Greetings, and welcome to the Whitestone REIT Second 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. Thank you. You may begin, sir.

Good morning and thank you for joining Whitestone REIT's second 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 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, August 02, 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 second quarter 2023 slides on our website yesterday afternoon, which will 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 second quarter 2023 earnings conference call. Operations delivered another very strong quarter in the second quarter of 2023. Legal expenses related to our termination for cause of our former CEO and our associated joint venture investment detracted from what would otherwise be a strong headline number. But we expect these to be short-term impacts to earnings this year and not ongoing. We will discuss litigation and our guidance in greater detail, but let me start with the second quarter results. Revenue grew over 4.2% from the second quarter of 2022. Funds from operations per share was $0.21, down from $0.25 a year ago. This decrease was primarily the result of higher interest and legal expenses, offset partially by increased property net operating income. Same-store net operating income improved by 0.4% for the quarter and is up 1.7% for the six months. We expect the impact of our occupancy gains and strong leasing spreads to be fully reflected in the second half of the year and are projecting same-store net operating income growth in excess of 5% for the balance of the year, which should get us to our full year same-store NOI growth guidance. Total occupancy is at 93.3%, up 180 basis points from the second quarter of 2022, and up sequentially 60 basis points from the first quarter of 2023. As of the end of the second quarter, our net effective annual base rent per square foot was $22.78, an increase of 4.9% from a year ago and up 2.5% from the first quarter. We continue to be very optimistic as we are seeing fundamental trends driving organic growth in 2023 that we anticipate will last well beyond this year. I will outline a couple of those trends. First and foremost, our portfolio of properties is well-located in the fastest growing cities in the country. The Dallas, Houston, Phoenix, and Austin MSAs ranked first through fourth in terms of the greatest number of new residents between 2019 and 2022. This influx drives business growth for both small and large businesses. Houston just topped the Paychex Small Business Jobs Index for the eighth month in a row, with Phoenix coming in third in the rankings. This kind of robust business growth generally allows us to have multiple options to fill spaces, enabling us to optimally fill centers to maximize foot traffic and take advantage of synergies. We have been positioned almost exclusively within these high growth cities for over a decade, and we continue to see strong benefits. The second key trend we are seeing right now is a lack of supply. Acquiring new centers in our markets in the right neighborhoods is extremely challenging. This is both because of limited existing product and because higher interest rates and a focus on other sectors are shutting off the valve for new retail center development. We have now delivered five consecutive quarters of combined GAAP leasing spreads in excess of 17%, and we're seeing no evidence of a pickup in the construction pipeline that would dampen the current environment. Despite this supply trend, we recently found two great additions to our portfolio with our Lake Woodlands acquisitions at the end of last year and our second quarter acquisition of Arcadia. We continue to upgrade the quality of our portfolio, trading out a number of properties with lower ABR where we felt additional value gains were limited in order to make these acquisitions. Our leasing team has already produced fantastic results for the first two quarters we've owned the Lake Woodlands property, and we're similarly excited about our Arcadia acquisition. We may have some additional activity on the acquisition and disposition front during the second half of 2023, and we anticipate we'll roughly balance the two in terms of financing the acquisitions. Now let me address the legal expenses included in our second quarter results. In late 2021, Pillarstone Capital REIT, the general partner of our joint venture in which we have an ownership interest of approximately 81% in real estate assets, filed a poison pill solely to frustrate our contractual rights to redeem and monetize our investment. Our former CEO beneficially owns 64.3% of Pillarstone Capital REIT. Whitestone initiated a Delaware lawsuit in mid-2022 asking the court to declare the poison pill unenforceable and to permit Whitestone to redeem and monetize its investment. Whitestone seeks an award of monetary damages of approximately $60 million, including the amount that the general partner's misconduct precluded Whitestone from receiving in or around December of 2021, and pre- and post-judgment interest at a statutory rate. The Delaware trial on removing the poison pill was held just over two weeks ago and went very well. We remain confident the court will support our position. While timing is difficult to predict in these types of legal matters, we anticipate a decision before the end of the year. The original intent of Pillarstone was a vehicle to monetize these non-core assets, and we're going to get back to that very shortly. Necessarily, our legal expenses have been significant and unfortunately greater than estimated in our initial guidance. Our legal expenses are included in our G&A expense. Additionally, Pillarstone Capital REIT, the general partner, has communicated that they have or will charge their legal expenses to the partnership, and our pro rata share is reflected in equity in earnings of real estate partnerships. Both charges significantly impacted this quarter's results and full year guidance. Scott will provide greater detail on those numbers in his remarks. As many of you know, we dramatically improved our governance profile over the last year, and we're working hard to advance our environmental objectives with several new initiatives. We'll be rolling out green leases across the board during the third quarter. In addition, we are evaluating the installation of charging stations at a number of our centers, which both attract customers and help facilitate the transition to electric vehicles. Finally, we completed our second GRESB filing in June, which we believe is an important tool for benchmarking our progress versus ESG practices across the wider real estate industry. We believe it's vital to do our part as the world grapples with climate change. My wrap-up comment is very short. The business is firing on all cylinders, and we believe that will become ever more apparent as we get past the litigation noise that is occurring now and will likely last until about year end. And with that, I'll turn the call over to Christine.

Good morning, everyone. On the leasing front, we've had a strong quarter and we are on target to deliver on leasing spreads, occupancy and same-store NOI growth for 2023. Occupancy rose to 93.3%, up 180 basis points from a year ago, achieved by signing the largest volume of leases since the second quarter of last year. Leasing spreads were 18.7% for the quarter, 32.2% on new leases, and 16.2% on renewals. Most importantly, we've hit these numbers by signing tenants that will drive traffic and boost the overall value of our centers. One very interesting trend that we're seeing is a definite uptick in the level of location technology used by retail. For years, we have used Placer.ai and ESRI in order to drive our acquisitions and determine the right merchandising mix to populate our centers. We now have tenants that are using the same technology to find us. This is not only boosting our success in the terms of new tenants, but we believe will also benefit renewals with tenants by attracting more concrete value to the traffic provided by our center. We're continuing to see the shift with neighborhood retail from the mall to smaller spaces, as retail continues to search to be closer to the work-from-home customer. In terms of tenant categories, we are seeing several that have strong success right now. There seems to be a generational movement away from eating off plates and towards consuming out of cups and bowls. This goes well beyond the exciting kava IPO or the fact that Starbucks is in expansion mode. We've got great restaurants like Flower Child and KPOT capturing the phenomenon and expanding franchises like Bluestone Lane and Swig building on America's increasing demand for coffee and caffeine. Bluestone Lane is an Australian cafe and coffee shop that opened five days ago at our Lake Woodlands location, and it's great to see the crowd drawn there for the opening. Swig is where you go if you want a beverage, with options for sugar and caffeine, and they're rapidly expanding to the delight of amateur mixologists. We've just signed a ground lease with Swig for a pad at our Keller Center in Fort Worth. In fact, Swig is one of three pads we've carved out that will help drive revenues in 2024. Pad creation is a fantastic way to enhance our revenue and is very in demand. We anticipate about $300,000 per year in additional revenues from the three pad leases we just signed and anticipate we'll be able to complete about the same number of pads each year for the foreseeable future. Starbucks just signed a long-term lease for a pad we've created at Lakeside Market in Plano, Texas. We bought the center in 2021 at just over 80% occupancy. Now we've reached 92% occupancy and we're creating additional value with the pad sites. Green Street recently scored our portfolio with an initial TAP score of 78 for the portfolio, placing us within the top third of our peer set, as shown in Slide 6 of our earnings presentation. Green Street's TAP or Trade Area Power Score combines income, population, education, and cost of living to create a common metric to gauge real estate demand for neighborhood centers across the U.S. We believe this is an excellent reflection of the strength we have in our markets. Although we also believe that Texas and Arizona will continue to outshine the coastal markets and improve our relative ranking. Phoenix is our largest market and led the way to leasing in the last quarter. Manufacturing in the city is already booming prior to the White House designating Phoenix as one of five workforce hubs in May. The White House made this designation as per the release because Phoenix is a growing hub for semiconductor manufacturing, optical tables, and critical minerals and battery manufacturing efforts. We believe this will benefit our centers in Phoenix and Scottsdale. I'll wrap up by saying the team is energized for a strong second half of 2023 as we continue to work to improve the lives of others by meeting the community needs of connection, convenience, and commerce.

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 produce sector-leading full-year same-store NOI growth in 2023. Our second quarter FFO per share was significantly impacted by legal expenses related to Pillarstone and our former CEO, so let me take a minute to provide detail on this subject. Contained within our G&A for the quarter is $0.02 of legal expenses incurred by Whitestone related to litigation with Pillarstone and our former CEO. We also estimated $0.02 of litigation expense incurred by Pillarstone Capital REIT, which they have communicated they will charge to the partnership. While we do not believe that their trial expenses related to this litigation are reimbursable by the partnership, and while these amounts are a part of our damages claim in Delaware, GAAP accounting requires that we accrue these amounts. Any recovery of these amounts by Whitestone will ultimately be reflected when received, and there is no current cash impact to Whitestone from litigation expenses incurred by Pillarstone Capital REIT. As a result of these legal expenses, we are reducing our 2023 full-year FFO per share guidance range by $0.05. Looking forward, there are a number of positives for 2024. As analysts look at Slide 10 and begin to think about 2024, let me provide a few thoughts. First, we are anticipating $0.08 from litigation in 2023 related to Pillarstone and the former CEO. This should allow us to improve G&A in 2024. Second, we expect to record a gain if and when we redeem our Pillarstone OP units, and when we do, the activity in the earnings and equity line should end. Our equity and earnings are projected to decrease FFO per share by $0.03 in 2023. Third, once we are able to monetize our Pillarstone OP units, the cash will be meaningful and significantly reduce our total debt and related interest expense. While we anticipate monetizing the OP units during 2024, we cannot yet estimate the timing and hope to have greater clarity on the timing later this year. Fourth, we expect interest expense to be somewhere between a minor negative and a positive in 2024. The reason for the $0.11 negative impact this year was mostly from renewing our credit facility. We currently have 84% of our debt fixed, so any move up in rates will likely have a modest impact. Finally, I'll mention that all of the drivers that Dave and Christine discussed are expected to result in a continuation of our same-store NOI growth and its contribution to FFO per share growth in 2024. The entire management team has a clear vision and a path forward to create shareholder value. We are eager to hit the upcoming milestones and will update investors as we do so. 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 is from Mitch Germain with JMP Securities. Please proceed.

Can I talk a little bit about the legal costs, if I might? I guess my first question is, is it $0.03 or $0.04? Because I think, Scott, in your comments, you talked about $0.02 in G&A, $0.02 in Pillarstone, but I think the press release talks about $0.03. So I'm just trying to understand what was the impact on the quarter?

The impact on the quarter versus the guidance was $0.01 and we had $0.02 of impact on the quarter from the Pillarstone equity line. Overall for the quarter we had $0.02 of legal expenses, but we had $0.01 in the guidance, if that makes any sense.

Okay. You had $0.01 in guidance, so in G&A you had an extra penny. And then in Pillarstone you're estimating $0.02, so net-net $0.03 of charges that were not initially guided by you. Is that the way to think about it?

That's right for the second quarter.

Okay. And I guess the Pillarstone charges to you is a little bit probably new versus what you may have been thinking about previously, but if you saw any momentum or shift in terms of how the process would've played out, why not take a bit of a conservative view to start with rather than come up with a little bit of a surprise here?

Sure. Hey Mitch, it's Dave. I'll take that one and Scott may add to it. I think part of the frustration has been Pillarstone has not provided financial information as they're required per the contract as well. So, we're doing our best, I think Scott and the team are doing our best to estimate and understand the numbers, but a little bit of a surprise in that they notified us during the quarter of those expenses that had not previously been notified.

So, any previous charges of litigation are not in your numbers before and now they're there in the Pillarstone side. Is that the way to think about it?

We learned that the general partner was billing the partnership in the second quarter, and until then, we had no reason to think otherwise. The trial actually took place in July, so the second quarter will likely show significant litigation expenses.

But from a modeling perspective, expect litigation expenses, I guess you talked about $0.08 in the year and it seems like this quarter had four. Just remind me how much was in 1Q and then how much you're estimating for the rest of the year.

So for Whitestone, we're estimating $3.9 million of legal expense for the entire year, with the difference between that and what we had already baked into the guidance being $0.02 for the full year. So, $0.01 versus guidance for the balance of the year on the Whitestone side and then on the Pillarstone side, we're estimating two additional cents of impact for the balance of the year. If you refer to the press release in the guidance table, you'll see a breakdown indicating that G&A is up by approximately a million from initial guidance, which is related to litigation. Additionally, there's a deficit in earnings that is also connected to litigation. We have provided the details in the guidance table.

Two more questions from me. What was the occupancy lift from the acquisition? Did that have any impact on the quarter?

It didn't really, I mean, to be honest, I don't know the number, but I think it was such a small part of the whole number. I don't believe it had an impact on it. I can follow up and clarify, that's pretty easy to do. But I think, really we were pleased with our leasing activity. I think if you look at the leasing activity, Christine can clear it up. I think the new leases were the highest we've had in a period of time as far as activity, so had a really good solid leasing quarter with occupancy increasing. I think our AVR is moving in the right direction about 5% as well over the year.

But you're saying the financial impact of that leasing is probably not going to hit until the back part of the year? Is that the way to think about it?

Yes, Mitch, it's Scott. We're expecting the third and fourth quarters to have around 5% same-store growth each Q3 and Q4. So, the differences there are just the lease up. We've got some lease incentives that are going to be rolling off from earlier leases in the third and fourth quarters, and just continued strong leasing activity.

And last one from me. Were there any asset sales in the quarter? Seemed like you booked some gains and the number of assets are down. So?

We sold two small assets in Houston called Sunridge in West Chase, recording about a $9 million gain, and those were actually sold on June 30. So, the proceeds from the sales of those two assets were actually used to pay down the credit facility in July by $14 million.

And I think we provide some details as to the cap rates on those in our earnings material in our deck. So, I think there's a slide that shows acquisitions and dispositions. We're continuing to recycle, like we've talked about. I think we also said we will have a few more coming throughout the year. But all-in-all, we're balancing that this year and we're doing that in a manner that's accretive from a cap rates standpoint. And then, obviously, more importantly, we are buying assets we think we can add value to. Just one more time on the debt side, Mitch, we ended the quarter with about $650 million of debt, and we took the proceeds from those sales, $14 million, and paid down the $650 million in July.

Thank you. Our next question is from Craig Kucera with B. Riley Securities. Please proceed.

I've got a couple on the lawsuits and then we'll move on to the business. I guess, first, it looks like there was a countersuit filed last September against Whitestone by Pillarstone regarding breach of agreement fiduciary duty. Is that suit a component of kind of what you're referencing the poison pill as far as your G&A expense expectations?

Thank you for the question, Craig. I'll keep it brief. In our year-end letter from last year, we outlined the three lawsuits we are involved in. The primary concern for us is monetizing our joint venture investment, which has been stagnant on our books and not yielding returns for our shareholders. There are three legal matters to note. The first pertains to our efforts to monetize our joint venture investment with Pillarstone, which is primarily owned (65%) by our former CEO. The second involves a lawsuit from our former CEO claiming breach of employment contract. Lastly, there is a minor lawsuit concerning the management agreement transfer, although the details of that claim are unclear. Ultimately, for the benefit of our shareholders, the key litigation focuses on unlocking the value of the joint venture, and we are making progress in that area.

Okay. Got it. And you're seeking, I believe, about $51 million plus interest in damages. Is that approaching your share of what you believe to be the fair market value of the assets? Or how are you coming to that number?

Yes. Our damages expert assessed the real estate value as of December 2021, which is when we believe our rights were hindered. This forms the basis of our damages claim. Ultimately, we plan to liquidate the assets to realize their value at that time. We believe this figure accurately represents the asset value, which is currently listed on our books at approximately $34 million. Therefore, we are confident that the proceeds will exceed our book value.

Okay. Got it. And I will circle back to the guidance. It looks like based on your net income guidance, there may be some additional gains. Can you talk about what your capital recycling expectations are for this year baked into the guidance?

So what we've got in the guidance now is just the actual gain of $9.6 million that we realized in June. And then I think, Dave, you want to talk about the second half of the recycling?

Sure. Just in summary, we've got about $50 million of dispositions and acquisitions expected for the year. I think we closed our Arcadia in the first half of the year, which is about half of that number on the acquisition side. And then on the disposition side, Scott mentioned, we closed on two assets near the end of June. We have a few others planned, so we anticipate about $50 million in total for the year. I think for the first half of the year, we've done roughly $25 million in acquisitions and $13 million or $14 million in dispositions. But at the end of the year, we expect all that to balance out.

Got it. And just last one for me. I was just going to ask on the transaction market. Last quarter, you had mentioned that it seems pretty shallow, but you were able to execute both some sales and a purchase here this quarter. What are your current thoughts on the market? Are you seeing any deepening?

Thanks, Craig. Yes, we're seeing that while some fundamentals are supporting our organic business, they're not as beneficial for the transaction business. Supply remains tight, and demand continues to be robust. We're being selective in refining and enhancing our portfolio and on the lookout for opportunities, similar to our peers who expect similar developments. Currently, we're focusing on strengthening our business and have noted a considerable gap between private and public pricing. We're monitoring this and aiming to fortify our position to be ready for any arising opportunities.

As there are no further questions at this time, I would like to turn the floor back over to Mr. Dave Holeman for closing comments.

Thank you, operator. Thanks to everyone for joining today's call. As we've said, we continue to be very optimistic about the fundamental trends of our business, which are really going very well. We anticipate a strong finish to 2023 and are excited about the future. Thank you again for joining us today. If there's anything we can do to help, please reach out. Thank you.

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