Ladies and gentlemen, good morning and welcome to the Whitestone REIT Third Quarter 2023 Earnings Conference 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, Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining Whitestone REIT's third quarter 2023 earnings conference call. 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 1, 2023. 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 2023 slides on our website yesterday afternoon, which highlight 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 2023 earnings conference call. We had another very strong quarter with combined straight-line leasing spreads of 24.4% and combined cash basis leasing spreads of 10.5%. Same-store net operating income increased 4.9% versus the third quarter of last year, and this now marks six consecutive quarters with a kind of straight line leasing spreads in excess of 17%. We're extremely proud of this accomplishment, which highlights the strength of our high-quality portfolio. Consistently strong leasing spreads and same-store NOI growth are not only our recent past, but they're the heart of our plan going forward. We've corrected a lot of things over the last 1.5 years from listening and responding to shareholders to improving our governance and balance sheet. As I look forward, the road ahead is comprised of continued excellence in execution, successfully ending the litigation we have with our former CEO and proving our thesis that active management focused on targeted strong geographies, smaller spaces and strong tenants can outperform the sector. The path ahead includes significantly lower G&A levels, strong leasing spreads, best-in-class same-store growth and eventually opportunities to scale our platform through disciplined accretive acquisitions. Our passion and our strategy over the next 5 years is to prove that by focusing on quality of revenue, we can operate neighborhood centers that will deliver consistently, strong leasing spreads and NOI growth. Investors should expect earnings growth, and they should expect dividends to grow with earnings. Investors may be able to look at our recent performance, our assets are at market dynamics and see a lot of promise for Whitestone. However, it is management's plan to add a longer track record in terms of consistently delivering improved performance. I'll have Christine delve more into how we…

Good morning, everyone. On the leasing front, we performed very well in the quarter, and we are on target to deliver strong leasing spreads, occupancy increases and top of sector same-store NOI growth for 2023. Occupancy rose to 92.7%, up 20 basis points from a year ago. Occupancy for 10,000 square foot plus spaces came in at 96% and with our higher ABR smaller spaces coming in at 90.8%. Leasing spreads were 24.4% for the quarter, 23.6% on new leases and 24.6% on renewals. One particular area of success we're seeing lately is the multiuse centers. Last week, we signed a renewal agreement with our second largest tenant, Frost Bank, at our Boulevard location in Houston. The center is anchored by Whole Foods and has great restaurants with North Italia, Ninfa's True Food Kitchen and Dough Zone. This isn't limited to Boulevard or long-standing tenants. 100% chiropractic has located their offices to Market Street and Scottsdale. We've also been able to utilize less visible space there for CUBEXEC, which provides collaborative office space for individuals and small businesses. The work-from-home movement is definitely creating a shift away from office towards well-located neighborhood centers packed with great restaurant amenities and needed service providers offering workspace that is preferable to home where zoom calls are often compete with the spouse's call or the dog barking in the background. The key to achieving these leasing spreads is to continue to successfully serve the community. This is a little like building a top-notch sports team. This includes remerchandising efforts where we focused on this year to strengthen the quality of our revenue. We recognize that having one superstar is not the best formula for a winning center, and we strive to have solid contributors in every position within the center. And just like the…

Thank you, Christine, and good morning. As Dave and Christine mentioned, we delivered very strong operating results in the quarter and continue to be on track to deliver on our 2023 annual FFO per share and same-store net operating income guidance ranges. FFO per share came in at $0.23 for the quarter versus $0.24 for the third quarter of 2022. There are other moving parts, but here's a high-level overview of the quarter-over-quarter FFO comparison. Same-store NOI was responsible for $0.02 of the uplift and was offset by $0.03 of higher interest expense. While Christine discussed much of the detail on what allows us to drive same-store NOI growth, if you're going to boil this down to a few numbers, our path forward is clear. Drive consistent earnings growth via same-store NOI growth and mitigate interest expense. The year-over-year interest expense increase was primarily from higher rates with the amended credit agreement we signed in September of 2022. We've reduced the overall debt level since the third quarter of last year and we anticipate interest expense variance will shrink or become positive next year as 86% of our debt is currently fixed and proceeds from any Pillarstone monetization will allow us to improve our balance sheet. Litigation expense related to our ex-CEO was responsible for $0.02 of G&A this quarter and was also responsible for $0.01 in the third quarter of 2022. We don't know exactly when we'll be able to successfully end our litigation and monetize our JV investment, but we believe we are nearing the end and we expect lower G&A levels should result in improved debt-to-EBITDAre metrics and FFO per share in 2024 and beyond. We're very eager to get to our next earnings call and roll out our 2024 guidance. Interest expense, litigation and a poor-performing JV investment may have obscured our fundamental growth drivers a bit in 2023, but we believe we'll be able to lay out a very positive earnings trajectory on our Q4 call. And with that, we'll open the line for questions.

[Operator Instructions] Our first question comes from the line of Mitch Germain with JMP Securities.

Can you provide some perspective on the change in occupancy quarter-over-quarter rather than year-over-year? And what gives you confidence that you can hit the guidance range? And to that, I guess, is there a bias towards maybe the lower end of the range?

Mitch, thanks for your question this morning. So a couple of things. We had talked about this before that our guidance range is going to be 93.5% to 94.5%. So we feel pretty comfortable remaining within the range. I think the most important thing that we've taken action towards this year, and besides just the Bed Bath & Beyond, which is a large chunk of that, and I'll speak to that in a moment, is that there's an intentional remerchandising towards quality of revenue. I believe you need to do that given my past experience that when you have a strong market and a strong market in retail, it's better to be more aggressive on that front and to continue to improve your merchandising efforts. I'd rather do that now than when the market pulls back. And so that's been a goal for team members this year to define which tenants might not be performing as well or are not what we consider successfully serving the neighborhood. And so that's been some of that changeover you've seen. In addition to that, what we've moved forward with the Bed Bath & Beyond is that -- and we're very, very pleased, by the way, with what the options that we have there and what we're working towards. So I think that we're in line with where we need to be. And I think, again, if you look at the strength of our revenue and in particular, just over the years, how well we've done with the quality of revenue, and I think that reflects in and just in our bad debt and how much we've reduced that and our day sales outstanding that we've been improving that effort, and we continue to do so.

Mitch, it's Dave. I might just add one thing, Christine. Specifically, the change sequentially quarter-over-quarter is a few things, as Christine said, but if you look at the one Bed Bath & Beyond space we have, it's about 28,000 square feet. So it represents really the change from Q2 to Q3. Obviously, there's other factors. We feel great about that space, have a lot of interest and feel very good about being able to increase the rate substantially.

Okay. So -- but the Bed Bath is really -- accounts for the change in the over 10,000 square feet, but you also had a change in the under 10,000 square feet. So what you're basically suggesting is that some of that is just purpose nonrenewals so you can upgrade tenant quality. Is that the way to think about it?

Yes, that's correct.

No sort of trend that you're seeing in your discussion with tenants to suggest there being any sort of distress or kind of any of the economic factors that are potentially negatively impacting their business?

Not yet. The only thing that we have seen is that -- we've alluded to this earlier that businesses that have high leverage within the private equity sector. Those are the ones that we've had a little bit of concern over. And quite frankly, we've always been very mindful of who we lease to that, that type of funding is part of their capital stack. So we don't have a lot of those type of tenants, but it's something that we have on watch.

Okay. And 40 basis points -- sorry, 40,000 square feet of positive absorption required just to hit the low end of your guidance range, and you guys are comfortable with that number at this point.

Yes, because I think just with the Bed Bath & Beyond and as I mentioned, that we have we're doing a bake-off for the type of options that we have there. And because, obviously, whenever you have a center like that and that type of space, it's a long-term fill. And so it really requires a defined focus as to what might be the best type of client of that center. That's number one. And number two, there's a -- it's a very crowded parking field with the Trader Joe's across from it. So you have to just be mindful of what type of tenant you put in there and the impact it has on the center.

Mitch, I think I said in my earlier remarks as well. We've got a number of leases we expect to commence in the fourth quarter. So I think we're very positive about the activity we have right now, confident of our guidance range we've given on occupancy and so just to be real clear, I think we feel very good. We're continuing to watch for signs of stress. But frankly, we're not seeing them in our properties and our markets.

And I'd like to add one more thing to it, too, Mitch, just that the type -- so if you really go back over entrepreneur growing businesses, they've had severe shocks over the last really 10, 20 years. And much of that has to do with the financial crisis and then COVID. And most of the businesses that we work with, they grow out of organic growth. So it's a little different. They're not leveraged the same way because they can't achieve the same opportunities for that type of leverage. So that's something that I think has always played well to our space.

Great. Okay. I apologize if you've mentioned it. I missed some of the prepared comments. Were there any asset sales this quarter?

Mitch, there were not. So we are continuing to explore recycling. As you and most others are aware, the transaction market continues to be very shallow. So last year, we did a little bit of recycling. Our intent is to do a little bit of recycling this year. But at this point in the quarter, we did not have any asset sales or acquisitions. We're continuing to work a few small deals, and we'll just see where we get to. But nothing significant, no dispositions in the quarter.

Do you think you may be acted a little bit too quickly on the acquisition then because I know the desire was to match fund any acquisition proceeds with disposition proceeds. So obviously, you've acquired without having the match funding aspect of it.

So first of all, I don't think we were too quick. I think the acquisition we made this year was a great acquisition of the portfolio. And we are match funding. If you look a little bit maybe of overlap year-to-year, if you look at last year, '21, '23 together, I think we're close to match funding and we continue to expect to match fund. So I think that says there's a few more dispositions to come in, but our intent is to fund that with proceeds from sales. So great asset. I think there's a slide in our investor deck that highlights kind of the metrics on the assets we've sold versus the assets we've bought. We've continued to buy properties that have more of demand drivers that we see that Christine discussed in a lot of our remarks. Have been able to sell at accretive cap rates. Just a more shallow market now from that and a little tougher. But we do expect to match fund our dispositions and acquisitions. And I think if you look at the 2 years combined, they're close maybe a little bit that we'll sync up shortly.

Great. And then last question on the litigation. Obviously, the Pillarstone trial was, I guess, during the summer and the CEO is scheduled for -- it looks like December. So I mean, is -- obviously, they're not coupled, but do you have any sense of timing? And then is the ruling definite? Or could it just get caught up in an appeals process that doesn't enable you to have the freedom and flexibility to kind of execute your strategy?

Mitch, Dave again. Yes, as you mentioned, really a couple of matters. The ex-CEO termination for cause lawsuit and then our attempt to receive fair value for our equity investment. It's difficult to give a lot of detailed talk on litigation. What I will say is both of the cases are nearing the end. We feel very good about our position. I think we've talked about the legal expense and really the underperforming JV and their effect on this year's numbers. We feel very good going forward that those are soon going to be out of the story. There is -- I'm not going to talk to the details of an appeal process, but we feel very strongly. We're nearing the end, and we feel like we are in a great position once that is resolved to really remove some of that noise from the story. The underlying fundamentals of the business are performing really, really well. And there is a bit of a noise from that. But I think we're in a good spot, and we're very close to the end, we believe.

Our next question comes from the line of Michael Diana with Maxim Group.

Dave, I think I heard you saying in the beginning of your remarks that you're expecting lower G&A levels. Could you give some more detail on that?

Absolutely. Thanks, Michael. In our G&A this year, it's about $4.2 million basically in legal expenses related to the 2 litigation matters. That will go away. It's hard to exactly present when, but that alone represents a significant decrease in our G&A. I'll also remind you that in early '22 when we made the leadership change, we took a number of steps to take significant costs out of our G&A cost structure at that time, largely resetting executive compensation. So a couple of steps. We reduced our G&A in early '22, and we expect when we conclude our litigation to have a much lower G&A number as well. We've also really worked on efficiencies. I think Christine has talked about the way we've executed. We've been much more clear with our folks and goals and accountability. As a result, we run leaner today. I think our headcount today is in the mid-70s and a couple of years ago, that was probably close to 110 people. So we've really streamlined the business. We've become much more productive in our execution. If you look at the results, we're laying down a good track record. And frankly, we're doing that in a more efficient way, and the future is very bright because there's some noise in the G&A number that's going to go away.

As there are no further questions, I would now hand the conference over to Dave Holeman, CEO, for closing comments.

Thank you. We thank everyone for joining us today. It's been -- third quarter was a very good quarter for us. We're excited to conclude the year and we look forward to finishing out very strong, and then we also look forward to giving everyone a look into the future with our guidance with our year-end earnings. With that, we wish everyone a great day. Take care.

Thank you. The conference of Whitestone REIT has now concluded. Thank you for your participation. You may now disconnect your lines.