Good day, and welcome to Whitestone REIT Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kevin Reed, Director of Investor Relations. Please go ahead.

Thank you, Mendy. Good morning, and thank you for joining Whitestone REIT's fourth quarter and full-year 2017 earnings conference call. Joining me on today's call will be Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors. Please refer to the Company's earnings press release and filings with the SEC, including Whitestone's most recent Form 10-K for a detailed description of these factors. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that today's call includes time sensitive information that may be accurate only as today's date, March 2, 2018. The Company undertakes no obligation to update the information. Whitestone's fourth quarter earnings press release and supplemental operating and financial data package have been filed with the SEC and are available on our website, whitestonereit.com, in the Investor Relations section. During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the Company. Included in the earnings press release and supplemental data package are the reconciliations of non-GAAP measures to GAAP financial measures. With that, let me pass the call to Jim Mastandrea.

Great. Thank you, Kevin, and thank you all for joining us on our 2017 fourth quarter and full year conference call. Today, Dave and I will provide an overview of our continued strong performance, starting with the highlight for 2017. In my remarks, I will discuss Whitestone's differentiated e-commerce resistant business strategy, highlights of our team's operational and financial performance, our long-term goals and enhancements we have made in our corporate, governance and compensation structure. At the time when the Company first went public, our initial goals were to take the Whitestone from a non-traded REIT we inherited the one listed on the New York Stock Exchange with greater access to capital and transparency for shareholders. It created differentiated business model, capitalizing on the disruption that was occurring within the retail distribution system and create an e-commerce resistant model, grow our asset base to generate a stable and profitable cash flow and provide our investors with an above market total return to shareholders. Let me provide you with a few highlights from 2017. On a total return basis through the end of 2017, Whitestone ranked Number 1 out of 17 public shopping center REITs for one year, and Number 3 of 17 for three years. In listing the shareholders during our ongoing proactive interactions, we have made several significant corporate governance changes; these include adopting share ownership guidelines of 3x to 5x salaries for officers and trustees, adopting an annual frequency for our shareholders stay-on-pay, aligning our compensation structure with performance goals more closely to our peers and industry practices using relative total shareholder return as a primary long-term performance measure, refreshing and strengthening the Board by adding three new independent trustees that have exceptional industry knowledge, experience and diverse backgrounds including gender, and adopting long-term financial goals for debt…

Thanks, Jim. 2017 was a strong year, highlighted by an increase of 80 basis points in our total occupancy with our wholly-owned operating portfolio occupancy, increasing to 90.5%. We highlighted by an increase of 8.6% in our annualized base rent in our wholly-owned portfolio and 8.9% in our total portfolio. It was also highlighted by 320 basis points improvement in of our total general and administrative expenses as a percentage of revenue. Now let me discuss some of the details of the full year and fourth quarter results. Revenue for the year increased $21.5 million or 21%, driven by revenue from new acquisition of $17 million and $4.5 million from same-stores. Our same-store revenue growth was 4.9% in our wholly-owned portfolio and 1.2% in our consolidated partnership non-retail properties. Revenue for the fourth quarter increased $5.5 million or 19.2% over the prior year period. The increase in revenues for the quarter was driven by revenue from new acquisitions of $4.9 million and $600,000 from same-stores. Our same-store revenue growth was 2.5% and our wholly owned portfolio and flat in our consolidated partnership non-retail property. Property net operating income for the year increased $13.5 million or 19.2%, driven by NOI from new acquisitions of $12.5 million and $1 million from our same-stores. We're same-store NOI growth was 2.6% in our wholly owned portfolio, while our consolidated partnership non-retail properties experienced a 6.6% decline. Property net operating income for the fourth quarter increased $3.6 million or 19% over the prior-year period. The increase in NOI for the quarter was primarily a result of new acquisition. Same-store NOI growth was flat in our wholly owned properties and decreased 2.5% in our consolidated partnership non-retail properties. Fourth quarter NOI was negatively impacted by approximately $250,000 in revenue reductions and expenditures relating to re-tenanting two…

[Operator Instructions] And we'll go first to Mitch Germain with JMP Securities.

Mitch, are you there?

So let's just quickly talk about some of the onetime charges this quarter. What are re-tenanting costs, what are marketing costs, maybe if you can just provide a little more details there?

Sure. And as I said, Mitch, in our business, these are not totally unusual cost. But they do provide some toughness in comparing quarter to quarter. So we wanted to compare quarter to quarter adjusting for some unusual items. Two items we had where in our Dallas and in our Austin market, we had two restaurants that we are replacing with new restaurants. Approximately, $250,000 in revenue reductions from writing-off some straight line rent and from writing off accounts receivable balances. Those restaurants are being replaced with tenants that will be positive for the portfolio, we believe, to contribute more positive in '18. So that's $250,000 related to those. The additional one we discussed was $100,000 in marketing expenses we spent in our properties to really enhance the communities. We did advance in a couple properties, where we spent dollars that we thought would be good to driving traffic to the centers and value to our tenants. And those were non-recoverable by their nature, so reduced our net operating income in the quarter.

And then you referenced also some legal-related fees, that were --

Yes, thank you. So we also had included in our general and administrative expense, we had 300,000 related to a legal fees, those were related to an adjacent property owner that we were attempting to develop that two large property. We were able to stop that. But the cost of doing that was $300,000 and was -- did impact our quarter by about $0.01 per share.

So if I think about this, about 650,000-or-so of cost, these are all were what would be characterized as nonrecurring going forward, right?

Mitch, I would say, from a comparability of quarter-to-quarter, I think, it's meaningful to point those out. I think I would be wrong in saying those kinds of things don't happen over a period of time. So I think, they were definitely impacting the comparability of the quarter versus quarter. But I would not characterize them as totally nonrecurring.

Got you. So I just have quantified down, it's about $0.02 right there, $0.03?

That's right.

Okay. So if I take last quarter at 33, this quarter at 30, if you strip these three items out, you're back at 33, is that the way to think about it?

That is the way to think about it from a comparability purpose from Q3 '17 to Q4 '17. That's correct.

Okay. And I think you said that the acquisition in the quarter was about $0.01 dilutive, just curious, I know that there were some upside that you guys had referenced. So just talk about maybe how those centers are doing relative to your underwriting at this point?

Sure. I'll give a couple comments on the two centers and then let Jim may add some comments as well. We acquired two really high-quality centers in 2017, Boulevard Flight located in Houston in a bright location in the district. And then we acquired Eldorado Plaza in the Dallas market in 2017 as well. Those properties were acquired for a total purchase price of $204 million. The going in kind of cash on cash on those properties was in the mid-6 range and they are performing very well. Boulevard is, as of the end of the year, was 100% leased. We are changing one restaurant out, that we think, will be a great addition to the center and Eldorado Plaza is 96% leased. We've only owned those for short period of time, but they are doing as expected. And we continue to be very positive on those. We have total of five restaurants, Mitch. And three of them now are kicking in on a percentage rents. We have one restaurant that does $9 million a year, which is almost paying $50 a square foot in percent. We have whole foods area, that has a lease, which we like. That will kick in when we hit $50 million in sales. They're at around $42 million, $43 million right now. And when the construction on is completed and you may recall that on they are widening it. They put a mass transit line to go all the way to Intercontinental Airport right on Couple other things we're doing to the property is that Whole Foods -- and when you have a breakfast buffet area in the Whole Foods and there is no place to sit in the right outside your front door, we're working with them for shading of the properties and we're having discussions with the rooftop theater operator. All that and the percentage rents will begin to add to that value. And as Dave said, we also have the ability to build about 140,000 square additional feet, which includes two stories of the retail and then the rest would be office. We have several large office tenant that are looking to be there. We have several LOIs on that property. And all of the infrastructure is in place for the parking and everything else. So that's very promising. In Dallas, the property, there we have -- we're working with Starbucks to do an independent drive-through. We have them they are now in line with our other tenants. And we are in a process of acquiring an adjacent piece of ground from the State Department, which the adjacent owners have the first right of it, at a very favorable cost. We think that, that will be completed soon. And we'll have an opportunity to continue to progress with Starbucks. Dave, do you we want to comment on that program.

That's right. Actually, we just closed on that land parcel at El Dorado; so that's great. We had that parcel that we're looking to move Starbucks into a stand-alone drive-through. So both of those have upside, as Jim said, from operations, and then upside longer term from the development opportunities.

And Mitch, I'd add that we continue to sell off non-core assets. We just completed the sale this week of Belmont, which is one of the oldest lingering legacy assets we've had. It had a 40,000 square-foot Kroger vacant box. We sold that, made a few bucks on it, but it's now gone. So we really purifying the portfolio to the community centers.

Got you. And maybe just to -- I know you quantified the G&A change and talked about a bit of a change in, I guess, your plan. But maybe you can just maybe provide a little more perspective, when, I guess, that takes effect now, and maybe just talk a little bit about the background behind that?

Sure.

Sure Mitch, thanks. We have communicated long-term goal around our G&A expenses as a percent of revenue with a commitment to reduce those to 8% to 10% by 2023. Some of the enhancements we've made in our compensation structure in the stocks programs, one of the things we did is we reduced the overall size of our stock compensation program by about 30%. So included in the tables and the guidance are a walk from 2017 to 2018. That's roughly $0.07 accretive to FFO from a reduction in stock comp. We also, in our plan that was approved by shareholders, we reduced the number of shares available and then we also took out the reload of our ever green provision. We have increased some of the cash-based comp. But overall, it's been a decrease in the compensation G&A of approximately $0.01 to $0.03 per share next year we expect from those changes. And we do remain committed to continuing to lower our G&A cost and continue to look for ways to operate the business more efficiently as well as to scale it over a larger base of assets.

And that increase is based on the accrual of the look back of the return on the company, is that the way to think about it?

Say that again, Mitch, I'm not sure I understand your question?

Is the increase in the non-cash share -- sorry, the cash comp, right. I mean, you said some higher salaries but ultimately you said -- is that based on the return parameters that are embedded in the comp plan, how do I think about that?

Yes, let me clarify that. Thanks for the question. So, our compensation committee obviously has worked with independent consultants and continue -- we continue to look to evolve as a public company as we grow. One of the things we've done is looked at the performance measures. On the stock side, I think Jim mentioned we've adopted a relative total shareholder return measure which we think is very important and it puts us in alignment with shareholders. And then we shift -- we reduced the overall long-term stock comp and we've increased the performance based cash compensation. So it will be based on the financial metrics but overall, approximately 1% to 3% decrease in shifting those measures. Our compensation consultant looked at the overall structure of the compensation and about 60% to 70% of the total compensation for the NEOs is performance based.

And Mitch, let me add to that. We put together the 2008 plan which ran for 10 years, that had a factor that was 12.5% of the shares outstanding that would be allocated for management to earn through performance goals. That also had what we call a reload provision of 12.5%. So whenever we issued more stock, 12.5% would go into that pool and that was approved by the shareholders. At our 2018, when we took it out for vote last year, our compensation committee changed the plan and what we have now is 8.5% of the total shares versus 12.5% and there is no reload feature. So when that's allocated, then the Board has to go back to the shareholders to vote to increase any shares net. So it's a significant reduction in the number of shares and I should say in the 12.5% earlier, that was established like at -- what they call founder's base of shares. And if you recall, taking the company from $150 million to over $1 billion, there was some incentives to do that and in doing so, the salaries were kept at a relatively low level for a number of years, so there was some tweaking to the salaries and reducing of the comp program like that.

[Operator Instructions] We'll go next to John Massocca with Ladenburg Thalmann.

I think Jim, you said earlier that your real estate is cheaper on Wall Street than on Main Street. I mean, given where your stock is trading today versus where you think the value of your assets are, why not sell asset and possibly fund the buyback or really delever on a quicker step; just kind of your thought process there?

Dave, you want to start off that?

Yes, I'll start off, give a couple of comments, John, and then Jim will obviously look into it. I guess, from a high-level perspective, obviously, our Board and management team remain committed to acting in the best interest of our shareholders and looking at all of the possibilities out there and opportunities that there are to enhance value. We recognized there's a discount today on Wall Street versus Main Street, and we continue to look for ways to drive value to our shareholders.

And lets out all the things you do mention John, we look at. And we look at regularly and will be making some decisions on in relatively near future.

Okay. What was the cap rate on 1Q sale of Belmont?

So it was -- so I'm sorry, John, I didn't catch you up. Belmont was 73,000 square foot center located in Houston. We sold our property for $4.7 million. It had about 30% -- it had about 60% vacancy. So from a cap rate perspective, it's probably not meaningful, I think, it was roughly 100,000 in annual net operating income on a $4.7 million purchase price.

Okay, is that kind of similar to the dispositions going forward, is it more that you, I guess, assets that really are in fully occupied or more less opportunistic and more kind of a portfolio management kind of disposition activity?

John, we're just getting to the point, where we started acquiring properties in late 2010, 2011, starting off with a very small IPO. So as we bought those properties and began the redevelopment process, we're just beginning to see some of them come to the point, where we have them on the market or putting them on the market for sale. For example, mathematically, when we look at is when, when our IRRs we project them every year, start increasing at a decreasing rate, we know that it's time to consider putting the market on the properties for sale. I'll give you one example. We have a property in Phoenix with a couple of boxes that particularly has a Walmart grocery store. We bought that property for about $6.5 million. On the cash flow, we have it with -- just had analyzed and listed with the broker for somewhere around $15 million. Now in the theme of things, that seems like a relatively small asset, $6.5 million for a publicly traded REIT. But that's our business. We like these smaller assets, that we make a significant amount of profit. We don't believe we can get any more revenues out of that on an increasing rate time to sell. We're just now starting to roll off properties like that, that you'll see, and as we see that we can make a great profit on it, we will roll that off.

Understood. And then what's the plan for assets that are in the Pillarstone. It seems like there been pretty solid drag on the NOI growth, they're going to continue to be at least underperform your wholly owned properties for the guidance going forward. Any update there?

Yes, John. So as you know, we are committed to continuing to move to a pure play retail company back in end of 2006, we continue to be remain committed to that. The investment of Whitestone and Pillarstone is roughly $20 million. So it's, while it is being diluted to us and impacting our earnings, we are committed to deconsolidating and lowering our investment in Pillarstone. With that, we were committed to doing that in a working toward doing that in '18.

But nothing kind of -- and would it be more of a selling those assets or is it more of a strategy you're trying to bring and another capital partner to grow that to a point where it's no longer consolidated on Whitestone financials?

Sure, it's probably not -- we're probably not ready to talk about the specifics, but assured that all of those discussions are going on with capitalizing Pillarstone, that's the Whitestone can ownership. We are looking at the debt side, we are looking at some asset sales, various different options to reduce Whitestone's ownership and Pillarstone.

And we have some significant private investors with very significant capital who are looking to work with us in both areas, where we have some opportunities in Whitestone and in Pillarstone.

We'll go next to Kibin Kim [ph] with SunTrust.

So my focus is on cash flow and FAB. So can you give some guidance parameters on your FAB projection for 2018 per share?

I think one of the things we've done, Kevin, this year is try to provide additional transparency and a look into our 2018 guidance. With that, we've given some parameters around same-store growth, G&A expense, lease up. We have not historically provided an FAD or an AFFO number. We provide the data in our supplemental package that calculated those various methods of calculating that. But you have not given guidance on that measure. But I think, the changes you see impacting the FFO and FFO core largely impacts FAD or FFO.

Okay. Well, second point of question because your dividend $1.14, if I, this is a very simplistic way of looking at it. If you look the normal spread between your company core FFO per share versus how I calculate FAD, And I think even add back stock comp to that. You are at $0.94 in 2017. In 2018, it something lower, probably closer to 92, maybe a little bit plus or minus couple of pennies. Still lower than the payout in dividend of $1.14. Your company is levered at 8.5x EBITDA. Isn't that an issue for you guys, I mean, why should you keep the dividend at the level it is today if you're not finding it by cash flow?

I think we are absolutely focused on the -- on improving the dividend payout ratio as well as debt leverage and G&A measures. We do have -- we constantly look at our cash flow and we have upside from leasing and from rental rate increases that we expect to increase cash flow. Be assured, we as a management team and board, always look at the key drivers of the business and evaluate those. And we feel confident in the ability of -- our ability to increase cash flow over the coming years.

And Kevin, we have no reason to borrow and pay dividend, if that's what you are implying. I mean, we're building a business that runs very precisely close And I think when you look at and do that kind of analysis, you should really take some time to talk to management and even visit. I mean, I think, that you're being presumptuous when you think that we're not able to cover. If you look at our track record and our cash flow in the last six years, I think, you're going to find keep increasing at an increasing rate.

Actual 2017 right, some 2018 maybe a little different story into some variability. But, I mean, those comments really 2017 in 2016, it's not covered. Capital pressure, especially, if you are at the higher end of leverage target should be or are, it seems like the easiest way to deliver and to rightsize the balance sheet for the longer-term. So, I mean, I guess, as a follow-up to that is why you talk to the Board, what are the reasons the are looking at to keep the dividend at this level?

Because they spend more time looking at our numbers than you do.

I guess I would say -- I would just say that -- I mean, we are committed -- I mean we're committed as a company, we feel like we've got great assets, we've got a great team, we've got a solid business model and from that we're committed to improving the financial metrics overtime which includes cash flow, dividend payout ratio, G&A ratio, leverage, all of the things we've tried to communicate to the market. So we remain committed to doing those things and we feel like we have the team in place to execute and do that. And our Board and management team consist -- does look at cash flow and dividend very seriously and try to make the best decisions for our shareholders.

Okay. And last question; if I look at your 2018 lease explorations, you have about 18% of ABR coming due this year. Could you provide some details around that, what is the composition, is that -- how much of office is in there? And what's your confidence level in terms of retaining those assets or those basis?

Historically, we have rolled about that amount of our leases each year. I think in 2017, we executed almost one million square feet in leases which is about the level we have coming due in 2018. The rate on the 2018 renewals is a blended rate of about $15 which is below our average for our company. So, there is no -- we have a very diverse tenant base without significant tenant concentration though it's fairly small leases, 490 leases mature next year, 1.1 million square foot at a $15 blended rate, and obviously we've worked very hard to renew those or appropriate or to improve the tenants where appropriate and increase the rental rates.

I know it's hard to see this in a supplemental but how much of that 18% of explorations have been, I guess, addressed so far whether that be hard contracts or LOI?

I don't have the number. We typically look at lease renewals 12-months out and begin the process of understanding how -- well, even before that, we stay very close with our tenants, we understand how their businesses are doing, we look for the ability to -- their businesses are succeeding, the ability to continue to improve their space and increase rental rates if they are not to look for a future tenant. So we're typically looking 12-months out and I don't have a number for you on what percent of those leases are secured. We are very confident on that, historically, we've signed that number of leases. If you look at what we did this year, I don't have the year before but I'm assuming it was pretty close, we've historically done about one million square feet with our shorter leases that are typically three to five years.

We'll go next to Carol Kemple with Hilliard Lyons.

I think on the third quarter call you all mentioned that you had about $15 million of assets that you expected to close in the fourth quarter. I'm assuming one of those is the one that was closed earlier this week. Did the other one just get listed later or was there not a lot of interest at the prices you were expecting or what kind of happened with those?

Yes, we did communicate that. The Belmont was one of those assets for little under $5 million. We continue to have the three other properties that are under negotiations and we -- I hate to give a timeline but we are confident that we will be able to dispose of those and recycle capital. So nothing has changed from Q3, except the timing a little bit, but they are still under contract, we closed one of the four properties that we're currently looking to dispose of.

Okay. So the other three are under contract?

They are under contract or negotiation, they are moving towards a close. I don't want to talk exactly where they are but we have -- actually have a couple of offers on some but we're still expecting to complete the dispositions of those assets.

Okay. And then I noticed in the supplement, it looks like your line of credits coming due in 2019. Have you started any discussions on that and how is that going so far?

We have. That's typical, these line of credits have a 4-year life with a 1-year extension period. We have begun discussions with our lenders. As to looking at the credit facility, one of the things we've been able to do is, as you know, we've significantly improved the quality of the portfolio over the years and with that we've made sure that the terms on our line of credit match that. So we have begun discussions, we'd expect to do that this year looking at the market as far as the cap rates that are used to value of our properties, the interest rates out there and are in the process of doing that, the discussions have been going great so far.

And we'll go next to Craig Kucera with B. Riley FBR.

Could you talk about the rise in bad debt you've seen year-to-date sort of what expectations are built into your guidance?

So our bad debt expense for the year was approximately 1.9% of our revenue, up from about 1.5% last year. We have kind of built into the guidance a similar level to where we are this year. So we are -- one of the upside is continuing to work with the tenants, to work with the AR and reduce that but we did see a little bit of an increase in our bad debt expense. Part of that was related to the two tenants we talked about re-tenanting in the fourth quarter but the rate is 1.9%, 1.5% last year. If you look back, we've historically been around that 2% or a little under 2% but we did see about 40 bip increase in our bad debt expense this year.

Okay. And given that we may be in a more sustained rising interest rate environment, even beyond this year. What are your thought sort of philosophically on may be terming out more of your debt versus using a line given -- I think, your line balance right now is about 35% of your debts?

Yes. So I think, first of all, Whitestone is really well positioned to operate very well in a rising interest rate environment. Just to talk about the leases quickly and then I'll move to the debt that we have. With our short the leases, we have the ability obviously to increase rental rates should the economy be performing well in that to raise interest rates. On the debt side, we have maintained probably a little larger variable rate portion than many of the others. I think this is in sync with our long-term goals of lowering our leverage but we will continue to look at lowering -- at laterring [ph] some of that debt, potentially adding more fixed rates. But we're also sensitive to the commitment we're making to lower the debt-to-EBITDA ratio to 6x to 7x and maintaining some flexibility of paying those down as we sell assets is important to us at this point.

And one other things we look at it is to work towards getting a credit rating, and I think we'll march towards that when I think when we start seeing things change the direction they are currently in.

We have a follow-up question from Kibin Kim [ph] with SunTrust.

Our lease modifications or early modifications fully reflected in the lease activity scheduling your supplemental?

Lease modifications, early lease modifications, whereby we have signed the lease and adjusted the rate up or down, is that your question?

Yes.

When we report the leasing spreads, those are the leases executed during the period, not -- if there is a renewal that's six months out there included in the supplemental data as to what we executed in the period.

[Operator Instructions] And at this time, there are no further questions. I will now turn the conference back to Jim Mastandrea for any additional or closing remarks.

Yes, well, thank you operator, and thank you all. I would like to thank you all for joining us on this 2017 fourth quarter and year end conference call. It's trying times when you wake up in the morning and your stock price is off by 10%, and you see analyst are publishing without talking to you and even coming in or trying to get to understand you better, and particularly you don't see them visit for over a year or two but they seem to know more about the business than we do. And what this does, it creates fears about the position of the company today, it creates fears where the company is heading, and it even creates fears about the leadership and that's unfortunate. What I'd like to do is just assure you that our business model, particularly e-commerce resistant is really solid, it's on-track and it's evident of our track record of what we've done with it. I'd also like to assure you that Whitestone has liquidity, and we have a great relationships with our banks and private equity sources if we need them and our credit is just solid. We've got a portfolio of high quality properties that have value in them and then the marketplace, our properties have been purchased right and most of them have appreciating value. I also want to close with telling you that your management team is exceptional, we understand the real estate business, we understand the capital markets, and we've been through both good and bad times, and we're here today to tell you that we're going to be with this company as your stock price starts to change from where I woke up this morning. I also want to know that your Board is committed, they're committed to continue the chart of course. The increased values to the business and your investment, that cover the dividend from cash flow and to protect all the shareholders from the downside risk; we work for all the shareholders. I want to thank you for joining us today. I want you to know that we appreciate your continued confidence in Whitestone, it's important to us. I want you to know that every single Whitestone employee is a shareholder and I remain the largest single individual shareholder, so we're in here shoulder to shoulder with all of you. Finally, I just like to say today that we will continue to keep you informed and as shareholders you are entitled to honest and straightforward information about your investment. With that, operator I'm going to close.

This does conclude today's call. Thank you for your participation. You may now disconnect.