Greetings, and welcome to the Whitestone REIT Fourth Quarter and Full Year 2022 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Mordy, Director of Investor Relations for Whitestone REIT. Thank you. You may begin.

Good morning, and thank you for joining Whitestone REIT's Fourth Quarter and Full Year 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, March 1st, 2023. The company undertakes no obligation to update this information. Whitestone's fourth 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 fourth quarter 2022 slides on our website yesterday afternoon, which highlighted topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

Thanks, David, and good morning, everyone. Thank you for joining us today. We have very strong results that I'm eager to discuss, but I wanted to start by sharing our vision. At Whitestone, our vision is to create the American Dream in our centers through inspired team members who position clients for success and to meet the evolving needs of thriving communities. We continually strive to champion a best-in-class team to create value in real estate better than anyone in our business. There are many aspects of that vision that keep me, and the team humble and passionate about what we do every day. 2022 was a very good year for Whitestone on many fronts. We exceeded our annual guidance for FFO per share, same-store NOI growth, G&A, and net debt-to-EBITDA. We ended the year on an especially high note with strong fourth quarter results, hitting record occupancy for the company and achieving it with very robust leasing spread levels. We continue to see the results from our strategic focus on the right locations in growing markets, convenience-focused shopping centers that have a large amount of smaller spaces and minimal big boxes. We populate our centers with an optimal mix of tenants that meet the evolving needs of thriving communities. We benefited from a number of positive macroeconomic trends driving neighborhood demand and supporting our growth, including hybrid work, migration to the Sun Belt, and population shifts towards suburban markets. These demand factors are further amplified by limited new supply in our markets. Our 2022 strong performance is a testament to the quality of our centers, the strength of our tenants, and the hard work of our team. We anticipate the positive momentum will continue, and we're looking forward to building on our success in 2023. Let me provide a few highlights from a year of major accomplishments on multiple fronts. We grew FFO by nearly 20% to $1.03 per share. This was accomplished by staying laser-focused on leasing throughout the year, raising our occupancy by 240 basis points to 93.7% and achieving same-store NOI growth of nearly 8%. Our fourth quarter ending occupancy improved sequentially from the record occupancy we reported in Q3 by an additional 120 basis points. Straight-line leasing spreads were 16.6% for the year and a positive 23.5% for the fourth quarter. We improved our debt-to-EBITDA ratio to 7.8x from 9.1x a year ago. We realized this primarily through strong EBITDA growth, supported by capital recycling from acquisitions and dispositions that met our dual criteria of growing FFO per share and improving leverage. During 2022, we sold 6 properties for an aggregate price of $35.8 million at a 5.6% cap rate and acquired 2 properties with greater current and future upside for an aggregate price of $27.5 million at a 7 cap rate. As a reminder, our debt-to-EBITDA ratio stood at over 10x in 2020. So we've made great progress in just 2 years. We lowered our G&A expenses by $4.6 million from the 2021 level. Although we did benefit from some one-time reductions that will not repeat in future years. Scott will provide greater clarity to our future G&A or corporate credit facility, adding additional liquidity, fixing the rate on 82% of our debt, and moving the bulk of our maturities out to 2027 and beyond. We received an investment-grade credit rating. We engaged heavily with shareholders and analysts increasing our interaction with and ownership by institutions while adding sell-side coverage. And importantly, we showed our commitment to corporate responsibility through our ESG actions, which included multiple governance improvements, submission of our first GRESB filing, and publishing of an updated corporate ESG report. The efforts we made in this area were recognized by ISS with year-over-year improvements in our governance score from 9 to 3; in our environmental score from 8 to 6; and in our social score from 4 to 3. These efforts truly position us well for 2023 as we enter the year with great momentum on the leasing side fueled by strong tenant demand and shorter lease structures, which will allow us to grow rents across our portfolio. In the third quarter of 2022, we shared that over 40% of our properties were at 95% or greater occupancy. As of year-end, nearly 60% of our properties were at or above 95% occupancy, and our overall occupancy rate hit a record 93.7%. Anchored occupancy for spaces over 10,000 square feet were 98%, and small space occupancy hit 91.2%. One area that is a significant differentiator for Whitestone is that over 60% of our leasable square footage is in smaller spaces, which we believe have much greater demand, provide more flexibility, afford premium rents, and offer occupancy upside in our portfolio in those spaces. As individual centers near full occupancy and tenant demand remains constant, we are presented with tremendous opportunities to accelerate ABR growth through disciplined selection of strong and successful tenants. With our small space focus, we diversify our risk over more tenants per center and shorter leases with more flexible lease terms than our peers. There has never been a better time to prove our differentiated strategy, ensuring that our centers are populated with high-demand businesses that meet the needs of their surrounding communities. Let me now just take a moment to comment on the environment in which we operate today. We understand that this strong economic environment as we see it through the eyes of our tenants, and in our current and ongoing leasing success does not necessarily match with the expectations of many Fed-focused investors. We have no crystal ball in terms of the economic impact of taming inflation. But what we can do is stay focused on a strategy that we believe will provide stronger returns for our investors, regardless of the macroeconomic environment ahead. Our focus remains on staying disciplined and adhering to our strategy, remaining patient with respect to acquisitions and dispositions, continuing to drive industry-leading same-store NOI growth, continuing to strengthen our balance sheet by improving our debt metrics, continuing to reduce our overhead costs as a percent of revenue, and, most importantly, being passionate about driving growth in FFO per share and long-term value for shareholders. I would like to thank my fellow Whitestone team members for their hard work in 2022. I thank you for your contribution to the progress we've made, and our team looks forward to delivering for our shareholders again in 2023. And with that, I'll turn it over to Christine to discuss operations.

Good morning, everyone. As Dave mentioned, we've achieved strong results in 2022, improving occupancy by 240 basis points to 93.7%. We believe we have further to go in terms of occupancy gains, but there will be a strong focus on remerchandising in 2023. And so same-store NOI becomes a bigger growth driver going forward. We outperformed on a relative basis with a 7.9% same-store NOI growth in 2022, and we're poised for strong growth again in 2023. With our locations in Sun Belt cities in high-growth, high-income neighborhoods and our focus on service and necessity-based tenants, we are well positioned for stability through COVID. We are now striving for additional upside through operational discipline and successfully serving our communities. With the management change in 2022, we aligned as a team to execute and lean into the paradigm shift in retail. As we settle into a hybrid work model for the long term rather than just a facet of the pandemic, consumers have much more time close to home. And we're looking for local connections, both for work and how they increase time spent with family. Whitestone’s strategy begins with our acquisition team engaging in consumer traffic, selection, and competitive positioning in prime locations. Our fourth quarter acquisition of the Lake Woodlands Center is a perfect example. Lake Woodlands is a convenience center across from the HEB grocer and adjacent to a top-performing fitness center, driving a steady and consistent stream of traffic to the location. With the 1-mile radius average household income in excess of $250,000, it is ideally positioned for the ease of access to that neighborhood. This center starts with an average base rent per square foot of above $30 per square foot. We anticipate filling the 11% vacancy, allowing us to surpass the income from the dispositions we just completed and improve the quality of our portfolio. Also core to our strategy is evaluating what makes the entrepreneurial businesses succeed. Our differentiator is making sure our Whitestone employees see businesses with an eye on how profits are made. Our underwriting process isn't just looking at the business for a current lease but with the anticipation that a business will remain in our growing locations for a lifespan of 10 to 20 years. Our strong same-store NOI performance is a reflection of the success of our tenants and their ability to consistently serve their communities. And because we have a lot of tenants whose businesses are thriving, we're able to accelerate our same-store NOI growth. Although I expect most of our tenants to become long-standing and renew leases multiple times, we intentionally structure leases for terms of 3 to 5 years because we have confidence in the trajectory of our tenants and the trajectory of our centers. Within the retail sector, availability of 2,500 to 3,000 square foot spaces, especially in well-designed and well-located centers, is limited. This isn't just because construction has slowed in our markets, which it certainly has, rather, its demand has increased as time-conscious consumers have shifted to shorter local excursions in their neighborhoods. The pandemic accelerated consumers’ need for convenience while increasing their desire for connections. Whitestone is the right fit for growing tenant categories such as restaurants, fitness, medical, financial, education, and entertainment. In the fourth quarter, we added EoS fitness to our Williams Trace Plaza location in Houston, replacing an aging and low-performing grocery store. This center is located in Sugar Land, Texas, a fast-growing and young, diverse community outside of Houston, and the change immediately jumped up the average base rent per square foot for the entire center by 38%. By proactively remerchandising for neighborhood needs, we've been able to reposition the location to a younger, diverse, and growing demographic and thereby increasing traffic levels for the center. We often talk about the quality of revenue. While the most important aspect of quality of revenue is the strength of the tenant, it's also important to note that over 90% of our leases are triple net leases, and the majority of those leases have an annual rent escalator of 3% to 4%. We firmly believe that 2023 will be another strong year in terms of our operational performance, showcasing the value of our differentiated strategy. And with that, I'll turn it over to Scott.

Thanks, Christine. I'll walk through our earnings drivers in 2022 and anticipated drivers for 2023, so investors and analysts have a better understanding of what to expect. All of this is shown on Slide 8. We finished 2022 with FFO per share of $1.03, which includes $0.04 of one-time benefit associated with forfeitures of restricted shares. Exclusive of the $0.04 of one-time cost savings, we generated an additional $0.13 per share in 2022 from our 2021 level. The key drivers of that change are a same-store NOI increase of 7.9% translating to $0.13 per share. G&A reductions of $4.6 million or $0.09 per share, with $0.04 being one-time, which we separate on the walk on Slide 8. Other primarily non-same-store NOI for a positive $0.02 per share contribution and higher interest expense resulted in a $0.07 per share decrease. Looking forward to 2023, we are projecting FFO per share to be in the range of $0.95 to $0.99. Using the 2023 guidance midpoint of $0.97 per share, the key drivers of the change from 2022 are our same-store NOI growth of $0.06 per share. Based on ending occupancy of 93.5% to 94.5%, G&A savings of $0.02, other primarily non-same-store NOI improvements for a positive $0.01 variance, and higher interest expense is anticipated to result in a negative variance of $0.11 per share for 2023. This is primarily a result of the refinancing we did in the third quarter of 2022 as well as the current SOFR curve. We anticipate that a 100-basis point move of the SOFR curve will result in a $0.0203 per FFO share variance, either a headwind or a tailwind depending on the direction of the rates. In 2022, we had approximately $2 million or $0.04 per share from percent sales revenue, with a little over half of that in the fourth quarter when many tenants hit their annual breakpoints. We anticipate a similar pattern in 2023, and we anticipate we'll finish with a stronger fourth quarter in 2023. A bit more commentary on G&A reductions in conjunction with Slide number 9. In 2022, we made significant progress reducing our G&A expenses, both by reducing management compensation and by focusing on greater efficiency with our employees. Excluding the one-time $2.2 million compensation adjustment, we finished 2022 at $20.3 million in G&A expense and we're targeting $19.2 million to $19.7 million for 2023. This focus on reducing cost, along with strong revenue growth, is anticipated to continue to lower our G&A costs as a percentage of revenue in 2023 and in future years. Let me wrap up by saying we believe the scale of the changes we've made over the last year are apparent and convey that we truly appreciate our investors and intend to remain committed to maximizing shareholder value. And with that, we'll take analysts and investor questions.

Our first question comes from Mitch Germain with JMP Securities.

Congratulations, everyone, on the great year.

Thanks, Mitch.

Curious about leverage reduction that you've got baked into your outlook. Is there asset sales that you are contemplating, additional asset sales? Or is that just cash flow from operations and active sales could create a further decline in leverage?

Mitch, it's Scott. I think for 2023, we plan to recycle a little bit of capital, and the rest of the leverage reduction is going to come from improved earnings and some amount of operating cash flow that we would use to reduce debt along the way during the year.

It’s largely driven by continuing to grow EBITDA. We are very pleased that we were able to organically improve our balance sheet metric by over one point through organic growth this year, and we expect to achieve similar results next year as well.

Got you. Is the strategy still to match any potential acquisitions with dispositions and continue to recycle? Is that how you are approaching your capital plan?

Yes, Mitch. It's Dave. Obviously, the transaction market today is difficult. As you hear from us and others, not a lot of activity out there. We're continuing to be very patient and disciplined on the acquisition side. And then really from a recycling perspective, I think just like anyone would do with the portfolio of assets or properties, we're continuing to look at our properties, looking for those where we feel like we've extracted the value and potentially recycle those. So right now, in our modeling for 2023, we have not included any growth in acquisitions. We've included some recycling. But we'll do what we did this year. Really pleased with our recycling efforts in '22, which were selling 6 properties at about a 5.6 cap and then buying a couple of properties at an aggregate 7 cap with a lot more upside.

Got you. I think last one from me. Bad debt. Obviously, you're baking into guidance a little bit of an increase. And I'm curious, has there been any changes to your watch list? Or is that just to create some conservatism given the potential for some macro and economic headwinds in the year?

Well, we forecasted 0.75% to 1.5% of bad debt. And I believe we ended '22 at about 0.82% or 0.83%. So towards the low end of the range this year, and we really haven't seen any backwards progress in our collections today. So it's a range. And the top end of that range is closer to where we've been historically, while the bottom end is where we've been in '22. We haven't really seen any downward pressure on collections or upward pressure on bad debt yet.

Our next question comes from the line of Gaurav Mehta with EF Hutton.

First question, I was hoping if you could provide some color on what you're expecting for your Pillarstone assets in '23?

Gaurav, it's Dave. Thanks for your question. So we have expressed that it's our desire to monetize our interest in Pillarstone. Largely, that is an effort that's being advanced through legal activities currently. So there's not a whole lot I can say other than we're continuing to believe that it's the best thing for Whitestone shareholders to monetize our investment, and we're working to do so. We obviously provide an update on those legal activities in our public filings.

Okay. Second question on your '23 guidance. What kind of leasing spreads are you underwriting in the guidance?

We expect to see strong leasing spreads for the remainder of '23, similar to what we experienced in the third and fourth quarters of '22. The leases that will be expiring in '23 are still expected to be at the lower end of the leasing pricing before inflation. Christine, would you like to add anything?

We continue to see the same improved leasing spreads over that we've had in the last year and continuing. We haven't seen much slowdown in leasing yet. It's just moderated a little bit through the first quarter. In addition to that, we're also focusing on remerchandising as well for our centers. So we have an asset plan for each center, where we look over the next 3 years and how we best remerchandise those for an increase in traffic and premium and rents.

Our next question comes from Craig Kucera with B. Riley Securities.

Does your investment-grade rating help at all in pricing on your line of credit?

The investment from Kroll that there's not a break in pricing from the investment-grade rating we received from Kroll. However, we do anticipate that it's going to improve our access to the debt markets going forward and improve any pricing we may have. And as we continue to improve our earnings, we may be able to achieve pricing reduction going forward in our line of credit.

Yes, I would like to add to that. If you take a step back and consider the bigger picture, we've made significant progress with the company this year in enhancing our overall profile. Our results are strong, and our balance sheet has improved. All of these efforts are reflected in our recast, and the progress we made was a crucial factor in achieving that. I am truly proud of Scott and the team for accomplishing this in late '22, which was very important. Looking ahead, we may have a slightly higher variable portion of our debt compared to others. However, we have no significant debt maturities until '27 or '28. Therefore, I believe the advancements we've made, including receiving an investment-grade credit rating, position us much better for the future.

Got it. And are you planning on going down the path with any other rating agencies to maybe see some better pricing, if possible?

We don't have any immediate plans for that. But as we move forward, we may consider it.

Okay. Great. I just want to talk about your operating expenses. I want to say the first 3 quarters of last year, they were up at a pretty healthy clip, relatively flat this quarter, so a nice improvement in NOI margin. Did you roll out any new programs? Or can you just give us some color on how you were able to keep those a little bit in line and kind of your expectations for '23?

Maybe, Christine, I can start out, but maybe Scott will jump in as well. But I do think one of the things we've done as a company is implement significant discipline, accountability, clarity of objectives. And so one of the things we've done is when working with the properties, Christine has been great with leading the team. And then I'll maybe let Christine and Scott talk to some of the things we've done in this area.

And Craig, this is Scott. In the third quarter, there is timing involved with property expenses. Sometimes you have repairs scheduled for more repairs in a quarter than you may have in another quarter. So I think about it more in the annual context than in a quarterly context.

And with that, we're really focused on planning. And so each property is part of the study of what we need to do going forward with a capital plan over a 3- to 5-year period. We haven't done that in the past. So that's part of what we've implemented this past year. In addition, it helps smooth operations quite a bit. And we've also really streamlined the team and reduced headcount over the year too. That's made a big difference. And so last year was about alignment. This year is about accountability. And next year, we look for the awards with that.

Our next question comes from the line of Mitch Germain with JMP Securities.

You there, Mitch? Sorry about that. I know you guys have a bunch of pad sites and redevelopment opportunities. I'm curious if there's any decision or progress to begin working or monetizing some of that?

Yes, I'll start and then perhaps Christine can provide more details. We still have plenty of opportunities in the portfolio by utilizing some of the excess land and converting it into pad sites. In the past, we likely had a slide in our presentation that we chose not to include this quarter because we're eager to share updates as they occur. While there hasn't been any significant progress, we continue to see great potential. I'll let Christine add more insight if she'd like. Between pad sites and other developments, there are opportunities to achieve very attractive returns.

Yes, Mitch. Last year we experienced a longer lead time on some planning due to the municipalities we worked with and the lingering effects of COVID that caused some delays. However, we are continuing to move forward with all our pad sites and are delivering several each year. We are also making progress on our larger projects. More detailed information will be provided soon.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Holeman for any final comments.

Thanks, everyone. We are very energized by the progress we've made in '22 and look forward to carrying that into 2023. Thanks for joining us today, and we look forward to updating you shortly on our '23 progress. Have a great day.

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