Whitestone REIT Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2024

Key Takeaways

  • Positive Sentiment: Core FFO per share rose from $0.86 in 2021 to $0.91 in 2023, and 2024 guidance of $0.98–1.04 reflects continued earnings growth.
  • Positive Sentiment: Debt to EBITDAre declined from 9.2× in Q4 2021 to 7.5× in Q4 2023, with a goal of falling below 7× by year-end 2024.
  • Positive Sentiment: Portfolio occupancy reached a record 94.2% at year-end 2023 (92.1% in small spaces; 97.5% in larger boxes), driven by disciplined leasing to high-quality tenants.
  • Positive Sentiment: Approximately $80 million of assets have been sold since October 2022 at a 6.2% cap rate, with proceeds redeployed into higher-upside retail centers.
  • Neutral Sentiment: Whitestone’s Quality of Revenue initiative is midway through its tenant review process and aims to complete an intensive portfolio upgrade by 2026.
AI Generated. May Contain Errors.
Earnings Conference Call
Whitestone REIT Q4 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Whitestone REIT 4th Quarter 2023 Earnings Call. At this time, all participants are in

Speaker 1

a listen only mode. A question and answer session will follow the formal presentation.

Operator

As a reminder, this conference is being recorded.

Speaker 1

I would now like to turn the

Operator

conference over to your host, Mr. David Mordy, Director of Investor Relations for Whitestone REIT. Thank you. You may begin.

Speaker 2

Good morning, and thank you for joining Whitestone REIT's 4th quarter 2023 earnings conference call. On today's call are Dave Holman, Chief Executive Officer Christine Mastendrea, Chief Operating Officer and Scott Hogan, Chief Financial 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, uncertainties and other factors. Please refer to the company's earnings news release and filings with the SEC, including Whitestone's most recent Form 10 Q and 10 ks for a detailed discussion of these factors.

Speaker 2

Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that this call includes time sensitive information that may be accurate only as of today's date, March 7, 2024. The company undertakes no obligation to update this information. Whitestone's 4th quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section. We published Q4 2023 earnings slides on our website yesterday afternoon, which highlight topics to be discussed today. I will now turn the call over to Dave Holman, our Chief Executive Officer.

Speaker 3

Thank you, David, and good morning, everyone. Welcome to our Q4 2023 earnings conference call. I'll break my comments into 3 parts. 1st, what we've done 2nd, ongoing initiatives that continue to drive value. And finally, our core strategy thinks very well with the current environment.

Speaker 3

I'll get straight into it. In terms of what we've done, this management team began in January of 2022, so we're 2 years into our run. Here's a high level list of our accomplishments. Core FFO per share has grown from $0.86 in 2021 to $0.91 for 2023. This is despite higher interest costs, primarily as we renewed and extended our credit facility in the Q3 of 2022.

Speaker 3

With that in place until 2027, we anticipate a higher earnings trajectory ahead of us. I'll have Scott cover our projections in greater detail. We've rapidly improved our balance sheet metrics, bringing our debt to EBITDAre down from 9.2 times for the Q4 of 2021 to 7.5 times for the Q4 of 2023. This is despite significant litigation expense impacting our numbers. We've focused and prioritized our disciplined leasing efforts to high quality tenants resulting in record occupancy in our portfolio, up 290 basis points from 91.3% at year end 2021 to 94.2% at year end 2023.

Speaker 3

Breaking this down further, we've grown our small space occupancy by 320 basis points to 92.1 percent and our larger space occupancy has grown by 200 basis points to 97.5%. We had same store net operating income growth of 7.9% in 2022 followed by 2.7% in 2023. Scott and Christine will provide more detail on this important metric later in the call. We've strengthened our Board, bringing on 3 new Board members or half of our 6 person Board of Trustees. This refreshment has been accompanied by a host of shareholder friendly actions, including rightsizing our executive compensation, winning the role of Chair and CEO and providing shareholders with access to bylaws.

Speaker 3

We've worked hard to successfully conclude the litigation with our former CEO and exit our investment in his related party joint venture. We are nearing conclusion. Whitestone has a very clear strategy and path to value creation that continues to be more clear as this noise is removed. And finally, culture. We've simultaneously brought on very talented individuals, reduced our headcount and improved employee satisfaction.

Speaker 3

In short, we're improving G and A while achieving better results. I'm super proud of the team and their long list of accomplishments over the last 2 years, only a few of which I have highlighted. I'm equally excited about how we're continuing to drive value. 3 initiatives are at the heart of our creating value: Our quality of revenue initiative, our balance sheet improvement plan and our capital recycling plan. I'll have Christine cover the quality of revenue initiative and I'll provide a bit of color on the other 2.

Speaker 3

We've had significant progress with our balance sheet improvement plan over the last 2 years, obtaining an investment grade credit rating. We have more work to do here and have the right people, the right plan and the market tailwinds supporting our efforts. Our debt metrics will continue to improve as we grow EBITDAre, apply free cash flow to reduce debt, monetize our Pillarstone investment and activate the land parcel and pad site development opportunities within the portfolio. We expect debt to EBITDAre below 7x by year end 2024 and we anticipate further improvement in 2025. Our asset recycling program has allowed us to upgrade the overall quality of our portfolio, selling properties with lower upside and ABR and redeploying the proceeds and acquisitions with significantly higher upside, higher ABR and characteristics that capture more of the key demand drivers in today's market.

Speaker 3

We anticipate that since October of 2022, we will have completed approximately $80,000,000 in asset sales by the end of the second quarter at an aggregate cap rate of 6.2%. I say anticipate because we have a sale upcoming but not yet announced and we believe we'll keep the effort going at about the same pace we've had over the last 2 years. I think it's important to note here that we are very capable of driving results via organic growth, but we're not reliant on the transaction market or the equity market cooperating in order to drive earnings growth. However, we are starting to see valuations adjust slightly to the higher interest rate environment and our team is ready to take advantage of those opportunities that align with our strategy. The final area I would like to cover today is what we're seeing in terms of the current environment.

Speaker 3

Frankly, this is a great environment for most of the retail REITs as limited supply of retail centers is driving good results across the peer group. The limited supply combined with country leading job and population growth in our markets and Whitestone's ownership of the right type of retail centers makes this current dynamic especially powerful for Whitestone. Our strategy and our assets are very well matched to take advantage of this environment and we've made a number of strategic decisions that are producing great outcomes. Specifically, we have shorter leases with annual rent bumps, the ability to capture mark to market rents quicker, a high quality diversified tenant roster and limited CapEx needs as compared to other peers. This strategic decision to operate with shorter leases and be more active owners is fundamental to what we do.

Speaker 3

Because of the confidence we have in our team that populate centers with fast growing tenants, we are better positioned to share in their success. We are 100 percent Sunbelt focused in business friendly states. Migration trends in our markets lead the country and are acting as a strong tailwind not only in terms of our operating results, but for the underlying value of our centers. Lastly, our centers have a much larger percentage of small spaces than most of our peers. We and others continue to see strong demand from businesses seeking out spaces in the 1500 to 3000 Square Foot range.

Speaker 3

We've intentionally acquired centers and made modifications to meet this demand. And we believe this trend will continue as businesses adjust to properly meet the needs of the surrounding communities. We introduced 2024 core FFO per share guidance yesterday of $0.98 to $1.04 We have a few more near term unknowns than I'd like, but I've never been more bullish about the fundamentals driving our business and the strategy we have in place. I'll have Scott walk everyone through our 2024 projections and the assumed variables. Once again, let me say, I'm very proud of the team here and everything we've accomplished and I'll now turn the call over to Christine.

Speaker 3

Thank you, Dave. We've had a real strong quarter in operations. Occupancy rose to 94.2%, up 50 basis points from last year's record finish. Occupancy may dip a bit for the upcoming quarter as it did for the Q1 of 2023. This is because we closed a large number of deals in the Q4 and we intentionally are remerchandising in the Q1 for revenue quality.

Speaker 3

However, while we may see a 1st quarter dip, we have a strong pipeline of deals and we're forecasting an occupancy of 93.8 to 94.8 by year end 20 24. Occupancy for 10,000 square foot plus spaces came in at 97.5% with our higher ABR small spaces coming in at 92.1%. Straight line leasing spreads were 21.8% for the quarter with 37.3% on new leases and 15.3% on renewals. For the last 12 months combined straight line leasing spreads were 21.7%. Frankly, as strong as our leasing spreads are, it keeps getting better if you dig into the numbers.

Speaker 3

Just recently, Marcus and Millichamp showed asking rents in Phoenix, our largest market, jumping 12.6% between 20222023. Not only did we capture those jumps more quickly because of our shorter term leases averaging 4 years, but the recency of the jump bodes well for our leasing spreads in 2024, 20252026. This isn't just a number on a spreadsheet, it matches what our leasing agents are seeing in the ground. Migration trends, Phoenix manufacturing boom, consumer trends and a shortage of retail neighborhood centers are all combining to make this one of the strongest environments we've ever seen. Some of our peers have recently been talking about the value of vacancy and that vacancy allows them to better align a center for the surrounding demographic, often a new younger demographic rather than letting a center get out of touch.

Speaker 3

However, as you can see from the fact we just hit the record occupancy, vacancy at our centers is limited. This leads us to our quality of revenue initiative. We strongly believe that upgrading our tenants during the good time creates long term shareholder value as we drive traffic with fast growing businesses and further improving collection rates and lowering our intended and unintentional turnover. We often compare what we do to gardening and that intentional pruning is key to make sure that you have high quality plants prime for growth. Oftentimes, we're swapping in a business with higher long term growth potential and the ability to drive center traffic.

Speaker 3

Is necessary because over 60% of our centers are at a 95% or greater occupancy. Given our average lease length, I like to think that this initiative is halfway through from when the management team stepped in. By 2026, we will have intensely reviewed the large majority of our tenants. We're confident investors will benefit from these efforts as we set this up for a long term robust same store NOI growth. Despite our great success in smaller spaces, we've had a number of positive things going on in the larger spaces too.

Speaker 3

Our former Bed Bath and Beyond space is being transformed into a high demand pickleball and entertainment venue. Our new tenant, Pickler, is extremely strong operator and we've recently signed a long term contract with them at Eldorado, our Trader Joe anchored center in Dallas. In the locations they've opened so far, Pickler has enjoyed a strong first mover advantage and they've shown themselves to be adept at going after a younger demographic. Our EOS build out at Williams Trace is taking longer than anticipated pushing back the commencement date. While this impacted our same store NOI growth in 2023, it will have some impact on 2024, but I want to remind everybody it's a great replacement of an underperforming grocer and triples our revenue for 51,000 square feet of space.

Speaker 3

This change is anticipated to drive strong center traffic for years to come. Many of the businesses that are cycling out right now are those challenged by the higher capital costs in the current environment. The business is moving in or adjusted to the higher capital cost. However, this has been a limited number of businesses in our portfolio as the margin of the bulk of our tenants are low inventory and low capital businesses serving the communities that we have. I'd add one comment to Dave's regarding our capital recycling initiative.

Speaker 3

With the sale of Sporeline in Chicago, we've exited our one property that didn't fit our geographic profile. At this time, we only have one property that doesn't fit our strategic profile that is owning services that serve the nearby community. That property is our headquarters office building, Woodlake. We take a hard look at exiting Woodlake this year. We strongly believe in having a very focused strategy and sticking to our expertise.

Speaker 3

I often comment on categories of tenants that are showing strength during the quarter. However, almost every category of tenant type is performing well right now from restaurants, health, beauty, education, fitness and financial and other service oriented businesses, we are seeing growth. I'm eager to drive results and see what leasing team can accomplish in 2024 and I'm eager to report those results as the year progresses. And with that, we'll have Scott cover the financials.

Speaker 4

Thank you, Christine. We delivered $0.24 in core FFO per share for the Q4 of 2023 versus $0.23 in the Q4 of 2022 and $0.91 for the full year 2023 versus $1.03 for the full year 2022. Now I'll walk you through the 2022 to 2023 core FFO per share earnings variance. And you may want to follow along on Slide 11. Same store NOI growth was our key positive driver as it should be every year, adding $0.05 G and A drove a $0.05 reduction in FFO per share, including $0.04 of benefit in the Q1 of 2022 associated with the forfeiture of outstanding restricted shares from our former CEO and other employees that was not repeated in 2023.

Speaker 4

While G and A normally reflects year over year increases in compensation expense, ours also contains litigation expense related to Pillarstone and our former CEO. Other items drove a $0.01 reduction and interest expense drove an $0.11 reduction. As a reminder, we amended our credit facility in the Q3 of 2022. The variance between the former and current credit facility primarily impacted the 1st 3 quarters of 2023. As Dave mentioned, we introduced 2024 core FFO per share guidance yesterday with a range of $0.98 to $1.04 Let me walk you through the forecasted changes between the 2023 core FFO per share amount of $0.91 and the midpoint of the 2024 guidance of $1.01 Same store NOI is expected to improve $0.07 in 2024.

Speaker 4

G and A cost reductions should drive a $0.01 increase, primarily as our former CEO and Poderstone related litigation expense is expected to be significantly reduced. Other items, primarily driven by non same store NOI and no longer reflecting earnings deficits from our equity method investment in Pillarstone following our OP unit redemption in January of 2024 are forecasted to add $0.03 Interest expense is forecasted to drive a $0.01 reduction in core FFO per share. We anticipate higher interest expense in the 1st part of the year, both because of the shape of the we assume some pay down of debt with partial Pillarstone monetization in July. Overall, if you divide our annual guidance into 4 quarters, I anticipate the Q1 will be a couple of cents under the average, primarily due to interest expense and I anticipate the 4th quarter to be a couple of cents over the average due to lower interest expense, percent sales clauses and growth that's expected to occur over the course of the year. In addition to the headline, let me cover a few other elements of our guidance.

Speaker 4

Same store NOI is forecasted to be between 2.5 percent 4%. The delay in EOS commencement is the reason the change is a little lower, but we still we are still expecting strong growth. Bad debt is expected to be between 0.6% and 1.1%. We improved bad debt by 18 basis points in 2023, bringing it down to 0.65%. Our quality of revenue initiatives should help keep this number low.

Speaker 4

Finally, our debt to EBITDAre metric is forecasted to improve to between 6.67 times by the Q4 of 2024 and that assumes we're not able to monetize the majority of our Pillarstone investment until 2025. We're very pleased to announce a 3% increase in our monthly dividend level. We believe dividends should grow with earnings and we believe we'll have good earnings growth in 2024 and continuing in 2025 and beyond. Thank you all for joining our earnings call. And with that, we'll open the line for questions.

Speaker 1

Thank you. At this time, we'll be conducting a question and answer Our first question comes from the line of Mitch Germain with Citizens JMP. Please proceed with your question.

Speaker 3

How are you? Good morning, Mitch. I think you broke up a bit. Good morning, Mitch. Yes, sorry about that.

Speaker 3

My bad.

Speaker 5

I wanted to obviously, you talked

Speaker 3

a little bit about quality of revenue.

Speaker 5

And it's I don't know, it seems like your bad debt is forecasted to be a little bit higher in 2024. I'm just curious in terms of I'm sure there's a little hint of conservatism in that number, but is there anything specific that is driving that midpoint

Speaker 3

of that number to

Speaker 5

be higher year over year?

Speaker 4

Hi, Mitch, it's Scott. The bad debt is a the bad debt assumptions we put into the forecast are a range that we're comfortable with. The midpoint isn't necessarily where we expect to end. And no, there's no specific tenants that we have identified that are going to

Speaker 3

drive higher bad debt next year.

Speaker 5

Okay, that's helpful. What percentage of your portfolio comes from these smaller tenants relative to the larger ones? How should we think about that? Obviously, we talk about that, obviously, trend above peers, but what is it specifically?

Speaker 3

Yes, I think hey Mitch, it's Dave. In our PowerPoint for the call today, I think David or you're going to give me a page number, but there's a page number that breaks out Page 6, breaks out our tenant base. Approximately 75% of our ABR is in the smaller spaces that are really in high demand today. So we think that's a key differentiator of Whitestone versus many others in the sector and we have the type of spaces that are in high demand.

Speaker 5

Agreed. Okay. Obviously, we've got a lot of products that are seem to be going smaller and smaller. Dave, talk about obviously, you're in the process of deleveraging. But you interestingly mentioned activating your land parcels and some of your redevelopment opportunities.

Speaker 5

Clearly, that creates a little bit of higher leverage initially before the EBITDA commences. So maybe if you could just provide some perspective on the potential opportunities that you've got embedded in the portfolio and how you feel some of those potential opportunities can be monetized?

Speaker 3

Yes, Mitch. I'll give a couple high level comments and maybe I'll ask Christine to share some more about the development opportunities. I will tell you, our goal and our challenge is to do a number of things. Over the last couple of years, we've improved our balance sheet. We've driven earnings.

Speaker 3

We've capitalized on development opportunities. So it's always a balance. We're focused on the balance sheet and we're going to plan and have made strong progress. And then we're obviously top line focused on value creation. Maybe I'll let Christine comment a little bit on the development opportunities.

Speaker 3

Mitch, I think the best way to look at our portfolios, most of these are pads and smaller buildings. And so the timeframe it takes to get these positions through an approval process, which is a low cost venture to start up,

Speaker 5

right, but it just takes time.

Speaker 3

By the time you get that in place and then you actually build, which is when you start your significant capital costs, that's like a 6 month timeframe. So it doesn't take that long to build these paths out. It takes a while to get them approved within the zoning districts that you have to work with. So I like to say, I think these things are very easy once you get approval, then it's then your capital costs start, your significant capital costs, and that's maybe 6 months. And then once you get them out of the ground, then of course, you're able to achieve on your returns with the rents.

Speaker 4

So most

Speaker 3

of our So how

Speaker 5

many of these fans have entitlements right now?

Speaker 3

We have we're doing 3 a year and I'm looking to amp that up to like 4 to 5 in the following years to 6. So it depends like Dana has a number of small pads that are already approved, but what we're doing is working through the right leasing strategy to move those forward. Those are already fully approved at Dana Park. And those have, let's see, I've got one, 2, about 7 pads there alone. In the portfolio, we have about we have well over, I think, about 15 to 16 pads that we can work through over time.

Speaker 3

It's just a question of making sure that we can manage it appropriately within our timeframe, the lease ability with it and also our resources with the team.

Speaker 5

Great. That's helpful. Thanks. And last one for me. Just Dave, maybe some perspective on the timing of the resolution of the damages associated with the Pillarstone ruling, obviously, I believe the ruling had provided some sort of timeframe where some sort of remedy or valuation was necessary to be provided.

Speaker 5

Maybe for some perspective on where that stands, please?

Speaker 3

Sure. Obviously, we're very pleased with the ruling, which on our investment in Pillarstone, the court ruled that obviously we had been damaged and what we're looking for is an exit. We've communicated that all along. So Pillarstone has some obligations to the court to provide a value as well as a payment to us. I would tell you we're moving into the collection phase and we are focused on getting that collected and exited as quickly as possible.

Speaker 3

Scott commented that in the guidance, we only have a partial part of that modernization in this year. We have the balance in 25. I'd love to report in the year that we got that much more quickly. So right now, we're very pleased with where we are as far as the decision. We're looking for an orderly monetized exit plan of exit, which I believe we kind of have in progress and we'll move quickly.

Speaker 3

It's hard to give you exact timing just because we're working through the court system. We're working through a number of things, but all of the decisions have been very supportive and very much in Whitestone's favor at this point.

Speaker 2

Thank you.

Speaker 3

Thanks, Mitch.

Speaker 1

Thank you. Our next question comes from the line of Anthony Hau with Deutsche Securities. Please proceed with your question.

Speaker 6

Good morning guys. Thanks for taking my question. So this morning, I saw the news that ARRIS has the management plans to nominate 2 directors to the Board. And they raised a few questions, right? Since the December press release, what other discussions and conversations have the Board had with Bruce and his proposal to work today?

Speaker 6

And have you guys thought about adding Board members to have more relevant real estate experience?

Speaker 3

Thanks, Anthony. It's Dave. I'll give a couple of comments to that. First of all, just off the top, obviously, we don't comment on articles like the Bloomberg article. We don't comment on market rumors or quotes from unnamed sources.

Speaker 3

We did publish in December a letter we received from Mr. Shanzer with Erez. We did that because we think it's important to be transparent. We want to have great discussions with shareholders and we want to minimize this information. We love and welcome shareholder feedback and discussion, but we don't discuss individual shareholder discussions obviously publicly.

Speaker 3

Really proud of the progress we've made over the last couple of years. We're focused on execution and delivery. And obviously, at this point, that's kind of what we can say. I think we've published a letter from Bruce. We've published our response.

Speaker 3

Obviously, happy with the follow-up question, Anthony, but I think that's the comment I would make at this point on your question. The only thing I would add is we've done a lot of refreshing and upgrading our Board, brought on great new skill sets and diversity, continue to look at that, continue to evaluate that we have the right people in place. And I think our Board is very good about that. Our Board also takes the strategic role they have in looking at the ways we create value very seriously, and we take that very seriously.

Speaker 6

Okay. Sorry to miss it, but property operating and maintenance was up 27% in the same store pool this quarter. What drove that interest? Was it and was that the main reason for our same store NOI for 2023 was at the lower end of the guidance?

Speaker 3

Anthony, it's Scott. On the maintenance side, we accelerated some large maintenance items, exterior painting of buildings, parking lot resurfaces and 6 or 7 properties in Arizona.

Speaker 4

We think that's going to add value and help the

Speaker 3

leasing rates. Those properties happen to have

Speaker 4

a little lower recovery rate than the majority of our portfolios. That was a component of the same store being a little lower than expected. The other one was, I think Christine mentioned delayed commencement in EOS, drove another portion of it. And then we had Bed Bath and Beyond that was retenanted towards the end of the year that was a smaller piece. So those are

Speaker 3

the 3 components of the same store decrease. And then once again on the maintenance side,

Speaker 4

those painting and parking lot resurfaces are once

Speaker 3

every 10 year type of expenses.

Speaker 6

Got you. And then a quick one on Polarstone. I know that you guys are going through the bankruptcy court now. What are the chances that, that Whitestone can fully recover the monetary adjustment now?

Speaker 3

Hey, Anthony, it's Dave. As you said, we are moving towards the collection phase at this point with receiving very positive rulings that we've been damaged and that we had the right to exit. As you said, Pillarstone has filed bankruptcy and we're moving through that. We remain confident in the value of that investment when you look at the underlying assets. Our investment on our books is roughly $30,000,000 We continue to believe that the value of the underlying assets is north of that.

Speaker 3

So it's hard to nail down a number, but I do think we're in the process now of moving through that and hopefully getting this noise out of the story very shortly.

Speaker 6

Thanks guys.

Speaker 2

Thanks Anthony.

Speaker 1

Thank you. Our next question comes from the line of Barry Oxford with Colliers. Please proceed with your question.

Speaker 5

Great. Hi, guys. On the disposition market, when you guys are looking at that, is it fairly fluid? And are the buyers able to get financing relatively easily?

Speaker 3

Hey, Barry, it's Dave. Very good question. I think we're continuing we are seeing a little bit of uptick in the transaction market, I think, as we all get more clarity on where interest rates are. Still not super deep, but we're seeing more transactions. And I would say we are seeing the buyers able to get financing.

Speaker 3

So in some recent transactions, there's been a financing component and we've seen the ability to get financing at rates that are probably now closer to the closer to 6%, a little bit above that, but rates that can work. So we are seeing that market normalize. We're also seeing on the sales side, on the acquisition side, we're seeing cap rates move up a bit. So we're continuing to monitor that for great opportunities.

Speaker 5

Is it your plan as much as humanly possible to match the dispositions and acquisitions? Or do you think one will run-in front of the other this year?

Speaker 3

Yes. I think we I'll say it this way. We our responsibility and what we focus on every day is creating and adding value. Over the last couple of years, we've been continuing to upgrade the portfolio through a bit of recycling, really selling assets and redeploying into new assets. I think right now, I think I mentioned in my remarks that we've done about $80,000,000 of that in the last 18 to 20 months.

Speaker 3

We believe that kind of that level is probably appropriate for a portfolio of our size on an ongoing basis. And our guidance we've given is the asset base as it is today. But we do believe there's going to be opportunities are starting to open up for acquiring assets and potentially growing and scaling this platform as well. We're as we've said for the last couple of years, we're going to be very, very disciplined in capital allocation, making sure those decisions are the right decisions for long term value. But for the last couple of years, it's been largely sales and dispositions one for 1.

Speaker 3

I would expect that that would be similar in 2024, but we think there's going to be opportunities as things continue to improve.

Speaker 5

Great. Thanks so much guys. Have a good one. Thanks Barry.

Speaker 1

Thank you. Our next question comes from the line of John Massocca with B. Riley Securities. Please proceed with your question.

Speaker 2

Good morning.

Speaker 3

Good morning, John.

Speaker 2

Maybe as we think about the guidance, as you think about kind of the $0.03 drag from your costs associated with the ongoing situation around Pillarstone, maybe if you can provide a little more color as to what you're assuming there? Is it a resolution to legal issues and vacancy court related issues now in July? Or is it that kind of ongoing to the full year as you look at guidance today?

Speaker 3

I'll let Scott maybe talk in guidance. But on the Pillarstone front, I think largely our efforts are related to collection. So think of it that way. In other words, now we've moved through the process. We've done our redemption of our ownership effort and now we're going to work to get those amounts collected.

Speaker 3

So that's largely the activities and I'll let Scott maybe give further comments.

Speaker 4

Well, on the guidance side, I don't think it's a $0.03 drag. I think we've got $0.03 of additional just in the other category. And so when you look at the guidance for 2024 against what we had in 2023, We're expecting lower litigation costs around Pillarstone. And then also, we redeemed our OP units in January. So the line on our income statement that's had a deficit related to Pillarstone goes away starting January 25 or so.

Speaker 4

So I think we expect a little bit of pickup from just no longer recognizing equity method deficits associated with Pillarstone, and we move on to collecting the amounts that were due. And then we expect lower litigation costs.

Speaker 2

Okay. And when you say $0.03 drag, I mean versus kind of run rate, no Pillarstone at all. Okay. Oh, sure. Okay.

Speaker 2

Yes. I mean, are you kind of assuming that being a full year to kind of of those elevated G and A costs? Or is that something that should end roughly in July just because you mentioned it as when you expected to or at least were guiding to start monetizing or collecting some kind of monetization from the Pillarstone assets?

Speaker 4

Well, we forecasted about $1,500,000 of litigation expense associated with Pillarstone, it's hard to predict the timing of when all those when the matters get resolved.

Speaker 2

Okay. That's fair. And then apologies if I missed this earlier in the call, but the acquisition in February, Garden Oaks, can you provide some color as to pricing and going in yield on that investment?

Speaker 3

Sure. Hey, John. So in early 2024, we're pleased to close on a really nice acquisition in Houston in the Garden Oaks submarket, which is an area that is very, very strong, continues to improve. And so really pleased with that. It's an Aldi.

Speaker 3

It's a center that has an Aldi, has several tenants that are the type tenants we like that support the surrounding community and has real upside, I think from continuing to apply what we do well, which is, is Christine and her team just really looking at the tenants and what we what they provide the community. So we're very pleased with the acquisition. I think it fits our portfolio well, was part of our capital recycling program. So I think we've upgraded to a much better asset there with greater upside than what we disposed of. As far as pricing and cap rates, I think that at this point, we have not I think that the 10 ks will have the acquisition price.

Speaker 3

I think David probably will be in the 10 ks that's filed. But we haven't given individual cap rates on acquisitions. But I will tell you it is I think we shared with you the capital recycling program that we've been able to sell assets kind of at the 6.2% cap rate going out and we are buying assets above that. So this fits in that scenario. But there'll be some the actual I can't remember the exact amount.

Speaker 3

It was in the $20,000,000 to $30,000,000 range is what the acquisition price was, but that exact amount will be in the 10 ks we filed very shortly. And then just we haven't given cap rates on individual sales or dispositions.

Speaker 2

Okay. Understood. And then maybe bigger picture, I know you've given very clear NOI guidance. But how should we think about rent growth as a component of that? Is what you were seeing in 2023 something you think you can continue into 20 24?

Speaker 2

Or is a lot of that NOI guidance going to be maybe lighter maintenance CapEx just given some of the items that were in your 2023 results?

Speaker 3

Yes. I think we're still seeing continued rent growth in all of our markets. And I think the benefit now is we have filled most of our larger boxes. And again, we don't have that many of them, but that was the challenge coming in 2022 early 2023. And so the smaller spaces and by the way, smaller spaces doesn't mean smaller balance sheets.

Speaker 3

So and there are a lot less capital intensive to turn. We anticipate with again with revenue the quality of revenue initiative, a lot of what we're looking at is if we do have weaker tenants that aren't serving successfully serving the communities, in this strong market, it makes sense to actually look at those stronger operations. John, one thing I might just add. I know you know this, but just one of the benefits obviously is Whitestone's shorter leases, which enables us to capture those market increases more quickly. So if you look at our spreads, they're very strong, and I think they're even stronger when you take into account the length of our leases compared to some of the others that report spreads.

Speaker 2

Okay. That's very helpful. And that's it for me. Thank you very much.

Speaker 3

Thank you.

Speaker 1

Thank you. Our next question comes from the line of Michael Diana with Maxim Group. Please proceed with your question.

Operator

Hey, thank you. Obviously, most of my questions have been asked. Just on you made great progress on getting rid of non core assets that don't fit. I think you said the only one that's left really is your headquarters building. Do you have anything do you want any comment about that?

Speaker 3

I'll just so our headquarters office building is a 6 story suburban office building. It is probably roughly 50% occupied. So it's very similar to some of that office product, incredibly different than everything else we have in our portfolio, which are community centers that support neighborhoods. So I think we as Christine mentioned, we would we expect to probably exit that property. For us, it's just making sure we find a nice home for our roughly 50 people in Houston that occupy that.

Speaker 3

We're headquarters that are. We'd love to be in one of our retail centers, similarly we have in some other markets. But I think when we look at our portfolio, kind of the non core assets that don't fit the geography or the strategy, we've made a lot of progress there and Woodlake is the only one we identify. Recycling wise, we'll always be looking at properties that we've owned for a period of time. We've added value and we feel like there's a better way to redeploy those proceeds just like you would do with a stock portfolio.

Speaker 3

So strategically, really Woodlake would probably be the only property at this point that doesn't fit the strategy. And then capital recycling will continue to look at redeploying proceeds where we can create more value.

Operator

All right. Thanks, Steve.

Speaker 3

Thanks, Michael.

Speaker 1

Thank you. Our next question is a follow-up from the line of Anthony Hau with Tuohy Securities. Please proceed with your question.

Speaker 6

Hey, guys. Sorry. I just had a quick follow-up. I noticed that the 24,000 square feet box at Windsor Park is still vacant. What's the plan for that space?

Speaker 6

And what type of demand are you guys seeing for this box?

Speaker 3

Strong demand, but it's one of our only centers, that's a power center and it has similar situations that other power centers have and it has some of those restrictions and covenants that you have to work through. So the demand is there. We actually have a very interested party and we're just having to work through those what I would consider items that are negotiable, but just take time because we have to work through that with the other tenants. So the demand is there and I'm not concerned about filling it. Actually, we have 2 interested parties in it.

Speaker 3

So it's just working through the timing with a couple of other tenants that are existing in the center.

Speaker 6

And I'm assuming that you guys are trying to remove those covenants, right? Because I know that's one

Speaker 2

of the I think one of the key things that Dave always talked about.

Speaker 3

Yes. As you know, that's something that we that's one of the business models that we have that we avoid. This is one of the very few centers that we have that. It's one of the legacy assets, but it's also very well located center in San Antonio. It's right at 2 major highways.

Speaker 3

So like I said, the demand is there. But this is a little bit slow going, but we anticipate that we'll have that completed this year.

Speaker 6

And how about the office people at that? I think there's office people at the same asset, right, I think.

Speaker 3

Yes, there is. So what I'm finding is Office Depot has changed their business model a little bit and they act more like a distribution center and a little less like retail. But it performs well there. All the tenants that are there performed very well. Okay.

Speaker 3

Thanks. Hey, Anthony, one thing I just want to know with us is that there is we are finding that there's a different type of demand now for larger boxes, but there is demand that actually is coming around fairly strongly in retail, just shifted to a different type of user. What do you

Speaker 6

mean by that?

Speaker 3

Less hard goods, more services or a product and a service. So it's just a it's a move to that's why we moved to work with EOS at one of our centers, right, because why compete with 2 other large grocers in the market that are already performing well? And when we did the study and found out that there was they were missing a fitness type of operator, we went for the strongest operator that was coming into the market. So that's what you look at with these boxes. I will instead of leaning into hard goods, I will lean into something that drives repeat visits because then it benefits all the other clients in the center and it benefits the market as a whole when we do that because again, there's more of a drive for services right now than product the sale of hard goods and soft goods.

Speaker 6

And then like for these big box, like have you guys ever considered just like kind of like dividing the space up to like smaller spaces? Because I know some of your peers that they're trying to do that right to convert these big boxes more, these are small shop space to drive higher rents for the center?

Speaker 3

Yes. It depends on the demand in the area. And one of the things that we always have to look at with this type of there's always a cost with that. And so how much linear square footage that you're how much linear feet do you have of frontage compared to what type of depth you have. So fortunately, we don't have a lot of that type of problem within the portfolio.

Speaker 3

And we've been able to fill the boxes pretty effectively this year and last year because there is again the demand is just tapping in the right type of demand and making sure that it evolves with the shift and the change in the neighborhood. But yes, we've done that a couple of times, where necessary, but we're always kind of cognizant of what the returns would be for doing that.

Speaker 6

Sorry, just one last one for me. Which pendant replaced back beyond box?

Speaker 3

That was the pickler. So we're finding this to be a very interesting source of traffic for our centers and especially with repeat businesses. So we had a number and two things about this, and because this is such a hot sport right now, and it's really interesting to see that's a very it's a hot sport for a very interesting demographic. We're finding that the demographic that visits for this has a high repeat visit factor of like 3 times a week, number 1. And also it happens to be younger people that are playing the sport indoors, right.

Speaker 3

So they're younger career oriented professionals that are looking to make sure they can reserve a core time versus waiting for the weather and other types of elements to play outside. So we studied this. We investigated a number of operations that are growing very, very fast. And we made a decision to work with one that was more dedicated to the sport and that's the Pickler and they're out of Utah and they've done a really good job with their study. We not only study them, we went to visit them, we went to visit other business units as well to understand how they make money.

Speaker 3

And it's a relatively low labor cost. It's actually a low capital cost that you need to put into these things, but the returns are pretty high on their sales. So we want to find the right one, the one that understood how to tap into the market quickly and have the 1st mover advantage. And so we worked with the pickler and very happy. They just got their permit and we expect them to be open shortly.

Speaker 3

That's

Speaker 6

pickleball, right?

Speaker 5

I just want to make sure.

Speaker 3

Yes, pickleball. I'm sorry. This is yes, it's for those that are wondering who the pickler is, it's pickleball. There are a number of variants on this, but we moved more towards the people that are more interested in playing and less towards the entertainment type of venue like Chicken and Pickle, which are great, but they're a higher capital cost. So we went more into what we consider the hardcore and the consistent player that likes to show up every week.

Speaker 3

So

Speaker 6

Okay. Well, thanks. Thanks for the color. I really appreciate it. Yes.

Speaker 1

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Holm for any final comments.

Speaker 3

Well, first of all, thank everyone for attending today. As I said in my comments, I can't be more bullish about the strong fundamentals of our business and how Whitestone is positioned. We are excited and looking forward to a strong 2024 and look forward to providing updates as we move throughout the year. So once again, thanks to all. I hope you have a great day.

Speaker 3

Thank you.

Speaker 1

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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