Ladies and gentlemen, good morning and welcome to the Whitestone REIT Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Mordy, Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining Whitestone REIT's third quarter 2023 earnings conference call. On today's call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, Chief Operating Officer; and Scott Hogan, Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors. Please refer to the company's earnings news release and filings with the SEC, including Whitestone's most recent Form 10-Q and 10-K for a detailed discussion of these factors. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, November 1, 2023. The company undertakes no obligation to update this information. Whitestone's third quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section. We published third quarter 2023 slides on our website yesterday afternoon, which highlight topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

Thank you, David. Good morning, and thank you for joining Whitestone's third-quarter 2023 earnings conference call. We had another very strong quarter with combined straight-line leasing spreads of 24.4% and combined cash basis leasing spreads of 10.5%. Same-store net operating income increased 4.9% versus the third quarter of last year, and this now marks six consecutive quarters of straight-line leasing spreads in excess of 17%. We're extremely proud of this accomplishment, which highlights the strength of our high-quality portfolio. Consistently strong leasing spreads and same-store NOI growth are not only our recent past but they're the heart of our plan going forward. We've corrected a lot of things over the last 1.5 years from listening and responding to shareholders to improving our governance and balance sheet. As I look forward, the road ahead comprises continued excellence in execution, successfully ending the litigation we have with our former CEO and proving our thesis that active management focused on targeted strong geographies, smaller spaces, and strong tenants can outperform the sector. The path ahead includes significantly lower G&A levels, strong leasing spreads, best-in-class same-store growth, and eventually opportunities to scale our platform through disciplined accretive acquisitions. Our passion and our strategy over the next 5 years is to prove that by focusing on quality of revenue, we can operate neighborhood centers that will deliver consistently strong leasing spreads and NOI growth. Investors should expect earnings growth, and they should expect dividends to grow with earnings. Investors may be able to look at our recent performance, our assets, and market dynamics and see a lot of promise for Whitestone. However, it is management's plan to add a longer track record in terms of consistently delivering improved performance. I'll have Christine delve more into how we accomplish this, but let me review the quarterly numbers first. Revenue grew 4.9% from the third quarter of 2022. Funds from operations per share were $0.23, down from $0.24 a year ago. The decrease was primarily the result of higher interest and legal expenses, significantly offset by increased property net operating income. Our total occupancy was 92.7%, up 20 basis points from the third quarter of last year. And we're reiterating our 93.5% to 94.5% occupancy guidance for the year. We've got a number of leases we expect to commence in the fourth quarter as our leasing team continues to see strong demand for our smaller spaces. And as of the end of the third quarter, our net effective annual base rent per square foot was $22.82, up 5% from a year ago. Investors may have noticed that some of the themes that are core to who we are are now being echoed across the sector. The strength of the Sunbelt, the idea that restaurants can be extremely valuable anchors, the strong demand for smaller spaces, the use of technology like Esri and Placer.ai, and the supply shortage, especially when looking specifically at neighborhood centers, are all themes being discussed by many of our peers. These ideas aren't new to us; they've driven our acquisition strategy and are key elements in how our leasing team operates. So now the onus is on us to show that Whitestone's strong position with these drivers translates into outperformance. Whitestone continues to be well prepared for either a higher inflationary environment or a harder landing. Our shorter lease structure allows us to better share in the success of our tenants and increase rates during inflationary periods. In terms of a harder landing, although there isn't much evidence of downside yet, we are starting to see that higher interest rates are causing problems backed by private equity. Fortunately, a very low percentage of our tenant base is funded by private equity or impacted by troubles there. Our tenants can often fund operations out of cash and generally have very low working capital requirements as they're service-oriented rather than being focused on hard and soft goods. We also believe that the shorter leases with less restrictive structures and our constant review of tenant strength allow us to stay ahead of the changes in the retail space, strengthening our position if there is a harder landing. There has been an industry shift towards a higher recognition of the value of small space locally connected tenants. We've embraced this view for many years, and these tenants allowed us to perform very well during the pandemic. In summary, we've consistently delivered over the last 1.5 years, and we look forward to building on that track record. Looking ahead, I wouldn't trade our position with anyone else in the industry. One final note, last quarter I mentioned that we were evaluating the installation of charging stations at several of our centers. I am pleased to report that we've signed an agreement with Tesla to build stations at our Whole Foods-anchored Boulevard location in Houston, and we expect to continue to explore additional locations within our portfolio. We believe this will help drive traffic at Boulevard, and we're excited to be part of the solution for the transition to electric vehicles. Christine?

Good morning, everyone. On the leasing front, we performed very well in the quarter and we are on target to deliver strong leasing spreads, occupancy increases, and top of sector same-store NOI growth for 2023. Occupancy rose to 92.7%, up 20 basis points from a year ago. Occupancy for 10,000 square foot plus spaces came in at 96% and our higher ABR smaller spaces came in at 90.8%. Leasing spreads were 24.4% for the quarter, with 23.6% on new leases and 24.6% on renewals. One particular area of success we're seeing lately is in multiuse centers. Last week, we signed a renewal agreement with our second largest tenant, Frost Bank, at our Boulevard location in Houston. The center is anchored by Whole Foods and has great restaurants with North Italia, Ninfa's, True Food Kitchen, and Dough Zone. This isn't limited to Boulevard or long-standing tenants. 100% Chiropractic has located their offices to Market Street in Scottsdale. We've also utilized less visible space there for CUBEXEC, which provides collaborative office space for individuals and small businesses. The work-from-home movement is definitely creating a shift away from office spaces towards well-located neighborhood centers packed with great restaurant amenities and service providers offering workspaces that are preferable to home where Zoom calls often compete with the spouse's call or the dog barking in the background. The key to achieving these leasing spreads is to continue successfully serving the community. This is a little like building a top-notch sports team. This includes remerchandising efforts that we focused on this year to strengthen the quality of our revenue. We recognize that having one superstar is not the best formula for a winning center, and we strive to have solid contributors in every position within the center. Just like athletes on a sports team, strong tenants can build off each other's success and contribute to the overall value of the center. Accordingly, our leasing agents need expertise in two core areas: first, determining the right category of tenant for a space within a center. Using Esri and Placer.ai, our leasing agents at Whitestone learn the customer needs and aspirations of a specific neighborhood and understand the customer traffic patterns within a center and the surrounding areas. We also use void analysis and leakage to discover the opportunities to merchandise to a specific community. Secondly, our leasing agents are experts in evaluating businesses. There's much more than just evaluating credit or obtaining a personal guarantee; we look at a business owner's track record, their ability to scale resources, and their commitment to the business, along with their assessment of the market and overall plan for growth. Generally, our businesses have a track record of opening at least three locations, providing us very good insight into their business. Our team leads our talent scouts and ensures our centers are designed for success and have the technology to effectively manage in their methodology. They not only update management on deal status but also frequently update on the overall performance of the center and their plans for ensuring continued success. Adherence to this planned and holistic approach, focusing on long-term traffic drivers rather than quick wins, has allowed our occupancy to reach new heights over the last 1.5 years since the management change in early 2022. Given our four-year average lease length, we believe we have more opportunities to strengthen our tenant base; however, it will take time to continually improve the traffic drivers populating our centers. We are fortunate in terms of our options going forward. If the acquisition market opens, we know how to find and add the right centers to our portfolio in a disciplined manner. However, the supply continues to be severely constrained, which leads us to believe that we can add the best-in-class operational expertise to deliver peer-leading organic growth. Looking at the supply and demand balance, very little supply of neighborhood retail centers is coming online due to higher interest rates and building costs. Simultaneously, migration is clearly driving demand in our markets. According to the National Association of Realtors, Austin's median home price is just under $500,000, while San Francisco's median home price is over $1.3 million. With higher interest rates making housing affordability ever more challenging, this reality will continue to drive migration to the cities where we're located. The pace of migration likely won't slow unless affordability improves between major metropolitan areas. Whether you're considering the benefit of continued migration or increasing real estate values, we believe we are well positioned in markets with high job growth. Some of you may have noticed in our October 10 press release about Social Motion, a local charity serving children, teens, and young adults with autism, ADHD, social anxiety, and similar special needs. We've been strong supporters of Social Motion for over a decade, and we're thrilled to encourage others to join and support the group. Details on supporting them can be found in the press release on our website. With that, I'll turn it over to Scott to discuss our financials.

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

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

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

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

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

The changes in the over 10,000 square feet are primarily driven by Bed Bath & Beyond, but there are also changes in the under 10,000 square feet. Essentially, you are suggesting that some of these changes are due to non-renewals intended to enhance tenant quality. Is that the correct way to interpret this?

Yes, that's correct.

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

Not yet. The only thing that we have seen is that we've alluded to previously that businesses with high leverage within the private equity sector are the ones we've had a little bit of concern over. Quite frankly, we've always been very mindful of whom we lease to, ensuring that that type of funding is part of their capital stack. So we don't have many of those types of tenants, but it's something that we are keeping an eye on.

Okay. And 40,000 square feet of positive absorption is needed just to reach the low end of your guidance range, and you are comfortable with that number at this point.

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

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

And I'd like to add one more thing too, Mitch. If you really go back over entrepreneur-growing businesses, they have encountered severe shocks over the last 10-20 years, mainly due to the financial crisis and then COVID. Most of the businesses that we work with grow organically. So it's a little different. They're not leveraged the same way because they can't achieve the same opportunities for that type of leverage. This has always played well in our space.

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

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

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

First of all, I don't think we were too quick. The acquisition we made this year was a great acquisition of the portfolio. We are match funding. If you look at a little overlap year-to-year, if you consider last year, '21, '23 together, I think we're close to match funding and we continue to expect to match fund. There are a few more dispositions to come in, and we'll fund that with proceeds from sales. So great asset. I think there's a slide in our investor deck that highlights the metrics on the assets we've sold versus those we've bought. We have continued to buy properties with more of the demand drivers that Christine discussed in a lot of our remarks. We have been able to sell at accretive cap rates. It's just a shallower market now, and it's a bit tougher. But we do expect to match fund our dispositions and acquisitions, and if you look at the two years combined, they're probably close, and we're syncing up shortly.

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

Mitch, Dave again. Yes, as you mentioned, really a couple of matters: the ex-CEO termination for cause lawsuit and our attempt to receive fair value for our equity investment. It is difficult to give a lot of detailed talk on litigation. What I will say is both of the cases are nearing the end. We feel very good about our position. I think we've discussed the legal expenses and the underperforming JV their effect on this year's numbers. We feel very good going forward; those will soon be out of the story. There is some noise from that, but I think we're in a good spot, and we believe we are very close to the end.

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

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

Absolutely. Thanks, Michael. In our G&A this year, it's about $4.2 million, basically in legal expenses related to the two litigation matters. That will go away. It’s hard to present an exact timing, but that alone represents a significant decrease in our G&A. I'll also remind you that in early 2022, we made the leadership change and took several steps to cut significant costs out of our G&A structure at that time, largely by resetting executive compensation. So a couple of steps: we reduced our G&A in early 2022, and we expect when we conclude our litigation to have a much lower G&A number as well. We've also really worked on efficiencies. I think Christine has discussed execution. We’re clearer with our team on goals and accountability. As a result, we run leaner today; our headcount is in the mid-70s, whereas a couple of years ago, that was closer to 110 employees. We've streamlined the business and become much more productive in our execution. If you look at the results, we're laying down a good track record, and frankly, we're doing that in a more efficient way. The future is bright because some noise in the G&A number will go away.

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

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

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