Greetings and welcome to the Whitestone REIT Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Rebecca Elliott, you may now begin.

Thank you, operator. Good morning and thank you for joining Whitestone REIT's third quarter 2021 earnings conference call. Joining me on today's call are 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 news release and filings with the SEC, including Whitestone's most recent Form 10-Q and Form 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, October 27, 2021. 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, www.whitestonereit.com in the Investor Relations section. Now, over to Jim Mastandrea, our Chairman and CEO to update you on our third quarter results.

Thank you, Rebecca and thank you all for joining us on our third quarter conference call. I would like to begin by sharing with you the highlights of our third quarter. Operating portfolio occupancy increased to 90.2% from 89.9% last quarter and annualized base rent increased to $20.41 from $19.95 last quarter. Our overall foot traffic at our centers in third quarter 2021 was 35% higher than the same quarter in 2020. With the resurgence of COVID through its delta variant, we maintained a steady, but slightly lighter pattern versus second quarter 2021. We continue to experience active recurring traffic from existing and new community members visiting our centers as population shifts continue with the ongoing migration of corporations and individuals to Arizona and Texas. Regarding our financial performance for the quarter, revenue grew by 9% to $32.4 million this quarter compared to $29.9 million in third quarter 2020. Same-store net operating income growth of 7% in this quarter and 8% in Q2 was driven by increases in occupancy and annual base rent per square foot as previously noted, as well as positive leasing spreads. A key financial indicator for a REIT is FFO. Funds from operations core was $0.25 per share in the quarter and $0.75 per share in the nine months ended September 30, 2021, respectively. Along with this noted growth, we continue to make progress towards one of our long-term goals of deleveraging the trust. We reduced our debt to EBITDA, which is now 8.1 times down from 9.4 times a year ago. Equally important to the trust is our dividend, which we consider sacred. Regarding our quarterly dividend, we have now paid dividends to our shareholders for the 134th consecutive month since our IPO. Our dividend yield of 4.3% remains at a premium and our payout ratio to FFO core is exceptionally strong at 42%. This quarter we reactivated our external growth plan with the acquisition of Lakeside Market in Plano, Texas at a purchase price of $53.25 million. Importantly, this acquisition did not require any additional corporate overhead, which is a key component toward our attaining economies of scale. Along with this acquisition, we're actively pursuing additional properties in our strong pipeline of assets in Austin, Dallas, and Phoenix. Looking at our current portfolio, we now have 4.6 million of our 5.1 million square feet of space leased. Our approximately 1,500 tenants' average lease space is 3,000 square feet per tenant, complemented by a mix of larger square footage leases by our grocery anchors. Our strong tenant relationships and rigorous vetting process ensures the quality of our revenue for our portfolio and the stability of our cash flow. I would like to point out that our tenant improvement costs to bring a new smaller tenant into one of our centers is much lower per square foot than the cost of a big box tenant. By doing so, we spread our risk among a group of tenants in relatively the same space as a larger tenant, achieve higher rent per square foot, annual escalators of 2% or 3%, and some of our tenants pay percentage rent based on revenues. In addition, typically our tenants pay taxes, insurance, and common area maintenance. Our strong leasing activity is one of the key drivers of performance this quarter. Some important metrics to highlight: our new lease count for third quarter 2021 is 38 versus 35 in the prior quarter and 32 in the prior year. Our leasing spreads for third quarter 2021 are 5.4% versus 3.1% in the prior quarter and 2.9% in the prior year, both of which are moving in a positive direction. In summary, the update I've shared with you today highlights, in particular, that our business model continues to perform exceptionally well. Our leasing strategy focusing on entrepreneurial tenants continues to produce consistent results. And most notably, we are continuing to make good progress toward achieving our long-term goals. While we are pleased with our continued improving performance, we know that the work ahead of us is significant, but our team remains committed to serving our shareholders and increasing long-term value. With that I would now like to turn the call over to Dave Holeman. Dave?

Thanks Jim. I appreciate the opportunity to share some great results for the third quarter. During the quarter, our best-in-class geography and strategically designed tenant mix have produced strong topline and bottom-line growth, and our long-term focus and day-to-day execution have allowed us to make significant progress towards our long-term goals of scaling our infrastructure and improving our overall debt leverage. The metropolitan statistical areas that we operate in continue to see significant population migration and corporate relocations producing jobs from other areas of the country. This is best evidenced by record leasing activity; occupancy and annualized base rent growth; year-over-year and quarter-over-quarter topline revenue, NOI, and FFO growth; robust leasing spreads; strong same-store NOI growth; reduced debt levels and interest cost resulting in improved debt leverage metrics; and greater scale of our G&A infrastructure. Total revenue was $32.4 million for the quarter, up 6% from the second quarter and up 9% from the third quarter of 2020. The revenue growth was driven by a sequential 0.3% increase in same-store occupancy from Q2 and a 1.2% improvement compared to Q3 of 2020. We are also benefiting from our ABR per square foot, rising 2.3% sequentially and 5.3% from a year ago along with lower collectability reserves. Property net operating income was $23.2 million for the quarter, up 5% sequentially and up 9% from the third quarter of 2020. Q3 same-store NOI increased 7% from Q3 of 2020. Net income for the quarter was $0.06 per share, up from $0.02 per share in the prior year quarter. Funds from operations core was $0.25 per share in the quarter, up 9% from the second quarter of 2020 and year-to-date FFO core per share was $0.75 per share, up 9% from the same period of 2020. Our leasing activity in the quarter continued to build on our very strong first and second quarters, with 38 new leases, representing 90,000 square feet of newly occupied spaces. Our new leasing activity for the nine months was 56% higher on a square foot basis than 2020 and 48% higher than 2019. On a total lease value basis, our new leasing activity for the nine months was 112% higher than 2020 and 191% higher than 2019. Leasing spreads on a GAAP basis have been a positive 8.5% over the last 12 months and third quarter leasing spreads increased by 5.4% on new leases and 14.1% on renewal leases signed. Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 2.3% to $20.41 from $19.95 in the previous quarter and increased 5.3% from a year ago. Total operating portfolio occupancy stood at 90.2%, up 1.2% from a year ago and up 0.3% from the second quarter. Including our newest acquisition Lakeside Market, our total occupancy is 89.9%, up 1% from a year ago. Our collections continued to be very strong in the third quarter, reflecting the overall high collection levels and collections on tenants classified as cash basis. Our tenant receivables decreased by $1 million, an improvement of 4.4% from year-end 2020. Our interest expense was 4% lower than a year ago, reflecting our lower net debt. At quarter end, we had $22 million in accrued rents and accounts receivable. Included in this amount is $17.8 million of accrued straight-line rents and $1.3 million of agreed upon deferrals. Our agreed upon deferral balance is down 43% from year-end reflecting tenants honoring their payment plans. Turning to our balance sheet. Since early last year, we have implemented various measures to strengthen our liquidity. Our total net debt was $616.6 million, down $20.5 million from a year ago, improving our debt to gross book real estate cost ratio to 51% down from 55% a year ago. Our debt-to-EBITDA ratio improved 1.3 turns from a year ago and 0.1 turn from the second quarter to 8.1 times in Q3. We are pleased with the significant progress we are making toward our long-term debt reduction goal and remain steadfast in our commitment in this area. As of quarter end, we have $155.5 million of undrawn capacity and $81.8 million of borrowing availability under our credit facility. During the quarter, we sold 3 million common shares under our ATM program, resulting in $28 million in net proceeds to the company at an average sale price of $9.49 per share. These strong results in 2021 are a testament to the strength of Whitestone's strategic geographic focus and business model. We are encouraged by the acquisition of Lakeside Market in the quarter and look forward to continued delivery of value to all of Whitestone's stakeholders. With that now we will now take questions. Operator, please open the lines.

And at this time, we will be conducting a question-and-answer session. Our first question is from Craig Kucera with B. Riley. Please proceed with your question.

Hi, good morning guys. You had a pretty decent increase in operating expenses, both sequentially and year-over-year. Were there any one-time items in there driving that increase or is that just a function of more broad-based increases in utilities and insurance and other expense items?

Hey Craig. Thanks for your question. Not really any one-time items. I would say, obviously in 2020, like others, we pulled back where we could on our operating expenses and we're catching up a bit on those in 2021. So, it's just kind of normal maintenance of the properties, but a little bit of a reduction in 2020 and a catch-up in 2021.

Got it. That's helpful. Jim, you had a solid leasing quarter from a spread perspective. As we start to potentially look at the specter of inflation in the economy, are you pushing to get and perhaps able to get higher escalators in your leases?

Well, right now, Craig, and thanks for your question and thanks for participating. Right now, we're averaging 2% to 3% increases annually and that's probably closer to 3%. All of our common area maintenance, taxes and expenses are passed through to the tenant and those have increases as well. We also have around 275 restaurants and a number of those restaurants, which are locally owned and operated places in our local markets, have percentage participation clauses where there is a breakpoint and we get a percentage of the sales. For example, if the breakpoint is $2.5 million, we'd get 6.6% on anything over $2.5 million. So, if they get up to $3 million or $3.5 million, we can get another 6% on it. The restaurants are doing exceptionally well, particularly in the Phoenix marketplace. So, we pick up something there. We've always stayed relatively short-term on our leases, three to five years. When we have time for renewal, tenants that are doing exceptionally well want to stay where they are. When it's time for renewal, we look at the greater of the rent at the end of their lease or the market and usually we're able to go back to the market, which is inflated at that time. We've had these precautions built in all along. I will remind you that we pay out 40% of our FFO in dividends. So, we have a substantial cushion there and we're accumulating a lot of cash each month.

Got it and I appreciate the color on that. I'm going to shift gears back to Dave. As far as your rent recoveries here—these COVID deferred rents—what was recovered this quarter? I may have missed that and kind of what are your expectations here in the fourth quarter?

Yes. So, with our agreed upon deferrals during COVID, we've reduced that by over 40% this year. We're down to about $1.2 million in deferred rents, which are largely expected to be paid back over the next 12 months. So, we've cut that number in half from year end and expect the rest of it to come in over the next 12 months.

Okay, that's helpful. Jim, you made a decision to make the acquisition in Dallas, you mentioned looking at Austin, Dallas, and Phoenix for other acquisitions, but can you talk about sort of your expectations here? Is it—are we far enough along in fourth quarter that it's probably too late to close something, or might we see something this quarter and maybe kind of what you're thinking about early next year as well?

Sure. We do have a contract in Austin on a property and we're under a confidentiality agreement, so I can't say much more than that. It's a great property, it fits our portfolio. The pickings are very thin in Austin, but we've got our people on the ground that have really looked at it, and we have two other properties that we are very attracted to there. Our goal is to grow each one of the regions. For example, Dallas and Fort Worth; Austin and San Antonio; and Houston to be roughly the same size as Phoenix, where we can control or rank as one of the top owners of real estate in that marketplace. If we do that, we would be on track for our strategic growth plan of about $5 billion. We'll try to keep making headway towards that next year. At some point in time, as our cost of capital comes down, the assets are much easier to acquire.

Got it. And I know in the past you've been able to do OP unit deals, so there may be pricing closer to your NAV. Year-to-date, you've been issuing more common, of course, but are any of these deals you're looking at OP unit deals?

We have one that we're looking at that's an OP deal, and by the way, that's a great observation on your part because we do issue the OP units; it's something closer to net asset value than we do at the market price.

Okay. Thanks. That's it from me.

And our next question is from Michael Diana with Maxim Group. Please proceed with your question.

Thank you. The leasing activity was very strong in the quarter. Can you maybe give us one or two examples of a new lease and a renewal lease that you thought was particularly important?

Sure Michael. Thanks for your question. Let me just go back and give you a little bit of background and history. When we bought a property called Sunset in our Scottsdale marketplace, there was a tenant called Soul Cafe. We worked very closely with her. She has an amazing reputation now in the marketplace and that was several years back. Since then, we worked with her to move about four miles away and open another restaurant called Vic & Olla's, which is an Italian restaurant. That's been an enormous success; it's probably doing about $3 million a year in sales, and it's only been open a year and a half. Following that success, in the same property she opened the Copper Club to do banquet facilities for Christmas, Thanksgiving, and large parties. Our deal structure there is that she pays all the common area maintenance, taxes and insurance and we get 20% of the revenues, not the net operating income. Then last year, even during COVID, we negotiated and opened a new restaurant with her called Alma down at our Seville property on Scottsdale Road across from where they're building a new Ritz-Carlton complex. That has a tequila, Mexican theme and it's doing exceptionally well. We have just now signed another lease with her to open a second-generation restaurant where we do very little TI in our Market Street property. All the restaurants that she has are doing exceptionally well. They all have breakpoints and percentage leases and that's just one example. We have another example called Jalapeno Inferno; they are on their third restaurant with us. We have a new cigar lounge that we're opening. We have eight cigar lounges and we have a 50% equity interest in that particular tenant. We have a Pilates studio that we leased to over a year ago; we have a 25% equity interest in that. The woman who runs that Pilates studio has a license to certify other Pilates instructors and we have earmarked about 10 properties that could host Pilates studios. Just to give you an example of how that works: you have the space already existing, minimal TI—paint and lighting—and then we purchase the equipment for about $60,000 and then we have the operator. We're looking at the opportunity to possibly franchise that. So, that's some of the color on some of the leases that we're doing—more of an entrepreneurial and incubation approach to tenants.

Okay. Now, on Lakeside, I know as soon as you acquire property, you go about trying to mold it to the way you want it to look. Can you give us any updates on what's been going on there?

Yes. What's great about Lakeside is that H-E-B is opening their flagship store in Dallas and it literally is a private road that bifurcates as it goes into the center and H-E-B is under construction now. Lakeside is part and parcel to that whole parcel. We had Lakeside under contract when COVID came around back on March 20th. We paused our contract and the seller worked with us very closely. It came back around and we knew about H-E-B and their intention. We were able to reactivate and make the acquisition. Wonderful property. I think we already have two or three leases signed thus far. Our team was already focused on that and it's been going very well so far.

Great. Then I know you have undeveloped property tracts that you've acquired with recent acquisitions. Is there any update on what the possible development opportunities are?

Yes. What we had been doing in the past before COVID, and then we pulled back on it, is we'd feed a couple of those into the market every year. We initiated one of them several months ago and that's in our Chicago property. We had enough land to build a Dunkin' Donuts and so we leased it as an outparcel. These usually come with about a 5% cap rate and will generate over a cost about $1 million in equity value. I'm going to off the top of my head say it generates about $800,000 in net operating income.

Hey Jim, it's about—I'm sorry—it's about $100,000 in net operating income. We're building it at about $1 million and to Jim's point about value creation, our cap consideration would be about a $1 million value creation.

So, it's a situation where, Michael, we can either feed that to a triple-net owner of properties and it doesn't take away from our funds from operations, or we can put it in our funds from operations stream. What's interesting in leading a REIT is you can sell these properties and make a great capital gain, but two quarters later the market forgets about it. So, we're very careful not to take funds from operations out of our cash flow. On the other hand, we've created enormous value within the portfolio, appreciated land opportunities. Let me give you one example: In Arizona, we have a property called Marketplace in an area called Sunnyslope. We bought that property for $65 a square foot, we put our Walmart grocery store in there; it's like 98% occupied. The cap rate with a Walmart is sub 6%, almost 5%. We could sell that property today for somewhere between $18 million and $20 million. So, you've got this huge profit in there, but if you sell it you've just reduced your funds from operations. We're looking to see where we can replace some of these assets and start selling and taking advantage of the capital we've built up in profits in some of these properties. I can give you more examples like that if we go down property-by-property, but there's a lot. On the development front, we have about $250 million to $260 million of development opportunities on land that we already own that was acquired with the acquisitions of properties.

Okay, that's a great update. Thank you very much.

Thanks Michael.

And our next question is from Aaron Hecht with JMP Securities. Please proceed with your question.

Hey guys. Thanks for taking my questions. I'm wondering if you can give us some thoughts on underwriting standards for new deals within the portfolio today. Obviously, you have somewhat of a pipeline. Are you looking for simply stabilized deals? Are you looking for more deals like the one you've recently done where there's upside—the occupancy gain and new captured better effective cap rate? Any parameters around deal flow would be helpful.

Sure, I'll give you a couple. We look at a property in a marketplace and determine what it takes to stabilize that property. Stabilization to us is 95% leased and receiving market rates. As you may know, we're heavy on artificial intelligence in the company. We run AI all the time on each of our properties across the enterprise. So, let's say we buy a property that's 95% occupied, but it might be 20% under market rent. If the market is $30 a square foot and it might be getting $24 a square foot, that obviously tells you why it's under market, but it's fully leased. So, one criterion is: what do we need to do to stabilize it with very little additional cost. The second thing we look for is that there is usually a parcel of land that comes with it so we can expand it. Third criterion: when we're looking at a center, if it's say a 100,000 square feet, we won't buy it if a single box is over 50% of the center. We like to break down boxes into smaller spaces but we don't want the percentage to be too high. We also want to make sure corner pieces of the property allow us to carve it up into different sections and make smaller areas. We look at the neighborhood—we don't like low income tax credit properties behind it. We like to see great neighborhoods. We always look at the rear and delivery systems of properties to make sure they're clean. I personally look at every property at least two or three times before we go to an LOI. We have drones that we fly over these properties and we look at them very carefully. When we take a property to our Investment Committee, they then look at what it looks like from the air as well. Our process is: we sign an LOI, we go from an LOI to a contract, but prior to that we've done a lot of due diligence. We take the proposed acquisition to the full Investment Committee, which is the Board of Trustees. Once the Board of Trustees likes the property and agrees to it, we run through the financials to look at financing to make it accretive. Then we sign the contract. When we sign a contract, we have never walked from a property after we've signed the contract. We have a 100% closing rate on our side. I hope that helps a little bit. Dave, do you want to add anything there?

Thank you. I think it does sound like every deal is going to have a value-add component. I guess I was trying to simplify it down—are you looking for a minimum spread on the investment on any stabilized portion? For example, if the market is at a 5% cap, do you have to get an effective 6% cap once you've added improvements or gotten rents up to market or increased occupancy? Is there a spread or a spread range that you could provide to give us ideas on value creation?

Yes, I'll start and maybe Jim can add a bit. Obviously we look at the contribution of the cost of our capital versus the net operating income of the property initially, and then we look at it on a pro forma basis with the improvements we expect to make. So, the first test is that the capital raised for the acquisition is less than the income produced from the property. We also look at the operation of the property. One of the big goals for us is continuing to scale our overhead. Lakeside Market required no additional corporate overhead and so we're going to continue buying properties where it's accretive from an earnings-to-cost perspective and it leverages and scales our overhead. And then, as we've done this year, we're doing that in a way that also contributes to our long-term goal of reducing our debt as a percent of total capital.

Okay. And I guess that implies that acquisitions would be a little bit over-equitized if you're going to reduce leverage while going into growth mode. Is that fair to say or how would you characterize the ability to do both?

Yes, that's fair to say. If you look at the nine months of this year, we've moved the leverage significantly, although probably not at the same pace going forward. This year, for instance, we've added $60 million to our assets—$53 million of that was Lakeside; the balance was improvements to our assets. We've paid down our debt by about $70 million and we financed that from equity proceeds of about $53 million and cash flow of $17 million. We target about 40% debt on our deals going forward to fund the acquisition and contribute to improved debt metrics.

Yes, and I'll just add that we always analyze a potential acquisition on a 100% cash-on-cash return. So if you hear us say a 6% cap rate or 6.5% cap rate, that's the total purchase price based on the going-in NOI. Once we own it then we decide if we want to financially engineer it. So, we look at the pure cap rate first.

Appreciate that response Jim. Thanks Dave.

Thanks Aaron.

It appears that we have reached the end of the question-and-answer session. I will now turn the call back over to Jim Mastandrea for closing remarks.

Yes, thank you and thanks all. We really appreciate the questions. We love to talk about the company, as you can tell. For me, it's been a pleasure to share our quarter results with you again. We are pleased as a company to report our continuing progress towards achieving our long-term goals and increasing shareholder value and we work very diligently to achieve them. We believe that owning shares in Whitestone REIT is an opportunity to own an interest in some of the very best quality properties in the heart and soul of both Texas and Arizona. As we continue to remain focused on acquiring the very best-in-class properties and then apply our disciplined management and leasing programs, we have been able to help many tenants grow their businesses and achieve success. I'm reminded each morning that God has given us a plan to serve Him by serving our shareholders and all of our stakeholders. Thank you very much and please have a great day.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.