Whitestone REIT Q2 FY2025 earnings call

• Remerchandising: Grew occupancy 100 basis points sequentially, added high-quality tenants like Ace Hardware at Terravita Center and expects to add Picklr later this year. - Acquisitions: Made 2 strategic acquisitions in Q2, San Clemente in Austin and South Hulen in Fort Worth, which fit the strategy and have growth potential. - Redevelopment: Lion Square in Houston on track to complete by end of Q3, benefiting from surrounding development. - Portfolio review: Sold 12 properties, purchased 6 properties since Q4 2022, with $153M in acquisitions and $126M in dispositions, expecting $40M acquisitions and $40M dispositions by year-end. - Expense management: Reduced G&A and interest expense by about 6% from last year.

Whitestone REIT delivered a solid second quarter. Core FFO per share was $0.26 for the quarter and $0.51 for the 6 months, up 5.4% year-over-year for the quarter and 5.6% for the 6 months. Same-store NOI growth was 2.5% for the quarter and 3.9% for the 6 months, on track for the 3% to 4.5% same-store NOI growth target for the year. Occupancy was 93.9%, up 100 basis points sequentially from Q1. Average base rent per leased square foot was $25.28, up 5.3% year-over-year. Leasing spreads were 17.9% for the quarter, with 41.4% for new leases and 15.2% for renewals.

Reaffirmed 2025 core FFO per share guidance of $1.03 to $1.07. Same-store NOI growth target is 3% to 4.5%. Year-end occupancy guidance is in the 94% to 95% range. Redevelopment and development growth are embedded in longer-term same-store growth target.

• Uncertainty in market conditions affecting acquisitions and dispositions timing. - Timing of interest expense due to acquisition-disposition timing. - Potential delays in savings from certain initiatives like Pillarstone.

Q: It seems like the next couple of quarters, this one as well, the next 2 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?

A: 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 6 months, I think we're right just a little under 4%, which is within our guidance range.

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

A: 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 [amenable] 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.

Q: 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?

A: Sure. I mean I think we've been very clear on our objectives of looking at our portfolio, continuing to evaluate every property, looking for those that we feel like we've tapped out the value, looking for opportunities in neighborhoods where we find assets. So we do have a number of activities going on. We are seeing a little bit more product coming to market. So one of the things we're seeing is a little bit more product than we've seen. But we do have, obviously, a number of activities. I did comment that we expect to be about $40 million, and we feel pretty good about that number. So that does tell you that we're moving along in that process. But recycling is just something we should be doing. It's just like any portfolio where you're continuing to look at your holdings and make sure you're allocating capital in the best way. So we're roughly balanced. I think we talked about $150 million or so sales and -- I'm sorry, $150 million or so acquisitions and $125 million or so of dispositions. So just for the balance of the year, you'll see us continue to do what we've done for the last couple of years, which is upgrade this portfolio, continue to add value through getting better properties in the mix.

Q: 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?

A: 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.

Q: I wanted to ask you on the 2 acquisitions that you announced in 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?

A: Sure. I'll start out again and allow some of my teammates to chime in if they'd like. But I think fundamentally, Gaurav, the most important thing we looked at was the quality of the neighborhoods and locations and the trajectory. Both the Fort Worth acquisition and the Austin acquisitions are in really great submarkets. They're in areas with strong household incomes, traffic growth and then neighborhoods that are continuing to get better. South Hulen in Fort Worth is adjacent to the Hulen Mall, which is a mall that's going through redevelopment. There continues to be activity there. I think as we look at the opportunity, obviously, continuing to be able to improve rents is a part of that and continuing to look at the tenant mix and upgrade that in conjunction with what we see going around the area. And in Austin, it's a couple of things. We have a sister property right across Loop 360 that's Davenport. So we're going to get some good synergies by those 2 properties being very close to each other. And another one, it's one of the best areas in Austin with very little retail around. And so we'll be -- you've got a really strong restaurant there that it's a local draw. And so we'll be able to do a number of things from the tenant mix and drive rents. So I think the opportunity for us on both of these is kind of our bread and butter. It is buying properties in areas that are -- have an upward trajectory where the center is trailing a bit, and we could come in and apply our model and really continue to move the tenant base and move the rents.

Q: 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?

A: Sure. We are evaluating our properties on a regular basis, right? It's what we do. We look at cash flow models. We understand the surrounding area. We look at the tenant mix, and we look at what's going on in the market. So none of this is ever set in stone. When we identify a property that we think it makes sense to divest and move on, it's obviously based on a value that we think is appropriate for receiving for that property. So we annually do -- we annually, quarterly, monthly do a review of our holdings, and we -- there's fluidity in that based on market conditions. But we do see good conditions right now. As I mentioned, we're seeing a little bit more product coming to market. So one of the things we're seeing is a little bit more product than we've seen. But we do have, obviously, a number of activities. I did comment that we expect to be about $40 million, and we feel pretty good about that number. So that does tell you that we're moving along in that process. But recycling is just something we should be doing. It's just like any portfolio where you're continuing to look at your holdings and make sure you're allocating capital in the best way. So we're roughly balanced. I think we talked about $150 million or so sales and -- I'm sorry, $150 million or so acquisitions and $125 million or so of dispositions. So just for the balance of the year, you'll see us continue to do what we've done for the last couple of years, which is upgrade this portfolio, continue to add value through getting better properties in the mix.

Q: 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?

A: 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.

Q: Maybe thinking about the same-store growth guidance. How much of that right now is subject to leasing activity? Is it going on now or is it going to be going on the remainder of 3Q and 4Q? And how much of that growth is really locked in based on things you have signed that are going through free rent period? I know you mentioned a little bit in kind of Mitch's question, but is there any kind of -- I mean is that kind of set in stone at this point, just given the free rent period that tends to exist for bigger tenants?

A: 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.

Q: That makes sense. I'm just kind of thinking like is the activity you're going to be engaging on the leasing front, the remainder of this quarter and into 4Q, really going to be more of a '26 event and it's stuff you did in 1Q, 2Q, maybe even last year that's going to be driving the remainder of kind of the same-store growth? I'm just kind of thinking is there any -- if something happens on a macro front, whatever it may be, I mean, how much of that is kind of variable in that guidance today?

A: We have a couple of large spaces that we're leasing that will run into 2026 that are -- but they're built into the forecast that way. And then we just have routine leasing that's going on. I don't know if Dave or Christine would add anything, but I think it's just -- there is a mix in there, but it's a normal mix.

Q: 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?

A: I think we've -- yes, I'll start. We've committed to continuing to improve our balance sheet as we grow. So I think that's our commitment. I think Scott talked about where we expect debt-to-EBITDAre to be year-end. If you look back, the progress we've made over the last couple of years is very significant. So I just think for us, it's continuing to execute to grow this platform, to strengthen the balance sheet, to strengthen our investor base. So what we're comfortable on taking leverage to, I think we're comfortable on doing the things we said we're going to do, which is we're going to grow earnings and we're going to strengthen our balance sheet in conjunction.