Please standby. Good day everyone and welcome to the Whitestone REIT Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dave Holeman, Chief Financial Officer. Please go ahead, sir.

Thank you, Denise. Good morning, and thank all of you for joining Whitestone REIT's Second Quarter 2017 Earnings Conference Call. Joining me 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, uncertainties and other factors. 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 factors. Acknowledging the fact that this call may be webcast 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, August 3, 2017. Whitestone's second 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 website, whitestonereit.com, in the Investor Relations section. During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the company. Included in the supplemental data package are the reconciliations of non-GAAP measures to the GAAP measure. With that, let me pass the call to Jim Mastandrea

Thank you, Dave and thank you all for joining us on our call. Today, I will provide an overview of our continued strong performance as we report our second quarter, share some perspectives on the directional changes in retail in retail-focused real estate, and discuss how Whitestone is uniquely positioned to thrive as these industries are evolving. Dave will follow with a discussion of the quarter's transactional activity, details of the financial metrics, and our updated financial guidance. First, with regard to the industry, while some pundits disagree with the headlines around the changes in the retail industry and believe that the impact on online e-commerce on physical retail is overstated. I think it is fair to say that changes in consumer behavior and online commerce have had a much greater impact on bricks-and-mortar retail than anyone would have predicted 10 years ago. The industry -- the retail industry is vastly changing. A recent Forbes article titled The Looming Retail Bailout cited 3 causes; bare-bones pay habits, retail pays only 55% of average wages, inability to innovate, and retailers have rushed into the high-debt world of private equity. True, but not conclusive. A leading Wall Street analyst projected in May of this year that 11% of the stores of the 31 retailers listed in the report will close in 2017. The problems for brick-and-mortar chains seem so entrenched that to many, it seems that the entire existing retail infrastructure in our country could collapse one day. Traditional retail real estate owners are looking for alternative uses for their spaces. The ability to change quickly from the traditional retail real estate owner will be hindered by the high cost of repurposing deep big-box spaces. In addition, the tenant-favorable leases of many of the traditional national retailers, which contain approval rights, co-tenancy…

I will now provide further detail on the quarter's transactional activity and financial performance and conclude with a discussion of our updated financial guidance. As Jim discussed, during the quarter, we closed on the acquisitions of BLVD Place in Houston and Eldorado Plaza in Dallas. Both leading properties are ideally located in great submarkets at stable tenant basis and provide upside through future development of additional leasable area on adjacent developable land parcels. The addition of these properties fit our business model perfectly and will drive substantial long-term shareholder value. In May, BLVD Place, located in the strong uptown submarket in our Houston region, was acquired for $158 million, and Eldorado Plaza, located in the McKinney submarket in our Dallas region, was added for $46.6 million. We funded the purchases through a successful capital raise, netting approximately $100 million from the issuance of $8 million common shares in late April and $105 million of debt. The timing impact of the issuance of the shares prior to the acquisition close date was approximately $0.02 FFO per share dilutive during the second quarter. For the quarter, our leasing team signed 89 new and renewal leases totaling 231,000 square feet, with a total lease value of $21 million, representing future rental revenue income. Our leasing spreads for the trailing 12 months were a blended 6.4% on new and renewal leases. We ended the quarter with a total operating occupancy -- operating portfolio occupancy at 89.8%, up 240 basis points from a year ago. Our annualized base rent on a year-over-year GAAP basis expanded 23% to $18.93 per leased square foot at the end of the second quarter. We have a diverse tenant base, which minimizes our individual tenant credit risk, with our largest tenant representing less than 3% of our annualized rental revenues.…

[Operator Instructions]. And our first question today comes from Carol Kemple with Hilliard Lyons.

Good morning.

Hi Carol, how are you?

Thanks, good, how are you all doing?

Good. Thank you.

So, what are your thoughts on acquisitions at this point, how big is the pipeline?

So as always, we keep a very robust pipeline of properties we are following. I think that pipeline typically is in the $0.5 billion range of assets that we're looking at and continue to follow. We are going to, obviously, continue to grow this business in an accretive manner. And in looking at those acquisitions if we feel there's an opportunity to add shareholder value, we would love to pursue those. But we continue to have a tremendous amount of potential in our properties that meet our business model, and ultimately, will add value to our shareholders.

Yes. We have -- Carol, we have -- we were always looking at deals, and I go back to the fact that we have made all of our acquisitions one-off transactions. And every time we make an acquisition, it has a component that we can add value. Two of those examples are in Starwood and in Pinnacle, which we completed ground-up construction last year, and they're now coming on board full steam.

And then have you all -- I think you talked about this in the past maybe recycling some of the assets you bought earlier in the company and just kind of showing the value you all have created in those, have you given any more thoughts to that or are there any plans to recycle retail assets?

Absolutely, one of the things we've focused on, obviously, as you can see in our results, is continuing to upgrade the quality of the income stream and the quality of the assets with our annualized base rent increasing 23% year-over-year. We've continued to focus on upgrading the real quality of the assets in the portfolio. We also will continue to look to recycle some capital and dispose of assets where we feel like we have extracted the value there. And so that is part of our plan, obviously, it is continuing to look for assets where we feel like we can use that capital in a better way.

So is that something you probably wouldn't look to sell anything unless you had something else you wanted to buy?

No, I would say, we are intending to sell a few properties. And we hope to have those listed and sold and closed before year-end.

Okay, thanks.

[Operator Instructions]. Our next question comes from Mitch Germain with JMP Securities.

Hey, good morning guys. I was curious, Jim, I know -- I get the strategy and I know you talk a lot about the smaller tenant focus. But you used some commentary about the stability of cash flows. And I just want to kind of weigh the four year term and the kind of service-oriented entrepreneurs that you're dealing with versus the better capitalized larger tenants and how you weigh the decisions behind both in terms of leasing and acquisitions and such.

Good question. When you say better capitalized, it's relative. The capitalization of the small tenants, if a tenant is paying $5,000 a month rent and have a clean balance sheet with $1.5 million net equity, that's fairly well -- that's a fairly well capitalized small tenant. But they are also in the market with a growing business. So we have tenants like Ruth's Chris, Fleming's, Mastro's, restaurants that are names that we just don't -- we don't have the list, it's too long to publish in our remarks. We have a lot of Starbucks. Those are small tenants, and they're very well capitalized. Compare that to the larger tenants in my remarks is it while you have -- while there is a, in some ways, a false sense of security with the credit of these large big boxes, because of the restrictive covenants and co-tenancy provisions, it's virtually extraordinarily difficult to access their credit. The -- you have to live by the terms of the contract, which is in the lease, and those terms give away many rights as an owner of the real estate. So we feel that our portfolio of the small tenants with the short-term leases, the percentage clauses on the rents, the triple-net factors of most of our properties, probably over 80%, is far stronger credit than what you might think of in the larger tenants. And let me remind you, if you look at our compounded annual growth rates since 2010, it just continues to grow. And while we are a small company, not many people recognize that. But this is a very strong portion of the -- where the retail businesses and when you are a company that looks at their assets as distribution centers, in other words, we have approximately 70 properties with -- that we think of as distribution centers as opposed to distributing services and need-based goods as opposed to thinking of them as just retail real estate. We help tenants by providing them great locations and great properties, the opportunity to build their businesses. And their success translates into our success.

The only thing I might add is, as Jim mentioned in his comments, with the significant disruption in the retail industry, we also strongly believe that the retail real estate owners that are able to move quickly will have the greater success, and we spent a lot of time developing our business model and really fine tuning it. And we believe our tenant base that's well crafted will be able to allow us to move quickly with the changes in the retail industry.

And that really kind of leads into my second question is, are you seeing, I'll call, maybe more passive landlords that just own a shopping center here or there, but it's not really their core business. Is there any deal shakeout that might be happening from those sort of investors and if so, how do you anticipate funding and having the liquidity if there is a potential for you guys to potentially grow meaningfully here, given the fact that you're relatively tapped out from a leverage and liquidity perspective?

Sure. I'll start, and Jim may add some comments. I think if you think about the business we're in is a very active business. This is an operating business. We know our tenants, we search out and look for tenants in our markets that are very good at what they do. We put together a mix of tenants that will help the property succeed. And you can't just buy real estate and let it perform. So we believe that this model we've developed and fine tuned, which is very much an operating model, will succeed and will allow us to succeed more in the traditional owners that are looking at it as more of an investment. On the capital side, we continue to maintain a very clean, simple balance sheet. It gives us a lot of financial flexibility. We have a great -- we have great relationships with the bank groups. We have a largely unsecured balance sheet. We mentioned the recycling and asset dispositions that will provide capital. So we feel like there are lots of capital sources out there to meet the potential opportunities that may come up as a result of what you discussed.

Mitch, another way of saying what Dave just said is we're not relatively tapped out. We got such a simple capital structure and a strong balance sheet that you could have said that six years ago, five years ago, four years ago, and people have said it. And yet we have the ability to find quality real estate and add value to it, which is our business. We have the infrastructure of our team that is well synchronized with the type of tenant base we have and the business model we have, which also differs very greatly to a huge number of the other REITs out there. It is a management-intensive business, and we've been able to scale our overhead, but in many ways, it really looks at what these -- what the retail industry was like probably 100 years ago when you went to a neighborhood shopping center or a neighborhood store, confectionary store, very much like that. So we don't see ourselves as being tapped out, and I think we've just demonstrated that with the two acquisitions we made. And the way we made them. And we have a lot of deals that come to us that we sit on until we have the right combination. Let me just say one final thing to that, as part of the magic in this business is how well you can synchronize the acquisitions, along with providing the capital to take those assets down. And as we grow and as the market begins to reward our shareholders with a higher price and brings our multiple in line with the industry, I think you're going to see that we have the access to some tremendous deals, and we won't have to rely as much as we relied on the earning power of the real estate to really move this company upwards. We can rely on bringing down the cost of capital on a more significant basis.

Great, thank you guys.

Hey Mitch, you are welcome.

[Operator Instructions]. Our next question today comes from Anthony Hau with SunTrust.

Good morning guys.

Good morning.

I understand that you guys went off the assets to Pillarstone but Whitestone still owns a majority of it. So when do you expect to completely sell off those assets?

Sure. I think we -- thanks Anthony, good question. We -- first of all, we think that the decision we made in 2016 to spin off those non-retail legacy assets was absolutely the right thing to do for our shareholders. And I think some of the key measures in the quarter highlight that, like the ABR increases and the occupancy increases in our operating portfolio. So we think the decision of spinning off those assets was absolutely the right decision. We don't want to give a time line on the disposition, but be assured, we are working toward disposing of those assets at the Whitestone level and have significant efforts around that.

And a follow-up on that, can you guys give us like an overview of your leasing plan for the office portfolio, because it seems like the portfolio has a huge chunk of lease expiring over the next year or so. Just curious what percentage of those leases, expiring leases has been back filled or addressed and can you also talk about the lease spread that you expect as well?

Let me give you just an overview and, Dave, you can give a little more of the detail of it. One of the two products that we have introduced, is a wholly owned subsidiary, a taxable subsidiary of Whitestone that's called CUBExec. And what CUBExec does is it has very similar characteristics as WeWorks. And we now have four locations where we've launched this. And as an example, we may go into one of our buildings and create 20 spaces in which we did and we opened about 90 days ago and just as this one example. And we probably have 60% or 70%, so roughly of those 20 spaces leased. And for 120 square-foot office, we're getting $1,200 a month, which is phenomenal. And what we're doing is we're gearing that towards the kind of the millennial and the entrepreneurial environment, and it's proven to be great success. It takes time to put together a plan like this and get it well synchronized in the rest of the business. In addition to that, what we found is that where we've started that several years ago, it begins to incubate tenants and one particular tenant that we had went to a full-floor in one of our buildings. So that's one of our efforts. The second effort is we combine it with commercial outside brokerage, particularly in the office building. And then the third piece is we hope to complete relatively soon a strategic plan to deal with those properties that is different than the plan that we have in Whitestone. In other words, you can't take a warehouse in a location surrounded by apartment buildings and create a retail property, and it doesn't fit in Whitestone. Therefore, we can't ask Whitestone shareholders to provide the capital for that. We can do that outside of Whitestone in Pillarstone and take a warehouse and convert it into apartments, and Whitestone will participate to the point of 80% of the profit to that, with no downside risk in terms of capital or debt. And that's been the plan to maximize the value for the Whitestone shareholders. And...

And I'll just add a couple things, Anthony, on kind of our leasing activities and, I think, you also mentioned the spreads. I will remind you that Whitestone through management agreement with Pillarstone does prepare -- provide the leasing and property management services. For that, we receive a fee that is -- that's go to the Whitestone shareholders. So there is a property management and leasing fee received for Whitestone for managing those properties. Whitestone has very qualified leasing agents and property managements that are assigned to those properties. And their efforts are very similar to what we do in our retail portfolio where we are proactive in looking for tenants, searching for tenants, continuing if it makes sense to break down spaces and fit tenants in. So the leasing efforts around the non-core legacy properties are robust. And as far as the spreads, we have seen -- have seen in our results this quarter, we've seen pressure on net operating income. The occupancy was down about 3.5%. As far as the rental rates, the revenue for the Pillarstone properties is about flat on a year-over-year basis and was up about 2% in the quarter. So we saw a little better results on the consolidated partnership legacy properties in Q2. But the rental rates at this point have been fairly flat, but I think the better opportunity there is to continue to push the occupancy, which we will do, and we will work hard, obviously, to look for tenants to drive NOI in those properties.

Okay, thank you.

Thank you.

[Operator Instructions]. Our next question comes from Daniel Donlan from Ladenburg Thalmann.

Good morning, this is actually John Massocca on for Dan. Looking at kind of the same-store NOI, I think there was a big jump in real estate taxes. Is that something that you guys maybe can look to appeal going forward, is that something that might be a bit of a continuing problem in coming quarters, just any color you could provide on that would be great?

Sure. We have seen an increase in our real estate taxes and our properties, primarily from our Texas location. We are very active in appealing those and pursuing reductions there. Although there is an increase, we do recover from an operating -- from a CAM perspective most of that increase, but it's important for our tenants to continue to look down to push those operating expenses. So we are very active in fighting the valuation increases we've received. But we have seen increases in the Texas properties on real estate taxes.

Okay. And then looking kind of at guidance revision, I mean, how much of that was tied to weaker NOI expectations versus kind of other factors?

Yes, so there's probably -- we lowered the same -- overall same-store growth guidance from 3% to 5% to 2% to 4%. So probably $0.02 to $0.03 of that is related to the NOI growth primarily from the consolidated legacy non-retail properties. The other couple things is really related to the timing of the offering in the quarter, which was unique to this quarter and that we raised the capital, and it does take a little bit of time to put that capital to work. So, that's the big drivers of the revision in occupancy were the timing of the shares and then really lower same-store growth in our non-retail portfolio. I will highlight that, Jim mentioned, we are continuing to scale our general and administrative expenses and our operating platform. In the revised guidance, we also revised the net income guidance, which is actually a little higher than before, reflecting the fact that we are scaling some of those operating expenses over a greater basis of assets and revenue.

Makes sense. That's it for me. Thank you very much.

Great, thanks John.

And with no further questions in the queue, I'll turn the conference back over to Mr. Mastandrea for any closing or additional remarks.

Great, thank you, Denise. Once again, I'd like to thank you for joining us on today's call. We appreciate your interest and the continued confidence in Whitestone. We continue to make progress on our strategic initiatives that support our innovative business model. Building upon our well-positioned portfolio of properties, with an optimal mix of e-commerce-resistant tenants, and a management team that have worked together for a minimum of eight years, we continue to grow our profitability and shareholder value. For the remainder of 2017, we will continue to focus on increasing property occupancies, selling properties where the value has been maximized, and we plan to use the proceeds from the property sales to reduce debt for selective -- and for selective accretive redevelopment. We remain confident that our business model and team will continue to produce results that will be rewarded in the marketplace. Thank you once again and we look forward to updating you on the progress as we move through the balance of 2017. Thank you, operator.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.