Good day, and welcome to Whitestone REIT Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kevin Reed, Director of Investor Relations at Whitestone REIT. Please go ahead, sir.

Thank you, Anna. Good morning, and thank you for joining Whitestone REIT's third quarter 2018 earnings conference call. Joining me on today's call are Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our 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 press release and filings with the SEC, including Whitestone's most recent Form 10-Q 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, November 1, 2018. The company undertakes no obligation to update this information. Whitestone's third quarter earnings press release and supplemental operating and financial data package have been filed with the SEC and are available on our website, www.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 earnings press release and supplemental data package are the reconciliations of non-GAAP measures to GAAP financial measures. With that, let me pass the call to Jim Mastandrea.

Thank you, Kevin, and thank you all for joining us on our third quarter 2018 conference call. As the economy continues to gain strength and momentum, Whitestone's entrepreneurial service-based tenant, over 1,600 in number, are participating in and benefiting from the country's economic growth. Our leases are structured to allow Whitestone to benefit from the strength of the economy and strength of our tenant. They have shorter-term duration, allowing for more frequent increases in rental rates and include annual rent bumps, the percent revenue [indiscernible]. Highlights of our third quarter includes gains in occupancy, revenue and net operating income. Continued improvements in the overall quality of our portfolio, both operationally and from selective dispositions, execution of a selective development and redevelopment activity, acquisition pursuit activities positioning Whitestone to move quickly on opportunity when the timing is right. Before turning to operations, I'd acknowledge the fact that our FFO Core per share for this quarter and our full year guidance are lower than in comparable periods in 2017. The primary reasons for this are increased borrowing costs, 2018 property dispositions reducing property cash flow, and the inclusion of acquisitions and disposition pursuit costs in 2018 which were added back to FFO Core in 2017. Dave will comment in greater detail on these items during his portion of today's call. He assured that we remain committed and focused on earnings per share and cash flow growth as we execute our differentiated E-Commerce Resistant business model and our efforts to grow long-term shareholder value. Our achievements continued for the first three quarters of 2018 as we have leased over 946,000 square feet. This resulted in occupancy increases of 40 bps quarter-over-quarter and 180 bps year-over-year. Same-store revenue growth of 4.6% quarter-over-quarter, 3.2% year-over-year and 2.2% for nine months year-to-date. Same-store NOI also grew…

Thanks, Jim. As Jim said, we continued to make strong progress on several fronts during the third quarter. That progress with highlighted by strong leasing activity and spreads, improvement in our occupancy levels, continued improvement in our general and administrative costs as a percent of revenue, successfully disposing of properties during the quarter at a 6.7% cap rate, and positive same-store net operating income growth of 2.5%. Now let me give a few details on these results. Revenue for the quarter grew $950,000 or 2.8% from a year ago. This was driven by same-store revenue growth of 3.2%. Same-store property net operating income was up $600,000 or 2.5% from a year ago. Our same-store growth for the quarter was down slightly from 3.4% in the second quarter due to the inclusion of our 2017 acquisitions in the same-store pool in Q3. In our wholly-owned portfolio, our operating portfolio occupancy grew 180 basis points year-over-year and 40 basis points sequentially from the second quarter. And our same-store occupancy grew 110 basis points year-over-year and 50 basis points sequentially from the second quarter. In our total portfolio, our operating portfolio occupancy grew a 130 basis points year-over-year and our same-store occupancy grew 90 basis points year-over-year. During the quarter, we signed 116 new and renewal leases containing 314,000 square feet and $28.9 million in total lease value or future rental revenues. The average lease size signed during the quarter with 2,700 square feet and the average lease term was 5.2 years. Spreads for the rolling 12 months were a positive 7.3% on new leases and a positive 11.9% on renewal leases, representing a blended increase of 11.2% on a GAAP basis. Interest expense increased $600,000 from the prior year, driven by a rise of 40 bps in our overall interest rate. General…

[Operator Instructions]. We'll now take a question from Anthony Hau with SunTrust.

In the previous 10-Q, you had mentioned that one of your loans valued at tangible net worth covenant. Have you guys reached a resolution with the lender set?

Yes. So, our credit facility, we have the normal and customary covenants. One of those is a GAAP network. We were slightly on a compliance with that as of the second quarter. Was not an issue with any of the lenders, but we received a waiver. I think I mentioned we're in the process of updating our credit new facility, which has about a year of maturity left on it. And so we did get a waiver again in the third quarter, but I expect that to be - to be reset by year-end and there are absolutely no issues with any of the lenders regarding that covenant.

And maybe I missed this, but what are the assets that you're planning to sell, right? What do you plan to use the proceeds for? Is it for us paying down debt or to match 1 acquisitions?

I think Jim and I both will comment on this. But obviously we look to add value to the properties we own and as we look to grow the company, we look to do some recycling of capital where we feel like we have added value. We also had an effort to continuously improve the overall quality of the portfolio, so we completed two property acquisitions so far this year, and we have some others, which are out there probably with differed comment on those as they close. But we that selling some properties, using the proceeds for reduction of debt, as well as recycling of capital, we think makes sense.

Anthony your - I think our assets you've looked at them fairly closely. Everything we buy has a value-add component to it and what that means is often we will buy something that's only 70% occupied, and as we begin to fill it towards the 95% stabilized occupancy and stabilized, we believe, the percentage of occupancy or equivalent to the market risk surrounding 3 mile to 5 mile area. So we buy and with that in mind, we also look at opportunities to add value, seems like the rooftop view which I've discussed. So when we feel that our property is getting to the point where we can no longer be effective as a value-add management team in the entrepreneurial space of small tenants, then we put it up for sale. We did our IPO as you know a few years back and some of the assets we bought, a lot of them in the downcycle, are now just getting to the point where they are getting ready to sell as well as turning around some of the legacy assets we've got, as you - as you've seen. And if you look at the sales price compared to the book value we've had, and if you look at the - not only sales price, but the opportunity that we have, you'll be seeing - you'll be seeing what we're paying now. You might also take a look at that net asset value when you look at your forecasting calculations as well.

We'll now take our next question from Brandon Travis with Ladenburg Thalmann.

Hi guys. I'm in for John Massocca. With the Torrey Square in mind - good morning, what is the size of opportunity set for capital recycling outside of the Verizon portfolio?

Brandon, I guess that you said - would you repeat that question?

Yes. What is the size of the opportunities set for capital recycling outside the Verizon portfolio?

Yes, so I think we have not given guidance as to a number in our - in our supplemental data and our updated guidance. We gave a range of dispositions this year of I think - $30 million to $46 million. So, I think - I think that's what we believe is probably out there this year. We'll continue to look at opportunities as we go forward, where we can add value by recycling capital into better assets.

Okay. And then also on Pillarstone, what is driving the strong performance? Would you relate it to a better oil market given the portfolio is Houston-focused?

So a couple of things. First of all, we have - we have a limited number of assets in that portfolio. Currently, we have 300 contracts itself. What's driving it is the Houston market. I think we are getting a lot of tailwind from the tax policies built into that. I mean, Texas has always been strong. I've been in this market since 2006 and we came through the 2008 debacle relatively well. So you are seeing the tax implications, you're seeing the opportunities for companies to acquire space, you're seeing well-located properties that have been - that we're managing and leasing. And a slight [indiscernible] continued performance in that portfolio.

And then in regards to other revenue for the Pillar Stone portfolio, it's higher in the quarter and also seems to be outpacing operating expenses. So, not quite all reimbursement. Can you touch on what could be driving that?

I am looking and thinking in terms of - you know obviously, the other revenue as you said, drives with the typically with the property operating in tax cost. I'm not - I can't remember anything specific to the telecom portfolio that was unusual in the quarter, I mean we continue to have obviously in any quarter, you have some items that we are not aware of anything, Brandon.

Okay, and then given pressure on the low end of the interest curve, what are your plans for swapping out additional debt?

Obviously, we've continued to maintain a bigger piece of variable rate debt to some of the others. We've done that really for two reasons; one is our commitment to lower our leverage - leverage levels for giving us the ability to prepay and then secondly with our shorter-term leases, we feel like we can match the increases in the economy and interest rates by raising revenue. With that said, as we amend our credit facility and update it, we expect to fix the rate on a greater portion of our debt. So I think you'll see that go up. Today we're about 55% fixed and we'll probably look to increase that to the 75% to 80% range by year-end.

I mean and one more for you. On the spike in TI and incentives, those attributed to a large percentage of the renewals or maybe a couple of properties specifically?

It's really hit - it obviously spreads and TI leased commissions are good to look at over a rolling period because within any quarter we don't have a large number of leases. We did have some larger TI spends during the quarter and we had a new restaurant at Boulevard Place in Houston. That was a large amount. We had a couple of other restaurants. So we didn't see any kind of general increase. What we did see is a couple of larger tenant improvement deals that were good for the portfolio that made the number look larger this quarter. I think obviously we look at a blended rate and we haven't seen any overall trends, other than a couple - a handful of larger leases with bigger TI amounts.

We will now take a question from Craig Kucera with B. Riley FBR.

Apologize if anybody has asked these questions already. I just had to hop on. But I want to ask about the line of credit. How does Pillarstone come into that as you consider recasting that? I mean I know some of the assets are collateralizing the line. And do you think you need to resolve Pillarstone before taking care of that or is that not really an issue?

It's not an issue. So Pillarstone will have its own debt structure today. It has secured mortgages and then it does have a loan from Whitestone that we expect to substantially repay by year-end. And then - Pillarstone really has its own capital structure outside of Whitestone and I think today, there are four Pillarstone properties that are included in the credit facility and we will take out in the new amendment. But really it's not an issue, Pillarstone has its own financing and Whitestone's creditability is not being impacted in any way by that.

Just let me take you back to Pillarstone and how that came about for 30 seconds, if I can. Pillarstone, we have responded to a lot of investors in RA saying that Whitestone should become a pure play retail company. And making it a pure play, we also said, we don't want to - we don't want to give up any value in those assets. How can you structure it. So we can - so we can get the upside now. So what we did is, we found a mechanism, I should say, an investment bank to explore the alternatives for us to find a mechanism, where we can take and spin those assets off, still have some influence over them and Whitestone would participate in a huge amount on the upside of any value that comes out of them. And the downside would be laid off on a different company. So, any borrowing or any equity, it needs to be raised to bring those assets to do a valuation in excess of where they were. That would be done off the balance sheet, not on Whitestone's balance sheet. So that's the real purpose behind the reason we did it and we wanted to make sure that we still have control of it [indiscernible] so that we could actually execute the rates on shareholders.

Yes, I appreciate the incremental color. But going into the wholly-owned assets, terrific leasing velocity this quarter and all year. Are you continuing to see strength here as we enter the fourth quarter?

Now we are, we are seeing some pretty exciting stuff. I will give you one example. We created a product which is 100% owned by Whitestone called CUBEXEC. It's blend between [indiscernible] and where there's tiny spaces, I'd say maybe a 100 square feet to the maximum say 200 square feet and we've built this out. We're building this out in primarily in our retail centers or for the small space users in incubator companies. The first one that we built out, we've had such tremendous success, it is about 5,000 square feet, we are now getting last month - I want to give you approximation around $20,000 for the month, huge numbers for this small space. And it's working just the way we thought while millenials - a lot of new people starting businesses and with the benefits of these tenancy, the tenants observe because they can rent our [indiscernible] from us for the day, they can run a bench for the day, they can get on our Internet, they can have [indiscernible] there, they can walk out the door to anyone of 7 or 8 restaurants and take their clients there, they can walk down the street to a cigar lounge within our property if that's the kind of business communications they want to do. So, this CUBEXEC product is really taking off for us. We have since decided to expand it, so we're going add about 2000 square feet to it and we're now looking at three other locations. So that's one of the things that we're doing to really exercise that. By the way the backspace was a very difficult space lease. But if you get a chance to see it, we would love to show it to you.

Okay, and one more from me. You have been pretty quiet on the external growth front this year versus prior years. Are you - are you looking at any potential transactions and kind of how it's pricing moving around?

I think we - I'll let Jim comment as well. But I think we talked about a little bit in our remarks that one of the things we've been doing is we've been focused on operations. We will be focused on some recycling and then balance sheet. But we've also kept a very active pipeline out there that we feel like is actionable. We're going to continue to be disciplined and look at the right price and the right timing, but we believe that obviously our operating model and our strategy can really be scaled over a larger - be larger business asset in the future.

And I'll add to that. We've got a pretty pipeline and very similar assets and the prices are fairly consistent. And usually there some type of stress on the assets we buy, either the occupancy stress, either the management stress. Here it is a great asset, but it is one asset owned by somebody who may have left a major development company, went out on their own and they need some help with it. So we've got these assets in the markets that we're currently operating in. We're looking at this year, we - in 2018, we wanted to start working towards reducing our cost of capital, make these more desirable and what we've learned is that the real estate side of our business has just gone tremendously well. And so now we're working on the capital structure to bring down our cost of capital because knowing that with a lower cost of capital, we can really exercise and learn about them. We have our infrastructure in place, we have our business model in place, we have that mechanism in place to create and extract value, we have enough real estate now with value-add opportunities within the portfolio, and we can bring on - and now is a matter to really grow the company with lower cost of capital.

We'll now take a question from Mitch Germain with JMP Securities.

So I'm curious about some of the sentiment in terms of - some of the touch points you've had with your customers. Obviously a lot of smaller entrepreneurial-type customers and given - I think many would agree economic risks or maybe more to the downside today Anything really changed with regards to their businesses, their willingness to sign leases? Is there any kind of push back on rates more than you've seen recently, anything changed at all in your mind?

I'll start off and Dave can jump in, Mitch. Good morning, Mitch. Haven't heard from you for a while. The [indiscernible] business model is really what we're focused on. And that's probably a better definition than being a retail Internet resistant type of company. But what we're finding is, the business entrepreneurs today are more willing to expand with the tax rates we are getting and with some of the reduction in the legislation and regulations on businesses. So we've seen people willing to take more risk and we think that's been good for their interest in well-located properties like ours. We're seeing a lot more entrepreneurs come into the market, particularly in the millennial age range. We're seeing a lot more people. What we found in Q2, going back to the Q2 example is that we have been at gathering areas at - at that location and we'll see 4 or 5 of these different tenants sitting out and collaborating outside. So we're seeing that begins to have some traction as well. I saw this week's Wall Street Journal, where Brookfield had gone through an entrepreneurial type model in New York looking at the smaller types of tenants and their commitment to it. What's important is that they a sign a lease, they have the networks, we look for at least 1.5 million group networks and the coverage of the lease expenses, we look for that. We are committed to their businesses, they have a 2% to 3% annual increase in the leases. In the restaurant leases we sign, they have percentage [indiscernible] will dissipate at our break point. What we don't permit are subordinations to small business loans through our assets. No one will permit negative covenants that restrict us from replacing any tenant or occupancy covenants and things like that. So it has a lot of flexibility and it puts the ownership of the real estate in our hands versus the tenant's hand.

And at this time there are no further telephone questions, I'd like to turn the conference over to Mr. Mastandrea for any additional or closing remarks.

So thank you. Just briefly I would like to thank you all for joining us today in our 2018 third quarter conference call. We are pleased with our continued solid results and we expect that they are providing us with confidence in our ability to really create some true long-term shareholder value and along those lines, increase future FFO per share. I thank you and I will conclude our meeting.

And once again that does conclude today's conference. We thank you all for your participation, you may now disconnect.