WSR
#Yes.
Thank you, <UNK>, and thank you all for joining us on our first quarter 2018 conference call.
We are off to a great start for the year, led by our record-setting quarter of leasing activity and square footage, dollar volume and rent per square foot.
This is the highest volume of quarterly leasing activity since our IPO.
One of the keys to the strong leasing effort was the persistence of our highly focused leasing teams canvassing of potential tenants that best fit the needs of our communities.
We attributed the success of our leasing effort in the first quarter to having a high-quality portfolio of community center properties that we assembled via the targeted investments we have made into creating needs-based centers that drive traffic.
We have accretively transformed our portfolio these past few years into one focused on driving high-frequency visits from consumers in the surrounding neighborhoods in each of our high-growth markets.
By owning well located, service-focused assets of community center properties, we produced first quarter ending occupancy that approached 91%, which is our highest level ever.
Our strategy is to become a leading real estate owner for entrepreneurial tenants that provide local-based necessities and services within the fastest growing cities of the country in business-friendly states.
Again, this is finally starting to resonate as we demonstrated in the first quarter with our robust leasing and 233 basis points of expanded occupancy.
We accomplished this by acquiring, developing, redeveloping and operating community center properties in high income neighborhoods with higher consumer spending.
With a strong start in the first quarter 2018, our long-term goals are quite achievable.
Our portfolio of geographically diversified community centers has evolved far beyond the Houston market, as we now have a meaningful presence in other highly attractive growth markets in the fastest-growing cities of Dallas, Fort Worth, Austin, San Antonio, Phoenix, Mesa, Gilbert, Chandler and Scottsdale.
Our unique value proposition is centered around our entrepreneurial culture, which is built on our differentiated strategy that focuses on neighborhood necessities and local services and is driven by a performance-rewarded culture.
We're focused our strategy on owning community center properties that have tenants committed to meeting and delivering the local necessities and services that cannot be bought online and require brick-and-mortar structures.
Digital disruption is here to stay and it is our intent to remain ahead of the curve.
As we stay focused on owning the prime assets that can provide for the needs of the surrounding neighborhoods.
These include specialty retail, grocery, restaurants, medical, educational and financial services.
We believe that our approach will continue to maximize property income and cash flow.
This provides stability from our growing base of 650 tenants, which will continue to increase and increase shareholder value.
Our ongoing approach and strategy drove strong first quarter results, including a 23% income increase in net operating income.
As we operate our business, we are constantly looking to the future and strive to balance growth while maximizing risk-adjusted returns.
That was a genesis of our long-term goals.
Some of these include: reduced leverage and improve general and administrative expense to revenue ratio, growth in our cash flow and a more robust dividend payout ratio.
Our key to success is built on the discipline, growth and driving efficiencies in our operations.
Our dividend is stable, and our cash flow is predictable.
We are energized by the successful start in 2018 and expect to continue to build upon our momentum, as we seek to create additional value for shareholders over the long term.
With that, I'd now like to turn the call over to Dave <UNK>.
Thanks, Jim.
Please note that most of the financial measures and ratios I will discuss exclude the impact of the $680,000 in professional fees incurred in the quarter related to our 2018 proxy contest.
As Jim said, we got off to a very good start in 2018.
Our first quarter was highlighted by 3.9% same-store net operating income growth, strong leasing activity and spreads and solid progress toward our 2023 goals, improving our debt-to-EBITDA ratio and improving our general and administrative expenses as a percentage of revenue taking it down to 17%.
Now let me give a few details on the quarterly results.
Revenue for the quarter grew $5.3 million or 19% from a year ago.
This was driven by acquisitions in 2017 and an increase in our same-store occupancy of 1.5% and growth in our annualized base rent per square foot of 6.6%.
Property net operating income was up $4.4 million or 23%, driven by strong same-store growth of 3.9% and new acquisitions.
Property operating margins expanded almost 200 basis points to 69% from 67% a year ago, primarily as a result of cost reductions and higher expense pass-through percentages from increased occupancy levels.
During the quarter, we signed 127 new and renewal leases, representing 374,000 square feet and $29.7 million in total lease value, representing future revenues.
This is our highest volume of quarterly leasing activity since our initial public offering.
The average lease size was 2,941 square feet.
The average ---+ and the lease term was 5.3 years.
Spreads were 12.1% positive on new leases and 13.6% positive on renewal leases for the quarter for a blended 13.4% increase on a GAAP basis.
Interest expense increased $1.3 million from the prior year quarter due to higher borrowings and an increase of 20 basis points in our overall interest rate.
General and administrative expenses decreased $535,000 or 9% from a year ago.
And as a percentage of revenue, improved to 17% from 21% a year ago.
This was primarily due to a planned reduction of 22% in our stock-based compensation.
To emphasize the scaling of our infrastructure, we increased quarterly property net operating income by $4.4 million or 23%.
And during the same time, we lowered our general and administrative expenses by 9%.
NAREIT funds from operations increased $2.7 million or 37% and was $0.24 per share, up from 23% in 2017.
Funds from operations core increased $2.4 million or 24% on a per share basis.
Funds from operations core was $0.31 versus $0.32 in 2017.
Now let me spend a few minutes on our balance sheet.
We have total real estate assets on a gross book basis of $1.1 billion, an increase of $224 million or 24% from a year ago.
Our assets have an annual in-place net operating income of approximately $93 million or an unlevered cash-on-cash return on investment of approximately 8.5%.
Our capital structure remains simple and transparent with one class of stock and operating partnership units and a combination of property and corporate level debt.
Further, our underlying debt structure comprises a mix of secured and unsecured debt and well-laddered maturities.
Our capital structure provides us with a financial flexibility to support growth opportunities.
At the end of the quarter, approximately 2/3 of our debt was fixed with a weighted average interest rate of 3.9% and a weighted average remaining term of 5 years.
We had $59 million of availability under our credit facility at the end of the quarter and the availability of a $200 million expansion feature.
During the quarter, we made progress towards improving the debt-to-EBITDA ratio to 8.4x, an improvement from 8.8x a year ago.
We also continued to maintain a largely unsecured debt structure with 49 unencumbered properties out of our wholly-owned 58 properties at an undepreciated cost basis of $735 million.
As to our guidance, we are reaffirming the funds from operations core range of $1.19 to $1.24 per share for the full year.
The details are included on Page 35 of our supplemental.
Before we get into the questions and answers, I'd like to ask that we please focus all of our questions on our first quarter results and outlook.
And with that, we will be happy to take your questions.
<UNK>.
Dave, thanks for the question.
Good question.
So we've continued to focus, obviously, on driving efficiencies in our properties.
One of the specific areas we looked at is security, making sure we have good security in properties.
We're able to do some reductions there through automation and various means.
But we've continued to work the property tax side well.
And then we also in our same-store NOI had better recoveries due to increased occupancy.
So I think we'll continue to push for efficiencies that we'll get as we scale our operations.
And we're very pleased with the start to '18.
Yes.
<UNK>, this is Dave again.
Absolutely, we're always looking at our debt and maturities.
We are having discussions with our very good group that we have in our bank group on our line of credit and looking forward to go and ahead and extending that and.
Potentially, obviously, we'll work to improve the terms of the agreement to match the improvements we've made over the portfolio of the years, but we are looking to do that.
I think we're a couple of years into the 4-year agreement.
Yes, it's ---+ <UNK>, it's Dave again.
Obviously, this is very technical accounting.
I think we provided a footnote in our earnings release that, hopefully, explains it well.
I think that the last paragraph talks to while we believe the impact to our results is if anything would be a nominal increase, we could ---+ we just have to go through with the SEC and determine the accounting, but we feel very good about the accounting.
We've provided disclosure in the earnings release that I think explains that hopefully well.
I think first of all, as I said, it's very technical.
We are committed to doing correct accounting and ensuring that we are in agreement with all the standards.
So I think that the disclosure in that earnings release, hopefully, explains it better than I could do on this call.
We believe that our accounting treatment is correct and we are going through a process.
And <UNK> just to add to that, that eventually, we have talked about de-consolidating the Pillarstone and that's been the ---+ that's been our thinking all along.
So <UNK>, Dave, again.
I guess, I would always caution in leasing spreads that it's a small amount of leases that come through in a particular quarter.
We had a very good quarter from a leasing activity.
We had a very good quarter from a spreads activity.
I think I tend to look at the rolling 12 months as a better indicator of trends.
There were a couple of leases during the quarter that were a little larger and had a large amount of the TI.
But when we look at our leasing activity, it was really across all of our markets and consistent with the smaller tenants we have.
But what cause the TI to be a little higher for the quarter, was it was one renewal with a bank that had a larger amount in it.
Sure.
I'll start out, and Jim probably can give some color.
But I think I would point to the first quarter, <UNK> <UNK>, as we said, a really good start to '18.
Our leasing volume was very good.
We always have a fair amount of leasing rolling with our model of shorter-term leases.
I think if you look at the leases that are scheduled your to roll in 2018, the percentages I'm looking forward roughly, I think it was 9% or 10%.
And the rate on those is actually a little lower than our overall portfolio.
So we feel very good about the leasing volume.
We feel very good about the start.
We feel good about the leasing spreads we had in the first quarter.
And I think we're off to a good start.
Yes and <UNK> <UNK> I'll add to that.
Our portfolio and the tenants we have mostly entrepreneurial, the size and the types of businesses they have, really did benefit from the tax cuts that have been ---+ that have gone through.
And what we are seeing is that these folks are expanding.
And it ---+ like, in the restaurants, for example, more people are eating out.
More restaurant operators are expanding their space.
They're adding more outdoor space.
They're adding fountains, they're adding missing systems things like that.
So we're seeing the uptick in the economy that is really having a direct impact on our portfolio.
And we had anticipated that when we put it together, and I think that it's really starting to come to fruition.
Sure.
I think it's in the footnotes, but I'll give it to you again.
So it's basically leases signed where there was a former tenant within the last 12 months, and the square footage was within 25% of the expired square footage.
So obviously, we look at the leases with those guidelines in mind and try to compare the ones that make sense to compare.
We provide that.
We do provide the total information in the sub data.
I just think comparing 2 things that aren't comparable doesn't make sense.
But we do provide the total lease volume, you can see the contractual rental rates entered into for the period.
So we just think it's meaningful disclosure to compare the ones that are comparable.
Sure.
I'll comment on a couple of things and.
First of all, I would say we remain focused on creating value for all shareholders.
We have a differentiated improvement strategy to create long-term value, which I think you can see has produced results as shown in our first quarter.
Yes, I think ---+ and I think, <UNK> <UNK>, that when those are pretty standard putting in change of control provisions.
And it usually evolves over a period of time.
They don't just pop up and happen.
So I think it's pretty standard.
But they're put in with the idea that you never have to exercise them.
So we are optimistic that those will never be exercised.
I was going to just say, I mean, I think our Board is committed to adding shareholder value.
Obviously, it looks at lots of attributes.
And believes the strategy and direction that we've taken is the right one.
And we can't speak to GPT and other companies, we can only speak to Whitestone.
It really is just bread-and-butter smaller leases.
I mean, there were ---+ there's always 1 or 2 that are little larger than they average, but very much a normal quarter.
The total volume was 127 leases.
I think that average size was about our average size.
The length was just a little longer than average.
So it was fairly much normal course of our strategy showing results.
Yes, that's ---+ well, that's Whitestone's.
The wholly-owned portfolio year-over-year.
It's about 1.5% same-store occupancy increase year-over-year.
Belmont contributed about 60 basis points, so Belmont was one of our lower occupied properties that we sold this year.
And the impact of that was roughly 60 basis points.
We do.
We have ---+ I think we communicated we have 3 currently in the queue.
We're working.
We think that recycling capital and where there are assets that are no longer core, we can't add any more value makes sense.
So we currently have 3 in the process of looking to sell and recycle the capital.
Yes, I think it's in the $40 million to $50 million range.
We certainly think so, <UNK>, and we have a fairly aggressive program.
What we're finding now is a lot of the spaces that we prepared to lease are now ready to lease and people are leasing the space.
They are making decisions regarding the space.
So that's a good sign.
I think we're very optimistic that we'll end the year at the higher occupancy than we have currently.
And we have given in our guidance.
We've tried to give some transparency as to the drivers.
So we've given some guidance on the occupancy levels that we've included in the guidance, but we're very positive given the good start to '18.
Sure, <UNK> <UNK>.
This is ---+ I don't have the exact numbers, but I will tell you both assets are performing as expected but we underwrote them and originally bought them if anything just a little better.
So I hope that answers your question.
Let me add, Dave, if I can.
The Boulevard place restaurant, we had the replacement tenant that we're looking at now.
We've reached the letter of understanding with them.
And we hope to go to and lease it sometime very soon.
It will be commensurate rent plus about 10%.
And then, in addition to that, we'll have some percentage rent clause as well.
And it's an exceptional tenant.
And we're pretty excited about that.
With regard to Eldorado, we're having discussions with a major coffee tenant that has over 1,000 locations in the country.
And we just acquired a piece of ground that is contiguous to ours, which is the location that they had preferred.
So we're still working on that deal.
I think ---+ yes, I'm assuming you're using the like end ---+ this update or maybe annualized base rent.
Is that what you're using, <UNK> <UNK>.
Right.
I was just going to ---+ so the thing that's probably and be open to suggestions as far as additional disclosure you'd like to see.
But Boulevard has a significant percent of rent component to its revenue that you really don't just see in the ABR, Eldorado also has a little bit as well.
Very well.
Thank you, operator.
And thank you all for joining us on our 2018 first quarter conference call.
Our strong operating results to start the year provide us with the confidence that we have the right plan in the right people in place as we look ahead.
We are a differentiated e-commerce resistant business.
And are uniquely position for continued growth and value creation in the retail segment of the retail real estate industry.
I'd like to remind anyone that we're available if anyone would like to call us and talk to us for property tours that we are always open and welcome that.
In the meantime, we want to thank you for joining us today.
And with that, we'll close the call.
