Whitestone REIT

Greetings and welcome to the Whitestone REIT fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Morty, Director of Investor Relations for Whitestone REIT. Thank you. You may begin.

Good morning and thank you for joining Whitestone REIT's fourth quarter 2023 earnings conference call. On today's call are Dave Holman, 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, March 7, 2024. The company undertakes no obligation to update this information. Whitestone's fourth 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 fourth quarter 2023 earnings slides on our website yesterday afternoon, which highlight topics to be discussed today. I will now turn the call over to Dave Holman, our chief executive officer.

Thank you, David, and good morning, everyone. Welcome to our fourth quarter 2023 earnings conference call. I'll break my comments into three parts. First, what we've done. Second, ongoing initiatives that continue to drive value. And finally, how our core strategy syncs very well with the current environment. I'll get straight into it. In terms of what we've done, this management team began in January of 2022 so we're two years into our run. Here's a high level list of our accomplishments. Four FFO per share has grown from 86 cents in 2021 to 91 cents for 2023. This is despite higher interest costs, primarily as we renewed and extended our credit facility in the third quarter of 2022. With that in place until 2027, we anticipate a higher earnings trajectory ahead of us. I'll have Scott cover our projections in greater detail. We've rapidly improved our balance sheet metrics, bringing our debt to EBITDA RE down from 9.2 times for the fourth quarter of 2021 to 7.5 times for the fourth quarter of 2023. This is despite significant litigation expense impacting our numbers. We've focused and prioritized our disciplined leasing efforts on high-quality tenants, resulting in record occupancy in our portfolio, up 290 basis points from 91.3% at year-end 2021 to 94.2% at year-end 2023. Breaking this down further, we've grown our small space occupancy by 320 basis points to 92.1%, and our larger space occupancy has grown by 200 basis points to 97.5%. We had same store net operating income growth of 7.9% in 2022, followed by 2.7% in 2023. Scott and Christine will provide more detail on this important metric later in the call. We've strengthened our board, bringing on three new board members, or half of our six-person board of trustees. This refreshment has been accompanied by a host of shareholder-friendly actions, including rightsizing our executive compensation, splitting the role of chair and CEO, and providing shareholders with access to bylaws. We've worked hard to successfully conclude the litigation with our former CEO, and exit our investment in his related party joint venture. We are nearing conclusion. Whitestone has a very clear strategy and path to value creation that continues to be more clear as this noise is removed. And finally, culture. We've simultaneously brought on very talented individuals, reduced our headcount, and improved employee satisfaction. In short, We're improving G&A while achieving better results. I'm super proud of the team and their long list of accomplishments over the last two years, only a few of which I have highlighted. I'm equally excited about how we're continuing to drive value. Three initiatives are at the heart of our creating value. Our quality of revenue initiative, our balance sheet improvement plan, and our capital recycling plan. I'll have Christine cover the quality of revenue initiative, and I'll provide a bit of color on the other two. We've had significant progress with our balance sheet improvement plan over the last two years, obtaining an investment-grade credit rating. We have more work to do here and have the right people, the right plan, and the market tailwinds supporting our efforts. Our debt metrics will continue to improve as we grow EBITDA RE, apply free cash flow to reduce debt, monetize our Pillarstone investment, and activate the land parcel and pad site development opportunities within the portfolio. We expect debt to EBITDA RE below seven times by year end 2024, and we anticipate further improvement in 2025. Our asset recycling program has allowed us to upgrade the overall quality of our portfolio, selling properties with lower upside and ABR and redeploying the proceeds into acquisitions with significantly higher upside, higher ABR, and characteristics that capture more of the key demand drivers in today's markets. We anticipate that since October of 2022, we will have completed approximately 80 million in asset sales by the end of the second quarter at an aggregate cap rate of 6.2%. I say anticipate because we have a sale upcoming but not yet announced, and we believe we'll keep the effort going at about the same pace we've had over the last two years. I think it's important to note here that we are very capable of driving results via organic growth, so we're not reliant on the transaction market or the equity market cooperating in order to drive earnings growth. However, we are starting to see valuations adjust slightly to the higher interest rate environment, and our team is ready to take advantage of those opportunities that align with our strategy. The final area I would like to cover today is what we're seeing in terms of the current environment. Frankly, this is a great environment for most of the retail REITs as limited supply of retail centers is driving good results across the peer group. The limited supply combined with country-leading job and population growth in our markets and Whitestone's ownership of the right type of retail centers makes this current dynamic especially powerful for Whitestone. Our strategy is and our assets are very well matched to take advantage of this environment, and we've made a number of strategic decisions that are producing great outcomes. Specifically, we have shorter leases with annual rent bumps, the ability to capture mark-to-market rents quicker, a high-quality diversified tenant roster, and limited CapEx needs as compared to other peers. This strategic decision to operate with shorter leases and be more active owners is fundamental to what we do. Because of the confidence we have in our team to populate centers with fast-growing tenants, we are better positioned to share in their success. We are 100% Sunbelt-focused in business-friendly states. Migration trends in our markets lead the country and are acting as a strong tailwind, not only in terms of our operating results, but for the underlying value of our centers. Lastly, our centers have a much larger percentage of small spaces than most of our peers. We and others continue to see strong demand from businesses seeking out spaces in the 1,500 to 3,000 square foot range. We've intentionally acquired centers and made modifications to meet this demand. And we believe this trend will continue as businesses adjust to properly meet the needs of the surrounding communities. We introduced 2024 core FFO per share guidance yesterday of $0.98 to $1.04. We have a few more near-term unknowns than I'd like, but I've never been more bullish about the fundamentals driving our business and the strategy we have in place. I'll have Scott walk everyone through our 2024 projections and the assumed variables. Once again, let me say I'm very proud of the team here and everything we've accomplished, and I'll now turn the call over to Christine.