Good day, ladies and gentlemen, and welcome to the Whitestone REIT First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Holeman, Chief Financial Officer. Please go ahead, sir.

Thank you, Alan. Good morning, and thank you all for joining Whitestone REIT's first quarter 2017 earnings conference call. Joining on today's call will be Jim Mastandrea, our Chairman and Chief Executive 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 and uncertainties. Please refer to the company's filings with the SEC, including Whitestone's Form 10-Q and Form 10-K for a detailed discussion of these risks. Acknowledging the fact that this call may be web cast for a period of time, it's also important to note that today's call includes time sensitive information, that may be accurate only as of today's date, May 4, 2017. Whitestone's first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC. Our Form 10-Q will be filed shortly. All will be available on our web site, whitestonereit.com in the Investor Relations section. Also, included on the supplemental data package are the reconciliations from GAAP financial measures. With that, let me pass the call over to Jim Mastandrea.

Thanks Dave, and thank you all for joining us on our call today. Today, I will provide an overview of our recent acquisition, capital raise and some highlights of the quarter's results. Dave will follow with the details of the quarter and our capital markets activity. Let me start with some quick history, which I think is important. We are a relatively young company that has evolved and grown from an asset base of approximately $150 million in assets, comprised of retail warehouses and offices in Texas in 2010 at the time of our IPO. Today, we are a pure-play retail company whose real estate assets exceed $1 billion. We are now geographically diversified with 69 community center properties, which I'll touch on later, located in the best submarkets and in the fastest growing cities in Texas and Arizona. Our culture promotes a property by property value add discipline with an e-commerce resistant, I'll repeat that, an e-commerce resistant retail service-based platform. A big differentiator for Whitestone is that the large majority of Whitestone tenants are service providers to local communities, making our approach more insulated from the impact of the transfer of sales from bricks and mortar to the Internet. Let me now highlight our two recently announced acquisitions, which are located in strong submarkets in Houston and Dallas. BLVD Place in the uptown area of Houston and Eldorado Plaza in Dallas have value add components, complement our business model and add to long term shareholder value. Specifically, the total purchase price for Eldorado and BLVD Place is $204.6 million with a stable occupancy in the high 90s, longer leases and credit tenants with upside from expansion of the gross leasable area. We expect to close both of these properties in the second quarter, in fact, yesterday we closed…

Thanks Jim. Our distinctive e-commerce resistant business model remains well-positioned to build upon the growth we have produced over the past six years. Today, I will discuss our first quarter results, our recent acquisitions and capital markets activity. For the first quarter, total revenues increased 11% over the same period last year to $28.3 million. This was driven by strong growth in our same property revenues of 5%. Property net operating income for the quarter was up 9% over last year, driven by our top line growth and efficiencies gained in our property operating expenses, reflecting our scalable business model. Same property net operating income grew 2% versus the prior year and includes approximately $200,000 in bad debt expense related to re-tenanting. We do not expect this bad debt expense repeat in Q2. Excluding this bad debt expense for same store growth would have been slightly over 3% for the quarter year-over-year. Funds from operations core for the quarter increased 5% or $500,000 versus the prior year quarter. On a per share basis, funds from operations core was $0.32. Negatively impacting funds from operations for the quarter were $200,000 of bad debt expense related to re-tenanting that I mentioned earlier and approximately $270,000 of professional fees of audit and tax fees related to year-end audit and non-core asset dispositions, which we do not expect to repeat in future quarters. Excluding these two expenses, funds from operations core would have been $0.34 per share. NAREIT funds from operations per share for the first quarter was off $0.03 from the prior year, primarily because of the re-tenanting bad debt expense, higher audit and tax fees and acquisition and disposition transaction costs incurred in Q1 2017. General and administrative expenses for the quarter, excluding the amortization of non-cash performance based share compensation, acquisition…

[Operator Instructions]. And we will take our first question from Craig Kucera with Wunderlich.

Hey good morning guys. Appreciate the color on your top tenants, but can you give us a sense of what percentage of your total tenant base is exposed to some of the more challenging retail categories? Particularly, apparel and maybe sporting goods?

Sure. I think one of the highlights of our business model is our approach to the tenant mix. As Jim mentioned, we focused on these tenants that we think will have the greatest success over the coming years, which are those that are less impacted by the trends on e-commerce. Approximately 83% of our tenants we have categorized that are not impacted by e-commerce. Those are health and wellness, entertainment, dining, grocery. So we continue to build a tenant mix of tenants that the feel like will be those that will perform very well in the coming years.

So should I infer from that then, that outside of the 83% then, you do have some exposure to more your generalized -- whether it's general merchandise or apparel or sporting goods, some sort of combination of that?

I would not infer to that, because that's a fairly high percentage. But we probably have 10 tenants right now that are impacted, like a RadioShack, that's maybe 2,000 square feet. Now we're talking 6 million, 6.5 million square feet of space. So the tenants that we have are not necessarily affected by that. 3% is really quite strong, quite the opposite, yes.

Yes, I'll give you a very firm comment. We're really seeing no impact in our business on the shift of e-commerce that many of the traditional retail REITs are seeing. When I say we have 83% of our tenants categorized, we go through and look at the tenants and we have, about 17% we categorize as more traditional retail. We look for more specialized -- we have very few big boxes, big retailers. Our model is small tenants. So we feel like we're really well positioned for a lot of the changes that are happening in retail market today.

Got it.

We have one of the traditional big-box properties, which we inherited, and it's roughly in the 90% occupancy. And I think the impact that we're seeing there is that we can't increase the rent because of -- on the big box tenant, because of the limitations in their leases. Meaning that, most of the big box tenants have a 5% increase over five years, which is only 1% a year. Where our business model offsets this, again, we recognized it six years ago; is that we have smaller base tenants that are solid financial statements, that are restaurants, learning centers, medical, offices, things like that. And we have rent increases of 3% to 5% and we include triple net expenses. So the experience that we're seeing in the marketplace today is really not impacting Whitestone tenants.

Got it. And one more for me. I hopped on the call a little bit late, but I think I caught that you mentioned that the uptick in bad debt expense was -- you thought was not recurring or more of a one-timer. Can you give us a little bit more color on what happened there?

Yes. So a bit of it was -- it was very specific tenant related. We had a large bad debt write-off in the first quarter related to one tenant that we moved out in our Arizona region. So it was something that occurred in the quarter, that caused the bad debt expense to go about $200,000 over what we expected to be going forward. Obviously, we think from a long-term perspective, it's going to be good to re-tenant and get a new tenant in there. But we took the hit of moving out a tenant in the first quarter in our Arizona region that we had built up a little bit of an AR balance on. We obviously will continue to pursue collection and to the extent we can collect it, which would be positive in future quarters.

Okay. Thanks guys.

Thanks Craig.

[Operator Instructions]. And we would take our next question with Mitch Germain with JMP Securities.

Good morning gentlemen.

Good morning Mitch.

Good morning Mitch.

So couple questions for me. And I apologized I missed some of other questions that might have been asked. I'm curious about the bidding process in particular for the BLVD asset. So obviously, Houston is a market that's being somewhat scrutinized. So just curious about how the deal came to you, your underwriting and maybe some characteristics about the investment that really stood out in a positive way?

Yes Mitch, it's a surprise to a lot of people. As I mentioned in the beginning of my remarks, we built this enterprise in a short six years. And we built it on relationships and non-traditional methods. For example, we go hunting for properties, property by property. We built Arizona that way, we built Dallas/Fort Worth that way, we built San Antonio. We do the same method in Houston, Texas. And relationships that we built around allowed us to learn that the property could be available, wasn't necessarily available, -- could be available. And when we learned that, we had taken the opportunity to contact the seller, begin -- as the relationship that goes back a long-long time and we were able to strike a price that was acceptable to the seller. So it's a lot of -- I don't like to use the word, but I will, but a lot of covert strategies that we use in our company, and we build on a lot of relationships. And to give you just an example, our other listeners of what our relationships are like, if you look at the smallness of our company, we're now $1 billion, $1.2 billion, yet we have in our line of credit, the best banks in the country. And they were in our line of credit when it was one-fourth the size of what it is today. So in anticipation of how we're going to build the company, we assembled that bank group and we started focusing on the kinds of properties that we felt, would sustain what we expected to happen in the retail industry.

I might add just a couple comments on BLVD to what Jim said. I think part of what Jim said was clearly, we continue to believe that real estate is very much a local business. In the markets we're in, we get to know the areas, the tenants. Uptown Houston is absolutely the best area in Houston. And really through our relationships that Jim highlighted on, I think also from a little bit of other folks pulling back on Houston, we were able to enter into BLVD Place. The going in kind of cash-on-cash return on BLVD Place is about 6.2% and we think that's an attractive going-in entry rate. And then from an underwriting perspective, we expect with the development opportunity to be able to produce IRRs in the mid-teens. And the tenant base at BLVD Place is just outstanding. The average lease term is 10 plus years, weighted average lease term. Over 60% of the tenants are institutional grade credit tenants with an average rating of BBB+. So just a home run asset that we were able to enter into and we think will be a great addition to our portfolio over time.

Yes, two additional comments. We mentioned the residential population in the five mile radius. Within one half mile of the BLVD Place asset, which is at the corner of what we would call in real estate, Main and Main or San Filipe and Post Oak. Within one half mile is the world headquarters of the BHP Billiton International. They just expanded another 500,000 square feet. And three quarters of a mile in walking distance is Apache, which is an international oil company. And then closer to that would be Stewart Title's headquarters. So we have a huge base there and we feel very fortunate that we were the ones that were able to put that under contract, before it really was circulated.

One other thing I might add just on the tenant base that is helpful, I think, and plays to Houston. When you look at the tenants in the property, there are no tenants that are oil and gas related in any way and a 100% of the tenants are outside of that industry.

That's helpful. When you talk about the development parcel at that property, in particular, because I think the other one has somewhat been committed already, tell me about what your plans are? What type of customer fits? And what you're planning to do there?

All right. I'll start, Dave, you can jump in. We have approximately 140,000 square feet we can add to the property. There's a great website called BLVD Place, Houston, Texas. Any of our listeners jump on and take a look at the quality of the asset. The two stories of retail and then four stories of office. We have Frost Bank has the headquarters building there, and they're a great Texas bank, about $31 billion in size. We have five restaurants currently, all have percentage leases. Whole Foods, they're doing close to $1,000 a square foot and they have a percentage lease as well. We know Whole Foods is under pressure right now, but we think that they are a survivor in this industry. On the development parcel, we have interest from two additional banks who really would like to move into the area. What we're seeing is, a movement from The Galleria, which is really about less than a mile away, towards that center. Going down, Post Oak Boulevard is the infrastructure under construction now, with a transit system that will take folks all the way to Houston's Intercontinental Airport. So there's a lot of new development in that area and this is kind of the focal point. And the city years ago have taken the expense of building the underwater systems so when you have heavy rain in Houston, which we all know happens once in a while, right, there's no flooding in that area.

Yes, just a couple comments maybe to add. As Jim said, about 140,000 square feet, 50,000 retail. We have had a great amount of interest so far. We feel very confident about being able to lease the center. We've also done studies of the area to understand the missing retail components. So we think it's a great opportunity. All of the infrastructure is in place and clearly the economics we would expect on the development portion really enhanced the overall returns. So we expect to begin the redevelopment portion very shortly after we close on the asset and plan to finance it primarily [indiscernible].

Great. That's it for me. Thanks.

Thanks Mitch.

Thank you, Mitch.

[Operator Instructions]. And we will take our next question from Gerry Fershtman with Maxim Group.

Hey guys. Good job. Just one quick question. I had read an article recently that voiced concerns about the recent raise and subsequent acquisition that suggested the math doesn't add up, specifically voicing concerns about the high cost, significant expense, concerned about debt levels. Would you guys mind speaking to that and addressing it? I'd appreciate it.

Yes, let me kick it off, and then I'm going to turn it to Dave. Gerry, thanks for being on the call. We've been building this company for six years and I want to say that we are really good at what we do. And we synchronized our capital market activities with the assets we have and then we target value-add assets and then we actually add the value. So matching that is something that we really looked at very closely, to not compromise anything that we built in the company so far. So I just wanted to give you that 40,000 foot kind of vision of mine and Dave's. And I'll let Dave give you some details on that, Gerry, thanks.

Sure. Hey Gerry, how's it going? [indiscernible]. First of all, I'll hit maybe the debt levels comment. We continue to focus on putting a good match of debt and equity, putting proper leverage on the assets. We expect to fund these two acquisitions approximately 50% debt, approximately 50% from the equity raise. So what that does is, it slightly improves the debt metrics. So I think that the comment that this would be pushing our leverage is inaccurate. This is a transaction that overall improves our debt metrics. From the economics of the properties, just to give a couple highlights there. BLVD Place, I think I said is about a 6.2% unlevered cash-on-cash return going in. We project that, that will grow into the mid-7% with the development. Eldorado is approximately a 6.7% cash-on-cash yield going in, that grows into the 9% cash-on-cash with a little bit of rolling leases up to market and then about 24,000 square feet of additional GLA we're building there. We have the commitment from Starbucks to move to a standalone pad, that significantly increases the rent. So economics-wise and then when you layer on to that, the fixed rate debt we're obtaining on BLVD, which is at 3.72%, it absolutely works economics-wise. These assets are underwritten as well, will produce an IRR in the mid-teens. So from a long-term shareholder value perspective, these assets and the funding of them is absolutely accretive to our shareholders.

Thanks guys. Thank you for addressing this.

Yes, let me add sort of one of the things that played into this as well in the overall building of the company is that, we felt it was important to all of our shareholders at a larger base of institutional shareholders with our recent capital raise provided. And we did that. We had a large number of institutional shareholders, long-term, primarily. The second thing is, we wanted to increase our liquidity in trading volumes, because what happens is, you get stuck on a trading volume is around 125,000 shares a day, and we didn't have much liquidity. Our hope is that we can at least double or triple that. And then the third is to get over the $0.5 billion of market capitalization side, so that we could start approaching the $1 billion range to get into the credit rating opportunity with Standard & Poor's and Moody's, because attaining a credit rating is something that a REIT like ours would like to have. So we had those capital market characteristics that were important to do on a raise like this. Plus we had great assets that we had to take advantage of.

Right. Thank you.

Thanks Gerry.

You're welcome.

And gentlemen, there appears to be no further questions at this time. Mr. Jim Mastandrea, Chief Executive Officer, I'd like to turn the conference back to you for any additional closing remarks, sir.

Thank you, Alan. I'd like to once again just like to thank you all for joining us on our call today. And let you know that we appreciate your interest and your continued confidence in Whitestone. We continue to make progress on our strategic initiatives that support, what I believe is the most innovative business model. Building upon our well positioned portfolio of properties with an optimal mix of e-commerce resistant tenants, we will continue to grow our profitability and shareholder value. Once again, thank you, and we look forward to updating you on our progress as we move through 2017 and beyond.

And ladies and gentlemen, that does conclude today's conference. Like to thank everyone for their participation. You may now disconnect.