Good day, and welcome to the Whitestone REIT Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kevin Reed, Director of Investor Relations. Please go ahead, sir.

Thank you, Kevin. Good morning, and thank you for joining Whitestone REIT's 2018 fourth quarter and year-end earnings conference call. Joining me on today's call are Jim Mastandrea, our Chairman and Chief Executive Officer; and David 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-Q for a detailed discussion of these factors. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, February 28, 2019. The company undertakes no obligation to update this 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, www.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 on to Jim Mastandrea.

Yeah, thank you, Kevin. And thank you all for joining us on our 2018 fourth quarter and year end conference call. Today, Dave and I will provide highlights for 2018 that includes progress towards our long term goals, success with our unique e-commerce resistance strategy and our performance since our IPO and a look ahead to 2019. Dave will provide details on the quarter and discuss the restatement related to our ownership interest in Pillarstone. As a background to my remarks, our accomplishments in 2018 were significant, given the distraction of a costly and time consuming proxy contest, the disruption in the retail industry and its contagion impact on retail real estate and a rising interest rate environment. With that, I have three themes that I would like to share with you today. Maintaining our commitment to achieving our long term goals, our successful implementation of our e-commerce business and strategy and our process of creating long term value for shareholders. The first thing I would like to share is our commitment to maintaining and growing a healthy and vibrant company in the best way we can continue to drive long term value for our shareholders and know that our team is dedicated to achieving these goals that we communicated at the beginning of 2018. Our investment strategy is simple. Our high quality property in markets we know well and make them better, property is worth owning and worth taking care of and never lose sight of the consumer. This strategy has proven the best way to achieve success in both good and turbulent times and then let us produce some remarkable industry leading results. The process of acquiring properties in exceptional markets that we know and making them better will always be the primary engine of our long term…

Thanks, Jim. First, let me address the 2018 quarterly restatement we announced last time. I think it would be helpful for me to give a brief summary. December of 2016, Whitestone contributed 14 non-core properties to Pillarstone OP for aggregate consideration of $84 million, consisting of OP units and the assumption of 65 million in debt. Post contribution of the asset, Whitestone owned 81.4% of Pillarstone OP. Prior to 2018, we accounted for our 81.4% ownership of these properties under the profit sharing method, which required us to continue to recognize the assets and the liabilities of Pillarstone in our financial and defer the gain of approximately $19 million from the original contribution. In January 2018, Whitestone adopted the new revenue recognition standard and evaluated this transaction based on those standards. Based on consultation with advisors and ultimately our judgment regarding the control criteria, under the revenue recognition standard, we concluded that the transfer of the control criteria had not been met, and we should continue to recognize those assets and liabilities of Pillarstone in our financials and defer any gain from the contribution. In August of 2018, we received a comment letter from the SEC regarding our application of the new revenue recognition standard related to this transaction. After numerous communication with the SEC staff, in February of 2019, the staff informed the company that it objected to our conclusion regarding the assessment of the transfer of control criteria in topic 606 with respect to the contribution and objected for the company’s continued recognition of the underlying assets and liabilities associated with the contribution subsequent to January 1, 2018. Accordingly, the company has determined that it will restate the three previously issued 2018 quarterly financials and will do so in our form 10-K to be filed prior to March…

[Operator Instructions] We will now take our first question from Craig Kucera of B. Riley FBR.

I wanted to start with some of the assumptions in guidance. With your average interest rate, I think you're looking at something like a 4.3, kind of what is, I think in the fourth quarter, you were at 3, about 3.9 on your fixed rate. You had the line, I guess, are you assuming firming out? I know you mentioned taking things from 70% to 85%, can you just provide a little more color on what that assumption is?

Sure. I think a couple of factors, Craig, as we mentioned. Obviously looking to term out and fix the rate on about another 15% of our debt. And then secondly, we're building an increased assumption on the remaining variable rate debt as well.

And what is that assumption? I think the markets kind of assumed that the Fed might be done raising rates.

I think we've assumed kind of one rate improvement within our projection.

Okay. And from a standpoint of the Pillarstone contribution going forward, can you give us some color on sort of post the assets that were sold, what the quarterly or annual income statement impact is expected to be?

Maybe I will make sure I understand your question. I think obviously, the guidance we’ve given reflects the disposition of assets that were done this year. So was your question beyond that, Craig, let me make sure I understand it?

Yeah, well, I mean, you're not reporting it on the equity method and I'm just trying to determine what the net impact of that will be on a quarterly or annual basis?

I think the change in accounting have minimal impact on our financial results. It’s largely a presentation of Pillarstone under the equity method versus the grossing out under the profit sharing method. We did show the impact of our 2018 disposition, I think, in our 2019 guidance since updated.

And just from the standpoint of trying to -- we have the Pillarstone rents, but we don't have the expenses as we kind of think about how to consider net asset value calculations going forward. Do you have a sense of what the operating expenses for the existing assets or maybe operating expense margin that we can consider?

I think the results that are presented in our fourth quarter reflect the new method of accounting, so those would be the kind of the expected results going forward, the expected margin you’d see and revenue levels, et cetera.

We will now take our next question from Anthony Hau of SunTrust.

2019 is expected to be lower than previous years. Can you guys provide some more color on the underlying assumptions in terms of occupancy lease spreads, rent bombs and bad debt reserve?

Sorry, would you repeat the first part of your question? I heard the end, I just didn’t hear the very first part.

Sure. So ‘19 same store NOI guidance is expected to be lower than previous years. Just, can you guys just provide more color on the underlying assumptions in terms of occupancy, lease spreads, rent bumps and bad debt reserves?

Sure. So 2019, we’ve given -- in our guidance, we’ve given the assumptions regarding same-store growth as 0.5% to 2%. I think as I mentioned, our same store growth was 3.3%, but obviously each period that’s reported has a different pool of same store assets based on other assets for the entire period. Our same store growth for the second half of the year, including our 2017 acquisitions, was 1%. So we've reflected that inclusion of those assets in our expectation of same store growth in 2019. As far as occupancy, I think we've given guidance of 90% to 92% and then from -- those are probably the two large drivers of our assumptions, regarding NOI for 2019. Bad debt, on the bad debt side, we don't expect any significant difference from our current levels. We continue to see that improve slightly, but basically flat year over year.

And typically how much do you guys baked in, is it 100 bps of revenue?

How much do we do what?

How much bad debt reserve is embedded in the same store NOIs, 100 bps of gross revenue or 75 bps?

Our bad debt has generally run in the 1% to 2% of revenue. I think we really show that in our quarterly financial, you’ll see that, but typically then in the 1% to 2% of revenue.

And can you guys provide more color on why the leasing spreads were so weak this quarter, and how should that trend heading into ‘19?

I think the first thing is just the inclusion of some 17 acquisitions into that pool. One of the things that typically happened is Whitestone will acquire a property. And then it takes us a bit of time to apply our model and to really begin to drive rates. So the largest change in the second half of the year was the inclusion of the 17 acquisitions in the pool. I did mention in the fourth quarter, there were about $250,000 of things that we don't expect to repeat related to move-outs and some TAM trueups.

And the increased share count in ’19, is that caused by options in the money or are you guys planning to raise equity?

Yes. But the share count assumes really the additional dilutive impact of shares in ‘19 over what’s out there today. So it's not any assumption of raising additional shares.

[Operator Instructions] We will now take our next question from John Massocca of Ladenburg Thalmann.

So the $65 million of debt that you thought that kind of subsequent to quarter end, what was the rate on that?

So it was, I think you're referring to Pillarstone debt, but no longer is on our balance sheet that had kind of three pieces of debt. The first one was a two pieces of mortgage debt, which are at I think -- roughly 26 million of it is in the 4% range, 16 million of it is in the right at 5% and then the balance was the $6 million amount of Whitestone, which is roughly 4%.

And then the interval, at what point was intercompany well between you and Pillarstone, what's the long term plan for that, is that the data as you sell assets as opposed to Pillarstone’s assets to continue paying that off? Just any color you can provide there on how maybe that gets resolved going forward?

Sure. I think as we communicated, the original contribution involves about 15 million, 16 million of loans from Whitestone to Pillarstone. That was paid down to approximately 6 million at the end of the year and we expect to continue to further [indiscernible]

And is there anything other than the kind of growth moving out that you mentioned that there's driving kind of the occupancy outlook going forward with any other tenants or anything maybe in the lease role that's coming up here in ‘19 or you see some expected move out, just any color there would be helpful.

I think as you guys all know, our tenant mix has a lot of diversity, largest tenant is about 3%. So there's no – typically, we renew a lot of tenants each year and then provide a lot of activity. So there's nothing in particular, no large move outs we're expecting, obviously in our portfolio. We can turn a fair amount of square footage each year.

Okay. And then lastly, maybe with regards to kind of your conversations with the SEC, is there anything maybe besides kind of a differing interpretation of the rules around Pillarstone that kind of caused them to object to how you were classifying Pillarstone for accounting reasons. Am just kind of thinking more as you go forward and you kind of examine the effectiveness of your controls over accounting. Is there anything else that was kind of highlighted or flagged that maybe we should know about? Or was it just pretty much simply this issue and there was a divergence in opinion as to what, right how to put this entity?

I think ultimately the company made a determination involved judgment around the control, yes, we objected to that judgment, and was very clear on that. And so there's really nothing else there. As far as the evaluation of our control, we will clearly look at our controls over financial reporting and disclosures and assess where there's effective.

We will not take our next question from Anthony Hau of SunTrust.

[indiscernible] Just going back to the comments about the SEC and evaluating the controls and disclosures, I guess a couple of question. One is that 100% self-evaluating or self-policing on different accounting controls. Second, is there going to be ongoing dialog or communication with SEC regarding the other controls?

Obviously, I can't speak to the SEC’s actions going forward. I'm not aware of any ongoing dialog we would expect to have with the SEC. As far as the evaluation of controls, that is conducted by the company, obviously participation of the executive officers in that is the way that this works.

And should we -- is there any impact to previous quarters FFO per share from the whole accounting reshuffling with Pillarstone?

There is not – I think the impact is, I said, it’s small -- it is very, very small impact to FFO, but for the year though, we communicated the impact of revenue and expenses and net income, the impact for the previous three quarters of the year is nominal on a nominal on a $1 basis and very nominal on a share basis and it would be nominally accretive, but very small.

And in terms of like just the background on the deal, you guys sold I believe 20% of it, but that was to the CEO and maybe a couple of board members. At the end of the day, with everything that's happened, was it really worth it at the end of day to do that kind of minor transaction? And I guess what was the overall goal?

I think we have clearly communicated previously that transaction and the goals of lifestyle. I don't believe it will give you some more time to go back and rehash all those things that have been previously communicated and discussed.

Yeah, I'd like to make a comment on it. I know we talked about this some time ago, and we've always expressed an interest that you'd like to see Whitestone become a pure play. So we had approached it that way of bringing -- getting Whitestone to become a pure play without the nature of fire selling the assets, because of the time we looked at the transaction, they were valued relatively low and we didn't think that was fair to the Whitestone shareholders. Let that the profitability of those assets seep out of our hands. So what we did is we went to investment bankers and they looked at all those strategic alternatives available to us and recommended that we could do a transaction like this with no light, no future liabilities from Whitestone by spinning off stores and assets like that and the future liability to any of those assets really was in the hands of Pillarstone, which made it kind of a no risk situation with getting the best price out of it at the beginning of the transaction and then profiting further in 80% of the development risk. The SEC ruling brings us one step closer to becoming a pure play. We now only have about $6 million left in debt. It is owed to Whitestone from Pillarstone, yet Whitestone has a 80% interest in all of the upside. I hope that's helpful to you to understand it.

Yeah. And same store NOI, you mentioned the [indiscernible] in the fourth quarter. I'm just curious how that -- is there any kind of follow on impact co tendency to the other retailers in that center and how does that configure into your guidance if there is one?

Yeah, there is no impact to Whitestone center. And I think as I communicated, it was a lower rent ground lease. And so there's really no impact to any of the centers and the impact of that is all built into our guidance.

We will now take our next question from John Massocca of Ladenburg Thalmann.

Just two quick kind of follow ups for me. One is, on the G&A front, understand there is going to be some potential seasonal uptick in 1Q, is there also potential for maybe some kind of one time-ish G&A associated with kind of the examining of the effectiveness of controls and with the dealing with the SEC as you guys kind of got through here in 1Q?

So I think we’ve commented from G&A perspective, obviously we have a commitment to continue to decrease that level as well as scale it. I just say this first quarter typically has just a higher percentage of professional fees and accounting fees related to a year end audit. Those are a little higher this year probably than -- as a result of this, but nothing material.

And then the restatements shouldn't have any impact on the credit facility you guys recut in 1Q, correct?

That's right. The re-statements have no impact on the credit facility or any of the covenant. They were calculated in the same manner previously as they will be going forward.

There are no further questions at this time. I would now like to turn the call back to management for any additional or closing remarks.

Yes. Well, thank you, operator and thank you all for joining us. Again, I just like to go back and say that 2018 was a solid year for us, one that we had no less interest in driving the value of the portfolios than previous ones. The distractions are time consuming, as you all know, and we were able to overcome that with our tenacity and skill and experience we have in terms of this business. We still remain very excited about our business model. We think that it answers the questions to many of the concerns that people have about the consumers and we're starting to bring to our properties’ tenants with stronger balance sheets and also a longer work history where they have opened up multiple locations with us. So I thank you for your continued confidence. And I think you're going to find 2019 to be a very promising year for all of us and really do appreciate your consideration and the loyalty you've given us in terms of being with us since our IPO of 2010. Thank you, operator.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.