Earnings Call Transcript - WSR Q3 2025

Operator, Operator

Greetings, and welcome to the Whitestone REIT Third Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. David Mordy. Please go ahead.

David Mordy, Host

Good morning and thank you for joining Whitestone REIT's Third Quarter 2025 Earnings Conference Call. Joining me on today's call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, President and 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, October 30, 2025. The company undertakes no obligation to update this information. Whitestone's 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 2025 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.

Dave Holeman, CEO

Thanks, David. Good morning, and thanks again for joining our call. We've got a number of great things to discuss this quarter, so I'll start with some highlights for the quarter and our overall achievements. We hit 94.2% occupancy this quarter, up 30 basis points from Q2. This is near record occupancy, and given that the fourth quarter is typically our strongest leasing quarter, we're set up for a very strong finish to the year. We delivered 4.8% same-store net operating income growth for the quarter, again, fueled by increases across the spectrum of shop space leases, various tenant types in both Texas and Arizona. The quality of our portfolio continues to be recognized by third parties as Green Street has now increased our TAP score by 5 points since they started scoring our portfolio 2.5 years ago. In that time, the 5-point increase leads the peer group and is a testament to the strength of our acquisitions, our operations, and our recycling efforts, as well as the demographic trajectory of the area surrounding our properties. We extended and improved the terms of our credit facility, locking down one of the key variables for us to achieve our long-term 5% to 7% core FFO per share growth target. Scott will provide greater detail on our debt metrics in his remarks. We're near completion on redevelopment for La Mirada in Scottsdale. We're in full swing on our work at Lion Square in Houston, and we've kicked off redevelopment at Terravita in Scottsdale. We forecast that redevelopment will add up to 1% to Whitestone's same-store NOI growth with a $20 million to $30 million capital spend over the next couple of years, and we're on track to have this initiative deliver in 2026. Our average base rent is now $25.59, an 8.2% increase over the third quarter last year and a 26% increase versus this quarter 4 years ago, translating to a 5.9% compound annual growth rate. Specific to this quarter, we delivered $0.26 in core FFO per share. As a reminder, we typically have a lift of a couple of cents in the fourth quarter versus the third quarter as a result of new lease commencements and percent of sales clauses that trigger as we close out the year. Straight-line leasing spreads were 19.3% for the quarter, our 14th consecutive quarter above 17% on leasing spreads. So those are the recent highlights. Let me go on now to talk a little about what we have planned ahead. Our path forward is clear: deliver on consistent earnings growth, deliver on the targets we've put in front of our investors, and if you have any doubts about our ability to deliver these results and don't see the value of our differentiated business model, come talk to us, dig into our great results, and come see our properties. We know many investors have asked themselves why not Whitestone? How is this small cap delivering growth that's larger than many of our peers? Don't accept a quick inaccurate answer. We'll help you understand the building blocks underpinning our 5% to 7% core FFO growth target and why our cash flows are very durable. Because our success is rooted in operations, we believe investors gain a tremendous amount by seeing our operations. We'll be at REIT World in Dallas this December; we will be showing investors properties on Monday, December 8, and we'll have one-on-ones on Tuesday. We hope you'll be able to join us at this conference. As part of our ongoing asset recycling efforts, we disposed of one property this quarter, Sugar Park Plaza in Houston. Over the last 3 years, we have increased the NOI in this property by 22% by transforming the center into a grocery-anchored center and remerchandising the shop space, and the time was right to sell and deploy the proceeds where we can create greater value over the coming years. This disposition brings our total acquisitions and dispositions over the past 3 years to approximately $150 million. I anticipate we'll have a couple more acquisitions very shortly and should have 1 to 2 dispositions to finish out the year. Our markets are continuing to show significant strength as Texas and Arizona's business-friendly environments and strong demographic trends continue to support demand. Our acquisition team continues to identify neighborhoods with upwardly mobile consumers where our leasing team can have the greatest impact applying our business model. In closing, we remain steadfast in our belief that a company with a well-aligned, forward-thinking team, a well-located portfolio with a concentration of high-value shop space properly anchored to the community can outperform the herd. I look forward to connecting with investors in the months ahead, and I look forward to being able to lay out our 2026 plan on the fourth quarter call. Christine?

Christine C. Mastandrea, President and COO

Good morning, everyone. On the leasing front, we had a strong quarter, and we're accelerating as we close in on year-end. We signed $29.1 million in total lease value with spreads on new leases at 22.5% and renewals at 18.6% for a combined 19.3% on straight-line leasing spreads. Same-store NOI growth was 4.8% for the quarter, allowing us to raise the lower end of the same-store NOI growth target by 50 basis points. Foot traffic across the portfolio was up 4% versus the third quarter of 2024. That's a good indicator we've got in terms of the health of the consumer specific to our footprint and our locations. What we're seeing in terms of successful tenants right now are those that are successfully expanding on their offerings. For restaurants, delivery services have gone from a nice add to a critical component of the business. In addition, we continue to see an expansion of beauty, health, wellness, and fitness, and we see spending on overall health and mental wellness continuing to increase. Understanding these avenues for tenant success is critical for Whitestone to stand out as we curate our centers to meet neighborhood needs. On the redevelopment front, we've completed the facade renovation at La Mirada, which puts us on track to finish this by year-end. At Lion Square, the transformation is about 75% complete. With the redevelopment at Lion Square, the grocery we brought in last year at Sun Wing will expand, creating value by making this grocery-anchored center the heart of Houston's Asia Town. Now we're kicking off the facade work at Terravita, which we talked about on the second earnings call, bringing in the Pickler and ACE Hardware. This will further accelerate the transformation of the center, which is experiencing dynamic growth as a result of TSMC's nearby semiconductor fabrication facility. We also generally move a couple of pads into action each year. This year, we created a pad at Lakeside in Dallas and brought in Central National Bank on that pad. We also signed a tenant for a pad at Scottsdale Commons. As a reminder, we purchased Scottsdale Commons in 2024, so the creation of the new pad represents significant value creation pretty rapidly post-acquisition. We anticipate bringing a couple of additional pads online in 2026 as well. We continue to see pickleball succeed as demand with the younger demographic accelerates. We're looking at bringing pickleball to the roof of Boulevard, which is adding value to an area where we had no income stream for that square footage previously, and we welcome this as an opportunity to add value also for the office community in the area. On the last several calls, we've talked about the intentional design of our business model to benefit from change, both in terms of change allowing us to enhance our growth trajectory and change enabling us to ensure more durable cash flows. A key component of what we do proactively is tracking and understanding consumer behavior and capitalizing on that knowledge. We will see change as the result of three primary forces. First, change is a result of generational shifts as the younger generations step up into new roles, both as consumers and business owners. Second, migratory change as consumers move to more business-friendly areas and take advantage of opportunities there, such as our markets and what we've seen over the last number of years. And third, technological change as both consumers and businesses become more sophisticated in utilizing technology and spending patterns shift accordingly. Both generational change and migratory change show up in the Esri data, heavily used by our acquisitions and leasing teams. Migratory change is a bit slower moving but is also critical for the acquisition team to get it right. The Houston metro area has added nearly 2 million people over the last 15 years, while the Phoenix Metro area has added 1 million residents during that time as well. Ensuring we benefit from this phenomenal growth is very important in terms of Whitestone's success. All three types of change also impact consumer data and traffic data that we follow and Pacer AI. This is critical for leasing but is key in our underwriting process. Our assessment of the business's ability to meet future consumer demands weighs heavily into our decisions to move forward on any lease we sign. For all of our leasing agents, our weekly leasing meetings provide an opportunity to discuss what changes we're seeing as they interact with their neighborhoods and the tools they're using to evaluate those changes around our centers. The biggest takeaway for investors here is that our ability to translate change into a higher same-store NOI growth starts with our assets and our business model, but also relies heavily on technology and ultimately needs to be embedded in our culture and our processes to achieve the results we deliver. We delivered strong finishes in both 2023 and 2024, and the team here is pushing hard to take advantage of the year-end dynamics and close leases. And with that, I turn it over to Scott to cover the financials.

J. Scott Hogan, CFO

Thank you, Christine. This morning, we reiterated our 2025 $1.03 to $1.07 core FFO per share guidance, improved our same-store NOI growth range to 3.5% to 4.5% and reiterated our long-term growth rates. On our leverage metrics, we're making steady progress, and I anticipate our fourth quarter annualized debt-to-EBITDAre ratio will be in the mid to high 6s. The most significant development this quarter on the financial side was our amended and extended credit facility. We accomplished everything we wanted to in large part due to the actions we've taken over the last 3 years. We were able to expand our bank group and improve Whitestone's valuation cap rate to 6.75% because there was wide recognition that we are consistently delivering and have steadily increased the value of our properties through our focused strategy and strong execution. We increased the size of the facility to put Whitestone on par with our size-based peers in terms of available revolver credit capacity, and we expect to continue our debt leverage improvement initiative over the coming quarters and years. We fixed an increased percentage of our overall debt, bringing the weighted average term on all of our debt to 4.3 years and the weighted average rate on our fixed debt to 4.8%. Most importantly, locking down our debt clears the runway for us to focus on executing our plan and delivering core FFO per share growth for shareholders. I will note that included in the quarter is approximately $800,000 of debt extinguishment costs related to our refinancing. We have adjusted for this amount in our core FFO. Our revenue for the quarter was up 6%, and most importantly, the quality of revenue continues to strengthen as evidenced by our improvement in uncollectible accounts and downward revision to our full-year bad debt guidance. Our total headcount is down 6% from a year ago, and we continue to focus on lowering G&A costs as we scale. As a reminder, our dividend is well covered with a healthy payout ratio, and we expect to grow the dividend in sync with earnings growth. And with that, I'll conclude my comments and open the line for questions.

Operator, Operator

Our first question will come from Mitch Garman with JMP Securities.

Unknown Analyst, Analyst

This is Jody on for Mitch. Just a few questions here. The first one being, so the rent expirations in 2026, the average rent is higher than average there. Should we expect similar leasing spreads as in recent quarters? I think it was 17% for the next year or so?

David Holeman, CEO

Thanks, Jody. This is Dave. I'll start out, and Christine may want to add some detail. One of the characteristics of our tenants is that we have a highly diversified tenant base with 1,500 tenants. Therefore, in any given year, there is some variation, but there is nothing out of the ordinary regarding next year's rental rates. We continue to experience very strong leasing demand, and there are no indications of any decline in our leasing spreads. This quarter was excellent. We have consistently seen rates over 17% for many quarters, approximately three years. I'll let Christine share anything she would like to add.

Christine C. Mastandrea, President and COO

We don't see anything distinguishing next year as any different from this past year. We expect that we're going to continue to see the same rate of leasing spreads, if not more, continue because there's just such a demand for retail space.

Unknown Analyst, Analyst

Okay. That's very helpful. Secondly, could you give any more information on the change in occupancy? I think the larger centers increased in occupancy and the smaller ones, occupancy went down. So any more details there?

David Holeman, CEO

It's the same thing that we've been doing in the past couple of years where we're taking some space back. And the purpose for that in the smaller spaces is we see the opportunity for higher revenue and stronger quality tenants that we want to bring in. We have been doing that for the last couple of years, and we continue to do so going forward. So there's been a number of small spaces that we've taken back, and we expect to put to work with a higher income stream based on our leasing efforts. And then we did fill a couple of larger spaces this year. Much of that timing has to do with city approvals and the timing that we can bring that revenue online.

J. Scott Hogan, CFO

Hey, Jody, I might also just remind everyone that we report fully commenced occupancy. I know many of our peers report leased and commenced. Whitestone's 94.2% means tenants are in the space. We're continuing to see good trends in occupancy. I think we were up 30 basis points just over the second quarter. Fourth quarter tends to be a very good time for us. We're excited about finishing out the year strong.

Unknown Analyst, Analyst

Okay. And the last one for me here is if you all have any update on the Pillarstone JV?

David Holeman, CEO

I'm pleased to provide an update, Jody. I want to encourage everyone that we will be filing our 10-Q soon, which will include a detailed account of our recent activities. To summarize, we are nearing completion and are currently in the phase of collecting funds from our partnership. A settlement agreement was recently filed with the court, and we anticipate that it will be approved, leading to a distribution of proceeds. I highly recommend reading the 10-Q when it's available, as it contains all the specifics. In short, we have reached a settlement with the court, and pending its approval, we expect the proceeds to be distributed in December.

Unknown Analyst, Analyst

I'm looking forward to that, and good luck in the next quarter.

Operator, Operator

Our next question comes from Gaurav Mehta with Alliance Global Partners.

Gaurav Mehta, Analyst

I wanted to ask you on your leverage comments, mid to high 6s in 4Q. It seems like it was 7.2% as of 3Q. So, just want to get some more color on assumptions driving leverage lower in this quarter.

J. Scott Hogan, CFO

I'm sorry, Gaurav, it's Scott here. I didn't catch the whole question. Are you asking about the leverage ratios?

Gaurav Mehta, Analyst

Yes. I think you mentioned mid to high 6s expected in 4Q from 7.2% as of 3Q. So I just want to get some more color on the assumptions driving leverage lower.

J. Scott Hogan, CFO

Sure. I think there are two pieces to the puzzle. We continue to improve the balance sheet, and we're focused on that, and then operations continue to improve. The fourth quarter is, as Dave mentioned before, usually one of our stronger quarters. We have percent sales breakpoints that are hitting in the fourth quarter. On an annualized basis, we expect the fourth quarter to be in the mid to high 6% range on debt-to-EBITDAre. We think we'll continue to improve our balance sheet as we move forward. This year, there's been a little bit of timing in our recycling efforts. The acquisitions have gotten ahead of the dispositions, but we think we'll balance those out as we move forward.

Gaurav Mehta, Analyst

Okay. A follow-up on acquisitions and dispositions. I think in the prepared remarks, you said you're expecting some acquisitions shortly. You also mentioned a few more dispositions. So just in terms of timing, is that expected this quarter?

J. Scott Hogan, CFO

Yes. We anticipate making a couple more acquisitions and 1 to 2 sales by the end of the year, likely in the fourth quarter. This aligns with our past approach of seeking properties that fit Whitestone's model and enhancing our portfolio. Our investor deck includes a chart detailing our strategy, showcasing properties acquired based on their potential for growth in prime areas and the sale of those we believe have limited future growth. We are committed to continuing this strategy for the remainder of the year while effectively balancing our assets, acquisitions, and sales.

Operator, Operator

We'll go next to Craig Kucera with Lucid Capital Markets.

Craig Kucera, Analyst

Scott, you had a fairly large pickup in real estate tax accruals this quarter. Can you talk about your expectations for the year regarding real estate tax?

J. Scott Hogan, CFO

Sure. Yes. It's mainly Texas. Texas has a choppy real estate valuation process that we go through. We really go through a 3 or 4-step process to ultimately settle on what we're going to pay. Typically, around July, what's called the ARB process happens, and we usually settle in on a little higher valuation. We continue to protest and litigate those. Ultimately, I think we feel confident that those will come down. We do pass through most of those costs to our tenants, and we work very hard to keep those low because it's a burden on the tenants. Some of those can take 2 to 3 years to get through the full litigation process. This increase you see is just a normal increase that you'd see in the third quarter, particularly in Texas.

Craig Kucera, Analyst

Okay. That's helpful. Just circling back to your commentary, Dave, on the acquisitions and dispositions. I think earlier this year, you were talking about maybe $40 million for the year. Has that number changed at all? Or is that still sort of the expectation of having $40 million of acquisitions and maybe $40 million on the disposition side?

David Holeman, CEO

Yes, we've completed two acquisitions this year, and I anticipate that we'll exceed our previous estimates for acquisitions and dispositions, although not by a large margin. Over the past two and a half to three years, we've invested roughly $150 million, and this run rate aligns with our current position. We've identified some good opportunities, and I'm particularly pleased with our acquisition of San Clemente in Austin, which complements our Davenport property nicely. We also made a strong acquisition in Fort Worth with Hulen earlier this year, and I am looking forward to announcing a couple more soon. There won't be significant changes, as we are focused on optimizing our portfolio to reach our target of 5% to 7% long-term FFO growth. While it's likely we'll go slightly beyond the $40 million mark, the trend remains consistent with our activity over the last three years.

Craig Kucera, Analyst

Got it. And kind of changing gears here in the fourth quarter, I think you've got about 4% of your ABR expiring. Is that really just because you have a concentration of month-to-month leases or anything else going on there?

David Holeman, CEO

If you examine the number of leases, most of them are within our CUBEXEC product, which represents a small portion of our portfolio but operates on a shared office space model. These leases are typically month-to-month or very short-term, which is normal. If we focus on leases that we consider to be in our main area, there are about 50 to 75 leases that will expire in the fourth quarter, likely around 50%. The majority of these expiring leases are primarily from CUBEXEC.

J. Scott Hogan, CFO

It's actually very consistent with what we've always had. If you look back to last fourth quarter, I think we're a little smaller. We're super pleased with the opportunity to continue to have roll. One of the things that is a benefit for Whitestone is that in this environment, we're rolling a greater percent of our leases than some of our peers. So, with the positive marks we're having, we're pleased with that. But it's consistent with what we've had, about 20% of our leases rolling. If you look at the 4% of revenue, that translates very closely.

David Holeman, CEO

I think on a square footage and ABR basis, it's actually lower than we were in this position last year, Craig.

Craig Kucera, Analyst

Okay. That's helpful. One more, just on Slide 10 in the investor presentation. I appreciate the color; that's helpful. But just looking at it optically, it looks like you're acquiring properties with higher rents at higher cap rates and selling assets with lower rents and lower cap rates. So, obviously, you're getting that positive cap rate arbitrage, which you've reported over the past few years. Is that just you executing your strategy? Or is that a focus more on smaller shop space where you can charge higher rents? I just would be interested in your color on how you're doing that.

J. Scott Hogan, CFO

I think it's largely our strategy. As you look at the fundamental aspect of what we do, it's capital allocation. We're continuing to look at our portfolio. We do believe that it's the right time to continue to upgrade a number of things, upgrading the tenant base, upgrading the properties to higher income levels and potentially higher ABRs. So it is a focused strategy to ultimately buy properties that we think have greater growth going forward. You're seeing us move the ABR; you've seen us move our consolidated TAP score. Most importantly, the chart on Slide 10 shows that not only are we buying these properties at good rates, but Christine and her team are doing a fabulous job of stepping in day 1, looking at the merchandising mix and finding ways to drive NOI. We're buying at more attractive cap rates, and then we're making very quick return increases as we move forward.

Operator, Operator

We'll go next to Bill Chen with Rhizome Partners.

Unknown Analyst, Analyst

I was wondering if you have an update on Pillarstone in terms of timing and if the dollar figures are still in that same range of, I believe, $50 to $70 that you have previously guided?

David Holeman, CEO

Hey, Bill, this is Dave Holeman. Thank you for your question. As I mentioned earlier, we'll be filing our 10-Q very soon, which will provide a detailed overview of all the activities related to Pillarstone. Briefly, during the quarter, we received $13.6 million as part of our proceeds from Pillarstone. A court settlement has been reached that could bring us an additional $40 million, pending court approval. A hearing for this will take place in November. If approved, the distribution of around $40 million is expected in mid-December. We anticipate this happening, although there are several steps to complete first. This is the latest update: we've received $13.6 million this quarter, and we expect another $40 million in December.

Unknown Analyst, Analyst

Got you. I appreciate that. And does your leverage ratios factor into those payments that you just mentioned on the call earlier today?

J. Scott Hogan, CFO

Right now, the guidance for the fourth quarter does not include the impact of any gains or losses related to the Pillarstone proceeds. The $40 million, if received, would probably be around a half turn.

Unknown Analyst, Analyst

Okay. I appreciate that. And one last question, if I may. On the pass site developments, is the strategy going forward to hold them or to sell them for the gain and redeploy the capital?

David Holeman, CEO

Great question. I think that's a decision we go through on an individual basis for each pad site. Obviously, we do think there's value in having an aggregation of properties that all go together. As you can see from what we've done in the last couple of years, we've selectively sold a couple of pad sites that we thought the value was very attractive. As we do these pad sites, one of the things we look at is structuring them in a way with a lease that is attractive to a buyer. So it's an individual decision we go through, looking at the pad site, the location within the center, and the pricing in the market. We're looking at a number of ways to add value to shareholders.

Operator, Operator

Moving on to John Massocca with B. Riley Securities.

John Massocca, Analyst

Apologies if I missed it earlier in the call. I know it's not really how you tend to think about the portfolio, but as we think about fourth quarter rents and maybe even beyond that, do you have a signed not open pipeline or a pipeline of things that are on a free rent period that could be kicking in here in the next 3 to 6 months? If so, kind of what's the broad parameters of how big that number is?

David Holeman, CEO

Yes. So, hey, John, Dave. As I mentioned earlier, we report occupancy as commenced occupancy, meaning tenants have taken possession of the space. Some of our peers report, I think, leased occupancy and then signed not open. One of the fundamental aspects of our business model is smaller tenants, shorter leases that are much more quick and nimble. We just don’t have a substantial amount of leases that aren't commenced because we move quickly, we get those tenants in very quickly. I think when people report signed not open, they're not including potential tenants that move out. So that signed not open gap will always exist. Whitestone is at a solid 94%, over 94% heading into the fourth quarter. We sign leases and get them commenced very quickly. I think I answered your question, maybe...

J. Scott Hogan, CFO

John, just the 3.5% to 4.5% same-store guidance we've given for the year includes any kind of free rent or anything of that nature in it as well.

John Massocca, Analyst

So, I guess maybe just as we think about fourth quarter, which is historically a big leasing quarter, is that stuff that's in negotiation today? Or is that things that have been negotiated in 3Q, 2Q that are essentially just formalities to close in the quarter?

David Holeman, CEO

It's both. Leasing can be complicated. Some leases can take six months to negotiate and finalize, and they vary across the board. Traditionally, we’ve tried to reclaim some space at the beginning of the year, which slightly reduces our occupancy. We are now focusing on leasing activity well into the second and third quarters that will close in the fourth. Sometimes, this is because people want to start their businesses in the new year, and the fourth quarter has consistently been productive for us in recent years. We expect this trend to continue.

J. Scott Hogan, CFO

Yes. We have visibility into the leases. Christine and her team look at the activity, and there are substantial activities, we believe, to finish out in Q4.

David Holeman, CEO

I haven't seen a dip in leasing activity this year. Surprisingly, I thought there would be a little pullback, but it really has not occurred.

J. Scott Hogan, CFO

Yes. Just to add to that, we've consistently had upward trends in our leasing activity.

David Holeman, CEO

It's great to see such continued demand.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn the floor back to Dave Holeman for closing comments.

David Holeman, CEO

Thank you. Thanks to everyone for joining our call. We're very pleased with the progress we're making. I think we've laid down another solid quarter and are excited about finishing out the year with a very strong year. I would love to interact with anyone that was going to be at REIT World in Dallas in December. We're going to be having a property tour and then obviously meeting one-on-one with investors. So if you'd like to do that, reach out to us. And thanks again for joining, and have a great day.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines and have a wonderful day.