Earnings Call Transcript - WSR Q2 2025

David L. Mordy, Director of Investor Relations

Good morning, and thank you for joining Whitestone REIT's Second 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 the 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, July 31, 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 second 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.

David K. Holeman, CEO

Thanks, David. Good morning, and thanks again for joining our call. We delivered another solid quarter, increasing core FFO per share by 5.4% year-over-year, growing our occupancy 100 basis points sequentially from Q1 and increasing our average base rent per leased square foot year-over-year by 5.3% to $25.28. We continue to see a very strong leasing environment in our high-growth Sunbelt markets, which is allowing us to grow the value of our centers by strengthening the tenant mix with the addition of new and exciting businesses that serve the surrounding communities. Whitestone's strategically designed shorter lease terms are allowing us to capture the benefits of this strong environment faster than many peers with less lease roll. Over the next few years, we expect to leverage our leadership position in the high-value shop space to deliver core FFO growth of 5% to 7%, underpinned by same-store NOI growth of 3% to 5%. We intend to grow our dividend in conjunction with our FFO growth and scale our operations, spreading our fixed costs and broadening our investor base. Let me highlight and provide a few details on three of our second quarter accomplishments. First, we grew occupancy 100 basis points sequentially from Q1 to 93.9% as we remerchandised, bringing in stronger tenants and setting up same-store NOI growth in the quarters ahead. At our Terravita Center in North Scottsdale, during the quarter, we added a very strong franchise Ace Hardware and expect to add the best-in-class pickleball operator, the Picklr later this year. These types of high-quality tenants enhance the vibrancy of the center and allow us to populate the center with fast-growing businesses that allow us to benefit from their growth through higher rents and expansion potential. Over the last couple of years, we have frequently highlighted our remerchandising efforts, and these efforts are coming to fruition and are providing a catalyst for future growth. Secondly, we had two strategic acquisitions in the quarter, San Clemente in Austin and South Hulen in Fort Worth. San Clemente has very limited competitive retail around it, is anchored by a neighborhood with average incomes in excess of $280,000 and has over 55,000 vehicles per day passing at the intersection of Loop 360 and Westlake Drive. Across the street from our existing Davenport center, we anticipate strong growth ahead for both San Clemente and Davenport. Our South Hulen acquisition expands our geographic reach further in Fort Worth. The center sits at the entrance to Hulen Mall, already the highest visited mall within 30 miles and is poised to do even better as the fast-growing surrounding neighborhood drives additional commercial development in the area. Both San Clemente and South Hulen fit very well within our overall strategy and match our acquisition criteria well. Our third growth driver is redevelopment. Our redevelopment continues at pace with Lion Square in Houston. We anticipate it will be complete by the end of the third quarter. This is an example where we've really been able to take advantage of a neighborhood's rapid evolution, upgrading our product and ensuring we maximize growth. Not only is the surrounding Asian community experiencing very strong growth, Park Eight Place, a $1 billion redevelopment is occurring down the road on the former Halliburton campus. This type of development is occurring all around our centers, and I'll have Christine go into more detail there. We are on track for our previously communicated 2025 full year guidance and are reaffirming our core FFO per share, same-store NOI growth and year-end occupancy guidance ranges this morning. In terms of financial performance, we delivered core FFO per share of $0.26 for the quarter and $0.51 for the six months, up 5.4% for the quarter and 5.6% for the six months versus the prior year period. Same-store NOI growth of 2.5% for the quarter and 3.9% for the six months. We remain squarely on target to hit our 3% to 4.5% same-store NOI growth target range for the year. Straight-line leasing spreads of 17.9%, our 13th consecutive quarter with leasing spreads in excess of 17%. Early on in my time as CEO, I also spelled out that our plan would be to review every property within Whitestone's portfolio to ensure that the properties are in line with our strategy and are supported by the right neighborhood dynamics to drive growth and allow our leasing agents to do what they do best. We've done exactly what we said we would do, and I'll point you to a summary of our transactions on Slide 10. Our review has resulted in our selling 12 properties and purchasing six properties in addition to some pads and other parcels we bought adjacent to our existing properties. The net effect of all of this has been to strengthen our ability to grow and secure higher-ended properties that have greater growth potential and durability of cash flows. Since the fourth quarter of 2022, our acquisitions have totaled $153 million and our dispositions have totaled approximately $126 million. We anticipate the capital recycling program will continue with an estimated $40 million of acquisitions and $40 million of dispositions through the balance of the year. In conclusion of my prepared remarks, I'll reiterate our belief that in today's rapidly changing retail environment, a company with a well-aligned, forward-thinking team and a well-located portfolio with a higher concentration of high-value shop space properly anchored to the community can outperform the herd. We're not only putting all the pieces in place to make that happen via top line growth, we're actively managing our expenses as well, reducing our G&A and interest expense, both by about 6% from last year. All in all, we're executing on our remerchandising, capital recycling, reducing our expenses, improving our balance sheet while growing earnings and our steadfast commitment to grow long-term value for shareholders. I look forward to continue to update investors in the months ahead, and I'll now turn it over to Christine.

Christine C. J. Mastandrea, President and COO

Good morning, everyone. As Dave said, we delivered another strong quarter, bringing the occupancy number back up with the Ace Hardware commencing at Terravita and with strong momentum in the shop space leases. We signed $33.2 million of total lease value, picking up slightly from the first quarter and building towards the fourth quarter, which is typically our strongest quarter. Leasing spreads were 41.4% for new leases and 15.2% for renewals, giving us a combined leasing spread of 17.9% for the quarter. Same-store NOI growth was 3.9% for six months, and we remain confident in hitting our 2025 guidance of 3% to 4.5% same-store NOI growth. Looking out a bit further, two significant new tenants, EoS at Windsor Park in San Antonio and Cactus Club Cafe at Boulevard Place in Houston are energizing their respective centers and will move out of their build-free rent period soon and contribute over 150 basis points to same-store NOI in 2026. Our most recent acquisition, South Hulen, joins a growing list of Whitestone properties that have major development going on around them. We've had the opportunity to acquire very stable cash flows and future upside as a result of urban development. And so we took action and made the acquisition. Urban development is both a factor within our acquisition criteria framework and the natural progression that occurs because of our other criteria, strong university systems, high household incomes and upwardly mobile surrounding demographics. We spoke on the last two earnings calls about how Whitestone is designed to proactively identify change to take advantage of that change, delivering earnings as the company leverages change. Today, I would like to highlight some of the major changes going on around our portfolio that will provide the opportunity in years ahead. Expanding further on South Hulen's development, Fort Worth population grew 3.1% last year and has become the nation's 11th largest city. It's clear to us that Hulen Mall will undergo additional development, further elevating the traffic to the area, which is already robust with I-20 and Hulen Street attracting more than 180,000 vehicles per day. Our South Hulen Center is perfectly positioned as a gateway for the mall and for upcoming development. In terms of upcoming development, Garden Oaks purchased in 2024 is very similar. We anticipate a major announcement soon concerning the neighboring old Sears property. The property will be redeveloped in conjunction with the neighborhood that is experiencing very rapid growth as Houston Heights redevelopment spreads northward. In other parts of the Houston Metro, we've got pockets of development as well. Near our Lake Woodlands Center, The Cynthia Mitchell Woods Pavilion has taken over as the top spot globally for outdoor amphitheaters with over 600,000 guests in attendance in 2024 alone. In response to the area's growth, Howard Hughes is building The Ritz-Carlton Residences, a short walk from Lake Woodlands Center and projected to be completed by the beginning of 2027. We've anticipated this development when we purchased the property in late 2022, and we're already benefiting from our ongoing remerchandising efforts. Near our Boulevard Center, Post Oak Central is being revitalized, transforming a 16-acre campus into a mixed-use environment of retail, restaurant and office spaces. Midway is the lead developer on the project and groundbreaking recently occurred, and completion is expected late next year. In addition, the adjacent parcel to our Boulevard Center was recently purchased by Crescent Real Estate, the Doggett families and also the Schnitzer families. They are developing a 6-acre parcel to create a mixed-use development with 1.5 million square feet of additional space. We anticipate that this project is moving very quickly, and we welcome them as a neighbor. Given that our Boulevard property is very strong interest right now, and it sits at the main artery in the uptown area of San Felipe 610 and Post Oak Boulevard. We have the opportunity not only to protect our asset but further upgrade our tenant base and move Whitestone's developable land at the property into an income-producing column. One last Houston highlight that David touched upon was Park Eight Place, a $1 billion mixed-use development occurring less than a mile from Lion Square in the former Halliburton campus with over 70 acres designed around walkability, health and sustainability and convenience. This development is supercharging an already fast-growing Asian community. The second largest concentration of Asian Americans in the United States are in Houston, Texas. In Phoenix, near our Anthem Center, TSMC is investing $165 billion, including six fabs, two advanced packaging centers and an R&D center. The project is expected to produce 6,000 direct manufacturing jobs and over 20,000 construction jobs. Anthem is Whitestone's closest center to TSMC's investment, but we anticipate the benefits will be felt throughout the greater metro area, which represents approximately 40% of Whitestone's portfolio. In Dallas, explosive growth is occurring around our El Dorado center and plans to build and expand on the McKinney Airport have recently been announced, adding 47,000 square feet of terminal, which is intended to handle 1 million passengers annually within five years. This expansion is a result of numerous corporate headquarters located in McKinney and will likely add to the attractiveness of the area for more major corporations. Construction that has already begun on the new airport is expected to open late next year. In Austin, we announced the purchase of San Clemente, really a sister center that sits across the road from our Davenport Center. Both of our properties will benefit from the recent improvements to the Loop 360, which would increase the traffic above the current 80,000 vehicles per day our centers currently enjoy. In addition, the Four Seasons is adding nearly 200 high-end residences to the area. This is another opportunistic acquisition that fits our criteria as well. With all of these developments, our leasing agents are constantly working to ensure our tenant mix is properly connected to the community, and we'll see the benefits in the same-store net operating income growth as we evolve the tenant mix. In some cases, we'll benefit without investment to a center. Lake Woodlands would be an example of a center that's prime benefit from change without redevelopment. In other cases, Lion Square being a primary example, we can make a modest redevelopment investment and capture significant gains by upgrading a center to match the neighborhood. And finally, we've got a few centers like Boliver Place and Dana Park. We have land for development where we expect to capture additional growth and quite possibly partnering with another firm to develop mixed-use assets at the center. In total, we have at least five to seven years' worth of development and redevelopment in order to supplement our growth. In terms of guidance, we have up to 1% of redevelopment growth embedded in our longer-term same-store growth target, and we'll add development growth once we have greater visibility into timing on larger development projects in the area. I'll close by thanking the different teams at Whitestone for their ability to work together in a seamless fashion. Calling out one group I'm very pleased with is the tight integration between our acquisitions and leasing teams, allowing us to move quickly on acquisitions and integrate into our operations. That same closeness runs between leasing, property management, legal, finance really throughout the entire company. We're a team-based company, and it has proved in the efforts and where we've exceeded these past years. This may be because of our smaller size, but overall, we appreciate that we've got these great teams, all working hard towards the same objectives. And with that, I'll 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 and our longer-term 3% to 4.5% same-store NOI growth target. We have also reiterated our forecast for year-end occupancy in the 94% to 95% range. We have strong momentum going into the second half, which is where we typically fill spaces we've taken back at the beginning of the year. Another measure of health of the business, our bad debt for the quarter ran just under 1% of revenues, nearly identical to this time last year and within our forecasted range. Last 12-month pro forma debt-to-EBITDAre was 7.2x, an improvement from 7.8x for the same period a year ago. This is up slightly from last quarter with the acquisition of San Clemente and Hulen in the second quarter. We anticipate property acquisitions and property sales to be roughly balanced through the end of the year, and we expect year-end last 12-month pro forma EBITDAre to be about 7x. We're in the process of recasting our credit facility and bank demand seems to be very strong. Our goals are to further ladder our debt, expand our bank group and deepen the relationships with our existing banks. However, versus 2022 when we last recasted our credit facility, Whitestone is a very different company. Debt-to-EBITDAre is down over a full turn, driven primarily by EBITDAre growing 13.9% since Q2 of 2022. We've proven the value of high-return shop space and strengthened both our tenant base and the quality of our centers. We've been disciplined with our capital, delivered top quartile same-store NOI growth, broadened our investor base and positioned the company for continued strong growth. I anticipate I'll be able to provide a more detailed update on the credit facility recast on the next earnings call. In terms of Whitestone's liquidity, we had $5.3 million in cash and $69 million available under the credit facility at the end of the quarter. Our dividend remains very well supported at approximately 50% of our FFO, and we expect to grow the dividend level in conjunction with earnings growth. We are focused on continuing to execute our plan and in turn, financial results. And with that, we will open the line for questions.

Mitch Germain, Analyst

It seems like the next couple of quarters, this one as well, the next two have some pretty tough same-store comps. So I'm curious what gives you the confidence that you can continue to meet your forecast in the back part of the year?

David K. Holeman, CEO

Mitch, it's Dave. Thanks for the question. I'll give a high level and then maybe let Scott or Christine add more details if they'd like. Obviously, we do a very detailed forecasting. We look ahead at our tenants. We look at those tenants that come in. You saw this quarter that we brought up our occupancy 100 basis points from Q1. Those kind of activities obviously will contribute to future same-store NOI growth. So as we look at the projections of the activity we've done, we do anticipate stronger same-store NOI growth in the upcoming quarters versus Q2. For the six months, I think we're right just a little under 4%, which is within our guidance range.

J. Scott Hogan, CFO

And Mitch, this is Scott. I'll just add that there are several large tenants who are currently under contract and in their free rent periods. Therefore, their rents are not included in the same-store numbers you saw in the second quarter, but much of this is related to free rent coming into effect or ending in Q3 and Q4.

Mitch Germain, Analyst

Got you. And do you get any benefit from Picklr in the second part of the year? Or are they a back-end weighted commencement?

David K. Holeman, CEO

So we anticipate they're going to commence in the back half of the year. There will be some early concession period. So it will be beneficial to same-store NOI, I think, this year from Picklr. But obviously, as we project out to future quarters, a number of these activities are going to significantly increase the momentum we've got in that category.

Mitch Germain, Analyst

Great. And then, Dave, you mentioned $40 million of acquisitions and dispositions. The fact you gave that number and seem to be pretty certain about it leads me to believe that some of this activity is already in process. Anything that you want to share with regards to what's happening there?

David K. Holeman, CEO

Sure. I think we've been clear about our objectives in evaluating our portfolio and every property. We are looking for those that have maximized their value and for opportunities in neighborhoods with potential assets. We have several activities underway and have noticed an increase in available product. We expect to reach about $40 million in activities, and we are confident in that figure. This demonstrates our progress in the process. Recycling is essential; it's similar to managing any portfolio where we continuously assess our holdings and ensure optimal capital allocation. We have a balanced approach, aiming for around $150 million in acquisitions and approximately $125 million in dispositions. For the remainder of the year, we will maintain our strategy of upgrading the portfolio and enhancing value by incorporating better properties.

Mitch Germain, Analyst

Great. Last one for me. It looks like interest expense forecast moved up slightly. And I know that you had baked in some potential savings from Pillarstone. That obviously seems to be a little bit on delay, which I'm not surprised about. Is there anything else that's kind of motivating that change that I should be aware of?

J. Scott Hogan, CFO

Yes, sure. I don't think we had any Pillarstone savings baked into the forecast. But really what's driving that interest expense is just that in our recycling efforts, some of the acquisitions have come ahead of some of the dispositions. And so that $1 million increase you see in interest expense is going to be offset by increased non-same-store NOI, maybe even a little accretive on those efforts. So it's really just capital that we had to put out there to purchase a few properties.

Mitch Germain, Analyst

So just a timing thing. And then, Scott, from that regard, are we still thinking kind of sub 7x debt to EBITDA by year-end?

J. Scott Hogan, CFO

On a last 12 months basis, I think we'll be right around 7x. And if we're just talking about the fourth quarter annualized, probably mid-6s is where we're forecasting.

Gaurav Mehta, Analyst

I wanted to ask you on the two acquisitions that you announced in the second quarter. Can you provide some more color on the upside in those acquisitions as far as lease-up opportunity and maybe mark-to-market rent potential?

David K. Holeman, CEO

Sure. I'll begin and let my teammates add their thoughts if they choose. Fundamentally, Gaurav, the most crucial aspect we assessed was the quality of the neighborhoods and locations along with their growth potential. Both the Fort Worth and Austin acquisitions are situated in excellent submarkets. They are located in areas with strong household incomes and increasing traffic, and the neighborhoods are improving. The South Hulen area in Fort Worth is next to the Hulen Mall, which is undergoing redevelopment and continuing to see activity. As we evaluate the opportunity, improving rents remains a part of the strategy, along with enhancing the tenant mix in line with the surrounding developments. In Austin, there are a couple of key points. We have a sister property named Davenport directly across Loop 360, which will create beneficial synergies due to their proximity. Additionally, this location is one of the best in Austin, with minimal retail in the area. We have a strong local restaurant there that attracts customers. Thus, we will have various opportunities to adjust the tenant mix and drive up rents. Overall, the potential for both these acquisitions aligns with our strategy of acquiring properties in areas positioned for growth, where we can implement our model to enhance the tenant base and increase rents.

Gaurav Mehta, Analyst

Okay. Second question on the recycling on the $40 million of assets that you talked about that could be sold. Have you guys already shortlisted the properties that you plan to sell? And would you still consider selling if you don't find the right acquisition opportunities this year?

David K. Holeman, CEO

We regularly assess our properties, which is part of our process. We analyze cash flow models, consider the surrounding area, examine the tenant mix, and keep an eye on market trends. Our approach is adaptable; nothing is permanent. When we find a property that we believe makes sense to sell, we base that decision on an appropriate value for the property. We conduct annual, quarterly, and monthly reviews of our holdings, and we adapt our strategy based on market conditions. Currently, we are observing favorable conditions. We're noticing an increase in acquisition opportunities, and there remains strong interest in some of the assets we've sold, which differ from what we're acquiring; however, local and other buyers are quite interested in those properties.

Barry Oxford, Analyst

Just building on the acquisitions, what have you seen as far as from a pricing standpoint or cap rate, let's just say, from January 1 to now? And then on a market basis, are you seeing any of your markets on a pricing basis be more favorable on a risk-adjusted basis? Or are you guys just more on an asset-by-asset type of mindset?

David K. Holeman, CEO

I'll comment on the cap rates. I'll let Christine maybe give some thoughts on the markets. But from a cap rate basis, I do think we've seen some leveling of the cap rates, less volatility there. If you look at Slide 10 of our investor presentation, we've given the kind of the going-in cap rates on the centers we bought. Most recent acquisitions were in the 6.4% to 6.7% range, going in. So I think that's kind of consistent with what we're seeing. And then we've also provided on that slide some current history on some of the other acquisitions. So we look to add probably at least a couple of hundred basis points of yield to our initial going-in yield. So I think from a cap rate perspective, we've seen a lot of stability of that over the last several months and quarters and appears to be settling in for the type of product we're looking at.

J. Scott Hogan, CFO

We are beginning to notice changes in market trends that impact our growth strategy. Each time we acquire a center, we consider the timing for remerchandising or potential redevelopment. Typically, remerchandising starts within 18 months of acquiring an asset. For instance, we purchased Garden Oaks at a favorable price but decided to wait for an adjacent property to be developed before we initiate redevelopment. We have maintained strong cash flow in the meantime and expect to begin redevelopment in about a year. This decision is influenced by current market conditions. Our chosen locations exhibit robust infrastructure development and ongoing densification, which has been impressive and is largely due to the communities we select for expansion.

John Massocca, Analyst

Can you provide some clarity on the same-store growth guidance? How much of that is currently influenced by leasing activities? Are these activities happening now or will they occur in the remainder of the third and fourth quarters? Additionally, how much of that growth is already secured based on signed agreements that are currently in the free rent period? You've touched on this in relation to Mitch's question, but can you clarify if this is pretty much finalized at this stage, considering the common free rent arrangements for larger tenants?

J. Scott Hogan, CFO

I think what we have in our forecast right now, John, is just normal leasing activity. And so there's nothing extraordinary happening in the third and fourth quarters that those same-store forecasts are based on. So without getting into a lot of detail, I think it's just our regular lease expirations and just normal leasing activity. I don't know if that helps at all.

John Massocca, Analyst

That makes sense. I'm wondering if the leasing activities for the rest of this quarter and into the fourth quarter will primarily impact 2026, and if the growth in the same-store figures will mainly come from actions taken in the first and second quarters, or even last year. I'm also curious about how much variability there is in that guidance if something changes on a macro level.

J. Scott Hogan, CFO

We have several large spaces that we are leasing, which will extend into 2026 as reflected in our forecast. Additionally, we are engaged in routine leasing activities. I’m not sure if Dave or Christine would want to add anything, but there is a mix of activities, which is typical for us.

David K. Holeman, CEO

Yes. I think, John, as you said, at a macro level, the same-store NOI trails the leasing activity. And so I think we're very bullish on balance of the year same-store NOI as we look to '26, what we've been doing in our portfolio and the quality of tenants we've been bringing in and the remerchandising efforts. So I think we've given the guidance for '25. We're bullish about where we're headed, and we do think that you're on and that there is a bit of a trail on the same-store NOI to your leasing activity.

John Massocca, Analyst

What trends are you observing in leasing spreads, considering you started from a very high base in the third quarter of last year, but there has been a downward trend? I realize that the second half is typically your stronger leasing season. Is there a potential seasonal dip in the first and second quarters, followed by a rebound in the second half? Or could some of the tightening be indicative of a normalization in the macro and leasing environments?

J. Scott Hogan, CFO

The new leasing spreads were just over 40%. While there weren't a large number of leases, this figure is supported by robust restaurant activity. The second-generation restaurant spaces we are leasing are generating significantly higher rents compared to previous levels. Although renewal leasing spreads decreased slightly, they are associated with lower tenant improvement costs and leasing commissions than we’ve observed in previous quarters. Overall, when we consider the leasing spreads along with the tenant improvement costs and leasing commissions, they should balance out to a similar amount.

John Massocca, Analyst

Okay. I appreciate that color. And then last one for me. On a short-term basis, kind of where are you comfortable taking leverage if for whatever reason, maybe the acquisition environment is more attractive than dispositions? Or there is something that is kind of lined up there timing-wise?

David K. Holeman, CEO

I believe we are dedicated to continuing to improve our balance sheet as we grow. That's our commitment. Scott mentioned our expectations for the debt-to-EBITDA ratio by year-end. When you look back, the progress we've made over the last couple of years is quite significant. For us, it's about executing our strategy to expand this platform, reinforce the balance sheet, and enhance our investor base. We feel confident about the levels of leverage we're willing to take on, and we remain committed to our plans to grow earnings while also strengthening our balance sheet simultaneously. It is possible to achieve both objectives.

John Massocca, Analyst

Okay. I'd imagine the answer is no. But essentially, some of this acquisition activity you're seeing is attractive. It's not contingent on you closing disposition activity first.

David K. Holeman, CEO

No, I don't think so. We have different sources of capital, including a credit facility. We have largely maintained a capital neutral stance on our recycling efforts, and we plan to continue this approach. We've stated that this will be our focus for the remainder of the year. Looking ahead, we are considering acquisitions, and we have the capital sources that enable us to act more swiftly than a lot of other buyers. I believe I've addressed your question in a somewhat roundabout manner. Thanks to all for joining our call. We appreciate your interest in Whitestone. We appreciate giving you an update and look forward to finishing the year and look forward to further communications. If there's anything we can do, any questions anyone has, please feel free to reach out to us. Thanks, and have a great day.

Operator, Operator

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