Whitestone REIT (WSR) 2016 Q3 法說會逐字稿

Good day and welcome to the Whitestone REIT third-quarter 2016 earnings conference call. (Operator Instructions). Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Bob Aronson, Director of Investor Relations at Whitestone REIT. Please go ahead, sir.

Thank you, Hannah. Good morning and welcome to Whitestone REIT's 2016 third-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, November 1, 2016.

Whitestone's third-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 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 the supplemental data package. I would now like to turn the call over to Jim.

Thanks, Bob, and thank you all for joining us on our call. Today Dave and I will review our third-quarter results and we will provide you with an update on our recent progress and initiatives and we'll welcome your questions at the end of our presentation.

We continue to build on Whitestone's portfolio of exceptional retail properties located in prime locations with high household incomes within some of the fastest growing markets in the country.

Our tenant base is crafted with strong tenants who are primarily service providers that are performing very well as they continue to gain sales in direct contrast to many of the traditional retailers that continue to lose sales to e-commerce.

Our properties and overall enterprise value continues to increase. We make acquisitions of retail properties with potential upside gain through increasing rental rates, re-tenanting, increasing occupancies and adding leasable square footage at competitively lower cost.

This quarter I want to highlight our industry leading compound annual growth rates and key financial measures since our IPO and August 2010; our third-quarter financial and operating results; our recent acquisitions utilizing our operating partnership units priced at $19 a share which is a significant premium to our current traded stock price; our current development activities and our efforts to attract additional investors.

We have implemented a forward thinking business model that is service tenant-based and profitable. With it we have produced compounded annual growth rates since our IPO in August 2010 of 26.5% in revenues, 27.5% in property net operating income, 33.8% in funds from operation core and 8.5% in funds from operations core per share.

On a year-over-year basis this quarter marks our 24th consecutive quarter of revenue and NOI growth and our 25th consecutive quarter of FFO core build.

Our third quarter compared to last year's third quarter is equally impressive. Our results are highlighted by 220 basis points improvement in retail occupancy to 89.6%. Our highly differentiated business is innovate and continues to drive our performance and gain recognition with growth oriented institutional investors.

At its core are high-quality e-commerce resistant neighborhood community and lifestyle retail centers. Our portfolio currently consists of 71 properties located in the largest and the fastest growing cities in the United States including Austin, Dallas, Fort Worth, Houston, San Antonio, Phoenix, Mesa and Scottsdale.

Within these cities our properties are anchored by some of the best communities with high household incomes, highly educated workforces and strong job growth. Our internal growth is strategically driven by our team who continue to craft a tenant mix to capitalize on the changing retail landscape shifting consumer behaviors and purchasing patterns.

We utilize a full range of research to understand the needs of busy families living in the nearby thriving neighborhoods and match those with tenants that are go to destinations for daily necessities, services and entertainment.

This approach is in contrast to traditional retail REITs that lease their properties to retailers who are continually being threatened by the rising rate of online sales.

To ensure our tenants' success we create a physical environment at our properties to increase consumer traffic at gathering and social areas and promote social sporting and holiday events. This process begins with our acquisitions and property strategy team who redevelop and then they reposition, they [reband] and re-tenant and then turn it over to our operating team to lease and manage.

To meet our growth needs we continue to train and develop our people. In January we began our 2017 annual executive real estate executive development program. This 12-month program provides training and development to potential leaders who we select to ensure that the execution and management of our business policies and practices and processes and then give us the ability to scale our business.

In addition, we align the entire Whitestone team with our shareholders with our performance-based stock ownership program. During the quarter we added to our management team with the addition of Travis Rodgers who joined us Director of Operations. And Travis who has a law degree and brings 18 years of experience from his being with Walmart.

In addition to Travis we brought on Dennis Younes, a 26-year commercial real estate veteran who joined our team as Director of Leasing in our Houston operations.

During the quarter, as previously announced, we expanded our portfolio with acquisitions of two upscale retail centers located in Scottsdale. Both are value add properties and are complementary to our e-commerce resistant business model.

These assets bring our total holdings in the greater Phoenix metropolitan area to 27 community center properties totaling 2.3 million leasable square feet and are supported by our existing infrastructure. This places us in the top [two to three, five] owners of retail properties in the Phoenix market.

The two new properties containing a total of 237,000 square foot of leasable area were acquired at a combined aggregated occupancy of approximately 90% at a 7% in-place unlevered cash-on-cash return. But we expect to grow to over 9% as we increase the occupancy and re-tenant some of the tenants and implement our business model.

What stands out in addition to the cash-on-cash returns is that we funded 17% of the $72.5 million purchase price with the issuance of operating partnership units at $19 per operating partnership unit, an over 40% premium to yesterday's closing stock price.

This is the second acquisition we have made with OP units priced at the $19 a share, a premium to our current market valuation. And it is our intention to utilize this advantageous structure in the future.

Tenants of these two properties include two Starbucks, one at each property; an Orange Theory Fitness; Ruth's Chris; Massage Envy; Nashville Steakhouse; Walgreens; Kumon; Bank of America; (inaudible) Bread Company; and Jamba Juice and others as well.

On the disposition front we made good strides during the quarter and expect to complete the disposition of our remaining non-core assets this year, achieving our previously communicated goal of becoming a pure play owner of retail neighborhood centers.

This year we also initiated two development projects which we expect to complete in the fourth quarter. Our development projects are at Pinnacle of Scottsdale in Scottsdale and at shops of Starwood in Frisco, both located adjacent to existing Whitestone centers.

At Pinnacle we increased the leasable square footage by 24% and at Starwood by 61%. The land was included in the original acquisitions at the minimal incremental cost.

Pre-leasing efforts have been strong at both new centers; the additional space is projected to produce incremental annual NOI in excess of $1.7 million and an un-leveraged IRR of 13%. We expect to see the impact of this cash flow to begin sometime in the fourth quarter and then on into next year.

As we ended 2015 we committed to further place Whitestone on the radar screens of investors dedicated to long-term growth. We realized that our story wasn't quite understood and that we had to get out and really tell it one on one as it is different to what investors are accustomed to in the retail growth space.

We had one-on-one meetings with a significant number of potential new investors across the United States and in major European markets to make them aware of Whitestone's innovative e-commerce resistant business. Some of these meetings were second meetings from meeting with them the previous year, particularly in Europe, and we are now helping them as they build their models.

With that I'd like to now turn the call over to Dave and I will provide some closing remarks following the conclusion of Q&A. David?

Thanks, Jim. Our distinctive e-commerce resistant business model continues to deliver solid results. For the third quarter total revenues increased 3.7% over the same period last year to $25.5 million. Same-store revenues, which represent 91% of our total revenues for the quarter, grew 1.8% to $23.3 million.

Property net operating income for the quarter increased 5.4% over last year driven by our top-line growth and efficiencies gained in our property operating expenses. Reflecting our scalable business model. Same-store net operating income grew 3.5% versus the prior year.

Funds from operations core for the quarter increased 3.8% or $360,000. The increase in funds from operations core was primarily driven by increased net operating income of $900,000 or 5.4%, improved G&A by $300,000 which excludes the amortization of our stock compensation and acquisition expenses, which was partially offset by higher debt cost of $900,000 from higher average borrowings during the quarter and a higher effective interest rate.

To that point, in late 2015 we fixed the rate on $200 million of variable-rate debt for a period of five to seven years. Our average interest rate for this year's third quarter was 3.31% compared to 3.05% last year.

On a per share basis funds from operations core was $0.33 this quarter compared to $0.34 in the prior year quarter. The primary reason for the change in the per share amount was the timing of the issuance of 1.9 million shares in Q2 and Q3 through our at-the-market offering program. These funds were used to fund the two properties we discussed earlier.

We expect the two great acquisitions we made in the quarter to contribute approximately $0.12 per share annually or approximately $0.03 per quarter beginning in the fourth quarter of this year. The impact to Q3 2016 of the additional shares was $0.02 per share.

Funds from operations per share was off $0.03 from the prior year primarily as a result of higher amortization of non-cash stock compensation partially offset by lower acquisition expenses.

We continue to benefit as we gain scale from our larger base of assets on our G&A expenses. G&A expenses, excluding the amortization of non-cash share-based compensation expense and acquisition transaction costs from both quarterly periods improved 180 basis points from last year to 10.8% of total revenues. We expect that G&A will continue to become a smaller percentage of our revenue as we grow.

We continue to believe that performance-based compensation resulting in significant ownership by management is the best way to align our team with our shareholders. At the end of the quarter we had 101 employees.

With regard to leasing we had a great quarter. Our leasing team signed 113 new and renewal leases totaling 270,000 square feet with a total lease value of $16.3 million representing future rental revenue income.

Our leasing spreads for the last 12 months on a GAAP basis have been a positive 8.2% on renewal leases and a positive 6.5% on new leases for an aggregate 8% increase.

We ended the quarter with total occupancy at 87.3%. In our retail properties, which represent approximately 90% of our invested capital, occupancy was 89.6%, which was an improvement of 220 basis points year-over-year.

Our average retail base rent on a GAAP basis expanded 3% to [$17.17] per square foot. We have a diverse tenant base minimizing our individual tenant credit risk with our largest tenant representing only 3% of our annualized rental revenues. At quarter end we had 1,561 tenants.

Now let's spend a few minutes on our balance sheet. We had total real estate assets on a gross book basis of $918 million at the end of the quarter producing approximately $74 million in annual net operating income. This equates to an over 8% unlevered cash-on-cash return on our investments.

Over the last 12 months our real estate assets have increased 10%. Our capital structure remains quite simple with (technical difficulty), no joint ventures and a combination of property and corporate level debt.

Further, our underlying debt structure is sound 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 quickly react to growth opportunities and changing conditions.

At the end of the third quarter approximately 70% of our net debt was fixed with a weighted average interest rate of 3.8% and a weighted average remaining term of 5.5 years.

Primarily reflecting borrowings under our credit facility during the quarter of $33.5 million related to the funding of our two Scottsdale acquisitions, our real estate debt at quarter end net of cash was $540 million.

We had $108 million of availability under our credit facility at the end of the quarter with an additional availability of up to $200 million from the exercise of the facility's accordion option.

As previously communicated we expect our debt leverage to decrease over time as a result of increased net operating income generated from increases in occupancies and rental rates and capital structuring of future acquisitions.

During the quarter we completed $72.5 million in acquisitions using 54% equity and 46% debt. The debt to EBITDA ratio on these acquisitions was 6.5 times. As a result our debt to EBITDA ratio decreased from 8.9 times in the second quarter to 8.5 times in this quarter.

We continue to maintain largely unsecured debt structure with 52 unencumbered properties (technical difficulty) 71 with an un-depreciated cost basis of $687 million.

During the third quarter we sold 1,000,084 shares of our common stock under our at-the-market offering program at an average share price of $15.08 resulting in net proceeds of approximately $16.1 million.

These funds along with net proceeds of $10.6 million generated in the second quarter from the sale of 736,000 shares under our ATM program at an average share price of $14.66 were used to help fund the two accretive Scottsdale acquisitions which I previously said are expected to contribute approximately $0.12 per share on an annual basis beginning in the fourth quarter of this year.

To fund the remaining $72.5 million purchase price for the two Scottsdale properties, as Jim mentioned, we issued 621,000 operating partnership units valued at $19 per unit or approximately a 40% premium to our current stock price.

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

Turning to our guidance, we are updating our guidance for the year to reflect the two recent acquisitions, related transaction costs, increased shares and operating partnership and increased amortization of our non-cash stock compensation. We are tightening our guidance range for funds from operations core per share to $1.34 to $1.37.

As previously communicated our 2016 guidance does not reflect the effect of any future acquisitions or dispositions. Please refer to our supplemental financial information that is 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.

(Operator Instructions). Mitch Germain, JMP Securities.

You have a couple of larger tenants with 2017 expirations. I know it is just one of various leases, Safeway, Wells Fargo, Walgreens. What is the status of -- should we assume that all those are renewed?

Yes, let's start with Safeway. Safeway lease [and Anthem], they did just renew, so that is one of them. With regard to Walgreens, I think you are referring to the one that is in Macau. Dave, do you want to address that?

Sure, I will just -- I will touch -- the quick answer, Mitch, is we expect those tenants to renew. I think I will remind everyone obviously we have a really diverse tenant base with even our largest tenant being Safeway at 3% the next one is 1.2%. So the quick answer is we expect renewal of those tenants of the Safeway stores that are maturing in the coming months.

Let me mention, Mitch, on the Safeway up in Anthem that that was one of the Safeway stores that when Albertson's bought Safeway and then they sold a number of stores to [Kagan]. When we accepted that sale we kept Safeway on the lease.

And so Kagan, as you know, filed bankruptcy and Safeway now came in and they came back to us and said they would like to re-lease that space from us so we did. So they are in the process to be open by Thanksgiving.

Fantastic. Last one for me, asset sales. Obviously, Jim, you mentioned we should have some sort of validation of the process by year end. I am just curious, is this going to be several trades, is it one big portfolio? And maybe if you can just provide some sort of idea what types of potential buyers you are talking to?

Let me start off and Dave will jump in. I would say it is going great. We have been consistent with that that we think it will take place before year end. Right now I believe we have three different buyers on the portfolio of the assets and it is about 14 different properties. Values are coming in the range of between $60 million and $75 million, $80 million.

A little bit higher than that, $65 million to $85 million value. I think we have all of the non-core assets under -- in the process of disposition, so that is why we remain confident in our ability to close those transactions by year end.

Thank you.

R.J. Milligan, Robert W. Baird.

Just to follow up on Mitch's question on the disposition side. Can you guys remind us in terms of the dollar volume what your anticipated proceeds are and any idea in terms of pricing, what you guys are seeing in terms of cap rates?

Sure. I think we have previously communicated a range of kind of $65 million to $85 million expected proceeds, that range still is consistent. And then cap rate wise they are in the 9% to 10% range of NOI purchase price.

Okay and it look like occupancy ticked down a little bit in the office flex properties. Any color on what is going on there year over year?

Yes, clearly our focus is on the retail piece of the business. We had great same-store growth in our retail properties. Actually the same-store growth was 230 basis points, so up a little bit better than the overall.

We did see some decreases in our flex properties which are all located in Houston, about 3% on a year-over-year basis. There were a couple lumpier tenants that moved out. Larger spaces continue to be tough but we are confident in our ability to lease those up. But we are seeing some softening in that flex product and it is obviously part of our plan to move out of that and to move to 100% retail.

Yes we think that, R.J., that there is too many economies of scale being a pure retail play. And how we have been managing our focus is with a focus on the retail side knowing that we are going to be selling off these assets.

It is marginally difference in price whether they are down a point or two in occupancy when we sell them, prices all coming in about the same because they are primarily being based on the locations. We think we can sell them and retain some upside in them as well. But we think that that focus has been really on the retail side, I think you can see that getting very, very strong in the future.

And it does a little bit mask our overall results, so we recognize our overall is total occupancy was up 130 basis points year over year and that was taken down by some of the flex of about 3% year over year. So really the retail piece of the portfolio is really even performing better than kind of the overall results show. And I think that will be more clear to folks when we get these dispositions done.

Okay, so moving over to the retail side, obviously good same-store NOI growth, good leasing spreads. Wondering if you could provide commentary on a more market specific basis in terms of what you are seeing in both Phoenix and Houston and maybe some of the smaller Texas markets.

Well, Phoenix is terrific. We have had and continue to get strong interest in our properties in Phoenix. We now -- with this recent acquisition we control about 650,000 square feet within an area of 4 to 5 miles differentiating the property so that we have different price points for a tenant that wants to be in the marketplace and that gives us a very strong controlling position.

One of our properties that you have seen is at the intersection of Scottsdale Road and Pinnacle Peak; it has an Ace Hardware, a Safeway. We have recently expanded that, we will have a Starbucks, we will have an Italian restaurant, we have about four or five different restaurants there.

The property across the street is smaller; it is about 125,000 square feet. And it was -- it has a Sprouts there and it is the only competition in the area.

Two great pieces of news attached to that. One is that they were unable to attract any of our tenants and that is a hats off to our leasing and management team in how we take care of our tenants. Two is that the property just re-traded at $600 a square foot.

So we are pretty excited about that; I think we are in it about $140 a square foot. And I think ?- and everything to the west of it state owned land so there is nothing right in that proximity.

With regard to the Starwood property that we are pre-leasing up in -- north of Dallas up in the Plano -- in the Frisco area, and this is a first for Whitestone, we just hit our $50 a square foot rent plus triple nets. And I think in this industry in that kind of space I think it is an average of about 3,000 square foot of space.

So that is a really strong sign and we are having great fortune with the pre-leasing of both the Pinnacle and the Starwood property and we expect those to add about $1.8 billion next year in cash flow.

And they will actually start -- we're actually turning over -- we turned over two of them, one space to Starbucks, we turned over another space to Orange Theory. I think that gives us now about five Starbucks in the portfolio. So, in reality we've really have some pretty significant tenants in our -- along with the small tenant base in [this mall that we have].

With regard to Houston, our retail properties continue to grow strong. We have got redevelopment activity on six of the properties. And as we redevelop we are able to find extra land parcels.

For example, we have a lease with a Checkers on one of our properties which is a fast food store -- or a fast food chain, as you know. And this is a property that there is no cost to it. We just [recounted] the parking, we are able to do that. That is in one of our Houston properties.

So Houston continues to grow very well for us, particularly our Lion's Square property which is now nearing 100% leased and the rents are about 20% higher than they were two years ago. With regard to Dallas and Fort Worth, Dave, do you want to touch on those and then Austin?

Sure, I'll give you just a quick summary and then we will hopefully answer your question, R.J. So I guess I would say the leading markets really for us have been Phoenix and Houston over the last year, very consistent with our past practices; when we acquire properties it usually takes us 12 or 18 months to really acquire a model and see increases in occupancy and NOI.

Our newer acquisitions are in the Austin and Dallas markets, so those markets are performing a little slower right now but very much expected, it takes us a little time. So really the best markets for us really have been Phoenix and Houston from a growth perspective year over year, and we expect Dallas and Austin obviously to continue to contribute and grow as well.

In our investor presentation I think we have a slide that shows our acquisitions by year and then what we have done to those acquisitions since we have owned them. You can see it is very consistent and it takes 12 to 18 months from an acquisition to really start to see the significant increases.

Thanks for the color, guys.

Carol Kemple, Hilliard Lyons.

I noticed that real estate tax was down in the quarter, which is always exciting. Were you are able to go back and kind of argue the taxes out for why were they lower in the quarter?

Yes, we spend a lot of effort on really recon in the property in Texas. Property taxes are a little higher than they are in some parts of the country. So we are very active in contesting our taxes. Some of those we take to litigation and we were able to lower our property taxes primarily in our Texas markets in this quarter.

But we continue to see benefits there. We will continue to push those. Obviously those taxes are pushed through to our tenants, and as we decrease those it actually gives us the ability to have a little higher base rent and a higher net operating income.

And then can you just talk about the acquisition pipeline and if you have anything that you think you might close on before year end?

We have about four deals that we are working on right now in the pipeline. One of those we could close before year end. Our focus is really primarily on the -- becoming the pure play retail Company by year end. So we may or may not close one more deal this year, but we do have a much higher probability of becoming a pure play by year end.

We do have -- as we have always had we have a very large active pipeline of potential acquisitions. So nothing has changed on that front in that we continue to see opportunities in our market for deals that are off market that really meet our business model.

So just from a timing perspective and resource perspective, as Jim mentioned, we are focused very much on becoming a pure play REIT by year end. But we continue to see opportunities in this type of asset in our markets.

Yes, just to recap, Carol, this year we had $165 million worth of deals under contract, we took a pass when we were in due diligence because we learned that when one of the -- the large property when it was bifurcated it had a grocery store that had covenants that were too restrictive to the adjacent property.

And you couldn't tell that it had the covenants because there was a road splitting the grocery store from the other property so we took a pass on that. So we spent about three or four months working on that deal to take a pass and we had some costs, as you know, which impacted us. I think we might have had $75,000 worth of costs associated with that.

The two deals we just closed we had been working on for about two years, they have been in our pipeline. And so those have been just terrific additions to what we are doing. So overall our pipeline is much larger like these, it's about $0.5 billion.

Okay, thank you.

Anthony Hau, SunTrust.

So when I look at the portfolio today, there are a couple of assets that are well under leased such as Mercado at Scottsdale Ranch. Can you just give us an overview and your plans on these pockets of vacancy?

Yes, Mercado we have two larger tenants we are working on. One is an 11,000 square foot tenant. An alternative to that would be taking the entire space. We have been working with them to see if we would like either one of those to come back into the space and then some -- and they jump in (inaudible). So we are working a number of these spaces. Do you want to comment, Dave?

I was just going to go back and remind everyone of the Mercado acquisition. One of the highlights when we bought that property was there was a grocery store there that was really paying I think $2.00 rents and we expected to be able to re-tenant that.

So while there is a vacancy at Mercado from an economic standpoint that vacancy is not hurting us and we expect to have significant upside. And Jim was giving some comment on the colors. But we bought that property really knowing there was going to be the opportunity to re-tenant and add value over what we paid and the in-place NOI when we bought the property.

Yes. So we had 30,000 square foot vacancy there with a $2.00 square foot rent. The two deals we are looking at, one is $9.00 a square foot for the entire space, another one is $7.00 a square foot for 11,000 -- 31,000 square feet.

So we are really looking in terms of -- we are very particular how we match our tenants in a property. So that is one of the things that we are going back and forth on now. In fact I will be in Arizona meeting on that this week.

And what is the net debt to EBITDA for those non-core assets that you guys are planning to sell?

I'm sorry, did you say the net debt to EBITDA?

Right. Because I know that those assets have some mortgage debt to those office flex properties, right?

Yes. So some of those assets have mortgage debt, some are included in our credit facility. I think we -- I can't give you a net debt to EBITDA, but we believe that that transaction will be positive from a debt leverage perspective to Whitestone, those assets are a little higher levered than the retail assets.

Okay, thank you.

Craig Kucera, Wunderlich.

I would like to focus on the dispositions and kind of what you are thinking even going into 2017. If you are selling the office flex, call it at the midpoint of what you are talking about you are giving up maybe about $0.24 in NOI.

How do you think about -- as we think about next year how do we think about -- are you guys replacing it with acquisitions? Is it going to be match funded? Or do we think we might see some levering up to maybe replace that NOI that might be lost?

I think absolutely we think of this as recycling. So as we mentioned, there is great opportunities with our core product type. So we would expect to sell these non-core assets and then recycle those proceeds into the retail assets that fit our business model.

Yes, let me also say that what we learn from you all as a group of analysts and also from our investors is that we are being penalized with a 10 multiple today on FFO. We have been consistent in our dividends, we have -- our coverage is strong. The only thing that is not reflecting in this rent to the Company is our share price.

We have made two deals now at $19 an OP unit, a significant amount of capital we raised at 15 -- about $15 million worth of capital. And if in fact what we expect to happen is that our multiple will go up anywhere between a 10 and 18, then we'll be in a range that we can raise capital -- a much lower cost of capital and then just pick the deals out of our pipeline.

Because the deals are there but it takes a lot of time to be creative to use operating partnership units to make them accretive. And we have done this since we have grown this portfolio from $125 billion upwards to about $1.2 billion today.

So we think the benefits, while there might be a slight $0.02 or $0.03 decline in the sale of these assets, we think we will more than make it up in the multiples. Remember $0.15 a share gives us an extra $6 million in [value] -- actually more than that, it is about $15 million in value. So we think that that is going to be a significant change for us.

Got it. You did mention receiving some better economies of scale. I think this quarter was maybe a new high for G&A, almost pushing towards 25% of revenue. Do you think when you get out of the office and flex is there any opportunity to improve scale there or do think it comes from other areas?

Sure we believe very strongly that we will continue to increase scale. One of the things in our G&A, there is the non-cash amortization of stock comp that varies quarter by quarter based on the number of periods we were amortizing that cost over. So that when you quote that 20% plus, that is including really an amortization.

Our core G&A cost for the quarter was 10.8% of revenues, which pulls out the stock comp and pulls out the acquisition transaction expenses. We have seen that decline as a percent of revenue and continue to do that.

We have got the infrastructure that we can support and grow. An example of that is the acquisitions we made for the quarter and Phoenix, we brought on about 5 -- a little over $5 million in net operating income in those two properties and really added no G&A cost to support those.

So I think you will continue to see us scale our G&A. You will see the percent with the stock comp in it bounce a little bit just because that is GAAP accounting and doesn't really reflect kind of the true earning of that stock.

We also think along those lines that we have brought in some new folks that we replaced, particularly our director of operations. And so (inaudible) that change in terms of the addition to overhead there from where we were. But the individual brings a wealth of experience in the Company being with Walmart for all these years and he brings added systems and processes to us.

So that is an area that we wanted to really, really make sure we continue to round out our team properly. The only individual we brought on board is a fellow who is the director of leasing in Houston.

And as you all know, the leasing efforts in Houston, particularly with the core assets, has lagged behind everything else we have built in the rest of the Company. And so I think you are going to see what those two folks part of this team now is going to make an incredible difference.

All right, thanks.

Dan Donlan, Ladenburg.

Jim, just wanted to -- or just wanted to clarify the contribution from the developments that are coming on line in the fourth quarter and maybe in 2017. Is the $1.8 million you cited, is that a run rate once they are fully stabilized or is that how much you think they are actually going to contribute to 2017?

That is an annualized run rate once they are stabilized. Maybe I will give you a little more color on the pre-leasing efforts that will help you understand where we are in the stabilization process.

So we have two properties, about 70,000 square feet between the two. I mean, sorry -- with the two in total. In Dallas we have leasing discussions, some under lease, some under LOI, some close for a little over 65% of the square footage today.

In Scottsdale, the other property, they are both similar sizes, same [is being set] of exercises with leases, leases under discussion, LOIs. We are at close to 90% leased in that property -- leased is the wrong -- 90% under discussions. So the $1.8 million is an annualized stabilized 95% occupancy and today we are not too far from that.

And, Dan, let me just go back -- and I appreciate the question because it gives me an opportunity to share with you part of the culture and philosophy and strategy of Whitestone. We bought the shopping center at the corner of Scottsdale Road and Pinnacle Peak and at the same time we bought a parcel of land just north of that on Scottsdale Road from two different owners.

The land we bought we paid $900,000 for it (inaudible) from a bank who had a $4.5 million loan on it. We went into the city, we received the entitlements to build approximately 40,000 square feet plus an additional 20,000 square feet towards the back of that property.

The back of the property including -- there is a separate parcel and the buyer of that separate parcel purchased from us that 20,000 square foot postage stamp for $1.3 million. So we completely cashed out of our $900,000 investment in the land and they are paying a third of the development cost in putting in the new roadway going back to the property.

So net of all of those, net of the cost we were able to be in that 16% to 17% range return on investment. I share that with you because that is the way how we approach deals, the same thing in Starwood. We bought that property we had the residual piece of land.

We are careful to bring on a percentage of land each year, but I would say in virtually 90% of the properties we have acquired there is some element of development that we have -- we can either obtain the entitlements or we can -- we have a piece of land that is already entitled that we can add to the property.

Okay, thanks (multiple speakers).

Hey, Dan, just to give you one more piece on that just to help as well. And really the build cost on that is about $18 million for the two properties. We funded 75%-80% of that today. So that is kind of reflected also in our debt level and you are not seeing that in the EBITDA. So that is a transaction that will be accretive from a leverage perspective next year as well.

Okay, perfect. I really appreciate the color. And just last thing just for modeling purposes. It seems that you have been running the Company at a net debt to EBITDA -- net debt to adjusted EBITDA of somewhere between 8, 9 times. Is that kind of the range that we should be thinking about you guys going forward? Just kind of curious there.

No, we have communicated a goal to decrease that debt to EBITDA (technical difficulty) 24 months down to the kind of 7 turns range. So similar to the acquisition we did in Q3, which was at a 6.5 debt to EBITDA ratio, you are going to see us bring that ratio down really from increased cash flow and then the structuring on acquisitions and dispositions as we go forward.

Okay. Thanks I really appreciate the commentary.

Great, Dan, thanks.

And that concludes today's question-and-answer session. Mr. Mastandrea, I would like to turn the call over to you for any closing remarks.

Yes, thanks, operator. And thanks, all. We do appreciate your interest in Whitestone and for joining us on our call today. And we also appreciate your continued confidence in what we are doing with the Company. I think we are building a great Company.

Looking at the big picture, I am confident in our ability to maintain our momentum in the fourth quarter. Longer-term our belief is that our innovative e-commerce resistant business model is well-positioned and ideally located portfolio of properties, an optimal mix of tenants providing services -- really not readily available online. And that continues to drive profitable growth.

What's very important to that is that we are committed to educating our institutional and retail investors because it is a new business model and it is unlike the retail real estate ownership as traditionally has been known.

As we continue to educate and tell our story we do this on a one-on-one basis. We're also always consistently trying to educate our existing analysts and also the new analysts that we will be bringing on board who seem to love what we are doing.

And the reasons are the financial strength of the model, the earning power we have and the growth potential. That is pretty much inherent. When we did this recent deal of $19 share operating partnership, that was a discount to the net assets value of the Company. And that discount we feel really has been warranting a lot of attention.

With that the last thing I would like to say is that the NAREIT is holding its annual conference in REIT World the week of November 15th through the 16th. I have been mentioning on each of our calls and I want to again mention that we are hosting an event to spotlight one of our properties.

And within a four mile area of that property we have I want to say five other properties. It is at Market Street at DC Ranch. For those of you who will be attending REIT World we would love to have you come by on November 14 and join us.

We will be running a shuttle bus back and forth to the Marriott Desert Ridge which is maybe 15 minutes west of our Market Street property. We'll have lots of fun and entertainment; we have seven restaurants at the property, we have a new cigar lounge that we think will be open. But we will have some entertainment for you and we think it will be fun.

We have an RSVP list now and it is upwards of 50. So we would love to welcome anyone else who would come on by. With that I am going to close our call and thank you once again. We look forward to the final call we will be making at the end of the year. Thank you, operator.

And this concludes today's conference. Thank you for your participation. You may now disconnect.