Whitestone REIT Q2 2024 Earnings Call Transcript

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August 1, 2024

Key Takeaways

  • Positive Sentiment: Signed new and renewal leases at a blended 17.5% increase (7.7% on a cash basis) in Q2, marking over nine quarters of 17%+ leasing spreads.
  • Positive Sentiment: Delivered 6.6% same store NOI growth and $0.24 core FFO per share, while reiterating full-year guidance of $0.98–$1.04.
  • Positive Sentiment: Strengthened the balance sheet with a debt-to-EBITDAre ratio of 8.0x (7.5x excluding proxy fees), occupancy at 93.5%, and net effective rent of $24/sq ft (+5.4%).
  • Positive Sentiment: Maintained focus on neighborhood and community centers with 1,500–3,000 sq ft spaces, outperforming power centers—as shown by asking rent growth of 4.6% vs. 0.1%.
  • Neutral Sentiment: Announced a board refresh to add two new independent trustees and appointed a new independent chair, aiming to strengthen governance.
AI Generated. May Contain Errors.
Earnings Conference Call
Whitestone REIT Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Whitestone REIT Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Maudey, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining Whitestone REIT's Q2 2024 Earnings Conference Call. Joining me on today's call are Dave Holman, Chief Executive Officer Christine Massindrea, 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 1

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, August 1, 2024. The company undertakes no obligation to update this information. Whitestone's 2nd 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 Q2 2024 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 2

Thank you, David. Good morning, and thank you for joining Whitestone's Q2 2024 Earnings Conference Call. We had another very strong quarter extending out to 9 quarters, we have now had 17% plus leasing spreads. Beyond the very strong supply and demand fundamentals underpinning our business, our strategy and our focus on operations are driving strong same store net operating income growth, which is the key to our long term earnings growth. We reiterated our 2024 core FFO guidance of $0.98 to $1.04 this morning and delivered $0.24 core FFO per share for the quarter.

Speaker 2

We remain on track with our internal forecast for the year. In the Q2, we signed new and renewal leases at a blended 17.5% increase over the prior leases on a straight line basis and a 7.7% increase on a cash basis. We grew our top line revenue over 3.3 percent producing 6.6% growth in same store NOI and achieving core FFO per share of $0.24 and we continued to strengthen our balance sheet with debt to EBITDAre at 8 times. Excluding the proxy contest fees in the quarter, our debt to EBITDAre ratio was 7.5 times, an improvement of 0.8 times from a year ago. Our occupancy was 93.5 percent at the end of the quarter, up 20 basis points from a year ago and our net effective annual base rent per square foot was $24 up 5.4% from 2023.

Speaker 2

We recently took a harder look at some of our key differentiators in terms of our ability to drive growth and I wanted to share some of those with you this morning. These key differentiators are captured on Slide 3. Strategically, these key differentiators allow us to focus our acquisition efforts where we can drive results quickly once we take possession of a property. We assess demand growth drivers in the neighborhood anchoring the property and determine if our team will be able to improve the alignment of tenants with the surrounding demand. Our leasing team strength is placing high growth tenants in centers with 1500 to 3000 square foot spaces.

Speaker 2

We have long believed that neighborhood and community centers correctly configured with the right mix of 1500 to 3000 square foot spaces will outperform larger box centers. This belief is being proven by both national data and by Whitestone's numbers as you can see on our Slide 4. According to a recent Marcus and Millichap report, neighborhood and community centers grew year over year asking rents at 4.6% versus 0.1% for power centers. It is no surprise that our higher mix of neighborhood and community centers have allowed us to outperform the peer group's same store net operating income growth averaging 65 basis points over the last years of outperformance versus the group. Turning to Slide 5, you'll see this outperformance is even more impressive given the amount of capital were required to drive these results.

Speaker 2

Because we acquire correctly configured centers, our redevelopment capital is generally not spent on reconfiguring a center, but rather on areas that drive income. Another key differentiator in terms of driving results is our tenant base. We have over 1400 tenants that are selected by a leasing team trained to find tenants capable of growing, driving traffic and allowing us to push our same store net operating income higher. Once again, you need a long term operational mindset plus a really strong leasing team in order to build up that tenant base as a key differentiator. It is because of progress we have made in terms of market valuation and we believe there is more runway ahead for us as we continue to drive results via these key differentiators.

Speaker 2

The differentiators became more and more apparent as we consistently drive results and our success is built on a solid strategy and the ability of our leasing, property management and acquisition teams to execute. On the governance front, we continue to make improvements as we recently announced our intent to strengthen and refresh our Board of Trustees by adding 2 new experienced and independent Board members who will replace David Taylor and Nandi Tabari upon appointment to our Board. We will share more with investors as we move through this process and I'm very thankful to David and Nandita for their efforts in leading the company's leadership changes in early 2022, for their ongoing commitment to do the right thing for shareholders and for their strong support of our Board refreshment initiative. They've served investors well for the last 7 years and we are a much better company as a result of their efforts. I'd also like to thank Amy Fang for stepping up as our new independent chair and for Julia Boothman assuming the chair of our nominating and governance committee and leading our Board member search efforts.

Speaker 2

Both Amy and Julia have a strong commitment to grow shareholder value and bring a wealth of valuable experience to our team. We look forward to attending the Bank of America Conference in September. And for those of you attending the conference, we hope you'll find time to meet with Whitestone there. And with that, I'll turn the call over to Christine.

Speaker 3

Good morning, everyone. As Dave mentioned, we remain confident in terms of achieving our 2024 objectives and are on track with our internal monthly and quarterly goals. Occupancy remains high at 93.5 percent, up 20 basis points from a year ago. Anchor occupancy was 97% and smaller space occupancy was 91.4%. We achieved renewal leasing spreads of 13.9% and new leasing spreads of 33.3 percent for combined overall positive leasing spread of 17.5% in the quarter.

Speaker 3

Our drive to remerchandise continues unabated and it's one of the primary reasons behind our delivering 6.6 percent same store NOI this quarter. Rather than viewing our record occupancy percentage as simply an indication of the general strength of the business, we view it as an imperative to continue remerchandising. We are continually advancing our quality of revenue initiative, replacing tenants that aren't tracking increased demand from the newer younger demographic and properly serving the neighborhood. The leasing team is continually challenged to understand existing and prospective tenants business plans with a focus on understanding how business makes money and how they plan to capture demand growth in the surrounding neighborhood. This remerchandising effort extends well beyond larger remerchandising that we talked about in the past, such as EOS replacing the aging grocery store in the neighborhood, for the Pickler replacing the Bed Bath and Beyond.

Speaker 3

The younger demographic is spending far more on their pets and we've matched that offering with CityVet at Quinlan Crossing in Austin, Central Park at Paradise Plaza and Canine Creek both in Arizona. As part of our local franchises, Canine Creed was named the Small Business of the Year by the local Chamber of Commerce, opening their 2nd location at the Promenade at Fulton. We celebrate our local entrepreneurs and welcome the opportunity to participate in their success. We're also seeing the younger generation spend significantly more on self care and well-being, massage, yoga, beauty products, Pilates and more. One of the reasons these businesses are often well tied in the local demand is that they have a millennial or Gen Z operators operating their 3rd, 4th or 5th franchise and bringing in more sophisticated marketing techniques and the ability to meet demand with lower capital outlays.

Speaker 3

We've recently brought in the NOW Massage at Lakeside Market in Dallas, a perfect example of this. They've done a fantastic job creating a natural zen environment for their customers. But importantly, they've reduced their cost and in order to do so divide the space differently than used to be done in the past by using curtains rather than walls. They are often more of an example of newer operators with strong long term business plans that know how to develop and use their capital appropriately to make money. Week in and week out, we are constantly having our leasing team sharing their successes with one another.

Speaker 3

This is leveraging each other's talents and experiences not confined to how the team finds new prospects. They share their experience and technology and tools they utilize to access neighborhood demand and how they evaluate businesses and lessons learned from other centers that are evolving. Over the last few years, we've seen a number of competitors brand themselves with a grocery anchor or a Sunbelt sticker. We believe it's critical for investors to understand that the growth model we've built requires far more than shifting an acquisition strategy to draw investors' attention. The centers we've acquired are well positioned to capture neighborhood demands and they're configured correctly to attract high growth service oriented businesses.

Speaker 3

However, leasing team expertise is the reason we're able to properly curate centers and it's critical to understand how interdependent our differentiators are and how that allows us to deliver consistent results. I'll also expand on our ability to outperform with less capital. The biggest part of the capital difference is the redevelopment capital. Redevelopment capital is often a critical component of driving results. However, the key is to be tuned into the neighborhood demand allowing that demand to drive the actions you take.

Speaker 3

We project demand when we acquire the properties and we continually maintain a pulse on that demand in order to ensure the center is keeping up with it. This is vital for leasing agents to determine the right tenant and for when to apply redevelopment capital. We also factor in the timing of lease expirations both in our acquisition analysis and in our application of redevelopment capital. Investors may have seen recent news on Kroger's proposed acquisition of Albertsons and stores that may be divested to CNS. We have 3 Safeway stores on the list Market Street, Pinnacle of Scottsdale and Anthem Marketplace in our Phoenix market.

Speaker 3

Plus another 2 Shadow anchored centers Arcadia Town Center and Fountain Square also in our Phoenix market. These are well performing stores with an average grocery sales of approximately $500 per square foot and a 3 mile household income of approximately 124,000 If the merger goes through, we believe CNS will be a strong operator. As always, the key is that these centers are well anchored by surrounding neighborhoods. We'll keep investors updated as we learn more. If we look back over the last 10 years, the strongest quarters in terms of total value signed were the 4th quarters of 20 21, 2022 2023.

Speaker 3

The most recent quarter was the next highest on the list with nearly $37,000,000 signed in lease value. While this is impressive and certainly a sign that we're on the right track, my biggest reason for wanting to thank the leasing team and the operations team for delivering space to tenants is their ability to learn from one another and continually sweat out the details necessary to ensure the long term success of this business. We've got a busy second half ahead, but we also have the right environment and the right team to deliver. It's my thanks to that team that we've been able to deliver thus far. Scott?

Speaker 4

Thank you, Christine, and good morning. We were pleased to deliver $0.24 of core FFO for the quarter. As Dave and Christine discussed, this was a very strong quarter led by strong leasing efforts. Our original and our current forecast anticipates that we will increase FFO in the second half of the year, especially the Q4 with G and A reductions, percent of sales clauses kicking in more heavily in the 4th quarter and leasing delivering a 4th quarter similar to the last 3 years. Pursuant with our delivering same store NOI growth of 6.6% this quarter, we raised the full year same store NOI guidance range to between 3% and 4.5%, raising it 0.5% both on the bottom and the top end of the range.

Speaker 4

On the debt side, we financed 56 $1,000,000 of 6.2 percent secured debt maturing in 2,031. In essence, this was laddering out our secured debt we have coming due in the second half of this year. We will keep an eye on laddering out a bit more of our revolver debt. Currently, we have 13% of our debt on variable rates and the revolver matures in 20 2 6 month extension options. Looking at our core FFO walk on Slide 11, we reiterated guidance and updated the forecast in terms of how we get there.

Speaker 4

Non same store NOI growth increased and in conjunction interest expense also increased. We intend to continue balancing out our acquisitions and dispositions and the timing will impact these 2 contributors. But to the extent one increases, we should see the other approximately balance it out. Our goal is to make sure that our underlying growth engine becomes more and more visible to investors. We will do this both by eliminating noise and by continuing to drive same store NOI growth in order to deliver bottom line growth.

Speaker 4

With that, we will keep our comments brief today and I'll open the line for questions.

Operator

Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from the line of Anthony Howe with Truist Securities. Please go ahead.

Speaker 5

Good morning, guys. Thanks for taking my question. So in the rental trend chart on Page 7 in the presentation, rent growth for San rent

Speaker 6

growth for San

Speaker 5

Antonio and Austin moderated sharply. And then you see an uptick in Fort Dallas, right? So just curious, what are you guys seeing on the ground today for those markets?

Speaker 3

We're seeing strength in all of our markets, Anthony, still. It's just a matter of what leases are turning when and the size space. So I don't see a real shift in a negative way. In fact, I'm seeing it still continuing on track with where our expectations are. And that's across all markets.

Speaker 3

And quite frankly, the difficulty is some of our markets are getting to full occupancy. So that's why we continue to work our remerchandising efforts to strengthen the base of the growth.

Speaker 5

Got you. And then you're hearing news that a lot some restaurant owners or like McDonald's are struggling a little bit. Are there any like no restaurant tenants that's on your watch list right now?

Speaker 3

Not on our watch list right now. What we're finding, and I think this has been talked about quite a bit, is that fast food is starting to meet the same pricing as fast casual. And so people are opting for a choice of sitting down and having a good meal versus what would be something that would be less desirable like eating a hamburger on the car.

Operator

Thanks guys. Thank you. Our next question is from the line of Mitch Germain with Citizens JMP Securities. Please go ahead.

Speaker 6

Thanks for taking my question. So it appears based on your same store guidance, you're kind of looking at a little bit of a deceleration in the back part of the year. Just could you just talk about kind of what the expectation is there?

Speaker 4

Hey, Mitch. Thanks for the question. This is Scott. We're still looking at sequential same store growth. But I think that if you were to look at the first half of the year, same store growth and compare that to the second half of the year compared to 2023, the second half will be a little bit lower than the first half of the year was.

Speaker 4

You may recall in the second half of last year, we had a quarter that was a little bit lower. So that's one of the reasons why we one reason why the Q2 of this year was a little higher.

Speaker 2

Yes. Hey, Mitch, it's Dave. As you saw, we did increase our same store guidance for the year. So we're to Scott's point, I think we're very pleased with the performance a bit above our original guidance. We moved it up on the bottom and top end and I think pleased with the performance of the portfolio.

Speaker 6

Got you. You didn't provide an update on Pillarstone. I know a lot of what's happening there is a little bit out of your control. I know some of this is contemplated in your guidance right now. Anything of note happening there?

Speaker 2

Hey, Mitch, it's Dave again. A lot happening. I think we mentioned we're really in the collection phase for our redemption, working our way through that and expecting proceeds as we go through that process. I think we communicated earlier on we had about $13,000,000 of expected proceeds in our guidance this year and that kind of no change to that and we're working to collect those funds through a disciplined organized process.

Speaker 6

Are assets with it from the Pillarstone entity for sale?

Speaker 2

They are. As part of the BK, obviously, we're working through a plan of reorganization. Right now, we understand they have about $40,000,000 of contracts in place for 3 of the assets and we're obviously working to get all of the assets all or some of the assets liquidated in order to meet Whitestone's redemption.

Speaker 6

Got you. And then last

Speaker 2

for me,

Speaker 6

Christina, Q4 last year, obviously, you had a pretty meaningful increase in occupancy quarter over quarter from 3Q. You're starting at a little bit of a higher point this year, But obviously, your comments reference the fact that the back part of the year are the more seasonally active. So where do you think

Speaker 2

is a

Speaker 6

comfortable occupancy level for this portfolio to start to kind of perform a little bit more consistently?

Speaker 3

Well, I mean, like I said, I mean, there's an active remerchandising effort because I think there's a profitability that can be achieved with that. But we're still looking at 90 $3,800,000 to $94,800,000 But I'm quite confident that we can get this portfolio in a good place at the end of the year.

Speaker 6

Thank you.

Operator

Thank you. Our next question is from the line of Gaurav Mehta with Alliance Global Partners. Please go ahead.

Speaker 7

Thank you. Good morning. I wanted to ask you on your G and A guidance. For the second half of twenty twenty four, does your guidance include any nonrecurring items within the G and A?

Speaker 4

No. So in the first half of the year, we had proxy defense cost of around $1,800,000 and that's the majority of the increase in G and A. In the second half, we expect to be a little bit more normal. Some of the legal fees were front loaded into the first half of the year associated with the bankruptcy and other legal matters. So we do expect a more normalized G and A in the second half of the year.

Speaker 7

Okay. Thank you. I think the question I had was on the real estate property taxes, which were lower in Q2. How should we expect about real estate property taxes for the second half of twenty twenty four?

Speaker 4

So in the state of Texas, there's a long process to dispute and litigate property taxes and you often get So So we had a few more tax refunds in the 2nd quarter than we normally would. So I would expect property taxes to normalize and be closer to where we were in the Q1 for the second half of the year. And the reason the second quarter is so much lower is we just we've had a number of favorable settlements on properties in Texas.

Speaker 7

Okay. And then maybe lastly on the transaction, I think on the last call you had talked about maybe selling $25,000,000 of properties in Q2. Was there any update on those expected dispositions?

Speaker 2

Hey, Gaurav, it's Dave. Yes, our recycling efforts are on track. I think in the second quarter, we closed on a couple acquisitions and I think we closed on one disposition right before the Q2. We do have a couple of assets still in the pipeline and to close in the balance of the year. I think we've done about $100,000,000 in acquisitions over the last couple of years $85,000,000 of dispositions.

Speaker 2

Our plan is to continue to balance those. So we probably got another $20,000,000 to $30,000,000 of dispositions coming in the balance of the year. And those are going well. We're continuing to be able to buy assets where we think there's significantly more upside and an initial day 1 spread as well.

Speaker 7

Okay. Thank you. That's all I had.

Operator

Thank you. Thank you. Our next question is from the line of John Massocca with B. Riley Securities. Please go ahead.

Speaker 8

Good morning.

Speaker 4

Good morning.

Speaker 8

So just I mean, sorry if I missed this earlier in the call, but I am splitting hairs a little bit, but the interest expense expectation increased versus kind of prior guidance.

Speaker 6

What's the driver of that?

Speaker 8

Is it anything to do with disposition timing versus kind of what your expectations were last quarter or was just execution on the mortgage you recently did? Just trying to get a little color on the guidance outlook.

Speaker 4

No. The majority of the increase in the interest expense guidance is just we have a recycling plan where we the plan is to be capital neutral. But in the first half of the year and a little bit into the second half of the year, the acquisitions are outpacing the dispositions. And so with that, you just have a little bit higher NOI and a little bit higher interest expense. And so the bottom line impact to FFO is going to be virtually nothing.

Speaker 4

So the amount maybe $20,000,000 to 25 $1,000,000 would be the amount that we're ahead on acquisitions versus dispositions for the year.

Operator

Just to give you a sense.

Speaker 8

I guess maybe in the original in the guidance last quarter in 1Q, was the anticipation that there would have been earlier timing on dispositions then? Yes.

Operator

Okay. Yes, it's difficult to

Speaker 4

predict the dates of these things.

Speaker 8

And I guess what kind of is being assumed from a variable interest expense perspective, just given all the volatility we're seeing? I don't know when that was determined. It seems like in a given week that can be very different, but just kind of interested in the timeframe of when you set that element of the interest expense expectation.

Speaker 4

Well, we're down to 13% variable interest rate as of the end of the quarter, the second quarter. And we look at the we take a look at the 1 month sulfur curve going out through the end of the year. And to high 6s, low 7s would be the range that we're looking at for the balance of the year at least in this quarter's forecast.

Speaker 8

Okay. And then maybe switching gears to kind of operational stuff. I know there's been a lot of talk on calls over the last couple of quarters about the impact of higher interest rates on kind of low income consumers versus high income consumers. I mean as you look at your own portfolio to the extent you have exposure to those different kind of income buckets, Are you seeing any kind of difference in terms of your ability to push rent at properties that are maybe a little closer to lower income consumers versus higher income consumers? And does that shape kind of how you're thinking about your capital recycling plan?

Speaker 3

Good question. I think a couple of things. That's why we've positioned most of our acquisitions and our properties in high HHIs. And in those higher incomes where we see those growth opportunities really come from job growth. So we've been very fortunate that we've been able to see the upside of that growth as well with those incomes.

Speaker 3

Truly, this has been a concerning thing to see what's happening with the lower income consumers. We don't have a lot of exposure there. Where we do on some of those properties, they're still not really on the lower end. They're about mid range. So again, I haven't seen anything as of yet.

Speaker 3

But that being said, you feel bad for what's happening, right, to these people, and it's very unfortunate. So hopefully, things will balance out towards the end of the year for everybody in a good way. But like I said, we don't have a lot of exposure in that area. In fact, it's very minimal.

Speaker 8

So as you look at kind of capital recycle, I mean, is the thought process to continue to move up that curve?

Speaker 2

Hey, John, it's Dave. It is. I mean, we've continued part of our recycling is just the biggest part is the ability to add value through the new acquisition. But we have recycled with a little bit higher HHIs and also higher ABRs. So continuing to focus on where we think the greatest opportunity is.

Speaker 8

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

Speaker 2

Thanks, John.

Operator

Thank you. As there are no further questions, I would now hand the conference over to Dave Holman, CEO, for his closing comments.

Speaker 2

Thank you. Thanks everyone for joining us this morning. At Whitestone, we're pleased with our progress in the second quarter and really look forward to performing for the balance of the year. We will be out among

Operator

The conference of Whitestone REIT has now concluded. Thank you for your participation. You may now disconnect your lines.

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