U.S. Markets closed

Edited Transcript of WSR earnings conference call or presentation 2-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Whitestone REIT Earnings Call

HOUSTON Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Whitestone REIT earnings conference call or presentation Thursday, March 2, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dave Holeman

Whitestone REIT - CFO

* Jim Mastandrea

Whitestone REIT - Chairman and CEO

================================================================================

Conference Call Participants

================================================================================

* Unidentified Participant

- Analyst

* Mitch Germain

JMP Securities - Analyst

* Carol Kemple

Hilliard Lyons - Analyst

* John Massocca

Ladenburg Thalmann & Company Inc. - Analyst

* Craig Kucera

Wunderlich Securities, Inc. - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day and welcome to the Whitestone REIT fourth-quarter 2016 earnings conference. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Dave Holeman, CFO of Whitestone REIT. Please go ahead, sir.

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [2]

--------------------------------------------------------------------------------

Thank you< Amelia. Good morning and thank all of you for joiing Whitestone REITs fourth quarter 2016 earnings conference call. Joining me on today's call will be Jim Mastandrea, our Chairman and CEO. Please note some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks and uncertainties.

Please refer to the Company's filings with the SEC, including Whitestone's Form 10-K for a detailed discussion of these risks. Acknowledging the fact that this call may be webcast for a period of time, it's also important to note that today's call includes time sensitive information that may be accurate only as of today's date, March 2, 2017.

Whitestone's first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC. Our Form 10-K will be filed shortly. All will be available on our website in the investor relations section.

Also included on the supplemental data package of the reconciliations from the GAAP financial measures. With that let me pass the call to Jim Mastandrea.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [3]

--------------------------------------------------------------------------------

Thank you, Dave, and thank you all for joining us on our call. Today Dave and I will review our fourth-quarter annual results, and I will provide you with an update on the recent progress of our initiatives. My remarks could begin and end in one sentence.

Whitestone's performance culture is unique in the publicly traded real estate space whereby every Whitestone associate works to increase shareholder value and benefits the directly through their participation in our long-term incentive ownership program. Our performance-based culture combined with our e-commerce resistant business model made 2016 another record-setting year by all financial measures and metrics.

We 1.8% growth in revenues reaching $104.4 million, 17.5% growth in net income, a 13.3% growth in operating income to $70.3 million with the fourth-quarter annualizing at $75 million, a strong 5.1% same-store net operating income growth, a 10.1% increase in funds from operation core to $39.4 million and importantly an 89.7% operating portfolio occupancy up 200 basis points year-over-year.

Our fourth quarter 2016 was also just as impressive as Dave will discuss. We continue our focused to grow net asset value building on a foundation of Class A retail properties with a simple capital structure. We believe that what we do with what we own makes a significant difference and in time the net asset value and the truth valuation of Whitestone which is linked directly to the quality of our properties and the consistent high-quality cash flow will be reflected in our market valuation.

In the meantime, we will continue to execute on our successful and differentiated business model. To that point our e-commerce resistant tenants that are woven property by property into multiple integral neighborhood networks provides services that meet the day to day needs of a community. Unlike most shopping center REITs we avoid big box traditional retailers and purchasing a property. Doing so maximizes potential property income and ultimately increases enterprise value.

We recognized early that a significant disruption in the retail space that e-commerce was causing. That was an opportunity. We also recognized that e-commerce will forever change the way people shop and the manner in which soft and hard goods are distributed.

We proactively created a business model that focuses on the distribution of services to neighborhoods through the retail property network rather than the distribution of goods. We purchase value add quality properties in business friendly states in fast-growing cities, concentrated on neighborhoods with high household incomes.

Our year-over-year financial performance since our IPO in 2010 supports our thesis. By investing in properties where we can retenant with smaller service-based companies we are capturing the unmet demand for services that meet the needs and wants of the people in the surrounding neighborhood communities, which has directly driven increasing cash flows. Our approach fortifies the upside earnings potential with added room to increase occupancy, rents, and overall square footage while limiting our downside.

One example is that we lease space for shorter terms. Our typical lease are three to seven years with a base rent triple net reimbursements and a percentage of sales on clauses restaurants. This structure drives strong year-over-year increases in our rents. We also avoid giving restrictive lease covenants to tenants that viewed our net income upside and keeps the value of our property entitlements with Whitestone. This allows us to be more proactive in adding value throughout all of the economic cycles.

Our tenants include high-end restaurants, strong regional local family restaurants, national coffee shops, grocery stores, drug stores, hardware stores, delis, children's learning centers, bank branches, cigar lounges, ice cream and gelato stores, bicycle shops and wealth managers to name some.

We have approximately 1200 tenants with strong balance sheets and proven business models. Our performance-based culture has proven successful producing financial results over the past six years, and we are one of the best performing companies in retail segment in the industry today.

We have grown our property portfolio in business states and in six major markets to over $1 billion in market value from approximately $150 million when we began in terms of real estate markets. We have increased our annual net operating income to $75 million from $19 million and paid over $100 million in dividends over the last six years.

In 2016 we achieved many of the targeted goals we set thanks to the extraordinary effort of our team. Let me discuss some of our accomplishments. We sold 17 non-core assets including retaining a participation in the upside of 14 of those non-core assets with limited or no downside and no future investments in these assets.

We acquired two high-quality retail centers in our Scottsdale market for $72.5 million, utilizing approximately $12 million of cash from the sale of our up-REIT operating partnership units at $19 a share. We completed ground up construction on residual land parcels adjacent to existing properties that we purchased previously of approximately 70,000 square feet that will generate unlevered ROIs in excess of 12% and $1.8 million of contribution to annual NOI.

We initiated six new similar projects with similar expected returns that we will deliver in 2017. We strengthened our balance sheet through judicious access to capital, thereby reducing overall debt leverage. We signed new leases totaling $77 million in lease value, and over 1.1 million square feet.

We increased our average base rent by 16% and very importantly, increased occupancy to 89.7%. During 2016 we were highly proactive in meeting investors in the United States and Europe and sharing our unique story. Institutional ownership continues to grow and is now approaching 50%.

Our focus and unique business model resulted in our delivering a total return to our shareholders of 31% in 2016 outperforming the aggregate REIT industry. In 2017 we plan to increase our market presence in our existing markets that include Houston, Dallas, Fort Worth, Austin, San Antonio, Phoenix, Scottsdale, Mesa, Chandler, and Gilbert.

We plan to deepen our base of tenants that serve the community surrounding our properties and plan to continue to produce industry-leading growth rates. We plan to maintain our strong dividend, which is well supported by increasing cash flows as evidenced by our 5.1% same-store NOI growth in 2016.

We plan to train future leaders and managers through our real estate executive development program called REED to support additional growth. We plan to provide superior real estate returns with our performance-based culture, rewarding shareholders for their commitment to Whitestone.

And as we look to the future we believe that we can successfully grow our differentiated business model to over $5 billion in assets. We are committed to making accretive asset acquisitions in each of our existing markets and becoming one of the top five e-commerce resistant retail owners in each market.

We look forward to continuing to serve our shareholders as we work to accomplish these goals. With that I'd now like to turn the call over to Dave to provide a more detailed review of our financial and operating results, and Dave and I will provide some closing remarks following the conclusion of Q&A. Date please.

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [4]

--------------------------------------------------------------------------------

Thanks Jim. Our distinctive e-commerce resistant is this model continues to deliver solid results. Today I will spend rest of my time discussing our fourth quarter results and briefly summarize our key 2016 annual results.

For the fourth-quarter total revenues increased 11% over the same period last year to $28.4 million. Same-store revenues grew 5.7% to $23 million. Property net operating income for the quarter increased 11.4% over last year driven by our top line growth, as well as efficiencies gained in our property operating expenses, reflecting our scalable business model.

Same-store net operating income grew 4.9% in the fourth quarter versus the same period in the prior year. Funds from operations core for the third quarter increased 10.3% or $1 million. The $1 million quarterly increase in funds from operations core was primarily driven by strong same-store growth, scaling of our general and administrative costs over a larger asset base partially offset by a higher debt cost.

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 on all debt for this year's fourth quarter was 3.4% as compared to 2.8% last year. On a per-share basis, funds from operation core was $0.34 for this quarter.

NAREIT funds from operations per share for the fourth-quarter was off $0.06 from the prior year, primarily as a result of transaction expenses related to the divestitures of non-core assets and higher amortization of non-cash performance-based stock compensation. G&A for the quarter excluding the amortization of non-cash performance-based share compensation and acquisition and disposition transaction costs from both quarterly periods improved 70 basis points from last year to 10.5% of total revenues.

We expect that G&A will continue to become a smaller percent 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 106 employees.

For the quarter, our leasing team signed 98 new and renewal leases, totaling 260,000 square feet with a total lease value of $20 million representing future rental revenue income. Our leasing spreads for the last 12 months on a GAAP basis have been a positive 9.1% on renewal leases and a positive 3.1% on new leases for an aggregate 8.2% increase.

We ended the quarter with total operating occupancy at 89.7%, up 200 basis points from a year ago. Our annualized based rent on a GAAP basis expanded 16% to $17.33 per square foot. We have a diverse tenant base limiting our individual tenant credit risk with our largest tenant representing only 3.6% of our annualized rental revenues.

At quarter end, we had approximately 1200 tenants. For the full-year our total property net operating income increased 13.3%, or $8.2 million. This growth was driven by a very strong same-store growth rate of 5.1%.

Funds from operations core improved 10.1% to $39.4 million. On a per-share basis funds from operation was $1.34 compared to a $1.35 in 2016. The fixing of interest rates on our $200 million of debt in late 2015 impacted 2016 funds from operations core per share by approximately $0.07 per share as compared to 2015. Our general and administrative expenses scaled over a larger base of assets resulting in a reduction of our G&A costs as a percent of revenue by 90 basis points to 11.1%.

Now let me spend a few minutes on our balance sheet. We had total real estate assets on a gross book basis of $930 million at the end of the quarter producing approximately $75 million in annual net operating income. This equates to an 8.1% unlevered cash-on-cash return on investment.

Over the last 12 months our real estate assets have grown 10.1%. Our capital structure remains quite simple with one class of stock, 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 react quickly to growth opportunities and changing conditions.

At the end of the third quarter approximately two thirds of our debt was fixed with a weighted average interest rate of 3.8% and a weighted average remaining term of 5.2 years. We had $113 million of availability under our credit facility at the end of the year with an additional availability of up to $200 million from the exercise of the facility's accordion feature.

As we have previously communicated, we expect our debt leverage to improve over time as a result of increased net operating income generated from increases in occupancy and rental rates and to improve as a result of capital structuring of future acquisitions and additional asset dispositions. Our debt to EBITDA improved to 8.57 times at year end down from 8.95 times last year.

We continued to maintain a largely unsecured debt structure with 46 unencumbered properties out of 55 at an undepreciated cost basis of $666 million. During 2016 we raised $42 million in accretive equity at an average price of $15.77 through the sale of 2.000064 million common shares and 621,000 operating partnership units at an average price of $14.80 and $19 per share respectively.

These funds were used to fund our acquisitions and development (background noise). In 2017, we will continue to evaluate all sources of capital to fund our growth, including recycling capital generated from asset sales, and as appropriate, the judicious raising of capital along with the issuance of operating partnership units. Our initial 2017 funds from operations core guidance range is $1.34 to $1.39 per share.

This guidance does not include future acquisitions or dispositions and includes an expectation of 3% to 5% same-store growth and two 25-basis point rate increases by the fed. Please refer to the supplemental financial information that's posted on our website for additional details on our financial guidance.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

RJ Milligan, Baird

--------------------------------------------------------------------------------

Unidentified Participant, - Analyst [2]

--------------------------------------------------------------------------------

This is Will on for RJ. First question is regarding your ownership interest in Pillarstone. Have you been having any discussions with additional capital partners, and how do you see that progressing to where it becomes an off-balance-sheet interest?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [3]

--------------------------------------------------------------------------------

Sure I'll start out, and Jim may add some comments. Just to remind everyone we own approximately 81% of the assets that are in Pillarstone. That equity investment is about $20 million, so it's not a large amount of our equity. We do consolidate Pillarstone today because of the ownership percentage and expect to over time as Pillarstone brings in capital to be able to not consolidate that entity in our results.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [4]

--------------------------------------------------------------------------------

I think what we found was this was a tremendous opportunity to become a pure play on the retail side in the industry with Whitestone, and we were able to accommodate it in a way that was and will be accretive significantly in the future.

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [5]

--------------------------------------------------------------------------------

The only thing I might add, Will, is we have obviously in our supplemental income by many of the measures that are really Whitestone with just Whitestone, the GAAP financials do reflect consolidation but in the supplemental data we try to break it out to better communicate to the market the differentiation.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [6]

--------------------------------------------------------------------------------

With regard to capitalizing Pillarstone, Will, we expect to capitalize sometime in the next 12 months from now and in doing so it will lead to a deconsolidation of Whitestone's balance sheet.

--------------------------------------------------------------------------------

Unidentified Participant, - Analyst [7]

--------------------------------------------------------------------------------

Thanks that's helpful. And in terms of your acquisition pipeline right now and just thinking about that for 2017 how does the pipeline currently look? And how should we be thinking about the mix debt and equity for any potential deals?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [8]

--------------------------------------------------------------------------------

Let me take the first part. We have two properties under contract right now, and we have two properties in negotiations for LOI. The total of the two in LOI is about $300 million. They fit our business model exactly. The two that we have under contract are somewhere in the $125 million in $140 million and the two under contract could be closed sometime in the next 90 days.

The two to that were negotiating under LOI we don't have firm deals on them yet, but if we do we can close them fairly quickly. With regard to the capital sources I'll let Dave address that

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [9]

--------------------------------------------------------------------------------

Sure. I think as we communicated we expect to delever on the debt side through different mechanisms. The same-store growth obviously very strong this year with results in increasing cash flows, and then as we've communicated we expect that acquisitions will reduce our leverage by the structuring of those acquisitions.

Remind you the acquisitions we did in 2016 with the operating partnership units I think that acquisition was done at a less-than-seven debt to EBITDA, and we would expect that future acquisitions would be in that same range given a targeted debt to EBITDA in the seven turns range, and we expect future acquisitions to help us to get there.

--------------------------------------------------------------------------------

Unidentified Participant, - Analyst [10]

--------------------------------------------------------------------------------

So you're looking at more source of common equity or OP units again for these deals, or could you comment on that?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [11]

--------------------------------------------------------------------------------

We've got a strong interest on our operating partnership units, and when we use them this past year and as we expect to use them, depending on how you calculate the $75 million of NOI if you use a cap rate which is implied of 8.1% it's $925 million in value. If you use a cap rate of 6% because of the quality of our assets and the quality of the tenants and the high household incomes in the neighborhood grid you get a $1.2 billion value.

If you calculate net asset value off of the six cap rate year in the low-to-mid $20s. When you use OP units and you end up using them at $19 a share, that's usually discounted from a calculation like that. We went through an enormous amount of due diligence with the sellers of those assets, asset by asset, because of our simple capital structure they were able to arrive where they got an excellent bargain on that priced at $19 a share and we think that in time that will be more reflective of our market prices than currently is today.

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [12]

--------------------------------------------------------------------------------

As I said earlier, we've got several sources of capital to fund the growth. We think it's very exciting. We have also looked at some additional divestitures of some of the legacy assets, some of the older assets in our portfolio.

We are continuing to upgrade the quality of the portfolio and so when we look at sources of capital we've got recycling, we've got OP units, we've got debt, we've got several sources.

--------------------------------------------------------------------------------

Unidentified Participant, - Analyst [13]

--------------------------------------------------------------------------------

Okay and then my last question is as you have looked at these deals, have you seen any movement in cap rates and are these deals in some your core markets?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [14]

--------------------------------------------------------------------------------

Cap rates are along the same lines they were in I would say in 2016. That's probably we are seeing them in the low 5%s to the 7.5% for different kinds of deals. What we are finding though is that the cap rates on actual in place net operating income as opposed to pro forma, so that has fallen off a little bit.

There's also more opportunity to do some value-add to get to stabilization. Stabilization we define it as being 95% occupied and all of the tenants are paying what we would consider the market rent within a three mile radius. So the assets we're looking at aren't quite stabilized to our definition.

--------------------------------------------------------------------------------

Unidentified Participant, - Analyst [15]

--------------------------------------------------------------------------------

That's it for me. Thanks for that color guys.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [17]

--------------------------------------------------------------------------------

I am curious. You have got a bunch out on the line, [186]. Why not look to take advantage of the rate environment which obviously I think we can all say appears to be getting less favorable and term out some of that debt today rather than wait?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [18]

--------------------------------------------------------------------------------

Great question Mitch and obviously we did a fair amount of that late in 2015 where we termed out $200 million from five to seven years. We are always continually looking at our debt structure and making sure that we are laddering and fixing rates.

We do have a little different structure in that we have shorter term leases and have more ability to move our tenant revenues with the increasing interest rates that some of the others don't. With that, we think it is a little more appropriate to have a little greater percent of our debt floating than some of the other folks that might have long-term or more fixed leases.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [19]

--------------------------------------------------------------------------------

Yes and as you float along as your debt, a floating portion floats with our leases. I will give an example in one of our properties in north of Dallas in the Starwood area we received the highest square foot rent in our portfolio which is pushing $49 a square foot.

On that particular deal we get triple nets as well. We get 3% annual bumps. It's a five-year deal with a five-year renewable option, and so it really has the opportunity for us to generate a considerable amount of cash that floats with any of that rate floating it is.

That's in a particular new section of the development where we just added 40,000 square feet.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [20]

--------------------------------------------------------------------------------

Great. What about leasing? We saw a bit of a slowdown in number of leases done this quarter, and obviously you are facing a pretty lumpy year with regards to expirations relative to the next five-year levels.

Anything of note that you are seeing? Was there any caution around the election? Have you seen an increase in traffic if you could provide some perspective there?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [21]

--------------------------------------------------------------------------------

That's a good question. What we found is that the core of our tenants are small businesses, and the Trump being elected as president has gone a considerable distance to really help our tenants. One example was a small dog grooming location in one of our markets that felt that because of the medical insurance and taxes he may not be able to stay in business. He's ecstatic over the Trump presidency.

Another example was a tenant who had $100,000 worth of cash burning a hole in his pocket, and he wanted to expand but he was waiting to see if -- who would be elected. When Trump was elected he informed us that he was ready to invest.

What we found is these small businesses are truly optimistic, and we think they will benefit which I think in turn will benefit us because of two things, the short-term nature of the leases and the percentage increases that we have year over year.

In all of our calculations, when we quote return on investment we do it on 100% unleveraged property, and we never build into it a tailwind from inflation. So we think that to answer your question Mitch that we think this election will give some tailwind, and hopefully we will be able to feel that sooner than later.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [22]

--------------------------------------------------------------------------------

Specifically, getting back to the question, are you seeing, I am sure you get the traffic numbers, are you seeing an increase in traffic versus where you were in the fourth quarter?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [23]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [24]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [25]

--------------------------------------------------------------------------------

Yes we are.

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [26]

--------------------------------------------------------------------------------

And I might just that add, Mitch if you look at the lease expiration schedule, if you look at our leasing spreads obviously we have done a good job of being able to push rental rates as we do new leases and renewals. Specifically if you look at the leases that expire in 2017, the overall rate on those leases is below our Company average pretty substantially so we think we've got the ability next year to do very well on rolling those leases as well.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [27]

--------------------------------------------------------------------------------

Got you. And then my last question you mentioned some deals on the horizon. They are all in your target markets is that the way to think about you are just really looking to gain scale not to enter anything new?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [28]

--------------------------------------------------------------------------------

That's correct. The four deals I mentioned they are all in the Texas market within the areas that we serve today.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [29]

--------------------------------------------------------------------------------

Great. Is there any characteristics? Are you more comfortable going to the grocer side, or are you really just want to stick to what you have done which is stick with the community centers that you can stay with the smaller tenants?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [30]

--------------------------------------------------------------------------------

I think our unique business model, e-commerce resistant model, has a lot of traction and we continue to very committed to that. We always look for centers where we can add value. I think we communicated that in the past, and we have a track record doing that.

We'll look for centers that we can come in and either increase occupancy, drive rental rates, build additional square footage, so I think the types of assets we look for continue to be a little bit different than some of the other folks with our differentiated approach. We love small service based tenants because we think that's where we can add the most value to our shareholders.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [31]

--------------------------------------------------------------------------------

Mitch, each of these centers have grocery stores, but we don't buy them because they grocery stores. They also have I want to say three out of the four have Starbucks which is usually a good indicator of a community gathering place.

--------------------------------------------------------------------------------

Mitch Germain, JMP Securities - Analyst [32]

--------------------------------------------------------------------------------

Absolutely. Thanks for your time, guys.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

(Operator Instructions)

Carol Kemple, Hilliard Lyons.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [34]

--------------------------------------------------------------------------------

What year-end occupancy assumptions do you have built into the 2017 guidance?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [35]

--------------------------------------------------------------------------------

You know we have not given year-end occupancy guidance. We have given same-store growth guidance of 3% to 5% which we think is probably a better indicator. As you know there's obviously a mix between rates and occupancy.

We feel very good about being able to increase our occupancy in 2017. As we communicated the overall operating portfolio occupancy is up 200 basis points from last year. We have not given guidance specific to occupancy, but we have given some other measures such as same-store NOI growth.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [36]

--------------------------------------------------------------------------------

And then in the fourth quarter it looked like your property taxes were up pretty substantially over last year. Was there something non-recurring in nature, or is that just a good run rate going forward?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [37]

--------------------------------------------------------------------------------

No, it was. If you look at the fourth quarter there was a fair amount of settle-up on property taxes that occurred in the fourth quarter. I think for the year our property taxes are pretty flat with the prior year on a same-store basis. So I would say that the best run rate as you look at our property taxes is probably the 2016 expense obviously adjusted for new acquisitions. The fourth-quarter did have a bit of a true up in the property taxes. Since we are primarily a triple net Company that also contributes from the revenue line but not much impact to NOI by those increased property taxes.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [38]

--------------------------------------------------------------------------------

Okay. And then will 2017 be the last year that we will have to adjust for the non-cash share-based compensations?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [39]

--------------------------------------------------------------------------------

I'm not sure I understand the nature of your question. I think we adjust in our FFO for a couple of reasons. We obviously feel like for comparing historical results the GAAP accounting for stock compensation is a bit lumpy. That's one of the reasons we adjust.

We also feel like it doesn't give a good picture of the true cash flow or our true funds. I think we think it's appropriate. It is stock-based compensation, not cash. We report that in FFO core measure that's adjusted from NAREIT FFO. We expect to continue to report that way.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [40]

--------------------------------------------------------------------------------

I guess what I'm getting at is at the end of the third quarter in your quarterly 10-Q it said you will have $10.3 million subsequent after 2016 to adjust for, and if I do the math it looks like you are going to use all of that this year. So will there be more in the future years?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [41]

--------------------------------------------------------------------------------

I think you're looking probably at the GAAP disclosures in our financials. What those do is clearly from a GAAP perspective you look at the units that are outstanding and you estimate the amount to be earned. So I think we are double checking our number here, but you should expect to see stock-comp, it will go down obviously as a percent of the size the Company over time, but we firmly believe in performance-based stock compensation as one of the best ways to align our Company with our shareholders, and so I can follow up maybe Carol with specifics.

But we should see in our guidance we have included about $0.34 of FFO core in stock-comp really it's the adjustment from FFO to FFO core. And then in the -- I am looking at the note in the sub-data. I think we expect about $10 million in stock-comp in 2017 which is what we put in our guidance.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [42]

--------------------------------------------------------------------------------

Okay I guess I was just wondering if going out after 2017 will $10 million be a similar run rate?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [43]

--------------------------------------------------------------------------------

It should be lower. Yes. Obviously it's impacted by future grants and that sort of thing. But it should be lower. There will probably be a little better explanation in our 10-K more thorough explanation of the remaining stock-comps. That will be filed shortly and hopefully that will clear it up a little bit.

--------------------------------------------------------------------------------

Carol Kemple, Hilliard Lyons - Analyst [44]

--------------------------------------------------------------------------------

Okay. Thank you very much.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [46]

--------------------------------------------------------------------------------

I was thinking more long term after Pillarstone gets capitalized what are your long-term plans for your interest in Pillarstone? Is that something you would look to dispose of over the long term or if you like that your equity interest is a nice little asset in your portfolio?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [47]

--------------------------------------------------------------------------------

I think once again all investment is roughly $20 million. We don't mind the ability we think some of those assets probably have a lot of value-add opportunity. It's just not the right place to do it in Whitestone.

Whitestone is a retail REIT very focused. So I don't think -- I think we don't mind having the upside from that investment. We obviously would like to get to a deconsolidation level because I think that makes it a little clearer in our communications. So I think we will evaluate it going forward.

I think that plan clearly is to get where we're not consolidating those assets. But we are working with Pillarstone on the build up of that value to be created there, and I think Whitestone will evaluate whether it's fully liquidate its $20 million of equity or keeps some portion in it over time.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [48]

--------------------------------------------------------------------------------

Okay that makes sense. You mentioned capital recycling and possible source of capital for future acquisition. As you look over your portfolio today specifically post the Pillarstone transaction, what kind of asset could possibly be used for capital recycling would be mostly some of the smaller Houston retail assets? I think only one of the office flex properties didn't get sold to Pillarstone. Other than that, what properties would you be looking at?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [49]

--------------------------------------------------------------------------------

John, this is Jim. What we are looking at are assets that we are reaching stabilized -- stabilization as I defined it earlier that is 95% occupied and is achieving market rents within a three- to five-mile radius. We are starting to identify one or two of these properties and there is a significant profit in them. And so we will look at recycling those, take advantage of the gains that we have and use that towards new acquisitions.

Let me remind everyone that we've only -- we did our IPO in 2010, so we're still a relatively young Company, and the gestation period for a property runs about two years. So as we have been acquiring we had been acquiring, repositioning, restructuring and then strategically leasing and managing. We are just now starting to see those.

These properties will be for sale. We think that a Company when you're properties mature you should take advantage of the market and sell it.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [50]

--------------------------------------------------------------------------------

So fair to say that post the Pillarstone transaction, your disposition or capital recycling program would be more opportunistic rather than strategic disposal of assets that no longer fit your core strategy?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [51]

--------------------------------------------------------------------------------

I think that's right and we will give you a couple here -- I think that's right in that clearly the disposition of the non-retail assets was very important from a perception of getting the Company to be 100% retail. Going forward, I think as Jim said, we will look for opportunities where we feel like we've really extracted the value out of an asset, and we can capitalize on that and use it for other acquisitions. It would be opportunistic not necessarily strategic.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [52]

--------------------------------------------------------------------------------

And also as we get to the point where some of them may not quite fit our core and some of them are reaching their maximum value. It's also changing the classification of an asset from maybe a core-plus to a core. Because they really are quality assets and institutional quality for some institutions that are looking at them.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [53]

--------------------------------------------------------------------------------

Okay. And then on the development front. How is the Pinnacle development progress -- start progressing, and are there any other development opportunities within the portfolio that you might look to exploit going forward?

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [54]

--------------------------------------------------------------------------------

Development for 2016 has been a home run. We did approximately 70,000 square feet. We had low land cost basis when we acquired properties back in 2010, 2011, 2012. We took that residual land, did ground-up buildings and are getting double-digit return on investments.

Both properties are close to 50 % or 60% leased, and we are starting to catch some tailwind in terms of the upper side of the opportunities to create some rents. We have about six developments that are similar in the pipeline right now that are going through various stages so we think that we might be able to bring on another 50,000 to 100,000 square feet of space in 2017. And I'm saying that conservatively.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [55]

--------------------------------------------------------------------------------

(multiple speakers) Did Pinnacle get delivered, or is that still going to get delivered later this year?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [56]

--------------------------------------------------------------------------------

Yes, so we officially completed the construction on Starwood which is the -- both developments are roughly 30,000 square feet. Starwood is in Dallas. We completed that construction at year end, and that property is included in our development properties. Construction of Pinnacle is going to be completed in the first quarter, and we will begin including that property in the property list as well. So Pinnacle, while we have leased a significant part of the center we have not fully completed the construction, so we have not included that as a completed property at this point. It will be in the first quarter.

--------------------------------------------------------------------------------

John Massocca, Ladenburg Thalmann & Company Inc. - Analyst [57]

--------------------------------------------------------------------------------

Okay. Makes sense. That's it for me.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

(Operator Instructions)

Craig Kucera, Wunderlich.

--------------------------------------------------------------------------------

Craig Kucera, Wunderlich Securities, Inc. - Analyst [59]

--------------------------------------------------------------------------------

I'd like to circle back to the lease because you do have a lot of leases rolling over next year and a number of your top tenants look to have expirations next year. Can you comment on how discussions are going with some of those larger tenants such as Safeway?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [60]

--------------------------------------------------------------------------------

Sure. We have just to set the stage obviously even though we do have some larger tenants rolling, we do not have any tenants that are more than (inaudible) 3.6% of Whitestone revenues. I believe the Safeway lease that's rolling next year is here in Houston, and we expect that it will renew. No issues on our top tenants that we are aware of as far as non-renewals, and we expect that that Safeway lease is rolling in 2017 is going to renew.

--------------------------------------------------------------------------------

Craig Kucera, Wunderlich Securities, Inc. - Analyst [61]

--------------------------------------------------------------------------------

Got it. When you think about spreads this next year are you anticipating fairly constant or similar spreads to what you achieved in 2016?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [62]

--------------------------------------------------------------------------------

We are. If anything, we think we'll be able to -- if there's a general improvement in the economy, we will be able to have our shorter term leases be able to roll the higher rates. We have been in this 8% to 10% leasing spread on a GAAP basis range, probably for the last two to three years and we feel very good about that level.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [63]

--------------------------------------------------------------------------------

And if you compare that to the industry particularly we have been doing it over a longer period of time. It's pretty remarkable actually.

--------------------------------------------------------------------------------

Craig Kucera, Wunderlich Securities, Inc. - Analyst [64]

--------------------------------------------------------------------------------

Got it. And one more for me. I may have missed this when you guys were discussing acquisitions, but on the debt side are you likely to use more asset level financing or perhaps maybe some of the availability on a line of credit or maybe taking the accordion option?

--------------------------------------------------------------------------------

Dave Holeman, Whitestone REIT - CFO [65]

--------------------------------------------------------------------------------

I think it's really a specific; we continue to look at our debt structure, and if it makes sense to put asset-level financing on we will do that. We do like the flexibility of the credit facility and being able to obviously pay it down and draw it. So we will continue to look at a good mix of property level debt, corporate level debt and going forward possibly the potential of public debt as we go forward as well will be in our arsenal.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [66]

--------------------------------------------------------------------------------

Craig, one possibility to look at is we just keep getting stronger and stronger from an operating perspective. When the market begins to look at our Company and give us an industry multiple which is in that range of 16% to 20%, you'll see a lower dividend because our stock price will be higher, and you'll see our cost of capital being lower.

What we have been able to accomplish is again I would say remarkable based on the constraints that we have on our cost of capital based on where our dividend sits and given where our share price sits. I think as we see some improvement there you will see us being able to take down more assets out of our pipeline by over $0.5 billion.

--------------------------------------------------------------------------------

Craig Kucera, Wunderlich Securities, Inc. - Analyst [67]

--------------------------------------------------------------------------------

Okay thanks.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

That concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Jim Mastandrea for any additional closing remarks.

--------------------------------------------------------------------------------

Jim Mastandrea, Whitestone REIT - Chairman and CEO [69]

--------------------------------------------------------------------------------

Yes. Thank you very much. I would like to again thank everybody for joining us and also the spirited questions that I think are really important and helpful to all of our investors. We appreciate your interest and your continued confidence in Whitestone.

Our 2016 performance and the progress we are making on our strategic initiatives provides our team with the confidence that we have ability to maintain and build on our momentum in 2017. Longer term, our belief is that our innovative e-commerce resistant business model, well-positioned and ideally located portfolio of properties along with the optimal mix of tenants providing goods and services not readily available online will continue to drive profitable growth and shareholder value.

In closing I want to thank those of you that attended our event during REIT World at Market Street in DC Ranch. We had some great opportunities. There was close to 100 folks who came by to visit us. Probably the most interesting comment was we didn't -- one person said they didn't realize our properties were as the quality that they experienced. We accept that in all graciousness.

You are always welcome to give us a call and come by and we're glad to host you to visit any or all of our properties. Thanks again we look forward to updating you on our progress in 2017 and beyond. Operator, that will be all.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Thank you ladies and gentlemen for joining us today. That concludes our conference. You may now disconnect.