Greetings, and welcome to the Whitestone REIT First 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, David Mordy, Director of Investor Relations. You may begin, sir.

Good morning and thank you for joining Whitestone REIT's First Quarter 2023 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's also important to note that this call includes time-sensitive information that may be accurate only as of today's date, May 03, 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 first quarter 2023 slides on our website yesterday afternoon, which highlight the 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 first quarter 2023 earnings conference call. We are pleased to deliver another quarter of strong results on multiple fronts and are solidly on track to achieve our FFO guidance for the year and the underlying key drivers we previously communicated. In terms of leasing activity, 2022 was a record year for us and 2023 has shown no slowdown in demand for spaces in our centers, as evidenced by our sector-leading leasing spreads in Q1. It seems commercial real estate is often one category in many of the headlines today. So, I wanted to make a straightforward point that investors know but that sometimes seems to get lost. Simply put, not all commercial real estate is the same. Whitestone is in the most desirable markets, has the right types of tenants, the most flexible and in-demand size of leasable spaces, and continues to benefit from limited supply and strong population and job growth in our markets. We also continue to benefit from hybrid work as consumers spend less time in offices and urban centers and more time at home and in their neighborhoods. The lane we've been in for the last decade is exactly what is in greatest demand today. We specialize in smaller spaces and populating our centers with service-oriented businesses. As people continue to migrate to Texas and Arizona, we see the fundamental drivers of our business are not just remaining strong but accelerating in the current environment. In the first quarter, we signed new and renewal leases at a blended 20.8% increase over the prior leases on a straight-line basis and a 13.3% increase on a cash basis. During the first quarter, we grew our top line revenue over 5%, produced strong 2.8% same-store growth, NOI growth, and achieved FFO per share of $0.24. We strengthened our balance sheet, reducing our exposure to variable rate debt and improving our liquidity. Our occupancy at quarter-end was 92.7%, up 170 basis points from a year ago, and our net effective annual base rent per square foot was $22.22, up 4.7% from 2022. Christine and Scott will provide greater detail of our operating and financial activities and results in their comments. We are pleased with our start to 2023 and our focus for the remainder of the year will be growing shareholder value through operational and financial performance, FFO per share growth, and delivery of consistent results. The new management team has delivered five quarters of strong results and understands the value of building on those results. We will continue to focus on the balance sheet and cost of capital with improvements to debt leverage in 2023 and future years and remain disciplined stewards of capital. We recognize the value of a strong balance sheet and we recognize the importance of reaching the leverage milestones we have set. We will continue to focus on accretive recycling of capital. As we highlighted on the fourth quarter call, in 2022 we made a number of strategic dispositions that funded our Lake Woodlands acquisition and allowed us to improve our debt leverage. We are targeting similarly accretive activity probably of about the same magnitude within the next few quarters. And finally, we will continue to focus on monetizing our underperforming joint venture investment in Pillarstone. Our team is aligned, our focus is clear and we are confident in our ability to add value from a unique business model and a great portfolio of high-quality, open-air, convenience and necessity-based centers that are positioned to serve their respective communities on a daily basis and drive consistent cash flow growth. With that, I will now turn the call over to our Chief Operating Officer, Christine.

Good morning, everyone. As Dave mentioned, we remain confident in terms of achieving our 2023 objectives and are on track with our internal monthly and quarterly goals. Our leasing efforts remain very strong in the quarter, although the actual leases signed were a little lower than previous quarters. We expect the very active first quarter to show positive results in future quarters in terms of leases signed, leasing spreads, and overall occupancy. Occupancy remains high at just under 93%, up 170 basis points from a year ago and down slightly from the last quarter as a result of remerchandising efforts, which are going well. We achieved renewal spreads of 23% and new leasing spreads of 9.5% for a combined overall positive leasing spread of 20.8% in the quarter. It is gratifying to see the number of trends that we acted upon a decade ago really accelerate in the recent quarters, and we're working hard to capitalize on those trends. Probably the most important activity we do in order to ensure we're skating to where the puck is going is the mix of businesses we select for our centers. Getting this mix right drives traffic for every tenant in the center and paves the road for additional leasing successes, both with new and renewing tenants. It underpins our philosophy that shorter leases allow us to better share in the success of our tenants, providing our investors with better protection against inflation. In turn, the shorter leases allow us to be more nimble in terms of optimizing our tenant mix to best service the surrounding neighborhood. Our active management ensures our centers thrive for their communities. Proactive management requires that we know how our tenant businesses are performing and we do. We're continually verifying that local customer demand is being met, and we have designed Whitestone to take appropriate action if those needs are not being met. We have a very low number of big box tenants outside of grocery stores, and a risk-diversified tenant mix with minimal tenant concentration. Our largest tenant makes up only 2.2% of our base rent. In the news recently, we had one Bed Bath & Beyond. Our mix focuses instead on restaurants, medical, self-care, education, and entertainment offerings. The Bed Bath & Beyond we have is located in our center in McKinney, Texas just north of the Dallas Platinum corridor. The center is anchored by Trader Joe's and we look forward to having this space back as it is already in very high demand. Instead of big box tenants and power centers, we have entrepreneurial tenants, often fast-growing regional franchises, and we’ve anchored either by grocery, restaurants, or combinations of high-traffic tenants. We've averaged over 25 tons per center and we have a very high retention rate providing a high dispersion of risk for our investors. One of the advantages that arise from the closeness we have with our tenants is that we have a very good pulse on the current business environment in Texas and Arizona. Consumer demand remains very strong within our markets. Additionally, many service-oriented businesses within our centers are low capital businesses because they don't have capital tied up in inventory. We're keeping an eye out to see if credit conditions become a concern, but we're seeing no evidence currently in either Texas or Arizona.

Thank you, Christine, and good morning. Our solid first quarter results demonstrate the strength of our high-quality portfolio of properties, as evidenced by robust leasing spreads and positive same-store NOI growth. Our NAREIT funds from operations per diluted share was $0.24 for the quarter versus $0.30 for the same period in 2022. Notably, last year's figures include a benefit of $0.04 from the forfeiture of restricted equity compensation stock. Our first quarter results were driven by strong NOI growth, largely due to higher base rent of $900,000, offset by higher interest rate costs. In addition, pro-rata FFO from our joint venture was lower by approximately $500,000. Same-store NOI was a positive 2.8% increase fueled by strong leasing spreads and increased year-over-year occupancy. Additionally, furthering our ability to narrow in on our guidance target and minimize interest rate risk, we entered into an interest rate swap on $50 million of variable rate debt on the last day of the quarter, reducing our variable rate debt to $63 million, or approximately 10% of our total debt. While the SOFR curve suggests rates will flatten or fall soon, we are well positioned to sustain a higher interest rate environment for some time. As shown on Slide 9, while we estimate higher interest rates will be a drag on 2023 earnings, we expect same-store NOI growth and scaling of G&A infrastructure to positively contribute to our 2023 results. We continue to strengthen our balance sheet with improved debt leverage from $8 million in lower net debt and increased EBITDAre with lower variable rate interest exposure. Our EBITDAre ratio improved to 7.8 turns compared to 8.1 turns a year ago, excluding the stock forfeiture benefit in 2022, and our variable rate debt as a percentage of total debt improved to 10% from 17% at year-end. We have a well-laddered debt stack with limited maturities coming due over the next three years and we expect to continue to focus on strengthening our financial position to position us for opportunities as they arise. Let me conclude my prepared remarks by reaffirming our full-year 2023 guidance. As Christine and Dave both said, our results are in line with our internal monthly and quarterly expectations and have us well on track for achieving our 2023 full-year targets. And with that, we'll open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Anthony Hou with Truist Securities. Please go ahead.

Good morning, guys. Can you please provide a little bit more color on the interest in the Bed Bath & Beyond space and the mark-to-market opportunity there? And what's the plan for getting the space back?

Thanks for the call. Thanks for the question, Anthony. So, a couple of things regarding that space. It's a nice size; it’s well-sized for the market. It's right across from a Trader Joe's, making it a heavily trafficked center. The Trader Joe's does very well there. I would say that we're receiving interest from a broad range of users. We're considering splitting the space, which typically brings a premium. Since there has been trouble with Bed Bath & Beyond, we are receiving inquiries that have been happening since the beginning of the year. It’s important for us to evaluate all those opportunities and select the best fit for our mix. Given that center's high traffic, we want to ensure we strategically blend that with the right business.

Hey, Anthony, it's Dave. I think the second part of your question was, is it included in our guidance? I'm going to let Scott respond to that.

Yes, the answer to that is no. We didn't anticipate Bed Bath & Beyond's bankruptcy, but we view that as upside. There might be a short re-tenanting period, but no, that's not in the guidance. It's a very small percentage of our NOI.

It's small, but we also look forward to the opportunity of a well-placed box like this. Number one, it was heavily restricted, and at the same time, we had a number of caps on it. I think when we turn this, we're going to see some upside. Do you mind quantifying that mark-to-market upside?

No, I think it would be premature to do that. All of us are looking at each other, but we feel very strongly that there is upside. As Scott said, it's granular. If you remember, we have a really nicely risk-diversified tenant base with no huge tenant concentration. Our biggest tenant is 2.5%, so Bed Bath & Beyond is just one tenant and not a large part of our revenue, but we are confident that it will be a positive result when we re-tenant that space.

Got you. And how is the Whataburger space at Windsor Park? I think right now it's hybridized as a 24,000 office space. Just curious about what's the plan there for that space and the interest in that space as well?

So, it’s similar in nature. Let me explain how we look at these spaces when we get them back. It was very similar to when we replaced Randall's with EoS last year. First, we evaluate the demand in the market. What type of offerings could enhance that center's merchandising mix? We also analyze the competition to ensure we don't directly compete with others but rather fill gaps in the market. Then we assess the space itself to decide how to utilize it whether that means splitting it to maximize its potential or keeping its current infrastructure to add value. This particular space is a bit different from what we normally hold, so we are being quite selective about the next tenant. We have interest in it, but we are focused on ensuring we make the right choice.

And I'll just add that that vacancy is factored into the guidance.

Anthony, it's Dave. I'll add one more thing. This was known since the training space for Whataburger University, which had plans to move out. We anticipated this and it is part of our re-tenanting efforts. We believe that once we re-tenant, it will be beneficial for the space, but it was included in the guidance and we are optimistic about re-leasing.

And when does the Office Depot lease expire at this center?

The Office Depot lease at our Windsor Center in San Antonio...

I think that's a couple of years out. This center is very stable and really hasn't had any changes for quite some time. I would say that the turn that occurred there was years ago, and the center has maintained stability since. It's well established at sort of a gateway entrance into San Antonio, with two major highways converging. It’s a desirable location. Although it's somewhat unusual for our type of center, it has an Office Depot, a PetSmart, and other long-term tenants that have been there for quite some time.

Got you. Thanks for taking my question, guys.

Thanks, Anthony.

Our next question comes from Mitch Germain with JMP Securities. Please go ahead.

Hey, good morning. Just back to the decline in occupancy; I think you characterized it as remerchandising efforts. But we're at about 100 basis points. Is there anything more specific you can provide there?

Yes. I think really our focus on quality of revenue has been to look through the current portfolio. We started this during COVID and have closely analyzed the performance of tenants. Rather than prolonging a struggling tenant's lease, we've actively made changes quicker, as leaving an underperforming tenant could lead to issues in the overall marketing of the space. We believe taking proactive stances has worked well for us. The trends we've identified have accelerated over the last year, and we expect to share data soon supporting our retention strategies that are positive for our portfolio. Additionally, some of our seasonal adjustments help us align expectations with reality. The trends from the last couple of years have led to a slight pullback, but we remain on track with where we expect to be for the year.

Yes, Mitch. It's Scott here. I just want to mention that when we do our forecasting, we analyze all 1,500 tenants for the entire year. We're actually slightly above the forecast for first quarter occupancy, so there's nothing unexpected here.

To that point, Scott, is there a bias towards the lower end of the midpoint because of some uncertainties like Bed Bath? Or are you confident the plan will evolve as the year progresses?

I think we're confident that we will end up around the midpoint of our guidance.

Okay. Last one for me. Just curious about tenant demand. I think Christine or maybe it was Dave mentioned that the sweet spot is smaller spaces, but I'm just curious about how the pipeline looks this year compared to the last quarter.

Let me clarify, Mitch. Are you talking about the leasing pipeline?

Yes, please.

Okay, great. Thank you. I'll let Christine comment on that.

Yes. What we're seeing is that the stronger operators are very active in the market, which is exactly what we prefer. This last quarter we had the same trend with our restaurant spaces; if there is a second-generation restaurant space, I’d prefer that to be available to market rather than holding onto a under-performing tenant. We haven’t seen any demand pullback for our restaurants, and in fact, demand is increasing. We're currently finding that the tenants we are speaking to are quality operators with a growth track record. The only note I would make is that there seems to be fewer new entrepreneurs entering the market who have less experience. We are primarily dealing with those who understand the strength of our markets and continue to explore growth opportunities.

Great. Last one. Scott, was there any one-time items this quarter? I think I saw a lease term fee. Is there anything we should be aware of?

No, not really. We list out the lease term fees in our same-store reconciliation, so you can review that. If anything, locking in the interest rates may give us some upside compared to our forecasts. But, no, I can't think of any one-time items that we need to call out.

Great. Thank you.

Thanks, Mitch.

Our next question comes from Craig Kucera, B. Riley Securities. Please go ahead.

Yes, good morning, guys. You've had significant variability in your Pillarstone results. I think it was about $0.01 per share year-over-year. Can you provide some color on how we should think about what Pillarstone will contribute or take away from Whitestone this year? And I know you mentioned there weren't any one-time items, but were there any adjustments there?

Hey, Craig. Good morning. And thanks for your comment. This is Dave. I'll start out and then hand it over to Scott for the financial details. One key goal is to exit our joint venture relationship with Pillarstone. We would like to monetize that as the asset is underperforming and not delivering expected returns to our shareholders. We are actively working towards that exit in various ways, primarily through the court system. Right now we're estimating its financial performance based on available information as they haven't filed reports lately. The performance has been disappointing, and we are committed to exiting this partnership.

Yes, I would just add that when we think about Pillarstone from a cash flow perspective, it's 100% upside for us right now. There are no distributions coming from Pillarstone, and we do have some legal fees embedded in our G&A costs for the past year. So exiting should improve G&A. Once we monetize that investment, it should be thought of as upside from a cash flow perspective.

Got it. You were able to transact successfully in the fourth quarter, and I know you're considering capital recycling again. But Dave, what are your thoughts on the current environment and what you're seeing?

Yes, Craig. The transaction market continues to be shallow. You’ve probably heard that from others. We’re seeing slight movements in cap rates but not much. We’re targeted in the markets we’re in, deeply looking for opportunities. Obviously, we require interest rates to stabilize or provide some predictability. Last year, we recycled approximately $40 million in dispositions, which funded our acquisition in Woodlands, Texas and aided our deleveraging. Like last year, we expect to recycle in a similar fashion this year, looking for assets to sell and purchase new assets that are more accretive both immediately and in the future, while also strengthening our balance sheet.

Okay, great. And just one more from me. Christine, circling back to your remerchandising efforts, are you seeing any themes that are consistent with last year or changing in this environment? I feel like last year, Whitestone was quite positive on various types of restaurants and the strength of QSRs and fitness. What themes are you noticing as you adjust tenant mixes?

No, restaurants are still in high demand this year. This is why we are proactively making changes; if we have a restaurant not performing well in the current market, we believe it's crucial to swap it out for a better fit to serve the community. Demand has not slowed down in this space and has, in fact, increased. We're noticing that tenants interested in our spaces tend to be established, quality operators who know our regions well. There is a slight pullback in fitness options, but that seems normal as last year's surge of demand stabilizes. Overall, we're seeing strong demand in spaces around 1500 to 2500 square feet, flexible to shift towards market demand.

Yes, thanks. Good morning. I wanted to ask you about your asset recycling comments. If you were to acquire any properties this year, should we expect that it would match the funding through dispositions?

Hey, Gaurav. This is Dave. The question regarding disposition and acquisition balance, yes, I think you're correct. Given our position, we're very disciplined on capital allocation and believe recycling is currently in our best interest. We're always aware of market opportunities but leaning towards balancing acquisitions through recycling.

Okay. Second question on your debt maturity for 2023; the 4.28% note expires in June. Should we expect replacement with a credit line?

I think that's the most likely scenario right now. We will evaluate all refinancing options, but more than likely, we'll roll it into the revolver. We locked down $50 million of debt, reducing our floating rate exposure to around 10% and that gives us flexibility to cover upcoming maturities.

Okay. And where are the rates today for fixed-rate notes?

While Scott's looking at that, I believe the question was about fixed rates versus the credit line. The credit line is priced at a variable rate that is SOFR plus about 160 basis points today. So, I think that's in the range of 5% to 6%. Fixed rates, Scott is checking on that.

Yes, it seems like the fixed-rate note expiring in 2023 is around 4.25% and 2024 is closer to 4.5% to 5%. So a slight increase in the rates which is factored into our guidance based on how we forecasted them into the facility using the SOFR curves.

Okay. Thank you.

Thanks, Gaurav.

Hey, Dave. I think you partly answered this when discussing your recycling plan. Is there any update on outparcel developments or redevelopments?

Hey, Michael. It’s Dave. One aspect we’ve communicated is the embedded value in our ability to develop some pad sites and land parcels acquired when we bought centers, looking for future value adds. It's important for us to continue exploring those. I’ll hand it over to Christine to provide a further update on those activities.

The demand is present, but approval times have frustratingly slowed down with cities since COVID. The pipeline has been sluggish due to the permissions and approvals we must work through with the city, along with our architects and engineers. It's not for lack of demand; the timing for these approvals has become challenging. However, we are seeing that costs are coming down a little for these developments, so that's a positive aspect.

To illustrate, one asset we recycled was the pad site we developed for Dunkin' Donuts, which generated a higher return on cost of around 10%, and we were able to sell it at an effective cap rate of half that. We have several pad sites in our portfolio that we can develop. There are smaller pads being utilized for operations that cause less disruption to our parking spaces, which could increase the utilization of space throughout our properties.

Great. Thanks for the update.

Thanks, Michael.

There are no further questions at this time. I would now like to turn the floor back over to Dave Holeman, Chief Executive Officer for closing comments. Please, sir, go ahead.

Thank you, and thanks to all for joining today's call. We truly appreciate your interest in Whitestone. I would like to share that we’re very pleased to have Julia Bussmann as a nominee for the Whitestone Board of Directors at our upcoming annual meeting of shareholders on May 12. Julia will be our third new addition to our Board since the beginning of last year, and she brings strong skills to our board after a 35-year career primarily investing in senior debt, subordinated debt, and structured equity with Prudential. Julia's addition will continue to strengthen our governance, enhance alignment with shareholders, and make our Board a better reflection of society and our customers with 50% female representation. We're excited and wanted to welcome Julia. With that, I will now conclude the call and wish everyone a great day. Thank you.

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