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.

Thank you, Amelia. Good morning, and thank all of you for joining Whitestone REIT's 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 maybe webcast for a period of time, it is also important to note that today's call includes time sensitive information that maybe accurate only as of today's date, March 02, 2017. Whitestone's fourth quarter earnings press release and supplemental operating and financial data package has been filed with the SEC. Our Form 10-KQ will be filed shortly. All will be available on our website, WhitestoneREIT.com, in the Investor Relations section. Also included on the supplemental data package are the reconciliations from the GAAP financial measures. With that, let me pass the call to Jim Mastandrea.

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 based culture is unique in the publicly traded real estate space whereby every Whitestone Associate works to increase shareholder value and benefits directly to 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 but all financial measures and metrics. We had 11.8% growth in revenues reaching $104.4 million, 17.5% growth in net income, a 13.3% growth in net 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 focus 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 true valuation of Whitestone which is linked directly to the quality of our properties in a 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 provide services that meet the day-to-day needs of the community. Unlike most shopping center…

Thanks Jim. Our distinctive e-commerce resistant business model continues to deliver solid results. Today I will spend most of my time discussing our fourth-quarter results and briefly summarize our key 2016 annual results. For the fourth quarter, total revenue 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 topline 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 for the third quarter increase 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 cost over a larger asset base, partially offset by 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 operations core was $0.34 for this quarter. NARIET 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 divestiture of non-core asset 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 cost from both quarterly periods improved 70 basis points from last year to 10.5% of total revenue. We expect that G&A will continue to become a smaller percent…

[Operator Instructions] And we'll go first to RJ Milligan from Baird. Please go ahead.

Hi, good morning guys. 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 comes an off-balance sheet interests?

I'll start that 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 that Pillarstone brings in capital to be able to - do not consolidate that entity in our results.

Yes, I think that 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 - it was and will be accretive significantly in the future.

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

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 deconsolidation of Whitestone's balance sheet.

Thanks that's helpful. And then 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 of debt and equity for any potential deals?

Let me take first part. We have two properties on the contract right now and we have two properties in negotiations for LOI. The total of the two LOI is about $300 million. They fit our business model exactly. The two that we have under contract or somewhere in the $125 to $140 million and some of - the two under contract could be closed sometime in the next 90 days, the two they were negotiating LOI we don't have firm deals on those yet but if we do we can close them fairly quickly. With regard to the capital sources I'll let Dave to address that.

Sure. I think as we've communicated we expect to de-lever on the debt side through different mechanism that the same-store growth obviously very strong this year which results in an increase in cash flows and then as we communicated we expect that acquisitions will be - will reduce our leverage by restructuring 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 EBTIDA and we would expect that future acquisitions would be in that same range given our target debt to EBITDA in the $0.07 range and we expect future acquisitions to help us to get there.

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

We got a strong interest in 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 the cap rate which is implied of 8.1% that's $925 million in value, if you use the cap rate of 6% because of the quality of our assets, and the quality of the tenants and the high household income in neighborhood grids, you get a $1.2 billion value. If you calculate net asset value off of the six cap rate here in low to mid 20s, when you use OP units then you end up using them at $19 of share that's usually discounted from the 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 drive where they got an excellent bargain on their price of $19 a share and we think that in time that will be more reflective of our market price than it currently is today.

And as I said earlier we've got several sources of capital to fund the growth. We think this is very exciting. We've also looked at some additional divestitures of some of the legacy assets, some of the older assets in our portfolio. We're continuing to upgrade the quality of the portfolio and so when we look at sources of capital we got recycling, we get OP units, we got debt, we got several sources.

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 of your core markets?

Cap rates are along the same lines as they were in - I would say in 2016 and that's probably we're seeing them in the low 5s to the 7.5 for different kinds of deals. What we're finding though is that the cap rates on actual in place net operating income as opposed the pro forma so that's falling off a little bit. There is also more opportunity to do some value add to get the stabilization. Stabilization we define it as being 95% occupied and all 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.

That's it from me. Thanks for the color guys.

And we’ll go next to Mitch Germain from JMP Securities. Your line is open sir. Please go ahead.

Good morning guys. So I’m curious, you've 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?

That's great question Mitch and obviously we did a fair amount of that late 2015 where we termed out $200 million from five to seven years. We're always continually looking at our debt structure and making sure that we're laddering and fixing rates. We do have a little different structure and that we have shorter term leases and have more ability to move our tenant revenues with the increasing interest rates that some of others don’t. So with that we think it is a little bit more appropriate to have a probably a little greater percent of our debt floating in some of the other folks that might have long-term more fixed leases.

Yes, and as you float along as your debt a floating portion floats with our leases I’ll give you 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 the rate floating it is that’s a particular new section of the development where we just added 40,000 square feet.

Great. What about leasing we saw a bit of a slowdown in a number of leases done this quarter and obviously you're facing a pretty lumpy year with regards to expirations relative to kind of the next five year levels. Anything of note that you’re seeing was there any caution around the election? Have you seen an increase in traffic maybe if you can provide some perspective there?

Yes, that’s a good question. What we found is that the core of our tenants are small businesses and the Trump being elected as a President has gone a considerable distant 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 that he may not be able to stay in business he is 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 that these small businesses are truly optimistic and we think they’ll benefit which I think in turn will benefit us because of two things the short-term nature of the leases and the ability to – the percentage increases that we have year-over-year. In all of our calculations when we quote return on investment, we do it on a 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 us some tailwind and hopefully we’ll be able to feel that sooner than later.

And specifically again back to the question are you seeing I'm sure you get the traffic numbers are you seeing an increase in traffic versus kind of where you were in the fourth quarter?

Yes.

Okay.

Yes we are.

Great. And then the…

And I might just add Mitch if you look - it’s great, if you look at the lease expiration schedule, you look at our leasing spreads obviously we've 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 got the ability next year to do very well on rolling those leases as well.

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

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

Great is there any characteristics I mean are you more comfortable going to the grocer side or you really just want to stick to kind of what you've done which is you know stick with the community centers that you can – you don’t kind of stay with the smaller tenants?

Yes I think our unique business model, ecommerce resistant business model we think that’s a lot of traction and we continue to be very committed to that. We always look for centers so we can add value I think we’ve communicated that in the past and we got a track record of doing that. So we’ll look for centers that we could come in and either increase occupancy drive rental rates, build additional square footage. So I think the types of assets we look for continued 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.

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

Absolutely thanks for your time guys.

[Operator Instructions] And we'll go next to Carol Kemple from Hilliard Lyons. Ma'am your line is open. Please go ahead.

Good morning guys. What are your occupancy assumptions do you have built into the 2017 guidance?

We have not given the 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 is 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. So we have not given guidance specific to occupancy, but we’ve given some other measures such as same-store NOI growth.

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

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 it’s probably the 2016 expense obviously adjusted for new acquisition, but the fourth quarter did have a bit of true up in the property taxes. Although since we are primarily a triple net company that also contributes from the revenue line so it’s not much impact to NOI by those increased property taxes.

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

I'm not sure I understand the nature of your question. I think we adjust in our FFO for a couple reasons. We obviously feel like for comparing historical result the GAAP accounting for stock compensation is a bit lumpy so 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 a true fund. So I think we think it's appropriate it is stock-based compensation, not cash that we report that in FFO core measure that’s adjusted from NAREIT FFO but as we expect to continue to report that way.

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

Yes, I think you’re looking probably at the GAAP disclosures in our financials.

Yes.

But those two it’s clearly from a GAAP perspective you look at the units that are outstanding and you estimate that the amounts to be earned. So I think we’re double checking in our number here, but you should expect to see stock comp it will go down obviously as they present of the five of the company over time that we firmly believe in performance-based stock compensation is one of the best ways to align our company with our shareholders. And so I can follow-up may be Carol with some specific, but we should see in our guidance we’ve included about $0.34 of FFO core in stock comp really as the adjustment from FFO to FFO core. And then in the - I’m looking at the note in the sub data. I think as we expect about 10 million in stock comp in 2017 in which what we put in our guidance.

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

It should be lower.

Okay.

Yes, but obviously its impacted by future grants and that sort of thing but it should be lower it will probably be a little better explanation in our 10-K more thorough explanation of the remaining stock comp so that will be filed shortly and hopefully that will clear it up a little bit.

Okay. Thank you very much.

And we'll go next to John Massocca from Ladenburg Thalmann. Sir your line is open. Please go ahead.

Good morning everyone. I was thinking more kind of long-term after Pillarstone kind of get capitalized what are your long-term plans or your interest in Pillarstone is that something that you would look to dispose off over the long-term or would you like that your kind of equity interest as a nice low asset in your portfolio?

I think once again I'll it is a small investment it’s 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 it’s very focused. So I don't think we - I think we don't mind having actually the upside from that investment. We obviously would like to get to a deconsolidation level because I think that makes a little clearer in our communication. But so I think we will evaluate it going forward I think the plan clearly is to get where direct consolidating those assets. But we are working with Pillarstone on the build-up of the value we created there and I think Whitestone will evaluate whether or not it’s fully liquidates with $20 million of equity or keep some portion in it overtime.

Okay. That makes sense. And then you’ve kind of mentioned capital recycling is it possible source of capital for future acquisition. As you look over your portfolio today specifically kind of post the Pillarstone transaction what kind of asset could possibly be used for capital recycling will be mostly some of the smaller Houston retail assets I think only I know one of the office flex properties made – didn’t get sold to Pillarstone though other than that kind of what properties that you will be looking at?

Yes John, this is Jim, what we’re looking at our asset that we are reaching stabilized, stabilization as I had defined it earlier that there is 95% occupied and it is achieving market rents have been a three to five mile radius. We are starting to identify one or two of those properties and there is a significant profit in them. And so we’ll look at recycling those take advantage of the gains that we've had and then use that towards new acquisition. 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’ve been acquiring we have been acquiring repositioning, restructuring and then strategically leasing and managing we’re just now starting to see those. And these properties will be for sale and we think that a company when your properties mature you should take advantage of the market and sell it.

Is it just fair to stay that kind of post the Pillarstone transaction your dispositions are capital recycling program would be more kind of opportunistic rather than kind of a strategic – disposal of assets that no longer fit your core strategy?

Yes, I think that’s right and that we’ll give you couple here I think that’s right and that clearly the disposition of the nonretail assets was very important from a perception of getting the company to be a 100% retail. Going forward I think as Jim said we’ll look for opportunities where we feel like we’re really extracted the value out of an asset and we can capitalize on that and use it for other acquisitions. So would be opportunistic not necessarily strategic.

Yes. 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 in institutional quality for some institutions and we’re looking at them.

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

Development for 2016 has been a home run. We did approximately 70,000 square feet, at low land cost basis when we acquired properties back in 2010, 2011 and 2012 we took that residual land did ground up building and are getting double-digit return on investments both properties are close to 50% or 60% leased. And we’re 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.

Did Pinnacle get delivered or is that still going to get delivered later this year?

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 property. 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 lease certificate as part of the center we are not fully completed the construction so we have not included that as a completed property at this point they will be in the first quarter.

Okay, thanks. That's it from me.

[Operator Instructions] And we'll go next to Craig Kucera from Wunderlich. Please go ahead.

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

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

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

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

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

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?

Yes I think it's really a specific, we continue to look at our debt structure and 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 drive. So we will continue to look at a good mix of property level debt, corporate level debt and going forward possible extension of public debt as we go forward as well will be in our arsenal.

Craig one possibility, if you look at is, we just keep getting stronger and stronger from an operating perspective and 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 would be higher and you will see our cost of capital being lower. What we've been able to accomplish is again I would say remarkable based on the constraints that we have on our cost of capital given where our dividend is and given when our share price sits but I think as we see some improvement there you will see, you will see us being able to take on more assets out of our pipeline by over $0.5 billion.

Okay. Thanks.

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

Yes. Thank you very much. I’d like to again thank everybody for joining us and also the spirited question that I think are really important and helpful to all 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 provide our team with the confidence that we have the ability to maintain and build on our momentum in 2017. Longer term, I believe our innovative e-commerce resistant business model well positioned than ideally located portfolio 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 REITWorld at Market Street DC Ranch. We had some great opportunity 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 he didn't realize our properties were as the quality that they experienced. So we accept that in all graciousness. Always welcome to give us a call and come by and we’re glad to host you to visit any or all of properties. Thanks again. We look forward to updating you on our progress in 2017 and beyond. Operator, that will be all.