR of 14.1%.

We also continue to scale our business through accretive acquisitions while maintaining our discipline as we pursue and negotiate the purchase of additional properties. For example, during the second quarter, we had two properties under contract with only due diligence expense at risk. During due diligence, we determined that these properties did not meet our underwriting criteria, nor did they have the value-add potential we expected. As a result, we opted out of the two deals, which was the right decision even though we incurred additional acquisition-related expenses in the quarter.

At quarter end, our portfolio consisted of 69 properties, principally located in the fastest growing cities within the business-friendly states of Texas and Arizona, including Austin, Dallas, Fort Worth, Houston, San Antonio, Phoenix, Mesa, Chandler, Gilbert, and Scottsdale.

Overall, our properties are performing very well. But even more exciting is the fact that most of these properties have room to perform at even higher levels. Furthermore, our properties in Houston are well-positioned, and we continue to see relatively little impact on these properties from lower oil prices.

What energizes our management team is the opportunity to carve a niche in the changing retail landscape where consumer behavior and purchasing patterns are shifting. We utilize a full range of research and strategy to design, market, lease, and manage our centers to match tenants with the shared needs of the busy families living in the near-by (inaudible) neighborhoods.

By creating a community environment within our properties, we're able to promote an atmosphere for the success of our tenants, whether they are national, regional, or local, to capture higher investment returns and enterprise value.

Beyond our core business is the untapped intrinsic value within our properties that is being created. It is the embedded opportunity that we unlock by obtaining entitlements, such as additional building rights at several of our Arizona and Texas properties, totaling over a half a million square feet of potential expansion. This is significant.

While we accomplished much through the first half of 2016, we still have a lot of initiatives underway to help us sustain our momentum and drive profitable growth. Some of this work includes completing our transition to a pure-play retail company through the disposal of our remaining non-core properties, increasing our total portfolio occupancy, completing construction on two properties that I mentioned earlier in Texas and Arizona, lowering our overall debt leverage through increased cash flow and sales of legacy properties, and closing on additional accretive value-add properties.

Let me briefly touch on the continued disconnect in the market valuation of our Company, and specifically, the underlying net asset value of the properties. We have produced six years of impressive compounded annual growth in many key metrics of growth and profitability. Clearly, online retail sales of hard and soft goods have opened up the door for Whitestone's service-based retail community centers.

We know that if we continue to perform, over time, the market will recognize the value we are creating and that, in turn, will begin the reflect the overall market valuation of the Company. We are already seeing early signs of this in 2016.

With that, I would like to turn the call over to Dave, and I'll provide some closing remarks following the conclusion of the questions and answers. Dave, please?

Thanks, Jim. Our positive performance continued in the second quarter, reflecting the successful execution of our distinctive internet-resistant business model and was highlighted by a year-over-year increase of 170 basis points in our retail occupancy and solid topline growth.

Total revenues for the second quarter increased to $25.1 million, up 14% from the second quarter of 2015. Our revenue growth was driven by the combination of a 50 basis point increase in our average same-store occupancy, 2% growth in our same-store average revenue per leased square foot, and new accretive acquisitions slightly offset by asset dispositions.

Property net operating income for the quarter increased 17% from the prior year, driven by strong topline growth and efficiencies in our property operating expenses. Over the last 12 months, our real estate assets on a cost basis have increased 15%, and our total property operating expenses have gone up by only 10% due to the efficiencies generated from our scalable business model.

For the quarter, our same-store net operating income grew 4% from the prior year. Funds from operations for the quarter increased 13% from the prior year, and adjusting for acquisition costs, and the amortization of non-cash share-based compensation, funds from operations core was up 9% over last year.

On a per share basis, funds from operations core was $0.32 compared to $0.35 from the prior-year period. The primary reasons for the year-over-year per share decline were late last year, we termed out for five to seven years and fixed the rates on $200 million of our variable rate debt. And as a result, we incurred higher interest expense in the quarter of approximately $0.02 per share.

Our average interest rate for the year's second quarter was 3.51% as compared to 3.19% for the prior-year quarter. We believe that locking in the rates on the $200 million of debt was absolutely the right thing to do. We also incurred higher professional fees of approximately $0.01 per share in the second quarter related to tenant leasing, acquisition, and legal costs.

Let me provide a little more detail on our general and administrative expenses. At the quarter end, we had 95 employees, and our general and administrative expense for the quarter was $5.4 million, which was up approximately $400,000 from the prior year. The increase in general and administrative expenses was primarily due to increases in salaries and benefits of approximately $120,000, or 6.7%; an increase of $150,000 in our amortization of non-cash share-based compensation; and higher professional fees of approximately $141,000, as I said, primarily from legal costs related to tenant leasing and collections and litigation matters.

On the leasing front, we had an outstanding quarter, signing 101 new and renewal leases for 309,000 square feet. The total leased value signed in the quarter was $24.7 million, an increase of 54% from the 2015 second quarter. We expect these new leases to contribute fully to future quarters as they only contributed partially to the second quarter of 2016.

Our leasing spreads for the last 12 months on a GAAP basis have been a positive 9% on renewal leases and 4% on new leases for an aggregate 8% increase. In our retail properties, which represent 90% of our invested capital, occupancy was 89.6% at quarter end, which was an increase of 170 basis points year over year. And our average base rent per square foot on a GAAP basis expanded 5% to $16.35 per square foot.

Now let me turn to our balance sheet. We had total real estate assets on a gross book basis of $845 million at the end of the quarter, producing approximately $70 million in annual net operating income. This equates to an over 8% unlevered cash-on-cash return on our investment.

Over the last 12 months, our real estate assets have increased approximately 15%. Our capital structure remains simple and sturdy with one class of stock, no joint ventures, and a combination of property and corporate-level debt. As of the end of the second quarter, approximately 74% of our debt was fixed with a weight average interest rate of 3.9% and a weighted average remaining term of 5.6 years.

Our underlying debt structure remains sounds with a prudent mix of secured and unsecured debt and well-laddered maturities. This composition gives us the financial flexibility and support we need to react quickly to growth opportunities and changing conditions.

Our real estate debt at quarter end net of cash was $496 million, which is down $8 million from the first quarter, lowering our debt to market capitalization ratio by 6% from Q1 2016. We continue to maintain a largely unsecured debt structure with 49 unencumbered properties out of 69 at an undepreciated cost basis of $592 million.

We had $169.4 million of availability under our credit facility at the end of the quarter with additional availability of $200 million from the exercise of the facility's accordion feature.

During the second quarter, we sold 736,000 shares of our common stock under our at the market program at an average share price of $14.66, resulting in net proceeds of approximately $10.6 million. Subsequent to the end of the quarter, we sold an additional 450,000 shares at an average share price of $15.56, resulting in net proceeds received of $6.9 million. These funds were used primarily to pay down debt and reduce our overall debt leverage.

We continue to evaluate all sources of capital to fund our growth, including recycling of capital generated from non-core asset sales, additional debt, and issuances of equity.

Turning to our guidance for the year, we are reiterating our guidance range for funds from operations core of $1.33 to $1.39 per share. We are adjusting our guidance for net income and FFO per share due to higher non-cash depreciation and amortization expenses related to our properties and share-based compensation.

As previously communicated, our 2016 guidance does not reflect the effect of any future acquisitions or dispositions. We will update our guidance as necessary to reflect any new factors. Please refer to the supplemental financial information that's posted on our website for additional details on our financial guidance.

That concludes my remarks, and Jim and I will now be happy to take your questions.

Thank you. (Operator instructions)

Craig Kucera, Wunderlich.

Hey, good morning, guys. I know earlier this year you had been -- and I apologize, you may have discussed this earlier, but I had a hard time dialing in. But earlier this year, you were looking at disposing upwards of $100 million of assets. Is that still the plan? I know it's not included in the guidance, but is that still the plan? And kind of where are you in that process from a marketing perspective?

Yes, sure. Hey, Craig. It's Dave. Thanks for your question. Yes, we have communicated we still intend to be really disposed of our non-retail assets by year end. We are currently working that process on several angles, but we do expect to dispose of the remaining non-core properties. And it's roughly 10 industrial properties, two office properties, and then maybe a couple smaller retails. But it's about -- it's probably -- it's obviously hard to predict the dollar amount, but it's in that $70 million to $90 million range probably from a size perspective. And we are in the market, and we are expecting to get those completed by year end.

Got it. And looking at your core operations, you've -- it was nice to see the same-store up north of 4%. You've had a good success reducing operating expenses, particularly on the real estate tax side. Are you achieving any appeals there, or is that just sort of where the market has gone?

Yes, Craig. It's Dave again. We're very active on the property taxes. Obviously, especially in Texas, taxes on the property side are higher than some states. So we actively fight to lower our taxes in our properties and did have some success during the second quarter. So it gives us the ability, obviously, as we lower those operating expenses, to be able to charge a little higher base rent. So we are very active, and we do pursue a lot of angles to get the taxes reduced.

Got it. And one more for me. When I look at your guidance for the year, how much of that from a same-store perspective is driven by gains in occupancy? Is that getting from the current 87% up to the range you put out there of 89% to 91% by year end?

Yes, so the guidance, as I said, just to reiterate a couple things, we've obviously given guidance in the $133 million to $139 million range for FFO core. We've given some of the underlying drivers. I think you hit on the same-store growth of 3% to 5%, and then year-end occupancy, we've given a number.

Frankly, most of the increase is from the same-store growth. The occupancy increase, which we believe we will achieve, will probably contribute more heavily to 2017 than 2016 because we're continuing to push that. We're halfway through the year. We're moving the needle, but we've got a ways to go. So most of the growth comes from the same-store growth, which was 4% during the second quarter.

Craig, this is Jim. I'll add to that. We have two properties that we have under construction. We're in the final stages of those. We expect to add about $1.8 million in net operating income, which is significant. We have, in each case, the spaces are approximately 50% preleased. So as we bring those online, you'll begin to see that adding to it as well as the increases in the occupancies.

Great, thanks.

RJ Milligan, Baird Investment Bank.

Hey, good morning, guys. This is Will Harman on for RJ. Just a question just going back to the transaction activity. Do you guys have any plans to do any additional acquisitions in the second half of 2016? And if so, what markets are you looking at?

We do. In fact, we're constantly in the market working deals either at the LOI stage, some in the contract stage. We have two deals currently under letter of intent, and they're in that $75 million to $100 million range. They're also structured with some operating partnership units, which take a little bit longer. They're Class A properties in the Phoenix marketplace.

And I think I'll just add a little bit. I think just generally we absolutely want to continue to be acquisitive. We're seeing opportunities. We've built scale up in our five markets we're in today. I think we think there's an opportunity to continue to fill those markets out and operate very efficiently. So our primary target markets would be our existing markets. And yes, we do feel like there's an opportunity. We are going to continue to be disciplined on the acquisition front making sure that the underwriting is accretive and adds value.

Yes, and Will, just by forward looking, what we like to do is have a position in a marketplace once we have the infrastructure there of anywhere from 3% to 5% of the total ownership of retail assets in our class. So we've reached that and almost there in Phoenix. I'd say we're at the 4% or 5% level. We look to do the same thing in Austin, in San Antonio, in Dallas, in Fort Worth, and in Houston. But we have a ways to go in each of those marketplaces. But once we have the infrastructure in, the easy part is to add properties to them with very little additions to overhead.

And the assets you're looking at in those markets, what do cap rates look like?

Good question. Cap rates, depending on the occupancy levels, are in the 7% range. We haven't seen -- we see some sometimes bouncing off of 6%. But what we're finding is the assets that we like have some value-add component. For example, the two properties that we had under contract, once we got into the due diligence, did not have the upside that we look for in a property, which might be rolling the tenants, which might be replacing some tenants.

When you look at a property, it may have more covenants than you want to have because covenants and leases that restrict us in terms of who we can lease to is really doing no more than subsidizing one tenant's business. We don't like to do that, and we like to have the free range to really maximize the value on the property. So those are the kinds of reasons why we wouldn't do a deal. But it's rare that we opt out of properties. And if it is, that means that we can't really attain the kind of results that we're used to having.

We have 69 properties right now, and we're just reaching the point where one of the properties is fully stabilized. And we're just real close to that. I think we're about 2,000 square feet away. As we do, then we look at, should we replace that; in other words, sell it and replace it with more value-add opportunities. So if we have 69 like that, that means we have value opportunities in a lot of our assets.

Thanks, that's helpful. And then the last question is, on comparable new leases for Q2, looks like they were down about 6%. Was just wondering if you could provide any additional color there?

Yes, sure. We track our leases that we signed in quarter. We compare those to the lease that was in place before. You can see the numbers. In any particular quarter, there's not a tremendous amount of number of leases coming through. I think during the second quarter, we had one comparable new lease that was a larger reduction. So we tend to -- what I would tell you is I think I tend to look at the 12-month results because you have a larger number. They're only 15 comparable new leases coming through. We did have one restaurant lease in Arizona that the previous tenant had been a pretty extensive build-out. So when we brought a new tenant in, we obviously came in at a lower rate, and that reflected in the table as a reduction.

But our overall leasing spreads, I think, from a 12-month basis on an aggregate are about 8%. And nothing -- there was just one unusual comparable new lease in the quarter that caused that rate to be a little lower than we've seen in prior quarters. But I don't believe there's a trend there. We tend to look at the longer term on those.

Okay. Thanks, guys. That's all the questions for me.

Nate Kennedy-Mould, BMO Capital Markets.

Good morning, guys. I had a question about your dividend. I notice that the AFFO coverage ratio is around 100%, maybe a little bit north of 100%. Just wondering how you guys are currently funding that? And if you could provide maybe a forecast for coverage over the next couple years?

Sure, Nate. I think one of the things we report is we report funds from operations core adjusted like most companies do. We think it's appropriate to do some adjustments. The largest adjustment we have from NAREIT FFO to funds from operations core is really non-cash amortization of share-based comp.

So our funds from operations core, which we think is a more appropriate measure, the dividend is in the low 80% of funds from operations core. And then when you calculate to a more traditional AFFO subtracting tenant improvement and lease commissions, we're right around 100% coverage today, and obviously, we've been increasing.

So I think from a dividend coverage perspective, while our dividend percent is a little higher than some of the larger REITs, we believe it's covered, and we believe there's significant cash flow from lease-ups and lots of other levers in the Company. So we're very comfortable with the dividend level.

Got it. Got it. Okay, thank you. And about your -- the two development projects that are ongoing in Scottsdale and Frisco, Texas, have you seen any change in your costs in those projects, or have your forecasted yields come down at all?

Actually, they've come right on line with budget, maybe a little savings, giving just a little bit of cover. The one property that we have under construction is on land that we bought adjacent to Pinnacle, which is our property located at Scottsdale Road and Pinnacle Peak. We paid $900,000 for the entire parcel of land next to it. We sold a postage stamp towards the back of that property for $1.2 million, and the buyer is sharing our improvements of the main road coming down the center of approximately $300,000. So we virtually have no land cost on that at all.

We have a lease that is signed, which we're not permitted to name the tenant. All I can say is that they have coffee shops in excess of 900 throughout the world. And so they expect to open some time this fall. We have an upscale Italian restaurant that's preleased it. We're talking to a money manager to take an entire section (inaudible). So it's really just an excellent property.

The other property north of Dallas, Texas is in a similar situation. We've had the property in the 90% range occupancies, and we have it over 50% preleased today. Again, it's a matter of breaking it down into smaller spaces and getting the kinds of rents that we're accustomed to.

I mentioned also in my remarks, we have approximately 500,000 square feet of potential space that we can add to our portfolio. And what we do is when we're making acquisitions, we're looking for components of the property where we can either entitle or add some square footage.

Usually we're the second or third owner of a property, and the potential land opportunity is covered up with asphalt. So we were very careful to analyze to determine if there is residual land -- I'll give you a simple portion of the formula -- if you have 4.5 parking space to every 1,000 square feet, that's usually a requirement. When we find that we have seven or eight or nine parking spaces per square foot, we know there's an opportunity under that asphalt to roll it back and to build some additional square footage, which we're very good at.

Great, great. Thank you for that. And then just shifting over to leasing. I noticed you have about close to 25% of your annualized base rent expiring between now and the end of 2017. How much of that is in Houston? And what's the leasing environment currently like in Houston? I think you have a number of short-term leases in that market, if I'm not mistaken? Just wondering if you've had any negotiations going out to tenants before these leases come up?

Hey, Nate. As you remember, fundamental to our business model is we very much like leases where we have the ability to increase the rental rates, and we've done that very successfully over the last few years. Our typical lease range is about three years if you look at the leases we've signed. So we have kind of a normal roll in 2017 that we've had historically as well as going forward.

Our Houston market continues to do very well. I think on the retail side, Houston is performing very well, and our properties are doing great. Houston is about 20% of our overall net operating income. So it's a percent that's down quite a bit, obviously, from several years ago. But we continue to see our assets in Houston doing well.

I don't know the percent of that roll that's specifically related to Houston, but I can tell you that there's been really no difference in the way the assets are performing in the Houston market to any of our other markets.

Fair enough. Great. That's all from my end. Thanks a lot, guys.

Kevin Chang, SunTrust.

Hi there. Good morning, guys. Just a quick question on transaction activity. I believe a couple quarters ago you guys mentioned a $200 million acquisition target for this year. I was just wondering if that kind of still stands in light of what's going on with the acquisition pipeline? And I was wondering if you can comment on that?

Yes, sure. I think we have communicated regularly that we didn't give any guidance on acquisition levels. Obviously, it's tough to predict the timing. But we have said that we are very acquisitive. We've done over $130 million in acquisitions the last two years, and we plan to do that. So I think we have communicated that we think there's a great opportunity on the acquisition side, and we remain very positive on our acquisitions for the balance of the year.

We have not specifically given a number, but we think there's opportunity. And as Jim mentioned, we have several acquisitions under negotiation. But we have been very disciplined. We have been looking for acquisitions that meet the criteria. So I think we still are very pro from an acquisition standpoint. We continue to see the types of properties that we can buy and add value for our shareholders.

One of the things, Kevin -- one of the things I'll just mention to you, in our pipeline, we're at the point where a lot of the restructured deals of the CMBS market five to seven years ago are starting to roll. Owners of properties are looking at refinancing or selling, and on the refinancing requirements that they have to pay down some of the debt. So we're seeing some fairly significant opportunities there.

We're also seeing some opportunities in some of the TIC market where some of the assets are rolling over. And we use our OP structure, which is very helpful to sellers, where they can retain their tax benefits from before and keep their [bases] where it is and feel comfortable with our dividend that we're well covered.

And our dividend today is $1.14 in absolute numbers. And we're projecting a coverage that is much more higher than that, which Dave mentioned earlier. So there's a lot of really good real estate that's coming up, both in Dallas, Houston, and Phoenix [still].

Okay, great. And then another quick one. With respect to the development project at Pinnacle and Shops Starwood, when do you expect those properties to start contributing to NOI? And what's the leasing been like there so far?

Sure, good question.

We'll tag team this a little bit. I think Starwood in Dallas is probably four months ahead of Pinnacle. Starwood is kind of completing as we speak. The construction, we're about 50% preleased. So we will see some -- there's a little bit of free rent period in some of those leases, but we will see Starwood start contributing to our results probably primarily in the fourth quarter. And then Pinnacle will complete later in the year, and we expect really to see that contribute to the results in 2017. Both properties, as we've mentioned, when stabilized produce about $1.8 million in NOI together. So we expect it will be very close to that in 2017.

Yes, Kevin, let me add to that. In house, in the vertical integration of our Company, we manage the entire strategy, the development, which is the entitlement and the construction, in house through people that are Whitestone associates in the Company.

Sure. And then just on the 50% prelease, is that new customers? Or I'm just wondering have the existing customers of the property taken more space?

Primarily new customers. So we're talking about a little over 60,000 square feet in total. Both of these are centers that are in great locations. The existing property is pretty well full. But I think most of the activity are new customers, not tenants just moving from our existing property to the new one. I actually can't think of any tenants that are moving. All the tenants I'm aware of are all new.

Hey, guys. This is Ki Bin. Couple quick questions here. In your press release, you said 4.2% same-store NOI growth in the second quarter of 2016 over last year. But when you calculate off your disclosures, it's about 3.9%. So I was curious, am I just missing a line item there?

Hey, Ki Bin. It's Dave. I don't think so. I'm looking back at the disclosure. Should just be the same-store that's produced in the supplemental data if you divide it -- like you said, we might have a digit slipped, but there's no adjustment over what's reported in the supplemental data. I think it's on page 16, which is $560,000 and an increase (inaudible) [14.4%]. So it may have just (multiple speakers) missed a digit on the press release.

So what do you think about the use of equity at this juncture? Obviously your stock price has done really well. So the equation of using debt versus equity, I would say, probably has to change given the change in your stock price. As you look at your pipeline or things you want to buy or develop going forward, is your willingness to use equity a lot higher now, or has it been the same as before?

I think it's all relative, as you said. I mean, we did sell some shares under the at the market program -- about 1.2 million shares with an average price of $15. So we do think that price obviously is better than it was a quarter or so ago. We have communicated our intent to de-lever over time. A lot of that de-levering will come from just increased cash flow from the operating portfolio.

So I think we continue to feel like there are adequate sources of capital to buy the kind of deals we're looking at. Obviously the stock price increasing helps the cost of capital on the equity side, and so we will continue to look at all of those sources.

Ki, this is Jim. One of the things that we've been doing is we calculate -- it's our own internal estimate of NAV, which is north of $22 not including any of the intrinsic value and the entitlements in that. And what we're finding is we've got several deals we're in negotiations where we're using our OP units, which these are some of the TIC deals that we've looked at that are discounted from the $22 a share, which is significantly higher than what we're currently trading at.

And we find that when we present our Company to groups of investors that are included in some of these sales of these assets, that they find that it's a very compelling story and that we can show them the pockets of where we're driving the revenue. So we'll probably use more OP units in some of the deals going forward. We've used some in the past and we find that they've been -- our investors seem to be very satisfied with them.

Okay, and I'm looking at your lease summary pages. It just seems like overall what you consider -- and this is not just for Whitestone; this is probably for many REITs. But what you put in the non-comparable new lease pool versus comparable new lease pool, I mean, it's a lot more in the non-comparable bucket. So can you remind us how you determine what is comparable versus not comparable?

Yes, sure. On page 30 of the supplemental data in the foot notes, I think we give a definition. Most often -- a high percent of the renewals are comparable. Obviously, that makes sense. And we do have a fair amount of the new leases that aren't comparable. The way we define comparable leases, it's where there was a tenant in the space within the last 12 months and the new and renewal square footage was within 25% of the expiring square footage. So we have kind of just obviously tried to draw a line where we think it makes sense and provides information that's helpful.

And so there's no other criteria that might be involved besides those two?

No, that's the criteria we use. I mean, obviously -- yes, that is the criteria we use.

And just a last question. Just generally speaking, it seems like the weighted average lease term for what you sign is just a little bit lower than what you typically see and maybe that's the nature of your centers of your customer base. But (inaudible) renewals at three years, is that just what we should expect from the portfolio over time?

Part of our core strategy and philosophy is that we try to pick assets, and we've done a great job at it, in some of the best markets with high household incomes. And I think we're in the top of our group there. When you do that and then you select the tenants that can meet the needs and they link to the neighborhood, it's always better to have shorter term leases because as their business grows and gets stronger, then they don't want to leave. And we find that that's very good in terms of driving the profitability of each of our properties.

But also what happens is if you expect -- and we don't gear any of our decision based on inflation. But when you have short-term leases, if in fact you do have inflation, then our shareholders will benefit from that. And in our properties, the (inaudible) of our properties, we have a number of assets that are sometimes triple net that are some of the nationals. And of course, that's another component of the overall tenant base we have.

Okay. Thank you, guys.

Carol Kemple, Hilliard Lyons.

Good morning. Earlier in the call, you mentioned a couple transactions that you have under letter of intent. If everything goes well, would you expect those to close the third quarter or fourth quarter?

We've been careful about giving too much guidance around the timing of acquisitions. We have always had a, over the last several years, had a very active pipeline on the acquisition front. We do have two deals, and there'll probably be another two deals. But we have two deals that currently we're working on. I hesitate to give any guidance as to the timing. I mean, we feel very good about the deals. We feel very good about the closing. But we're going to be disciplined. We're going to work those and make sure that everything comes together in the underwriting that makes sense.

Okay. And I know you all said that there was some interest in units with those. Would both of those deals be structured with 100% units, or would they be paid for with some cash and some units?

There would be a portion of units, and that could be anywhere from 25% to 50%. And then the balance would be using cash, drawing down on our line of credit. Also we had sold some shares in the ATM program at much higher prices. And I think you know that when you sell in the ATM program, your commissions on that are really roughly about 1.5%, so it's a low cost of capital for us. So we're starting to see a real nice blend of a mix to make acquisitions (inaudible). And then one final piece too. We'll be recycling the cash and the some capital from the sales of some of our assets as well. So you'll see that used for the new acquisitions.

And can you give any color on what you're seeing from interested buyers in your disposition? Like, pricing, is it about where you all thought? Is the buyer pool larger than you thought?

You know, we're seeing -- we're out there in the market. We are seeing a fair amount of activity. But this time, we probably don't have a whole lot of color. We'd probably rather communicate when we have some of those deals closed. But it is our intent to get those assets out of Whitestone and really become a pure-play REIT. But we are seeing a fair amount of activity on those, Carol. Pricing is always hard to determine till you get to the end.

Yes, and Carol, if you look at some of them, you can see there's just a very low book value on them.

Okay, thanks.

Dan Donlan, Ladenburg Thalmann.

Thank you and good morning. I took a while to get on the call, and then I cut out (inaudible). Sorry if some of these questions have been asked. But I just wanted to go to the Houston occupancy for the office flex. It looks like it fell 300 basis points from the first quarter. So I was just curious what drove that. Were there lease expirations? Or did you just have some folks go bankrupt? Or what happened there for the 300 basis point decline?

Yes, so in our Houston occupancy on the office side, I think I'm looking at the -- the office side, we only have one office building in Houston, and I believe the occupancy on that center is close to 100% and has done fine. The flex centers are located in Houston and were slightly down for the quarter. We had a couple larger move-outs that occurred in the quarter, but we are working to release those. Those were pretty low rates, so from a financial perspective, not a big hit; from an occupancy, we did have a little bit of a decrease in our flex product.

Okay, that's helpful. And so as we look at Houston between now and, call it 2017, what percentage of your lease roll is in that Houston office flex type of product?

Well, I guess I would tell you it's a little longer probably in the flex and office portfolio than it is in the retail portfolio. So it's probably a little longer roll than we have in our retail. But I think we have communicated it's our intent to move that flex and office out of Whitestone hopefully by year end. And so we're comfortable with that portfolio. We just think from a pure-play REIT standpoint, Whitestone is better positioned with having all retail assets.

Yes, Dan, that grouping produces somewhere between $6 million and $8 million of NOI, which is easy for us to replace in terms of other properties that have much more potential to them.

Okay. And then as it pertains to your other revenues in the quarter, it looks like they declined by about 9% in the second quarter versus the first quarter. So I think you did about $5.5 million. Was just curious, is that a good run rate, or was there something that went on in the quarter that was one-time-ish? Just trying to get a better sense of how that's going to move going forward.

Yes, so the net operating income first quarter to second quarter was fairly flat; maybe down just a little bit, but fairly flat. We did have lower property expenses in the second quarter. Property taxes, we got some favorable refunds, and then we also, just the amount of repairs we spend. So the other revenues are primarily driven by the pass-through of those property expenses. So really timing of refunds on property taxes and then also the spend on repairs and maintenance. I think from a net operating income standpoint, if you net those two out, it's fairly flat with the first quarter.

The other piece was in the income tax line on the income statement -- which is really in Texas, that's what's called a margin tax, but it's like a property tax -- was down as well. So the result of those expense decreases drove the other revenue down for the quarter. We would expect probably both of those lines to come up. But on net operating income perspective, it doesn't change it much.

Okay, I get it. That makes sense. But just to double check, so the other revenue that's comprised of mainly tenant reimbursements, is there lease termination fee come in there as well?

Very little. It's primarily CAM tax insurance reimbursement. There are some small other charges like late fees. We really don't have a lot of lease expirations in our portfolio. Largely just expense reimbursement.

Okay, okay. Thank you. Appreciate it. And then the increase in the non-cash share-based compensation going up $2 million or $0.07 versus the prior guidance, is that just because your stock price is higher?

It's a combination of stock price being higher obviously makes the cost higher, and then just the amortization period that you incur. So we have -- we obviously look at the expected results and look at an amortization period. So price and then the period over time, which we expense those grants on a non-cash basis are the two factors.

Okay. And once the current grants -- I'm not sure when the current program ends. Is there going to be another program reinstituted? I'm just trying to get a sense for why you guys are adding this back to FFO core if it's something that you're going to continue to have going forward. Seems like it's going to be something that should be included. But if this was a kind of a one-time-ish program, then I understand what you're doing.

Dan, this is Jim. What's really significant to our Company and, I think, a lot of the REITs out there is we have a performance-based program. So we've always had a long-term incentive ownership program in here in the Company. And so we're really closely in line with the other REITs. So I think you're going to see that program, part of the structure going forward in our REIT and other REITs.

And I think, Dan, the reason we add it back to FFO core is we do think it's helpful to investors because it's a non-cash and it is a little bit choppy. And so we think for comparability purposes, it helps to understand the better funds from operations. And so our reason to add it back is to give a little more disclosure around the true operations and take out the choppiness of the accounting, which does not match the actual earning of the stock.

Dan, one thing I think you'll find unique to Whitestone is that we have just under 100 employees in the Company, and every single employee participates in our long-term incentive ownership program. So every employee is an owner, and that really is significant in terms of how they deal with the customers and how they operate and manage a property. And I think you see it in our consistent performance over time.

Okay. And then just lastly on -- it looks like you guys had about $400,000 of acquisitions cost in the second quarter. Was just curious what that was related to since you didn't acquire anything in the first or second quarter?

Yes, it really related to the transactions that we talked about that we ended up taking a pass on the underwriting, and then really our efforts on the acquisition front. So the activities in the Company that were transaction, legal costs, those sort of things related to acquisitions even though we didn't close on any. There's probably some a little bit of carry-over from some of the acquisitions previously. But primarily, our activities relating to acquisitions that were not closed on.

Yes, none of it relates to forfeitures or anything like that. When you're working with operating partnership unit type structures, there's an added legal fee because you're working through tax consultants. And so we're doing much more of that now than we've done in the past.

And some of that, even though the cost was incurred, benefits us on the next deal we do. We've spent a fair amount of time on the structure related to operating partnership units and tax matter agreements that are all acquisition-related, that the cost has been expensed and will benefit us as we go forward.

Okay, understood. I've heard the complexity around OP unit transactions is quite large, so understood.

And we have no further questions at this time. I'd like to turn the conference back over to Mr. Mastandrea for any additional or closing remarks.

Great. Well, thank you, operator, and thank you all for joining us. And we really do appreciate the great questions. Before I close, I do want to remind everyone on the call that we will be hosting an event at our Market Street property at DC Ranch in Scottsdale the evening of November 14.

And we've picked that date because it's -- particularly those who will be attending REIT World in Scottsdale, which is the following two days, we would love to have you stop by. We have seven restaurants here at the property. And when we acquired it, it was just pushing 80%. It's now over 90% occupied. It's a great example of the kinds of value-add, small tenant, service-based, internet-resistant properties that we have.

So anyone who's going to REIT World, for their convenience, we'll be providing shuttle service between the JW Marriott in Phoenix, which is a Desert Ridge Resort, and that's the host hotel, and our Scottsdale property. And so we'll be giving you more of these deals in the future.

I just want to close by saying that we're really proud of the accomplishments since our IPO six years ago. I mean, it's amazing to be able to post double-digit CAGRs. And what we have found is that last year, doing a deep dive into the Company, that we really have to get out and tell our story because we're not a traditional retail REIT.

And so Dave and I, as we continue to be on the road meeting investors, we're continuing to share our story and we believe it's starting to resonate very well. We've had some nice interest in our stock. It's a unique story. The internet-resistant business model has been terrific, and of course, it's being helped with all the problems that are going on on the retail side where most people are beginning to take advantage of the online shopping and the technology that's available.

Our history of profitable growth and our opportunities will continue. And we will be looking forward to meeting with a number of investors on trips that we have already got scheduled, trips that we've had this week even, and that we have in the future and towards the fall.

So we welcome any incoming calls or any incoming inquiries to visit and see the properties. And with that, I'd just like to say thank you and we appreciate your confidence and support, and we look forward to a great third quarter of this year. Thank you, operator.

And that does conclude today's call. Thank you for your participation. You may now disconnect.