Greetings and welcome to Whitestone REIT Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, David Mordy. Thank you, you may begin.

Good morning and thank you for joining Whitestone REIT’s third quarter 2022 earnings conference call. Joining me on today’s call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, Chief Operating Officer; and Scott Hogan, 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 news release and filings with the SEC including Whitestone’s most recent Form 10-Q and 10-K 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, November 2, 2022. The company undertakes no obligation to update this information. Whitestone's third quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section. We published third quarter 2022 slides on our website yesterday afternoon which highlights topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

Thank you, David. Good morning. And thank you for joining Whitestone’s third quarter 2022 earnings conference call. We delivered another very strong quarter of operating and financial results. First is the third quarter of 2021, our revenue grew over 9%, our FFO per share is $0.24, up from $0.22. Same-store net operating income increased 4.5%, and is up over 8% for the nine months of the year. Our total occupancy is 92.5%, up 260 basis points from Q3 2021 and 100 basis points from the second quarter. As of the end of the third quarter, our net effective annual base rent per square foot was $21.73, up 6.5% from 2021. And our balance sheet continues to strengthen with lower debt leverage as shown by the improvement in our year-to-date net debt to EBITDAre ratio of 7.9 times versus 9 times for the first nine months of 2021. I am very proud of the team for delivering these results. We know that consistent execution is vital to producing strong results and that's exactly where our focus is throughout the company. Specifically, since I was appointed, we're a 100% focused on our core business and on executing the company's strategic plan. It has been a process that started with the elimination of numerous distractions. We turned our attention to unlocking value and aligning interests to ensure that this unique business model was able to deliver results from a portfolio of properties that are positioned to serve the respective communities on a daily basis and drive strong consistent cash flow growth. We have delivered $0.80 FFO per share year-to-date and we are narrowing our 2022 guidance range to the upper portion of the range, making our new target $1.00 to $1.02 per share. Today we thought we might take a little different approach to make the call a bit more interactive. We'll share and answer some of the questions we have received from the investment community. Following that, we'll take additional questions from the audience on our call today. David?

Thanks Dave. I'll start with a common investor question and have you answer it Dave. How do you close Whitestone's valuation gap? What's your plan?

Let's start with what we've already accomplished, as we've done a tremendous amount in a short amount of time. We are at Target for an over 16% year-over-year FFO per share growth and we just delivered record occupancy of 92.5%, but our accomplishments extend well beyond just the earnings achievement. Since the new executive team was put in place, executive compensation has been reduced significantly. Numerous governance actions have been taken, including splitting the Chair and CEO roles, the removal of the poison pill, approval of shareholder access to bylaws, and Board refreshment with the addition of Amy Feng. Furthermore, we extended our credit facility and set the company on a path to divest of our JV investment in Pillarstone Capital REIT operating partnership. So we are pleased with what we've accomplished so far, but additional opportunities still exist to improve. We need to continue to grow earnings and reduce leverage. We need to continue delivering consistent quarterly results. We need to demonstrate that we're the best at operating community connected centers with a well curated mix of 2000 to 3000 square foot spaces occupied by vibrant, successful businesses. If we deliver on these remaining items, I am confident the market will recognize and appreciate the value being unlocked.

Thanks, Dave. Let's go with another question for you regarding Whitestone's occupancy. The company's occupancy is at a record high. Why shouldn't investors view the current occupancy as a ceiling, is again just the environment we're in and if not, what's changed?

Thanks, David. We are pleased with the progress we're making in growing our occupancy level, which I believe is the result of the numerous actions we have taken so far in 2022. Upon taking the CEO role, we immediately began to engage with our various stakeholder groups to truly understand the issues and take steps to focus the business on maximizing long-term value for shareholders. As I stated in my first earnings call, we know this begins and ends with high quality leasing. Accordingly, we have taken the following steps. First, we made additional changes in the executive leadership team to achieve alignment with the investment community. Second, we increased accountability. Specifically, we streamlined and strengthened the regional leasing and property management teams providing clear goals and priorities, eliminating micromanagement and allowing for faster and better execution. Third, we began the process of restoring our relationships within the real estate community, especially with the brokers which has dramatically increased our transaction flow. Importantly, we've improved morale throughout the company by giving employees more effective tools for success and clear objectives that were aligned with the management team, which is resulting in greater productivity. In combination, these steps have expanded our potential on leasing and occupancy. We have an extremely competitive team that wants nothing more than to outperform. There has never been a better time for our strategy, our tenants, our properties, and our team to drive results and create value.

Thanks, Dave. Staying with occupancy, let me turn to Christine for a couple of questions. Christine, how high can occupancy go? What's the goal for 2023?

Well, we'll address our 2023 occupancy growth target with the Q4 call. However, I think it's important to note that occupancy is an outcome. Our focus is designing the right centers, the tenants that are adding value to the community and that bring in quality of revenue. We target tenants who can increase traffic, successfully serve the community and compliment co-tenants. In order to grow rental rates we seek out successful tenants, not just fill the space. Review -- remerchandising is a critical component of ensuring the center is connected to the surrounding community. It's not just occupancy that does well when you have successful tenants. Rent increases are far more tenantable when businesses are thriving. I should also point out that this quarter for the first time, we broke out our occupancy between greater than 10,000 square foot spaces and those 10,000 square feet and under. Our 10,000 and under square foot occupancy, which is our core competency, was 90.1% for the quarter and we believe still has substantial room to increase. One of the additional trends we are seeing is that as the workforce reduces its orbit around the office buildings, demand in our local centers is increasing and we're reaping those benefits.

Thanks, Christine. Can you guys give us more color on the current environment?

We continue to see great demand within our footprint. Our 260 basis point, year-over-year occupancy improvement reflects not only that environment, but the momentum we have found from making the changes Dave walked you through. I should also mention that demand has remained strong for the first month of Q4 leading up to this call. This strength runs throughout our tenant categories, including fitness, restaurants, education, medical, and is a point of reference to the quarter -- during the quarter we signed 86 leases representing 219,000 square feet and $29 million in total lease value. This is versus the pre-pandemic 2019. The third quarter was 25% higher on a square foot basis and 56% higher on a total lease basis and year-to-date with 56% higher on a square foot basis, and 96% higher on a total lease value basis.

Moving with recent trends, we opened two Asian barbecue [ph] and hot pot [ph] restaurants this quarter, bringing the total within our centers up to six each in a different location. We think these perfectly fit with the growing affluent communities focused on casual economic, family dining experiences with the communal component. Like all of you, we are watching for signs of a market downturn, but that's not what we're seeing. If that should change, we believe staying true to our strategy of leasing to growing businesses such as services and restaurants and focusing on quality of revenue on highly desirable sunbelt markets will allow us to effectively weather a range of economic environments. A great example of the value of our centers we operate is that our FFO per share was off only 8% between 2019 and 2020, which was very strong in performance against our peer set.

Thanks, Christine. I'll shift over to Scott now with a few key investor questions. Scott, how is capital prioritized? How will capital allocation be handled over the course of the next few years?

Thanks, David. Whitestone has twin goals of growing earnings and improving leverage. In the current environment, it means we need to focus on recurring earnings, activating non-income producing land parcels and recycling assets to fuel growth. It also means that projects or acquisitions need to have strong returns in order to achieve our twin objectives. We're fortunate to have strong organic growth opportunities embedded in our properties and a number of development and redevelopment projects with returns strong enough to achieve our twin goals in the near-term. On the acquisition side, we are actively seeking well-located, value-add properties that will meet our dual criteria. The current transaction market is shallow and disconnected with the rising costs of capital, so patience and discipline are doubly important. We look forward to sharing more information on our projects and capital recycling as they progress over the balance of the coming quarters.

Thanks, Scott. One major development during the quarter was the extension of Whitestone's credit facility. What's your projection for interest expense in the fourth quarter?

Thanks, David. We are pleased to have amended and extended our corporate credit facility in the third quarter. This credit agreement amendment moves the bulk of our maturities until 2027 and beyond inclusive of our two six-month extension options on the revolver. Also, the amendment allowed us to lock the interest rate on 82% of our debt. The renewed credit facility's attractive terms reflect our strengthening balance sheet and provides us with additional liquidity and financial flexibility to take advantage of opportunities in our current portfolio and in the marketplace. Looking at the forward sofa [ph] curve at our current debt level, we anticipate the fourth quarter of 2022 will have $1.3 million higher interest expense versus the third quarter. We had strong support from our bank group and continue to improve our overall debt leverage.

Thanks, Scott. I'll ask one final question of Dave, quite simply, how does Whitestone stand out? What's your compelling differentiation?

Thanks, David. This really is at the core of everything we do. I believe we have numerous differentiating factors that make Whitestone unique and attractive. In the interest of time, I'll just highlight one or two. We believe there is tremendous growth to be had in a non-formulaic center development. If you're looking for a company paying low cap rates for grocery anchored centers or operating power centers with big box and soft good tenants, that's not Whitestone. We believe needs based centers that serve thriving communities on a daily basis with quick serve and family restaurants, fitness, medical, and educational offerings can effectively anchor a center and deliver higher rents. And we believe those centers combined with great locations, in high income neighborhoods, in high growth Sunbelt locations are better designed to outperform in all economic cycles. Our average base rent for spaces 10,000 square feet and under is $25.34 versus $13.58 for larger spaces. In a properly designed center we believe the tenants in the 2000 to 3000 square foot range provide higher profitability and less risk, especially giving the expense and timing of switching out a larger space and the restrictions and approval rights that often are contained in these larger tenant leases.

Thanks, Dave. This concludes our prepared remarks by the Whitestone team and we're now ready to take some questions. Operator?

Thank you, sir. [Operator Instructions] The first question we have is from Mitchell Germain from JMP Securities.

Great. I appreciate you guys doing something on the call, so thanks for that. Maybe just some color on the leasing pipeline, I'm hearing a lot more in national tenants taking smaller spaces than typical. Maybe a little bit in terms of the types of tenants that you're seeing the most traction from?

Thanks for the question, Mitch. This is Christine. We're seeing consistently across all categories the same type of drive for activity to come into our markets. So most of it has been from, I would say, continual interest in restaurants. But I would say that this would also be from the strength of our regional brands and franchises still increased there. Fitness, as we talked about last quarter, is still strong, whether it's franchises or national brands expanding. And in addition to that, it would say that health, beauty and wellness is still, and there's so many new iterations of health, beauty and wellness coming out. So we're seeing a new -- a lot of new types of product out there and it's coming from both the east and the west coast, so usually the new ideas start there. They move in, but they come into our locations because of our HHIs. And I think along the lines of, as I mentioned earlier, I think there are, you see some of these new trends. So for example, the Korean hot pot and barbecue restaurants, we've opened six this year and they're all from -- each one of them all six, two in Dallas, one in Austin, three in Houston coming in, and all again, strong regional brands opening up in our locations.

Hey, Mitch, it's Dave. I might just add one thing to Christine's comments. You mentioned the size of the spaces exactly right. We continue to see really that demand in the spaces we have. If you look at our properties, we -- we've always said we focus on those 2000 to 3000 square foot space tenants and we're really well positioned. So its space size continues to be a focus on the smaller spaces and then as Christine on the types of tenants.

And just one more new trend that we’re seeing that’s kind of interesting is that we’re seeing in the case of companies that have a workforce that are looking to be closer to home taking spaces in retail centers for a couple of different reasons. One is, they want the ability to have their brand out on the storefront, number one. Number two, it’s about finding talent. So much that about the brand and also creating the opportunity for amenities for the workforce to come back, and that’s been a unique move too. And those spaces have actually been a little bit larger than the norm, so they’re closer to 3000 in some cases. We’ve had a couple of spaces fill up at around 4,000 to 5,000 square feet.

Great. I appreciate that. Dave, maybe a broad question for you, pretty significant opportunity to do some development/ redevelopment opportunities within your portfolio, and I know you get a pretty significant return on that. But how do you weigh that versus de-leveraging, obviously the balance sheet screens fairly unfavorably to peers. So talk to me a little bit more broadly about how you view capital allocation going forward?

Yes, thanks Mitch. Excuse me. I think Scott indicated in his comments that we have dual goals and that’s the way we are focused today. We are going to look to take actions that drive earnings growth, but also that improve our balance sheet. So I think as we look at opportunities, there are, I believe in our deck we posted for the call, there’s a slide on that, but we have pad sites, we have redevelopment opportunities, and then we have some land parcels within the portfolio that have been with us for a number of years that we’re going to look to activate and create income. None of that happens overnight, but I will tell you that we as a management team are focused on those opportunities and delivering those consistent with our goals of driving earnings growth and improving the balance sheet.

Got you. And the update on Pillarstone, obviously I know that there’s some noise that’s preventing, or at least delaying some of that, but is it just broadly the market that’s delaying a sale or is it some other issues that are weighing on that?

So we are, we’ve clearly communicated our intent to exit our JV venture and we’re setting a path to doing that. There is some litigation involved in that, so I can’t comment a whole lot on it, but be assured that Whitestone is focused on taking actions that are in the best interest of our shareholders. There is no -- nothing other than that in our focus, but we do believe that the Whitestone exiting those, that partnership, monetizing our investment and then looking to reinvest that back in the business is the right thing for our shareholders. Currently that investment is not generating a lot of return for our shareholders because of the relationship with Pillarstone. So not any update, Mitch, other than saying we are focused and taking the steps to monetize that investment for Whitestone and looking to do that in due course.

Got you. Last one from me. Anything happening in operating expenses, property operating that we need to be aware of this quarter?

Yes, thanks for that question, Mitch. This is Scott. I’ll just start by mentioning that the vast majority of our leases are triple-net leases, meaning that we recover our common area expenses, real estate taxes and insurance costs from our tenants. And I’ll also mention that over the last few years, our recovery percentage has been in the mid to high 80s, and we, that should move up along with our occupancy as our occupancy increases from one quarter to next. We do have increases and decreases based on some degree of seasonality with utilities and timing of repairs. And the utilities typically are the highest in the summer months, which is the third quarter in Houston and well just in Texas and in Arizona. And we did have higher repair cost in the third quarter as well. But if you take a look at the operations expense just as a percentage of revenue on a year-to-date basis, it’s around 18% so far this year, which is the same as it was in 2021. And so for the full year of 2022 I expect it to remain around 18%.

Great. I appreciate it. Thanks.

Thanks, Mitch.

The next question we have is from Gaurav Mehta from EF Hutton.

Yes, good morning. Thanks for taking my questions. In your prepared remarks, you talked about lowering leverage long-term as one of company’s goals. Can you maybe help us understand, how you plan to lower the leverage and what your long-term targets are as far as leverage?

I’ll start. This is Dave. Thanks, Gaurav. I’ll start, and Scott may want to add some further comments. But I think the key answer is really we’re doing that from operations with a focus on really growing our EBITDA and using excess cash to create additional EBITDA or reduce debt. If you look at our debt leverage this year, I think for the nine months we’re down to debt-to-EBITDA of 7.9, that’s down from above 9 a year ago. So we believe just by focusing on organic growth we can reduce that debt-to-EBITDA measure significantly. We’ve set a target of, I think, seven turns by end of 2030, and we expect to be down into the 7s by end of this year.

Okay. Second question on your G&A, you guys lowered the G&A guidance for 2022. Was there any one time item driving that or you think that’s like the long-term run rate going forward?

We, so in the, this is Scott, in the first quarter, we did have $0.04 of non-recurring G&A savings associated with the exit of some of the existing executives at that time. I expect the G&A cost to hover right around the high $4 million to $5 million range going forward. We may have some puts and takes in legal costs associated with litigation with our ex-CEO and with Pillarstone, but I do expect the G&A savings to continue.

Okay, thank you.

Thank you, sir. [Operator Instructions] The next question we have is from Craig Kucera from B. Riley.

Yes. Good morning, guys. I believe earlier in the year you mentioned that you were looking at selling some assets potentially in the back half of the year, perhaps recycling $50 million. And I know you discussed sort of more challenging market conditions for transactions, but I’d be curious, at the time you thought you’d be able to get a pretty, meaningful cap rate arbitrage. Are you seeing as you sort of evaluate those opportunities that same sort of spread or have things sort of sort of tightened? Just any color there on the transaction part would be helpful.

Hey, Craig its Dave. Thanks for the question. I think the comment I’ll give on the transaction activity is probably similar to what you’re hearing from others. It’s fairly shallow. There’s less deals in the market right now, obviously lots of dislocation potentially between bid and ask, but we are progressing on our recycling efforts and really look forward to sharing that with you probably next quarter as we move to closure. So I think we had identified a small amount, a target of around $50 million in dispositions and then, obviously looking to redeploy that. We’re finding 1031 [ph] money that’s out there still, so this little bit smaller assets are still in the market. They’re still our buyers that have 1031 money that needs to be put to work. So I’d love to give you more, but can’t get ahead of myself. We’ll have more to share on that on the coming months, but we are on track with what we said we would do this year and look forward to sharing more details.

Okay, great. And just one more from me. On the dividend, I think right now you’re paying out about 50% of FFO which is quite a bit below where it was prior to the pandemic. How was the Board thinking about managing the dividend going forward? Is that just to grow with earnings or is there room to maybe see the dividend outstrip earnings growth going forward?

Good question, Craig. I’ll start, and once again Scott may have something to add. But I think when we look at the dividend we’re looking at obviously our tax requirement as a REIT, as one of the key criteria. We’re looking at capital allocation, as Scott said. We’ve got some great opportunities in the portfolio to invest and drive value. So our Board is looking at our dividend level in light of our tax requirement in light of our FFO level and then in light of obviously the different options for that cash. We do think there’s room to grow the dividend in sync with our earnings growth, but I think we’re comfortable with our dividend level. We’ll continue to monitor the taxable income, and then we’ve got some great opportunities as well for some of the development opportunities that will create a lot of value.

Okay. Thank you.

Thanks, Craig.

Thank you. The final question we have is from Michael Diana from Maxim Group.

Okay, thank you. More on Pillarstone and your dispositions, is there -- because of your leverage considerations, is there a linkage there between your ability to dispose of assets and your development and redevelopment, or are you also thinking or considering or working on bringing in partners for your development and redevelopment?

Thanks, Michael. I think when we think about the dispositions and the investment in Pillarstone, I think of that as just available capital that we can redeploy in a way that creates more value. We do have significant positive cash flow that we’re able to invest in some of these smaller projects as well. So I think when you look at our opportunities, many of the development, redevelopment pad side opportunities, we can fund from organic cash flow as well as a little bit of recycling. We do have a couple of larger development opportunities in the portfolio that we’re working towards activating and those might involve a partner. We’re looking through the best ways. A couple of those potentially are putting some residential in line with the retail, but we’re looking to continue to move forward on those. But most of our development opportunities, the smaller ones, we can do from our organic cash flow, not a lot of capital needed.

Okay, Great, thanks. And is there any consideration to disposing of your Chicago communities?

I think what we do is just like you would do with a stock portfolio, we look at all of our holdings and we determine which ones we can, it’s the right time to monetize. So the Chicago asset is absolutely in our list with all our properties. It is outside of our footprint, but it’s a very well operating center, but it is under consideration as well.

Okay, great. Thanks Dave.

Thank you, sir. At this stage, there are no further questions. I would like to turn the floor back over to Dave Holeman for closing comments. Please go ahead, sir.

Thank you, Operator. I'd just like to thank everyone on the call today for joining us. We appreciate your interest in Whitestone and are very pleased with the progress we’re making. If we can help further, don’t hesitate to reach out to David Mordy or any of us on the executive team. Have a great day, thanks.

Thank you, sir. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.