Ladies and gentlemen, good morning and welcome to the Whitestone REIT Second Quarter 2024 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, and thank you for joining Whitestone REIT's second quarter 2024 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, August 1, 2024. The company undertakes no obligation to update this information. Whitestone's second 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 2024 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 second quarter 2024 earnings conference call. We had another very strong quarter. Extending out to nine quarters, we have now had over 17% leasing spreads. Beyond the very strong supply and demand fundamentals underpinning our business, our strategy and our focus on operations are driving strong same-store net operating income growth, which is the key to our long-term earnings growth. We reiterated our 2024 core FFO guidance of $0.98 to $1.04 this morning and delivered core FFO per share of $0.24 for the quarter. We remain on track with our internal forecasts for the year. In the second quarter, we signed new and renewal leases at a blended 17.5% increase over the prior leases on a straight line basis and a 7.7% increase on a cash basis. We grew our top line revenue by over 3.3%, producing 6.6% growth in same-store NOI and achieving core FFO per share of $0.24. We continued to strengthen our balance sheet with a debt to EBITDA ratio at 8 times. Excluding the proxy contest fees in the quarter, our debt to EBITDA ratio was 7.5x, an improvement of 0.8 times from a year ago. Our occupancy was 93.5% at the end of the quarter, up 20 basis points from a year ago, and our net effective annual base rent per square foot was $24, up 5.4% from 2023. We recently took a harder look at some of our key differentiators in terms of our ability to drive growth, and I wanted to share some of those with you this morning. These key differentiators allow us to focus our acquisition efforts where we can drive results quickly once we take possession of a property. We assess demand growth drivers in the neighborhood anchoring the property and determine if our team will be able to improve the alignment of tenants with the surrounding demand. Our leasing team's strength is placing high-growth tenants in centers with 1,500 to 3,000 square foot spaces. We have long believed that neighborhood and community centers correctly configured with the right mix of 1,500 to 3,000 square foot spaces will outperform larger box centers. This belief is being proven by both national data and by Whitestone's numbers. According to a recent report, neighborhood and community centers grew year-over-year asking rents by 4.6% compared to 0.1% for power centers. It is no surprise that our higher mix of neighborhood and community centers has allowed us to outperform the peer group's same-store net operating income growth, averaging 65 basis points over the last years of outperformance versus the group. Turning to slide 5, you'll see this outperformance is even more impressive, given the amount of capital we are required to drive these results. Because we acquire correctly configured centers, our redevelopment capital is generally not spent on reconfiguring a center, but rather on areas that drive income. Another key differentiator in terms of driving results is our tenant base. We have over 1,400 tenants that are selected by a leasing team trained to find tenants capable of growing, driving traffic, and allowing us to push our same-store net operating income higher. It is because of these differentiators that we believe we should trade at a more attractive cap rate than most of our peers in the retail sector. We are pleased with the progress we have made in terms of market valuation, and we believe there is more runway ahead for us as we continue to drive results via these key differentiators. The differentiators become more and more apparent as we consistently drive results, and our success is built on a solid strategy and the ability of our leasing, property management, and acquisition teams to execute. On the governance front, we continue to make improvements as we recently announced our intent to strengthen and refresh our board of trustees by adding two new, experienced, and independent board members who will replace David Taylor and Nandita Berry upon appointment to our board. We will share more with investors as we move through this process, and I'm very thankful to David and Nandita for their efforts in leading the company's leadership changes in early 2022, for their ongoing commitment to do the right thing for shareholders, and for their strong support of our board refreshment initiative. They have served investors well for the last seven years, and we are a much better company as a result of their efforts. I'd also like to thank Amy Feng for stepping up as our new independent chair and for Julia Buthman assuming the chair of our nominating and governance committee, leading our board member search efforts. Both Amy and Julia have a strong commitment to grow shareholder value and bring a wealth of valuable experience to our team. We look forward to attending the Bank of America Conference in September, and for those of you attending the conference, we hope you'll find time to meet with Whitestone there. And with that, I'll turn the call over to Christine.

Good morning, everyone. As Dave mentioned, we remain confident in terms of achieving our 2024 objectives and are on track with our internal monthly and quarterly goals. Occupancy remains high at 93.5%, up 20 basis points from a year ago. Anchor occupancy was 97%, and smaller space occupancy was 91.4%. We achieved renewal leasing spreads of 13.9% and new leasing spreads of 33.3%, for a combined overall positive leasing spread of 17.5% in the quarter. Our drive to remerchandise continues unabated, and it's one of the primary reasons behind our delivering 6.6% same-store NOI this quarter. Rather than viewing our record occupancy percentage as simply an indication of the general strength of the business, we view it as an imperative to continue remerchandising. We are continually advancing our quality of revenue initiative, replacing tenants that aren't tracking increased demand from the newer, younger demographic and properly serving the neighborhood. The leasing team is continually challenged to understand existing and prospective tenants' business plans, focusing on understanding how businesses make money and how they plan to capture demand growth in the surrounding neighborhood. This remerchandising effort extends well beyond larger remerchandising initiatives that we talked about in the past. The younger demographic is spending far more on their pets, and we've matched that offering with City Vet at Quinlan Crossing in Austin, Central Bark at Paradise Plaza, and K9 Creed, both in Arizona. As part of our local franchises, K9 Creed was named the small business of the year by the local chamber of commerce, opening their second location at the Promenade at Fulton. We celebrate our local entrepreneurs and welcome the opportunity to participate in their success. We're also seeing the younger generation spending significantly more on self-care and well-being – massage, yoga, beauty products, Pilates, and more. One of the reasons these businesses are often well tied into the local demand is that they have a millennial or Gen Z operator managing their locations, bringing in more sophisticated marketing techniques and the ability to meet demand with lower capital outlays. We've recently brought in The NOW Massage at Lakeside Market in Dallas, a perfect example of this. They have done a fantastic job creating a natural Zen environment for their customers while importantly reducing costs by dividing the space differently than used to be done in the past, using curtains rather than walls. They are often examples of newer operators with strong long-term business plans that know how to develop and use their capital to make money. Week in and week out, we constantly have our leasing team sharing their successes with one another. This is leveraging each other's talents and experiences, not confined to how the team finds new prospects. They share their experiences in technology and the tools they utilize to assess neighborhood demand and evaluate businesses and lessons learned from centers that are evolving. Over the last few years, we've seen a number of competitors brand themselves with a grocery anchor or a Sunbelt sticker. We believe it's critical for investors to understand that the growth model we build requires far more than shifting an acquisition strategy to draw investors' attention. The centers we've acquired are well positioned to capture neighborhood demands, and they're configured correctly to attract high-growth, service-oriented businesses. However, the leasing team's expertise is the reason we're able to properly curate centers, and it’s essential to understand how interdependent our differentiators are and how that allows us to deliver consistent results. I'll also expand on our ability to outperform with less capital. The biggest part of the capital difference is the redevelopment capital. Redevelopment capital is often a critical component of driving results. However, the key is to be tuned into the neighborhood demand, allowing that demand to drive the actions you take. We project demand when we acquire the properties and we continually maintain a pulse on that demand to ensure the center keeps up with it. This is vital for leasing agents to determine the right tenant and for when to apply redevelopment capital. We also factor in the timing of lease expirations in our acquisition analysis and in our application of redevelopment capital. Investors may have seen recent news on Kroger's proposed acquisition of Albertsons stores that may be divested to C&S. We have three Safeway stores on the list: Market Street, Pinnacle of Scottsdale, and Anthem Marketplace in our Phoenix market. We also have two shadow anchored centers, Arcadia Towne Center and Fountain Square, also in our Phoenix market. These are well-performing stores with average grocery sales of approximately $500 per square foot and a three-mile household income of approximately $124,000. If the merger goes through, we believe C&S will be a strong operator. As always, the key is that these centers are well-anchored by surrounding neighborhoods. We'll keep investors updated as we learn more. If we look back over the last ten years, the strongest quarters in terms of total lease value signed were the fourth quarters of 2021, 2022, and 2023. The most recent quarter was the next highest, with nearly $37 million signed in lease value. While this is impressive and certainly a sign that we're on the right track, my biggest reason for wanting to thank the leasing team and operations team for delivering space to tenants is their ability to learn from one another and continually sweat out the details necessary to ensure the long-term success of this business. We've got a busy second half ahead, but we also have the right environment and the right team to deliver. It's my thanks to that team that we've been able to deliver so far.

Thank you, Christine. And good morning. We were pleased to deliver $0.24 of core FFO for the quarter. As Dave and Christine discussed, this was a very strong quarter led by strong leasing efforts. Our original and our current forecast anticipates that we will increase FFO in the second half of the year, especially the fourth quarter, with G&A reductions, percent of sales clauses kicking in more heavily in the fourth quarter, and leasing delivering a fourth quarter similar to the last three years. Pursuant to delivering same-store NOI growth of 6.6% this quarter, we raised the full year same-store NOI guidance range to between 3% and 4.5%, raising it 0.5% both on the bottom and the top end of the range. On the debt side, we financed $56 million of 6.2% secured debt maturing in 2031. Essentially, this was laddering out our secured debt we have coming due in the second half of this year. We will keep an eye on laddering out more of our revolving debt. Currently, we have 13% of our debt on variable rates, and the revolver matures in 2026, not including two six-month extension options. Looking at our core FFO walk on slide 11, we reiterated guidance and updated the forecast in terms of how we get there. Non-same-store NOI growth increased, and, in conjunction, interest expense also increased. We intend to continue balancing our acquisitions and dispositions, and the timing will impact these two contributors. However, to the extent one increases, we should see the other approximately balance it out. Our goal is to make sure that our underlying growth engine becomes more visible to investors. We will do this by eliminating noise and by continuing to drive same-store NOI growth to deliver bottom line growth. With that, we will keep our comments brief today, and I will open the line for questions.

Our first question is from the line of Anthony Hau with Truist Securities.

In the rental trend chart on page 7 in the presentation, rent growth for San Antonio and Austin moderated sharply. And then you see an uptick for Dallas, right? So, just curious, what are you guys seeing on the ground today for those markets?

We're seeing strength in all of our markets, Anthony, still. It's just a matter of what leases are turning when and the size of the space. So, I don't see a real shift in a negative way. In fact, I'm seeing it still continuing on track with where our expectations are, and that's across all markets. Quite frankly, the difficulty is that some of our markets are getting to full occupancy. That's why we've continued to work our remerchandising efforts to strengthen the base of the growth.

You're hearing news that some restaurant owners, like McDonald's, are struggling a little bit. Are there any restaurant tenants that are on your watch list right now?

Not on our watch list right now. What we're finding, and I think this has been talked about quite a bit, is that fast food is starting to meet the same pricing as fast casual. So, people are opting for a choice of sitting down and having a good meal versus what would be something that would be less desirable, like eating a hamburger in the car.

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

It appears, based on your same-store guidance, you're kind of looking at a little bit of a deceleration in the back part of the year. Just talk about kind of what the expectation is there.

This is Scott. We're still looking at sequential same-store growth, but I think that if you were to look at the first half of the year same-store growth and compare that to the second half of the year compared to 2023, the second half will be a little bit lower than the first half of the year was. You may recall in the second half last year, we had a quarter that was a little bit lower. So, that's one reason why we – one reason why the second quarter this year was a little higher.

It's Dave. And as you saw, we did increase our same-store guidance for the year. To Scott's point, I think we're very pleased with the performance, which is a bit above our original guidance. We moved it up on the bottom and top end, and I'm pleased with the performance of the portfolio.

You didn't provide an update on Pillarstone. I know a lot of what's happening there is a little bit out of your control. I know some of this is contemplated in your guidance right now. Anything of note happening there?

Mitch, Dave again. A lot happening. I think we mentioned we're really in the collection phase for our redemption, working our way through that and expecting proceeds as we go through that process. We communicated earlier on that we had about $13 million of expected proceeds in our guidance this year, and there's kind of no change to that. We're working to collect those funds through a disciplined, organized process.

Are assets from the Pillarstone entity for sale?

They are. As part of the bankruptcy, obviously, we're working through a plan of reorganization. Right now, we understand they have about $40 million of contracts in place for three of the assets, and we're obviously working to get all or some of the assets liquidated to meet Whitestone's redemption.

Last from me. Christine, the fourth quarter last year, you had a pretty meaningful increase in occupancy quarter to quarter from 3Q. You're starting at a little bit of a higher point this year, but obviously your comments reference the fact that the back part of the year are the more seasonally active. So where do you think is a comfortable occupancy level for this portfolio to start to perform a little more consistently?

Like I said, there's an active remerchandising effort because I think there is profitability to be achieved with that. We're still looking at 93.8 to 94.8. But I'm quite confident that we can get this portfolio in a good place by the end of the year.

Our next question is from the line of Gaurav Mehta with Alliance Global Partners.

I wanted to ask you about your G&A guidance. For the second half of 2024, does your guidance include any non-recurring items within the G&A?

In the first half of the year, we had proxy defense costs of around $1.8 million. That's the majority of the increase in G&A. In the second half, we expect to be a little more normal. Some of the legal fees were front-loaded into the first half of the year associated with the bankruptcy and other legal matters. So, we do expect a more normalized G&A in the second half of the year.

Second question I had was on the real estate property taxes, which were lower in the second quarter. How should we expect about real estate property taxes for the second half of 2024?

In the State of Texas, there's a long process to dispute and litigate property taxes, and you often get tax refunds. You don't know when you'll get those. We had a few more tax refunds in the second quarter than we normally would, so I would expect property taxes to normalize and be closer to where we were in the first quarter for the second half of the year. The reason the second quarter is so much lower is that we've had a number of favorable settlements on properties in Texas.

Maybe lastly on the transactions, I think on the last call, you had talked about maybe selling $25 million of properties in the second quarter. Was there any update on those expected dispositions?

It's Dave. Yes, our recycling efforts are on track. I think in the second quarter, we closed on a couple of acquisitions, and I think we closed on one disposition right before the second quarter. We do have a couple of assets still in the pipeline to close in the balance of the year. We've done about $100 million in acquisitions over the last couple of years and $85 million of dispositions. Our plan is to continue balancing those. We probably have another $20 million to $30 million of dispositions coming in the balance of the year, and those are going well. We're continuing to buy assets where we think there's significantly more upside and an initial day one spread as well.

Our next question is from the line of John Massocca with B. Riley Securities.

I'm sorry if I missed this earlier in the call, but I'm splitting hairs a little bit. But the interest expense expectation increased versus prior guidance; what's the driver of that? Is it anything to do with disposition timing versus what your expectations were last quarter, or was it just execution on the mortgage you recently did? Just trying to get a little color on the change in that guidance outlook?

No, the majority of the increase in the interest expense guidance is just we have a recycling plan where the plan is to be capital neutral. But in the first half of the year and a little bit into the second half of the year, the acquisitions are outpacing the dispositions. With that, you have a little bit higher NOI and a little bit higher interest expense. The bottom line impact to FFO is going to be virtually nothing. Maybe $20 million to $25 million would be the amount that we're ahead on acquisitions versus dispositions for the year.

In the guidance last quarter on Q1, was the anticipation that there would have been earlier timing on dispositions then?

Yes. It's difficult to predict the dates of these things.

And I guess what kind of is being assumed from a variable interest expense perspective, just given all the volatility we're seeing, I don't know when that was determined. It seems like any given week that can be very different. Just kind of interested in the timeframe of when you set that element of the interest expense expectation.

Well, we're down to 13% variable interest rate as of the end of the quarter, the second quarter, and we look at the – we take a look at the one-month SOFR curve going out through the end of the year. High 6s, low 7s would be the range we are looking at for the balance of the year, at least in this quarter's forecast.

Switching gears to kind of operational stuff, I know there's been a lot of talk on calls over the last couple of quarters about the impact of higher interest rates on kind of low-income consumers versus high-income consumers. As you look at your portfolio, to the extent you have exposure to those different income buckets, are you seeing any difference in terms of your ability to push rent at properties that are maybe a little closer to lower-income consumers versus higher-income consumers? And does that shape how you're thinking about your capital recycling plan?

It's a good question. I think a couple of things. That's why we've positioned most of our acquisitions and our properties in high household incomes and in those higher incomes where we see growth opportunities come from job growth. We've been very fortunate to see the upside of that growth as well with those incomes. Truly, this has been concerning to see what's happening with lower-income consumers. We don't have a lot of exposure there. Where we do on some of those properties, they're still not really on the lower end. They're about mid-range. Again, I haven't seen anything as of yet. But that being said, you feel bad for what's happening to these people, and it's very unfortunate. Hopefully, things will balance out towards the end of the year for everybody in a good way. But, like I said, we don't have a lot of exposure in that area. In fact, it's minimal.

So, as you look at kind of capital recycling, is the thought process to continue to move up that household income curve?

John, it's Dave. It is. Part of our recycling is just – the biggest part is the ability to add value through the new acquisition. We've recycled with a bit higher household incomes as well as higher annual base rents. So, we will continue to focus on where we think the greatest opportunity is.

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

Thank you. Thanks, everyone, for joining us this morning. At Whitestone, we're pleased with our progress in the second quarter and really look forward to performing for the balance of the year. We will be out among investors in the fall and would love to interact with any of you that would like to. So please reach out to us. And have a great day.

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