Greetings, and welcome to the Whitestone REIT Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Mordy, Director of Investor Relations for Whitestone REIT. Thank you. You may begin.

Good morning, and thank you for joining Whitestone REIT's Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me on today's call are Dave Holeman, 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 1st, 2023. 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 2022 slides on our website yesterday afternoon, which highlighted topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

Thanks, David, and good morning, everyone. Thank you for joining us today. We have very strong results that I'm eager to discuss, but I wanted to start by sharing our vision. At Whitestone, our vision is to create the American Dream in our centers through inspired team members who position clients for success and to meet the evolving needs of thriving communities. We continually strive to champion a best-in-class team to create value in real estate better than anyone in our business. There are many aspects of that vision that keep me, and the team humble and passionate about what we do every day. 2022 was a very good year for Whitestone on many fronts. We exceeded our annual guidance for FFO per share, same-store NOI growth, G&A and net debt-to-EBITDAre. We ended the year on an especially high note with strong fourth quarter results, hitting record occupancy for the company and achieving it with very robust leasing spread levels. We continue to see the results from our strategic focus on the right locations in growing markets, convenience-focused shopping centers that have a large amount of smaller spaces and minimal big boxes. We populate our centers with an optimal mix of tenants that meet the evolving needs of thriving communities. We benefited from a number of positive macroeconomic trends driving neighborhood demand and supporting our growth, including hybrid work, migration to the sun-belt and population shifts towards suburban markets. These demand factors are further amplified by limited new supply in our markets. Our 2022 strong performance is a testament of the quality of our centers, the strength of our tenants, and the hard work of our team. We anticipate the positive momentum will continue, and we're looking forward to building on our success in 2023. Let me provide a few…

Good morning, everyone. As Dave mentioned, we've achieved strong results in 2022, improving occupancy by 240 basis points to 93.7%. We believe we have further to go in the terms of occupancy gains. But there will be a strong focus on remerchandising in 2023. And so same-store NOI becomes a bigger growth driver going forward. We outperformed on a relative basis with a 7.9% same-store NOI growth in 2022, and we're poised for a strong growth again in 2023. With our locations in sun-belt cities in high-growth, high-income neighborhoods and our focus on service and necessity-based tenants, we are well positioned for stability through COVID. We are now striving for additional upside through operational discipline and successfully serving our communities. With the management change in 2022, we aligned as a team to execute and lean into the paradigm shift in retail. As we settle into a hybrid work model for the long term rather than just a facet of the pandemic, consumers have much more time close to home. And we're looking for local connections, both for work and how they increase time spent with family. Whitestone strategy begins with our acquisition team engaging in consumer traffic, selection and competitive positioning in prime locations. Our fourth quarter acquisition of the Lake Woodlands Center is a perfect example. Lake Woodlands is a convenience center across from the HEB grocer and adjacent to a top-performing fitness center, driving a steady and consistent stream of traffic to the location. With the 1-mile radius average household income in excess of $250,000, it is ideally positioned for the ease of access to that neighborhood. This center starts with an average base rent per square foot of above $30 per square foot. We anticipate filling the 11% vacancy, allowing us to surpass the income from the…

Thanks, Christine. I'll walk through our earnings drivers in 2022 and anticipated drivers for 2023, so investors and analysts have a better understanding of what to expect. All of this is shown on Slide 8. We finished 2022 with FFO per share of $1.03. And which includes $0.04 of onetime benefit associated with forfeitures of restricted shares. Exclusive of the $0.04 of onetime cost savings we generated an additional $0.13 per share in 2022 from our 2021 level. The key drivers of that change are a same-store NOI increase of 7.9% translating to $0.13 per share. G&A reductions of $4.6 million or $0.09 per share, with $0.04 being onetime, which we separate on the walk on Slide 8. Other primarily non-same-store NOI for a positive $0.02 per share contribution and higher interest expense resulting in a $0.07 per share decrease. Looking forward to 2023, we are projecting FFO per share to be in the range of $0.95 to $0.99. Using the 2023 guidance midpoint of $0.97 per share. The key drivers of the change from 2022, our same-store NOI growth of $0.06 per share. Based on ending occupancy of 93.5% to 94.5%, G&A savings of $0.02, other primarily non-same-store NOI improvements for a positive $0.01 variance, and higher interest expense is anticipated to result in a negative variance of $0.11 per share for 2023. This is primarily a result of the refinancing we did in the third quarter of 2022 as well as the current SOFR curve. We anticipate that a 100 basis point move of the SOFR curve will result in a $0.0203 per FFO share variance, either a headwind or a tailwind depending on the direction of the rates. In 2022, we had approximately $2 million or $0.04 per share from percent sales revenue with a little over half of that in the fourth quarter when many tenants hit their annual breakpoints. We anticipate a similar pattern in 2023, and we anticipate we'll finish with a stronger fourth quarter in 2023. A bit more commentary on G&A reductions in conjunction with Slide number 9. In 2022, we made significant progress reducing our G&A expenses, both by reducing management compensation and by focusing on greater efficiency with our employees. Excluding the onetime $2.2 million compensation adjustment, we finished 2022 at $20.3 million in G&A expense and we're targeting $19.2 million to $19.7 million for 2023. This focus on reducing cost, along with strong revenue growth, is anticipated to continue to lower our G&A costs as a percentage of revenue in 2023 and in future years. Let me wrap up by saying we believe the scale of the changes we've made over the last year are apparent and convey that we truly appreciate our investors and intend to remain committed to maximizing shareholder value. And with that, we'll take analysts and investor questions.

[Operator Instructions] Our first question comes from the line of Mitch Germain with JMP Securities.

Congratulations, everyone, on the great year.

Thanks, Mitch.

Curious about leverage reduction that you've got baked into your outlook. Is there asset sales that you are contemplating, additional asset sales? Or is that just cash flow from operations and active sales could be a further -- can create a further decline in leverage?

Mitch, it's Scott. I think for 2023, we plan to recycle a little bit of capital. And the rest of the leverage reduction is going to come from improved earnings and some amount of operating cash flow that we would use to reduce debt along the way during the year.

It's largely -- and maybe honestly -- maybe I'll make sure, it's kind of largely driven by continuing to grow EBITDA. I think the like we did this year, I think we're very pleased that we were able to organically improve our balance sheet metric by over one point through organic growth, and that's what we expect to do next year as well.

Got you. Do you -- is the strategy still to match any potential acquisitions with dispositions and continue to recycle? Is that the way that you're contemplating your capital plan?

Yes, Mitch. It's Dave. Obviously, the transaction market today is difficult. As you hear from us and others, not a lot of activity out there. We're continuing to be very patient and disciplined on the acquisition side. And then really from a recycling perspective, I think just like anyone would do with the portfolio of assets or properties, we're continuing to look at our properties, look for those where we feel like we've extracted the value and potentially recycle those. So right now, in our modeling for 2023, we have not included any growth in acquisitions. We've included some recycling. But we'll do what we -- consistent with what we did this year. Really pleased with our recycling efforts in '22, which were selling 6 properties at about a 5, 6 cap and then buying a couple of properties at an aggregate 7 cap with a lot more upside.

Got you. I think last one from me. Bad debt. Obviously, you're baking into guidance a little bit of an increase. And I'm curious, has there been any changes to your watch list? Or is that just to create some conservatism given the potential for some macro and economic headwinds in the year?

Well, we forecasted 0.75% to 1.5% of bad debt. And I believe we ended '22 at about 0.82% or 0.83%. So towards the low end of the range this year, and we really haven't seen any backwards progress in our collections today. So it's a range. And the top end of that range is closer to where we've been historically, the bottom end is where we've been in '22, and we haven't really seen any downward pressure on collections or upward pressure on bad debt yet.

Our next question comes from the line of Gaurav Mehta with EF Hutton.

First question, I was hoping if you could provide some color on what you're expecting for your Pillarstone assets in '23?

Gaurav, it's Dave. Thanks for your question. So we have expressed that it's our desire to monetize our interest in Pillarstone. Largely, that is an effort that's being advanced through legal activities currently. So there's not a whole lot I can say other than we're continuing to believe that it's the best thing for Whitestone shareholders to monetize our investment and we're working to do so. We obviously provide an update on those legal activities in our public filings.

Okay. Second question on your '23 guidance. What kind of leasing spreads are you underwriting in the guidance?

We expect to see leasing -- strong leasing spreads for the balance of '23, similar to what we've seen towards the third and fourth quarters of '22. The leases that are expiring in '23 would still be towards the lower end of the leasing pricing before we've seen inflation. And I don't know, Christine, if you want to add any color there?

We continue to see the same improved leasing spreads over -- that we've had in the last year and continuing. We haven't see much slowdown in leasing yet. It's just moderated a little bit through the first quarter. In addition to that, we're also focusing on remerchandising as well for our centers. So we have an asset plan for each center, where we look over the next 3 years and how we best remerchandise those for an increase in traffic and premium and rents.

[Operator Instructions] Our next question comes from the line of Craig Kucera with B. Riley Securities.

Does your investment-grade rating help at all in pricing on your line of credit?

The investment from Kroll that there's not a break in pricing from the investment grade rating we received from Kroll. However, we do anticipate that it's going to improve our access to the debt markets going forward and improve any pricing we may have. And as we continue to improve our earnings, we may be able to achieve pricing reduction going forward in our line of credit.

Yes, I might just add to that. I mean just if you step back and look at the high level. Obviously, we've made a ton of progress with the company this year in improving the overall profile. Results are strong. The balance sheet has strengthened. So all of those activities were reflected in our recast and the progress it made was an important part of us getting that done. Really proud of Scott and the team for getting that done in late '22, which is very important. If you look at us going forward, we have a little -- maybe a little bit higher variable portion of our debt than some others. But really no maturities, no debt maturities from -- until '27, '28 of any significance. So I think the progress we've made, the receiving of the investment-grade credit rating, all position us to going forward in a much better position.

Got it. And are you planning on going down the path with any other rating agencies to maybe see some better pricing, if possible?

We don't have any immediate plans for that. But as we move forward, we may consider it.

Okay. Great. I just want to talk about your operating expenses. I want to say the first 3 quarters of last year, they were up at a pretty healthy clip, relatively flat this quarter, so a nice improvement in NOI margin. Did you roll out any new programs? Or can you just give us some color on how you were able to keep those a little bit in line and kind of your expectations for '23?

Maybe, Christine, I can start out, but maybe Scott will jump in as well. But I do think one of the things we've done as a company is implement significant discipline, accountability, clarity of objectives. And so one of the things we've done is when working with the properties, Christine has been great with leading the team. And then I'll maybe let Christine and Scott talk to some of the things we've done in this area.

And Craig, this is Scott. In the third quarter, there is timing involved with property expenses. Sometimes you have repairs schedule -- more repairs scheduled in the quarter, they may have in another quarter. So I think about it more in the annual context than in a quarterly context.

And with that, we're really focused on planning. And so each property is part of the study of what we need to do. Going forward is with a capital plan over a 3- to 5-year period, we haven't done that in the past. So that's part of what we've implemented this past year. In addition, it helps smooth operations quite a bit. And we've also really streamlined the team and reduced headcount over the year too. That's made a big difference. And so last year was about alignment. This year is about accountability. And next year, we look for the awards with that.

Our next question comes from the line of Mitch Germain with JMP Securities.

You there Mitch?

Sorry about that. I know you guys have a bunch of pad sites and redevelopment opportunities. I'm curious if there's any decision or progress to begin working or monetizing some of that?

Yes. I'm going to start and then probably let Christine maybe give more info. But we do still have a ton of opportunity in the portfolio from extracting some of the excess land and turning that into pad sites. I think historically, we probably had a slide in our deck that we didn't include this quarter just because we're excited to kind of provide information as it happens. And so there was nothing -- no significant progress there, but we still see great opportunity. And I'll let maybe Christine, if she wants to add more color. But there are between pad sites and other developments, there is opportunity to build those at very attractive returns.

Yes, Mitch. What we had last year is a little bit longer lead time on some of the planning that has to do a lot with the municipalities that we've worked with. Some of the COVID effects that they were backed up quite a bit. But we continue on the of all of our pad sites that we have. So we keep -- we'll keep delivering a number of those each year. And on both projects, the much larger projects we're making we're making headway on those as well. We'll be giving more detail as we -- more detail to come.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Holeman for any final comments.

Thanks, everyone. We are very energized by our progress we've made in '22. And and look forward to carrying that into 2023. Thanks for joining us today, and we look forward to updating you shortly on our '23 progress. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.