You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”), and the consolidated financial statements and the notes thereto and “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2019. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report.
This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, pending acquisitions and the impact of such acquisitions on our financial condition and results of operations, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management'smanagement’s view only as of the date of this Report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sectionssection of our Annual Report on Form 10-K for the year ended December 31, 2016,2019, as previously filed with the Securities and Exchange Commission (“SEC”) and of this Report below.
We serve as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), which was formed on December 31, 1998 as a Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions.
Substantially all of our revenue is derived from rents received from leases at our properties. We had rental income and tenant reimbursementstotal revenues of approximately $33.7$29.9 million and $25.5$29.9 million for the three months ended September 30, 20172020 and 2016,2019, respectively, and $92.1$88.1 million and $76.1$89.2 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.
We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal leases. As a result of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis, and there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term following the end of the pandemic or at all. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Over the past twothree years, we have seen modest improvement in the overall economy in our markets, which has allowed us to maintain overall occupancy rates, with slight increases in occupancy at certain of our properties, and to recognize modest increases in rental rates. However, as of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. In addition, included in our adjustments to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis. We expect this trendare unable to continuepredict the impact that the COVID-19 pandemic will have on our rental income in 2017.the long term. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our and our tenants’ financial positions and operating results.
We tend to lease space to smaller businesses that desire shorter term leases. As of September 30, 2017,2020, approximately 21%19% of our GLA was subject to leases that expire prior to December 31, 2018.2021. Over the last twothree years, we have renewed expiring leases coveringwith respect to approximately 77%95% of the square footage subject to expiring leases.our GLA. We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 1824 months prior to the expiration date of the existing lease. WhileInasmuch as our early renewal program and other leasing and marketing efforts target these expiring leases, we hopework to re-lease most of that space prior to expiration of the leases. In the markets in which we operate, we obtain and analyze market rental rates through review of third-party publications, which provide market and submarket rental rate data and through inquiry of property owners and property management companies as to rental rates being quoted at properties that are located in close proximity to our properties and we believe display similar physical attributes as our nearby properties. We use this data to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental rates, we believe that, in the aggregate, our current leases are at market rates. Market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate and/or the rental rates we are able to negotiate. We continue to monitor our tenants'tenants’ operating performances as well as overall economic trends to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our cash flow and ability to make distributions to our shareholders.
On September 30, 2016, we acquired La Mirada and Seville, properties that meet our Community Centered Property® strategy, for 621,053 OP units and $60.7 million in cash and net prorations. The OP units are redeemable for cash or, at our option, Whitestone REIT common shares on a one-for-one basis, subject to certain restrictions. La Mirada, a 147,209 square foot property, was 90% leased at the time of purchase. Seville, a 90,042 square foot property, was 88% leased at the time of purchase. Both properties are located in Scottsdale, Arizona.
Development properties. As of March 31, 2017, we had substantially completed construction at our Pinnacle of Scottsdale Phase II property. As of September 30, 2017, we had incurred approximately $5.2 million in construction costs, including approximately $0.5 million in previously capitalized interest and real estate taxes. The 27,063 square foot Community Centered Property® was 91% leased as of September 30, 2017 and is located in Scottsdale, Arizona, and adjacent to Pinnacle of Scottsdale.
On December 31, 2016, we had substantially completed construction at our Shops at Starwood Phase III property. As of September 30, 2017, we had incurred approximately $8.0 million in construction costs, including approximately $0.9 million in previously capitalized interest and real estate taxes. The 35,351 square foot Community Centered Property® was 63% leased as of September 30, 2017 and is located in Frisco, Texas, a northern suburb of Dallas, Texas, and adjacent to Shops at Starwood.
Leasing Activity
As of September 30, 2017,2020, we owned or held a majority interest in 7258 properties with 6,554,9524,953,571 square feet of GLA and our occupancy rate for all properties was approximately 87%89% and 90% occupied as of both September 30, 20172020 and September 30, 2016.2019, respectively. The following is a summary of the Company'sCompany’s leasing activity for the nine months ended September 30, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Leases Signed | | GLA Signed | | Weighted Average Lease Term (2) | | TI and Incentives per Sq. Ft. (3) | | Contractual Rent Per Sq. Ft. (4) | | Prior Contractual Rent Per Sq. Ft. (5) | | Straight-lined Basis Increase (Decrease) Over Prior Rent |
Comparable (1) | | | | | | | | | | | | | | |
Renewal Leases | | 143 | | | 474,778 | | | 3.9 | | | $ | 1.31 | | | $ | 17.70 | | | $ | 17.08 | | | 11.6 | % |
New Leases | | 37 | | | 83,529 | | | 5.1 | | | 11.55 | | | 22.43 | | | 22.98 | | | 1.9 | % |
Total | | 180 | | | 558,307 | | | 4.1 | | | $ | 2.85 | | | $ | 18.41 | | | $ | 17.96 | | | 9.8 | % |
| | | | | | | | | | | | | | |
| | Number of Leases Signed | | GLA Signed | | Weighted Average Lease Term (2) | | TI and Incentives per Sq. Ft. (3) | | Contractual Rent Per Sq. Ft. (4) | | | | |
Non-Comparable | | | | | | | | | | | | | | |
Renewal Leases | | 2 | | | 2,563 | | | 4.7 | | | $ | 30.64 | | | $ | 46.08 | | | | | |
New Leases | | 40 | | | 97,884 | | | 4.7 | | | 8.82 | | | 19.24 | | | | | |
Total | | 42 | | | 100,447 | | | 4.7 | | | $ | 9.38 | | | $ | 19.93 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Leases Signed | | GLA Signed | | Weighted Average Lease Term (2) | | TI and Incentives per Sq. Ft. (3) | | Contractual Rent Per Sq. Ft (4) | | Prior Contractual Rent Per Sq. Ft. (5) | | Straight-lined Basis Increase Over Prior Rent |
Comparable (1) | | | | | | | | | | | | | | |
Renewal Leases | | 159 |
| | 415,175 |
| | 3.3 |
| | $ | 1.61 |
| | $ | 15.72 |
| | $ | 15.30 |
| | 7.9 | % |
New Leases | | 33 |
| | 100,437 |
| | 4.2 |
| | 3.85 |
| | 15.43 |
| | 16.44 |
| | 6.1 | % |
Total | | 192 |
| | 515,612 |
| | 3.5 |
| | $ | 2.05 |
| | $ | 15.66 |
| | $ | 15.52 |
| | 7.5 | % |
| | | | | | | | | | | | | | |
| | Number of Leases Signed | | GLA Signed | | Weighted Average Lease Term (2) | | TI and Incentives per Sq. Ft. (3) | | Contractual Rent Per Sq. Ft (4) | | | | |
Non-Comparable | | | | | | | | | | | | | | |
Renewal Leases | | 5 |
| | 18,865 |
| | 3.5 |
| | $ | 6.50 |
| | $ | 19.38 |
| | | | |
New Leases | | 75 |
| | 200,173 |
| | 6.0 |
| | 10.37 |
| | 17.92 |
| | | | |
Total | | 80 |
| | 219,038 |
| | 5.8 |
| | $ | 10.03 |
| | $ | 18.05 |
| | | | |
(1) Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and the new or renewal square footage was within 25% of the expired square footage.
| |
(1)
| Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and the new or renewal square footage was within 25% of the expired square footage. |
| |
(2)
| Weighted average lease term is determined on the basis of square footage. |
| |
(3)
| Estimated amount per signed leases. Actual cost of construction may vary. Does not include first generation costs for tenant improvements (“TI”) and leasing commission costs needed for new acquisitions or redevelopment of a property to bring to operating standards for its intended use. |
| |
(4)
| Contractual minimum rent under the new lease for the first month, excluding concessions. |
| |
(5)
| Contractual minimum rent under the prior lease for the final month. |
(2) Weighted average lease term is determined on the basis of square footage.
(3) Estimated amount per signed leases. Actual cost of construction may vary. Does not include first generation costs for tenant improvements (“TI”) and leasing commission costs needed for new acquisitions or redevelopment of a property to bring to operating standards for its intended use.
(4)Contractual minimum rent under the new lease for the first month, excluding concessions.
(5) Contractual minimum rent under the prior lease for the final month.
Capital Expenditures
Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis.
The following is a summary of the Company's capital expenditures for the three and nine months ended September 30, 20172020 and 20162019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Capital expenditures: | | | | | | | | |
Tenant improvements and allowances | | $ | 1,820 | | | $ | 1,790 | | | $ | 3,048 | | | $ | 3,185 | |
Developments / redevelopments | | 95 | | | 728 | | | 474 | | | 3,576 | |
Leasing commissions and costs | | 235 | | | 625 | | | 913 | | | 1,993 | |
Maintenance capital expenditures | | 840 | | | 1,205 | | | 2,286 | | | 3,190 | |
Total capital expenditures | | $ | 2,990 | | | $ | 4,348 | | | $ | 6,721 | | | $ | 11,944 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Capital expenditures: | | | | | | | | |
Tenant improvements and allowances | | $ | 1,944 |
| | $ | 1,478 |
| | $ | 4,821 |
| | $ | 3,996 |
|
Developments / redevelopments | | 2,608 |
| | 2,211 |
| | 5,548 |
| | 9,421 |
|
Leasing commissions and costs | | 869 |
| | 1,004 |
| | 2,407 |
| | 2,015 |
|
Maintenance capital expenditures | | 668 |
| | 756 |
| | 3,130 |
| | 1,945 |
|
Total capital expenditures | | $ | 6,089 |
| | $ | 5,449 |
| | $ | 15,906 |
| | $ | 17,377 |
|
Critical Accounting Policies
In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, under “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”There have been no significant changes to these policies during the nine months ended September 30, 2017.2020. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Results of Operations
Comparison of the Three Months Ended September 30, 20172020 and 20162019
The comparability of our results of operations for the three months ended September 30, 2020 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the three months ended September 30, 20172020 and 20162019 (dollars in thousands, except per share and per OP unit amounts):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 |
Number of properties owned and operated | | 58 | | | 57 | |
Aggregate GLA (sq. ft.)(1) | | 4,848,652 | | | 4,848,652 | |
Ending occupancy rate - operating portfolio(1) | | 89 | % | | 90 | % |
Ending occupancy rate | | 89 | % | | 90 | % |
| | | | |
Total revenues | | $ | 29,900 | | | $ | 29,879 | |
Total operating expenses | | 22,730 | | | 21,914 | |
Total other expense | | 6,347 | | | 6,538 | |
Income from operations before equity investments in real estate partnerships and income tax | | 823 | | | 1,427 | |
Equity in earnings of real estate partnership | | 196 | | | 524 | |
Provision for income taxes | | (105) | | | (102) | |
Income from continuing operations | | 914 | | | 1,849 | |
| | | | |
Net income | | 914 | | | 1,849 | |
Less: Net income attributable to noncontrolling interests | | 14 | | | 42 | |
Net income attributable to Whitestone REIT | | $ | 900 | | | $ | 1,807 | |
| | | | |
Funds from operations(2) | | $ | 8,467 | | | $ | 9,231 | |
Funds from operations core(3) | | 10,112 | | | 10,950 | |
Property net operating income(4) | | 21,272 | | | 22,051 | |
Distributions paid on common shares and OP units | | 4,511 | | | 11,694 | |
Distributions per common share and OP unit | | $ | 0.1050 | | | $ | 0.2850 | |
Distributions paid as a percentage of funds from operations core | | 45 | % | | 107 | % |
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.
(2) For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below.
(3) For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below.
(4) For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below.
|
| | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
Number of properties wholly-owned and operated | | 58 |
| | 57 |
|
Aggregate GLA (sq. ft.)(1) | | 5,023,215 |
| | 4,587,268 |
|
Ending occupancy rate - wholly-owned operating portfolio(1) | | 90 | % | | 90 | % |
Ending occupancy rate - all wholly-owned properties | | 90 | % | | 89 | % |
| | | | |
Number of properties managed and consolidated | | 14 |
| | 14 |
|
Aggregate GLA (sq. ft.) | | 1,531,737 |
| | 1,531,737 |
|
Ending occupancy rate - managed and consolidated operating portfolio | | 80 | % | | 81 | % |
| | | | |
Total property revenues | | $ | 33,653 |
| | $ | 25,508 |
|
Total property expenses | | 11,285 |
| | 8,318 |
|
Total other expenses | | 19,062 |
| | 16,172 |
|
Provision for income taxes | | 126 |
| | 80 |
|
Gain on sale of properties | | — |
| | — |
|
(Gain) loss on disposal of assets | | 40 |
| | (26 | ) |
Net income | | 3,140 |
| | 964 |
|
Less: Net income attributable to noncontrolling interests | | 147 |
| | 15 |
|
Net income attributable to Whitestone REIT | | $ | 2,993 |
| | $ | 949 |
|
| | | | |
Funds from operations (2) | | $ | 10,129 |
| | $ | 6,343 |
|
Funds from operations core (3) | | 13,097 |
| | 9,812 |
|
Property net operating income (4) | | 22,368 |
| | 17,190 |
|
Distributions paid on common shares and OP units | | 11,257 |
| | 8,247 |
|
Distributions per common share and OP unit | | $ | 0.2850 |
| | $ | 0.2850 |
|
Distributions paid as a percentage of funds from operations core | | 86 | % | | 84 | % |
| |
(1)
| Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting. |
| |
(2)
| For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below. |
| |
(3)
| For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below. |
| |
(4)
| For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below. |
Property revenues.We had rental income and tenant reimbursementsdefine “Same Store” as properties that have been owned for the entire period being compared. For purposes of approximately $33,653,000 forcomparing the three months ended September 30, 2017 as compared2020 to $25,508,000 for the three months ended September 30, 2016, an increase of $8,145,000, or 32%. The three months ended2019, Same Store includes properties owned during the entire period from July 1, 2019 to September 30, 2017 included $6,510,000 in increased revenues from Non-Same Store operations and $57,000 in increased revenues from our Consolidated Partnership.2020. We define “Non-Same Stores”Store” as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Revenue | | 2020 | | 2019 | | Change | | % Change |
Same Store | | | | | | | | |
Rental revenues (1) (3) | | $ | 21,217 | | | $ | 21,623 | | | $ | (406) | | | (2) | % |
Recoveries(2) | | 8,010 | | | 8,240 | | | (230) | | | (3) | % |
Bad debt(3) | | (1,167) | | | (495) | | | (672) | | | 136 | % |
Total rental | | 28,060 | | | 29,368 | | | (1,308) | | | (4) | % |
Other revenues (4) | | 887 | | | 283 | | | 604 | | | 213 | % |
Same Store Total | | 28,947 | | | 29,651 | | | (704) | | | (2) | % |
| | | | | | | | |
Non-Same Store and Management Fees | | | | | | | | |
Rental revenues | | 591 | | | — | | | 591 | | | Not meaningful |
Recoveries | | 329 | | | — | | | 329 | | | Not meaningful |
Bad debt | | (112) | | | — | | | (112) | | | Not meaningful |
Total rental (5) | | 808 | | | — | | | 808 | | | Not meaningful |
| | | | | | | | |
Management fees | | 145 | | | 228 | | | (83) | | | (36) | % |
Non-Same Store and Management Fees Total | | 953 | | | 228 | | | 725 | | | 318 | % |
| | | | | | | | |
Total revenue | | $ | 29,900 | | | $ | 29,879 | | | $ | 21 | | | — | % |
(1) The Same Store rental revenues increased $1,578,000decrease of $406,000 resulted from a decrease of $179,000 from the decrease in the average leased square feet to 4,324,332 from 4,360,443, and a decrease of $227,000 from the average rent per leased square foot decreasing from $19.84 to $19.63.
(2) The Same Store recoveries revenue decrease of $230,000 is primarily attributable to related decreases in Same Store operating expenses of $239,000. Operating expenses generally decreased as a result of cost saving initiatives during the COVID-19 pandemic.
(3) Included in the average rent per leased square foot decrease mentioned above is a Same Store rental revenue decrease of $117,000 from straight-line rent write offs as a result of converting 12 tenants to cash basis accounting during the three months ended September 30, 2020. Bad debt decreased Same Store total rental revenue by $1,167,000 during the three months ended September 30, 2020, as compared to a reduction of $495,000 during the same period a year ago. The bad debt for the three months ended September 30, 20172020 was primarily attributable to increases in allowances against accrued receivables as tenants have deferred or missed payments as a result of the COVID-19 pandemic.
(4) The increase in Same Store other revenues is primarily comprised of increased lease termination fees.
(5) Non-Same Store total rental revenue increased due to the addition of Las Colinas Village on December 6, 2019.
As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis. We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained.
Operating expenses. The primary components of operating expenses for the three months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Operating Expenses | | 2020 | | 2019 | | Change | | % Change |
Same Store | | | | | | | | |
Operating and maintenance (1) | | $ | 4,649 | | | $ | 4,888 | | | $ | (239) | | | (5) | % |
Real estate taxes | | 4,437 | | | 4,410 | | | 27 | | | 1 | % |
Same Store total | | 9,086 | | | 9,298 | | | (212) | | | (2) | % |
| | | | | | | | |
Non-Same Store and affiliated company rents | | | | | | | | |
Operating and maintenance (2) | | 155 | | | 16 | | | 139 | | | 869 | % |
Real estate taxes (2) | | 233 | | | — | | | 233 | | | Not meaningful |
Affiliated company rents (3) | | 225 | | | 214 | | | 11 | | | 5 | % |
Non-Same Store and affiliated company rents total | | 613 | | | 230 | | | 383 | | | 167 | % |
| | | | | | | | |
Depreciation and amortization | | 7,171 | | | 6,789 | | | 382 | | | 6 | % |
| | | | | | | | |
General and administrative (4) | | 5,860 | | | 5,597 | | | 263 | | | 5 | % |
| | | | | | | | |
Total operating expenses | | $ | 22,730 | | | $ | 21,914 | | | $ | 816 | | | 4 | % |
(1) The $239,000 Same Store operating and maintenance cost decrease was primarily comprised of lower repair costs.
(2) Non-Same Store operating and maintenance and real estate tax expenses for the three months ended September 30, 2020 are due to the addition of Las Colinas Village on December 6, 2019.
(3) Affiliated company rents are spaces that we lease from Pillarstone OP.
(4)The general and administrative expense increase is attributable to a $973,000 increase in accrued annual incentive bonuses, offset by decreases of $319,000 in professional fees, $170,000 in payroll costs (exclusive of the annual cash incentive bonus), $95,000 in travel expenses, and $126,000 in other general and administrative expenses. The annual incentive bonus program was approved by the Board of Trustees in July of 2020, and therefore the amount recorded to three months ended September 30, 2020, reflects nine months of the projected payout for the full year.
Other expenses (income). The primary components of other expenses (income) for the three months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Other Expenses (Income) | | 2020 | | 2019 | | Change | | % Change |
| | | | | | | | |
Interest expense | | $ | 6,400 | | | $ | 6,679 | | | $ | (279) | | | (4) | % |
Loss on sale or disposal of assets and assets held for sale | | 18 | | | — | | | 18 | | | Not meaningful |
Interest, dividend and other investment income | | (71) | | | (141) | | | 70 | | | (50) | % |
Total other expense | | $ | 6,347 | | | $ | 6,538 | | | $ | (191) | | | (3) | % |
Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $328,000 from $524,000 for the three months ended September 30, 2019 to $196,000 for the three months ended September 30, 2020. The $328,000 decrease is primarily attributable to lower net income from Pillarstone OP for the three months ended September 30, 2020 as compared to the same period in 2019 resulting from the prior year.sale of Corporate Park West, Corporate Park Woodland and Plaza Park on October 8, 2019. Please refer to Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.
Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase | | % Increase |
| | 2020 | | 2019 | | (Decrease) | | (Decrease) |
Same Store (51 properties, excluding development land) | | | | | | | | |
Property revenues | | | | | | | | |
Rental | | $ | 28,060 | | | $ | 29,368 | | | $ | (1,308) | | | (4) | % |
Management, transaction and other fees | | 887 | | | 283 | | | 604 | | | 213 | % |
Total property revenues | | 28,947 | | | 29,651 | | | (704) | | | (2) | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 4,649 | | | 4,888 | | | (239) | | | (5) | % |
Real estate taxes | | 4,437 | | | 4,410 | | | 27 | | | 1 | % |
Total property expenses | | 9,086 | | | 9,298 | | | (212) | | | (2) | % |
| | | | | | | | |
Total property revenues less total property expenses | | 19,861 | | | 20,353 | | | (492) | | | (2) | % |
| | | | | | | | |
Same Store straight-line rent adjustments | | (50) | | | (178) | | | 128 | | | (72) | % |
Same Store amortization of above/below market rents | | (148) | | | (226) | | | 78 | | | (35) | % |
Same Store lease termination fees | | (727) | | | (127) | | | (600) | | | 472 | % |
| | | | | | | | |
Same Store NOI(1) | | $ | 18,936 | | | $ | 19,822 | | | $ | (886) | | | (4) | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) See below for a reconciliation of property net operating income to net income.
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
PROPERTY NET OPERATING INCOME (“NOI”) | | 2020 | | 2019 |
Net income attributable to Whitestone REIT | | $ | 900 | | | $ | 1,807 | |
General and administrative expenses | | 5,860 | | | 5,597 | |
Depreciation and amortization | | 7,171 | | | 6,789 | |
Equity in earnings of real estate partnership | | (196) | | | (524) | |
Interest expense | | 6,400 | | | 6,679 | |
Interest, dividend and other investment income | | (71) | | | (141) | |
Provision for income taxes | | 105 | | | 102 | |
| | | | |
Management fee, net of related expenses | | 81 | | | (14) | |
Loss on sale or disposal of assets and assets held for sale of continuing operations, net | | 18 | | | — | |
NOI of real estate partnership (pro rata) | | 990 | | | 1,714 | |
Net income attributable to noncontrolling interests | | 14 | | | 42 | |
NOI | | $ | 21,272 | | | $ | 22,051 | |
Non-Same Store NOI (1) | | (421) | | | 16 | |
NOI of real estate partnership (pro rata) | | (990) | | | (1,714) | |
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata) | | 19,861 | | | 20,353 | |
Same Store straight-line rent adjustments | | (50) | | | (178) | |
Same Store amortization of above/below market rents | | (148) | | | (226) | |
Same Store lease termination fees | | (727) | | | (127) | |
Same Store NOI (2) | | $ | 18,936 | | | $ | 19,822 | |
(1) We define “Non-Same Store” as properties that have been acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. For purposes of comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, Non-Same Store includes properties acquired between July 1, 2019 and September 30, 2020 and properties sold between July 1, 2019 and September 30, 2020, but not included in discontinued operations.
(2) We define “Same Stores”Store” as properties that have been owned forduring the entire period being compared. For purposes of comparing the three months ended September 30, 20172020 to the three months ended September 30, 2016,2019, Same Stores includeStore includes properties owned during the entire period frombefore July 1, 2016 to2019 and not sold before September 30, 2017. Same Store revenue increased $156,000 for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 as the result of an increase in the average leased square feet to 3,870,000 from 3,842,000. The Same Store average revenue per leased square foot increased $1.47 for the three months ended September 30, 2017 to $23.85 per leased square foot as compared to the average revenue per leased square foot of $22.38 for the three months ended September 30, 2016, resulting in an increase of Same Store revenues of $1,422,000.2020. Straight-line rent adjustments, above/below market rents, and lease termination fees are excluded.
Property expenses. Our property expenses were approximately $11,285,000 for the three months ended September 30, 2017 as compared to $8,318,000 for the three months ended September 30, 2016, an increase of $2,967,000, or 36%. The primary components of property expenses are detailed in the table below (in thousands, except percentages):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Overall Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 5,181 |
| | $ | 3,414 |
| | $ | 1,767 |
| | 52 | % |
Utilities | | 1,594 |
| | 1,354 |
| | 240 |
| | 18 | % |
Contract services | | 1,930 |
| | 1,513 |
| | 417 |
| | 28 | % |
Repairs and maintenance | | 1,119 |
| | 713 |
| | 406 |
| | 57 | % |
Bad debt | | 535 |
| | 535 |
| | — |
| | — | % |
Labor and other | | 926 |
| | 789 |
| | 137 |
| | 17 | % |
Total property expenses | | $ | 11,285 |
| | $ | 8,318 |
| | $ | 2,967 |
| | 36 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Same Store Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 3,346 |
| | $ | 2,812 |
| | $ | 534 |
| | 19 | % |
Utilities | | 1,096 |
| | 963 |
| | 133 |
| | 14 | % |
Contract services | | 1,300 |
| | 1,247 |
| | 53 |
| | 4 | % |
Repairs and maintenance | | 833 |
| | 585 |
| | 248 |
| | 42 | % |
Bad debt | | 327 |
| | 436 |
| | (109 | ) | | (25 | )% |
Labor and other | | 606 |
| | 580 |
| | 26 |
| | 4 | % |
Total property expenses | | $ | 7,508 |
| | $ | 6,623 |
| | $ | 885 |
| | 13 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
Non-Same Store Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 934 |
| | $ | 12 |
| | $ | 922 |
| | Not meaningful |
Utilities | | 244 |
| | 11 |
| | 233 |
| | Not meaningful |
Contract services | | 347 |
| | 5 |
| | 342 |
| | Not meaningful |
Repairs and maintenance | | 108 |
| | 9 |
| | 99 |
| | Not meaningful |
Bad debt | | 148 |
| | (2 | ) | | 150 |
| | Not meaningful |
Labor and other | | 102 |
| | 16 |
| | 86 |
| | Not meaningful |
Total property expenses | | $ | 1,883 |
| | $ | 51 |
| | $ | 1,832 |
| | Not meaningful |
Real estate taxes. Real estate taxes increased approximately $1,767,000, or 52%, during the three months ended September 30, 2017 as compared to the same period in 2016. The real estate tax increase was comprised of increases of $534,000, $311,000 and $922,000 in our Same Store, Consolidated Partnership and Non-Same Store properties, respectively. The increase in Same Store real estate tax expense was primarily attributable to increased assessments with tax authorities in our Texas markets resulting in larger expenses for 2017 taxes. Many of the tax assessments on our properties are still under protest for 2016, and we expect to achieve further reductions through the litigation process. We actively work to keep our valuations and resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases, and we strive to keep these charges to our tenants as low as possible.
Utilities. Utilities expenses increased approximately $240,000, or 18%, during the three months ended September 30, 2017 as compared to the same period in 2016. Utility expense increased $233,000 and $133,000 in our Non-Same Store and Same Store properties, respectively, and was offset by a $126,000 decrease in such expense from our Consolidated Partnership properties.
Contract services. Contract services expenses increased approximately $417,000, or 28%, during the three months ended September 30, 2017 as compared to the same period in 2016. The contract services increase was comprised of $342,000, $53,000 and $22,000 increases in our Non-Same Store, Same Store and Consolidated Partnership properties, respectively.
Repairs and maintenance. Repairs and maintenance expenses increased approximately $406,000, or 57%, during the three months ended September 30, 2017 as compared to the same period in 2016. The repairs and maintenance increase was comprised of increases of $248,000 in Same Store properties, $99,000 in our Non-Same Store properties and $59,000 in our Consolidated Partnership properties.
Bad debt. Bad debt expenses were $535,000 for the three months ended September 30, 2017 and 2016. Bad debt expense increased $150,000 for Non-Same Store properties and decreased $109,000 and $41,000 for Same Store and Consolidated Partnership properties, respectively.
Labor and other. Labor and other expenses increased approximately $137,000, or 17%, during the three months ended September 30, 2017 as compared to the same period in 2016. The increased labor and other expense was comprised of $86,000, $26,000 and $25,000 increases in our Non-Same Store, Same Store and Consolidated Partnership properties, respectively.
Same Store, Non-Same Store and Consolidated Partnership net operating income. The components of Same Store, Non-Same Store, Consolidated Partnership and total property net operating income and net income are detailed in the table below (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Percent |
| | 2017 | | 2016 | | Change | | Change |
Same Store (49 properties, exclusive of land held for development) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | $ | 16,998 |
| | $ | 16,471 |
| | $ | 527 |
| | 3 | % |
Other revenues | | 6,076 |
| | 5,025 |
| | 1,051 |
| | 21 | % |
Total property revenues | | 23,074 |
| | 21,496 |
| | 1,578 |
| | 7 | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 4,162 |
| | 3,811 |
| | 351 |
| | 9 | % |
Real estate taxes | | 3,346 |
| | 2,812 |
| | 534 |
| | 19 | % |
Total property expenses | | 7,508 |
| | 6,623 |
| | 885 |
| | 13 | % |
| | | | | | | | |
Total Same Store net operating income | | 15,566 |
| | 14,873 |
| | 693 |
| | 5 | % |
| | | | | | | | |
Non-Same Store (4 Properties, exclusive of land held for development) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | 4,677 |
| | 128 |
| | 4,549 |
| | Not meaningful |
|
Other revenues | | 1,996 |
| | 35 |
| | 1,961 |
| | Not meaningful |
|
Total property revenues | | 6,673 |
| | 163 |
| | 6,510 |
| | Not meaningful |
|
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 949 |
| | 39 |
| | 910 |
| | Not meaningful |
|
Real estate taxes | | 934 |
| | 12 |
| | 922 |
| | Not meaningful |
|
Total property expenses | | 1,883 |
| | 51 |
| | 1,832 |
| | Not meaningful |
|
| | | | | | | | |
Total Non-Same Store net operating income | | 4,790 |
| | 112 |
| | 4,678 |
| | Not meaningful |
|
| | | | | | | | |
Consolidated Partnership properties (14 Properties) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | 3,216 |
| | 3,245 |
| | (29 | ) | | (1 | )% |
Other revenues | | 690 |
| | 604 |
| | 86 |
| | 14 | % |
Total property revenues | | 3,906 |
| | 3,849 |
| | 57 |
| | 1 | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 993 |
| | 1,054 |
| | (61 | ) | | (6 | )% |
Real estate taxes | | 901 |
| | 590 |
| | 311 |
| | 53 | % |
Total property expenses | | 1,894 |
| | 1,644 |
| | 250 |
| | 15 | % |
| | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Percent |
| | 2017 | | 2016 | | Change | | Change |
Total Consolidated Partnership properties net operating income | | 2,012 |
| | 2,205 |
| | (193 | ) | | (9 | )% |
| | | | | | | | |
| | | | | | | | |
Total property net operating income | | 22,368 |
| | 17,190 |
| | 5,178 |
| | 30 | % |
| | | | | | | | |
Less total other expenses, provision for income taxes, gain on sale of properties and gain (loss) on disposal of assets | | 19,228 |
| | 16,226 |
| | 3,002 |
| | 19 | % |
| | | | | | | | |
| | | | | | | | |
Net income | | $ | 3,140 |
| | $ | 964 |
| | $ | 2,176 |
| | 226 | % |
Other expenses. Our other expenses were approximately $19,062,000 for the three months ended September 30, 2017, as compared to $16,172,000 for the three months ended September 30, 2016, an increase of $2,890,000, or 18%. The primary components of other expenses are detailed in the table below (in thousands, except percentages):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
General and administrative | | $ | 5,581 |
| | $ | 6,218 |
| | $ | (637 | ) | | (10 | )% |
Depreciation and amortization | | 7,247 |
| | 5,449 |
| | 1,798 |
| | 33 | % |
Interest expense | | 6,376 |
| | 4,669 |
| | 1,707 |
| | 37 | % |
Interest, dividend and other investment income | | (142 | ) | | (164 | ) | | 22 |
| | (13 | )% |
Total other expenses | | $ | 19,062 |
| | $ | 16,172 |
| | $ | 2,890 |
| | 18 | % |
General and administrative. General and administrative expenses decreased approximately $637,000, or 10%, for the three months ended September 30, 2017 as compared to the same period in 2016. The decrease was comprised of $338,000 in decreased share-based compensation expense, $240,000 in decreased professional fees and $109,000 in decreased acquisition expenses, offset by $50,000 in increased other expenses.
Total compensation recognized in earnings for share-based payments was $2,704,000 and $3,042,000 for the three months ended September 30, 2017 and 2016, respectively.
We expect to record approximately $10.0 million in non-cash share-based compensation expense in 2017 and $5.5 million subsequent to 2017. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 18 months.
Depreciation and amortization. Depreciation and amortization increased $1,798,000, or 33%, for the three months ended September 30, 2017 as compared to the same period in 2016. Depreciation for improvements to Same Store properties increased $578,000 for the three months ended September 30, 2017 as compared to the same period in 2016. Depreciation for Non-Same Store properties increased $1,085,000 and depreciation for Consolidated Partnership properties increased $64,000. Lease commission amortization and depreciation of corporate assets increased $71,000 for the three months ended September 30, 2017 as compared to the same period in 2016.
Interest expense. Interest expense increased approximately $1,707,000, or 37%, for the three months ended September 30, 2017 as compared to the same period in 2016. The increase in interest expense is comprised of approximately $1,128,000 in increased interest expense resulting from a $136,365,000 increase in our average notes payable balance, a $564,000 increase in interest expense resulting from an increase in the average effective interest rate on our average notes payable from 3.31% to 3.65% and an increase in amortized loan fees included in interest expense of $15,000.
Interest, dividend and other investment income. Interest, dividend and other investment income decreased approximately $22,000, or 13%, for the three months ended September 30, 2017 as compared to the same period in 2016. The decrease in interest, dividend and other investment income for the three months ended September 30, 2017 as compared to the same period in 2016 is comprised of approximately $26,000 in decreased interest income, and $1,000 in decreased dividend income, offset by $5,000 in increased realized gains from sales of available-for-sale securities.
Results of Operations
Comparison of the Nine Months Ended September 30, 20172020 and 20162019
The comparability of our results of operations for the nine months ended September 30, 2020 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the nine months ended September 30, 20172020 and 20162019 (dollars in thousands, except per share and per OP unit amounts):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
Number of properties owned and operated | | 58 | | | 57 | |
Aggregate GLA (sq. ft.)(1) | | 4,848,652 | | | 4,848,652 | |
Ending occupancy rate - operating portfolio(1) | | 89 | % | | 90 | % |
Ending occupancy rate | | 89 | % | | 90 | % |
| | | | |
Total revenues | | $ | 88,081 | | | $ | 89,151 | |
Total operating expenses | | 65,328 | | | 63,613 | |
Total other expense | | 20,237 | | | 19,303 | |
Income from operations before equity investments in real estate partnerships and income tax | | 2,516 | | | 6,235 | |
Equity in earnings of real estate partnership | | 752 | | | 1,480 | |
Provision for income taxes | | (288) | | | (324) | |
Income from continuing operations | | 2,980 | | | 7,391 | |
Gain on sale of property from discontinued operations | | — | | | 701 | |
Net income | | 2,980 | | | 8,092 | |
Less: Net income attributable to noncontrolling interests | | 58 | | | 184 | |
Net income attributable to Whitestone REIT | | $ | 2,922 | | | $ | 7,908 | |
| | | | |
Funds from operations(2) | | $ | 26,145 | | | $ | 29,104 | |
Funds from operations core(3) | | 30,312 | | | 33,874 | |
Property net operating income(4) | | 62,965 | | | 67,005 | |
Distributions paid on common shares and OP units | | 21,201 | | | 34,840 | |
Distributions per common share and OP unit | | $ | 0.4950 | | | $ | 0.8550 | |
Distributions paid as a percentage of funds from operations core | | 70 | % | | 103 | % |
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.
(2) For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below.
(3) For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below.
(4) For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below.
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Number of properties wholly-owned and operated | | 58 |
| | 57 |
|
Aggregate GLA (sq. ft.)(1) | | 5,023,215 |
| | 4,587,268 |
|
Ending occupancy rate - wholly-owned operating portfolio(1) | | 90 | % | | 90 | % |
Ending occupancy rate - all wholly-owned properties | | 90 | % | | 89 | % |
| | | | |
Number of properties managed and consolidated | | 14 |
| | 14 |
|
Aggregate GLA (sq. ft.) | | 1,531,737 |
| | 1,531,737 |
|
Ending occupancy rate - managed and consolidated operating portfolio | | 80 | % | | 81 | % |
| | | | |
Total property revenues | | $ | 92,128 |
| | $ | 76,072 |
|
Total property expenses | | 30,561 |
| | 24,453 |
|
Total other expenses | | 54,311 |
| | 46,711 |
|
Provision for income taxes | | 296 |
| | 247 |
|
Gain on sale of properties | | (16 | ) | | (2,890 | ) |
(Gain) loss on disposal of assets | | 135 |
| | (10 | ) |
Net income | | 6,841 |
| | 7,561 |
|
Less: Net income attributable to noncontrolling interests | | 429 |
| | 131 |
|
Net income attributable to Whitestone REIT | | $ | 6,412 |
| | $ | 7,430 |
|
| | | | |
Funds from operations (2) | | $ | 25,982 |
| | $ | 20,856 |
|
Funds from operations core (3) | | 34,925 |
| | 28,732 |
|
Property net operating income (4) | | 61,567 |
| | 51,619 |
|
Distributions paid on common shares and OP units | | 30,426 |
| | 24,021 |
|
Distributions per common share and OP unit | | $ | 0.8550 |
| | $ | 0.8550 |
|
Distributions paid as a percentage of funds from operations core | | 87 | % | | 84 | % |
| |
(1)
| Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting. |
| |
(2)
| For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below. |
| |
(3)
| For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below. |
| |
(4)
| For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below. |
Property revenues.We had rental income and tenant reimbursementsdefine “Same Store” as properties that have been owned for the entire period being compared. For purposes of approximately $92,128,000 forcomparing the nine months ended September 30, 2017 as compared2020 to $76,072,000 for the nine months ended September 30, 2016, an increase of $16,056,000, or 21%. The nine months ended2019, Same Store includes properties owned during the entire period from January 1, 2019 to September 30, 2017 included $11,993,000 in increased revenues from Non-Same Store operations and $230,000 in increased revenues from our Consolidated Partnership.2020. We define “Non-Same Stores”Store” as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Revenue | | 2020 | | 2019 | | Change | | % Change |
Same Store | | | | | | | | |
Rental revenues (1) (3) | | $ | 63,766 | | | $ | 64,752 | | | $ | (986) | | | (2) | % |
Recoveries(2) | | 24,094 | | | 23,701 | | | 393 | | | 2 | % |
Bad debt(3) | | (4,187) | | | (926) | | | (3,261) | | | 352 | % |
Total rental | | 83,673 | | | 87,527 | | | (3,854) | | | (4) | % |
Other revenues (4) | | 1,475 | | | 931 | | | 544 | | | 58 | % |
Same Store Total | | 85,148 | | | 88,458 | | | (3,310) | | | (4) | % |
| | | | | | | | |
Non-Same Store and Management Fees | | | | | | | | |
Rental revenues | | 1,825 | | | — | | | 1,825 | | | Not meaningful |
Recoveries | | 882 | | | — | | | 882 | | | Not meaningful |
Bad debt | | (264) | | | — | | | (264) | | | Not meaningful |
Total rental (5) | | 2,443 | | | — | | | 2,443 | | | Not meaningful |
Other revenues | | 34 | | | — | | | 34 | | | Not meaningful |
Management fees | | 456 | | | 693 | | | (237) | | | (34) | % |
Non-Same Store and Management Fees Total | | 2,933 | | | 693 | | | 2,240 | | | 323 | % |
| | | | | | | | |
Total revenue | | $ | 88,081 | | | $ | 89,151 | | | $ | (1,070) | | | (1) | % |
(1) The Same Store rental revenues increased $3,833,000decrease of $986,000 resulted from a decrease of $431,000 from the decrease in the average leased square feet to 4,353,422 from 4,381,957, and a decrease of $555,000 from the average rent per leased square foot decreasing from $19.70 to $19.53.
(2) The Same Store recoveries revenue increase of $393,000 is primarily attributable to related increases in Same Store real estate taxes of $498,000 offset by a decrease in Same Store operating and maintenance expenses of $120,000.
(3) Included in the average rent per leased square foot decrease mentioned above is a Same Store rental revenue decrease of $1,045,000 from straight-line rent write offs during the nine months ended September 30, 2020 as a result of converting 84 tenants to cash basis accounting. Bad debt decreased Same Store total rental revenue by $4,187,000 during the nine months ended September 30, 2020, as compared to a reduction of $926,000 during the same period a year ago. The bad debt for the nine months ended September 30, 20172020 was primarily attributable to increases in allowances against accrued receivables as tenants have deferred or missed payments as a result of the COVID-19 pandemic.
(4) The increase in Same Store other revenues is primarily comprised of increased lease termination fees.
(5) Non-Same Store total rental revenue increased due to the addition of Las Colinas Village on December 6, 2019.
As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis.
We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained.
Operating expenses. The primary components of operating expenses for the nine months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Operating Expenses | | 2020 | | 2019 | | Change | | % Change |
Same Store | | | | | | | | |
Operating and maintenance | | $ | 13,895 | | | $ | 14,015 | | | $ | (120) | | | (1) | % |
Real estate taxes | | 12,972 | | | 12,474 | | | 498 | | | 4 | % |
Same Store total | | 26,867 | | | 26,489 | | | 378 | | | 1 | % |
| | | | | | | | |
Non-Same Store and affiliated company rents | | | | | | | | |
Operating and maintenance (1) | | 425 | | | 116 | | | 309 | | | 266 | % |
Real estate taxes (1) | | 619 | | | — | | | 619 | | | Not meaningful |
Affiliated company rents (2) | | 701 | | | 629 | | | 72 | | | 11 | % |
Non-Same Store and affiliated company rents total | | 1,745 | | | 745 | | | 1,000 | | | 134 | % |
| | | | | | | | |
Depreciation and amortization | | 21,112 | | | 19,865 | | | 1,247 | | | 6 | % |
| | | | | | | | |
General and administrative (3) | | 15,604 | | | 16,514 | | | (910) | | | (6) | % |
| | | | | | | | |
Total operating expenses | | $ | 65,328 | | | $ | 63,613 | | | $ | 1,715 | | | 3 | % |
(1) Non-Same Store operating and maintenance and real estate tax expenses for the nine months ended September 30, 2020 are due to the addition of Las Colinas Village on December 6, 2019.
(2) Affiliated company rents are spaces that we lease from Pillarstone OP.
(3) The general and administrative expense decrease was attributable to $532,000 in decreased share-based compensation expense, $357,000 in decreased travel expenses, $327,000 in decreased professional fees and $250,000 in decreased other general and administrative expenses offset by a $556,000 increase in payroll costs. The increased payroll costs included a $973,000 increase in annual incentive bonuses, offset by a decrease of $417,000 in other payroll costs. Please refer to Note 12 (Incentive Share Plan) for more information regarding share-based compensation expense. Travel has been reduced in response to the COVID-19 pandemic.
Other expenses (income). The primary components of other expenses (income) for the nine months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Other Expenses (Income) | | 2020 | | 2019 | | Change | | % Change |
| | | | | | | | |
Interest expense | | $ | 19,561 | | | $ | 19,738 | | | $ | (177) | | | (1) | % |
Loss on sale or disposal of assets and assets held for sale | | 882 | | | 115 | | | 767 | | | 667 | % |
Interest, dividend and other investment income | | (206) | | | (550) | | | 344 | | | (63) | % |
Total other expense | | $ | 20,237 | | | $ | 19,303 | | | $ | 934 | | | 5 | % |
Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $728,000 from $1,480,000 for the nine months ended September 30, 2019 to $752,000 for the nine months ended September 30, 2020. The $728,000 decrease is primarily attributable to lower net income from Pillarstone OP for the nine months ended September 30, 2020 as compared to the same period in 2019 resulting from the prior year.sale of Corporate Park West, Corporate Park Woodland and Plaza Park on October 8, 2019. Please refer to Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.
Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase | | % Increase |
| | 2020 | | 2019 | | (Decrease) | | (Decrease) |
Same Store (51 properties, excluding development land) | | | | | | | | |
Property revenues | | | | | | | | |
Rental | | $ | 83,673 | | | $ | 87,527 | | | $ | (3,854) | | | (4) | % |
Management, transaction and other fees | | 1,475 | | | 931 | | | 544 | | | 58 | % |
Total property revenues | | 85,148 | | | 88,458 | | | (3,310) | | | (4) | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 13,895 | | | 14,015 | | | (120) | | | (1) | % |
Real estate taxes | | 12,972 | | | 12,474 | | | 498 | | | 4 | % |
Total property expenses | | 26,867 | | | 26,489 | | | 378 | | | 1 | % |
| | | | | | | | |
Total property revenues less total property expenses | | 58,281 | | | 61,969 | | | (3,688) | | | (6) | % |
| | | | | | | | |
Same Store straight-line rent adjustments | | 640 | | | (919) | | | 1,559 | | | (170) | % |
Same Store amortization of above/below market rents | | (589) | | | (690) | | | 101 | | | (15) | % |
Same Store lease termination fees | | (1,028) | | | (401) | | | (627) | | | 156 | % |
| | | | | | | | |
Same Store NOI(1) | | $ | 57,304 | | | $ | 59,959 | | | $ | (2,655) | | | (4) | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) See below for a reconciliation of property net operating income to net income.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
PROPERTY NET OPERATING INCOME (“NOI”) | | 2020 | | 2019 |
Net income attributable to Whitestone REIT | | $ | 2,922 | | | $ | 7,908 | |
General and administrative expenses | | 15,604 | | | 16,514 | |
Depreciation and amortization | | 21,112 | | | 19,865 | |
Equity in earnings of real estate partnership | | (752) | | | (1,480) | |
Interest expense | | 19,561 | | | 19,738 | |
Interest, dividend and other investment income | | (206) | | | (550) | |
Provision for income taxes | | 288 | | | 324 | |
Gain on sale of property from discontinued operations, net | | — | | | (701) | |
Management fee, net of related expenses | | 246 | | | (64) | |
Loss on sale or disposal of assets and assets held for sale of continuing operations, net | | 882 | | | 115 | |
NOI of real estate partnership (pro rata) | | 3,250 | | | 5,152 | |
Net income attributable to noncontrolling interests | | 58 | | | 184 | |
NOI | | $ | 62,965 | | | $ | 67,005 | |
Non-Same Store NOI (1) | | (1,434) | | | 116 | |
NOI of real estate partnership (pro rata) | | (3,250) | | | (5,152) | |
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata) | | 58,281 | | | 61,969 | |
Same Store straight-line rent adjustments | | 640 | | | (919) | |
Same Store amortization of above/below market rents | | (589) | | | (690) | |
Same Store lease termination fees | | (1,028) | | | (401) | |
Same Store NOI (2) | | $ | 57,304 | | | $ | 59,959 | |
(1) We define “Non-Same Store” as properties that have been acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. For purposes of comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019, Non-Same Store includes properties acquired between January 1, 2019 and September 30, 2020 and properties sold between January 1, 2019 and September 30, 2020, but not included in discontinued operations.
(2) We define “Same Stores”Store” as properties that have been owned forduring the entire period being compared. For purposes of comparing the nine months ended September 30, 20172020 to the nine months ended September 30, 2016,2019, Same Stores includeStore includes properties owned during the entire period frombefore January 1, 2016 to2019 and not sold before September 30, 2017. Same Store revenue increased $615,000 for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as the result of an increase in the average leased square feet to 3,866,000 from 3,830,000. The Same Store average revenue per leased square foot increased $1.11 for the nine months ended September 30, 2017 to $23.46 per leased square foot as compared to the average revenue per leased square foot of $22.35 for the nine months ended September 30, 2016, resulting in an increase of Same Store revenues of $3,218,000.
Property expenses. Our property expenses were approximately $30,561,000 for the nine months ended September 30, 2017 as compared to $24,453,000 for the nine months ended September 30, 2016, an increase of $6,108,000, or 25%. The primary components of property expenses2020. Straight-line rent adjustments, above/below market rents, and lease termination fees are detailed in the table below (in thousands, except percentages):
excluded.
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Overall Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 13,588 |
| | $ | 10,072 |
| | $ | 3,516 |
| | 35 | % |
Utilities | | 4,091 |
| | 3,590 |
| | 501 |
| | 14 | % |
Contract services | | 5,361 |
| | 4,507 |
| | 854 |
| | 19 | % |
Repairs and maintenance | | 3,212 |
| | 2,445 |
| | 767 |
| | 31 | % |
Bad debt | | 1,442 |
| | 1,298 |
| | 144 |
| | 11 | % |
Labor and other | | 2,867 |
| | 2,541 |
| | 326 |
| | 13 | % |
Total property expenses | | $ | 30,561 |
| | $ | 24,453 |
| | $ | 6,108 |
| | 25 | % |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Same Store Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 9,883 |
| | $ | 8,382 |
| | $ | 1,501 |
| | 18 | % |
Utilities | | 2,800 |
| | 2,597 |
| | 203 |
| | 8 | % |
Contract services | | 3,799 |
| | 3,746 |
| | 53 |
| | 1 | % |
Repairs and maintenance | | 2,428 |
| | 1,946 |
| | 482 |
| | 25 | % |
Bad debt | | 1,107 |
| | 1,170 |
| | (63 | ) | | (5 | )% |
Labor and other | | 1,941 |
| | 1,900 |
| | 41 |
| | 2 | % |
Total property expenses | | $ | 21,958 |
| | $ | 19,741 |
| | $ | 2,217 |
| | 11 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
Non-Same Store Property Expenses | | 2017 | | 2016 | | Change | | % Change |
Real estate taxes | | $ | 1,537 |
| | $ | 56 |
| | $ | 1,481 |
| | Not meaningful |
Utilities | | 403 |
| | 38 |
| | 365 |
| | Not meaningful |
Contract services | | 678 |
| | 22 |
| | 656 |
| | Not meaningful |
Repairs and maintenance | | 237 |
| | (2 | ) | | 239 |
| | Not meaningful |
Bad debt | | 213 |
| | (25 | ) | | 238 |
| | Not meaningful |
Labor and other | | 231 |
| | 84 |
| | 147 |
| | Not meaningful |
Total property expenses | | $ | 3,299 |
| | $ | 173 |
| | $ | 3,126 |
| | Not meaningful |
Real estate taxes. Real estate taxes increased approximately $3,516,000, or 35%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The real estate tax increase was comprised of increases of $1,501,000, $534,000 and $1,481,000 in our Same Store, Consolidated Partnership and Non-Same Store properties, respectively. The increase in Same Store real estate tax expense was primarily attributable to increased assessments with tax authorities in our Texas markets resulting in larger expenses for 2017 taxes. Many of the tax assessments on our properties are still under protest for 2016, and we expect to achieve further reductions through the litigation process. We actively work to keep our valuations and resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases, and we strive to keep these charges to our tenants as low as possible.
Utilities. Utilities expenses increased approximately $501,000, or 14%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The utility expense increase was comprised of $365,000 and $203,000 in our Non-Same Store and Same Store properties, respectively, offset by a decrease of $67,000 in our Consolidated Partnership properties.
Contract services. Contract services expenses increased approximately $854,000, or 19%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The contract services increase was comprised of $656,000, $145,000 and $53,000 in our Non-Same Store, Consolidated Partnership and Same Store properties, respectively.
Repairs and maintenance. Repairs and maintenance expenses increased approximately $767,000, or 31%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The repairs and maintenance increase was comprised of increases of $482,000 in Same Store properties, $239,000 in our Non-Same Store properties and $46,000 in our Consolidated Partnership properties.
Bad debt. Bad debt expenses increased approximately $144,000, or 11%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The bad debt expense increase was comprised of a $238,000 increase in our Non-Same Store properties, offset by decreases of $63,000 and $31,000 in our Same Store and Consolidated Partnership properties, respectively.
Labor and other. Labor and other expenses increased approximately $326,000, or 13%, during the nine months ended September 30, 2017 as compared to the same period in 2016. The labor and other expense increase was comprised of $138,000, $147,000 and $41,000 in our Consolidated Partnership, Non-Same Store and Same Store properties, respectively.
Same Store, Non-Same Store and Consolidated Partnership net operating income. The components of Same Store, Non-Same Store, Consolidated Partnership and total property net operating income and net income are detailed in the table below (in thousands):
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | Percent |
| | 2017 | | 2016 | | Change | | Change |
Same Store (49 properties, exclusive of land held for development) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | $ | 50,486 |
| | $ | 48,869 |
| | $ | 1,617 |
| | 3 | % |
Other revenues | | 17,547 |
| | 15,331 |
| | 2,216 |
| | 14 | % |
Total property revenues | | 68,033 |
| | 64,200 |
| | 3,833 |
| | 6 | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 12,075 |
| | 11,359 |
| | 716 |
| | 6 | % |
Real estate taxes | | 9,883 |
| | 8,382 |
| | 1,501 |
| | 18 | % |
Total property expenses | | 21,958 |
| | 19,741 |
| | 2,217 |
| | 11 | % |
| | | | | | | | |
Total Same Store net operating income | | 46,075 |
| | 44,459 |
| | 1,616 |
| | 4 | % |
| | | | | | | | |
Non-Same Store (4 Properties, exclusive of land held for development) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | 9,082 |
| | 387 |
| | 8,695 |
| | Not meaningful |
|
Other revenues | | 3,438 |
| | 140 |
| | 3,298 |
| | Not meaningful |
|
Total property revenues | | 12,520 |
| | 527 |
| | 11,993 |
| | Not meaningful |
|
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 1,762 |
| | 117 |
| | 1,645 |
| | Not meaningful |
|
Real estate taxes | | 1,537 |
| | 56 |
| | 1,481 |
| | Not meaningful |
|
Total property expenses | | 3,299 |
| | 173 |
| | 3,126 |
| | Not meaningful |
|
| | | | | | | | |
Total Non-Same Store net operating income | | 9,221 |
| | 354 |
| | 8,867 |
| | Not meaningful |
|
| | | | | | | | |
Consolidated Partnership properties (14 Properties) | | | | | | | | |
Property revenues | | | | | | | | |
Rental revenues | | 9,629 |
| | 9,659 |
| | (30 | ) | | 0 | % |
Other revenues | | 1,946 |
| | 1,686 |
| | 260 |
| | 15 | % |
Total property revenues | | 11,575 |
| | 11,345 |
| | 230 |
| | 2 | % |
| | | | | | | | |
Property expenses | | | | | | | | |
Property operation and maintenance | | 3,136 |
| | 2,905 |
| | 231 |
| | 8 | % |
Real estate taxes | | 2,168 |
| | 1,634 |
| | 534 |
| | 33 | % |
Total property expenses | | 5,304 |
| | 4,539 |
| | 765 |
| | 17 | % |
| | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | Percent |
| | 2017 | | 2016 | | Change | | Change |
Total Consolidated Partnership properties net operating income | | 6,271 |
| | 6,806 |
| | (535 | ) | | (8 | )% |
| | | | | | | | |
| | | | | | | | |
Total property net operating income | | 61,567 |
| | 51,619 |
| | 9,948 |
| | 19 | % |
| | | | | | | | |
Less total other expenses, provision for income taxes, gain on sale of properties and gain (loss) on disposal of assets | | 54,726 |
| | 44,058 |
| | 10,668 |
| | 24 | % |
| | | | | | | | |
| | | | | | | | |
Net income | | $ | 6,841 |
| | $ | 7,561 |
| | $ | (720 | ) | | (10 | )% |
Other expenses. Our other expenses were approximately $54,311,000 for the nine months ended September 30, 2017, as compared to $46,711,000 for the nine months ended September 30, 2016, an increase of $7,600,000, or 16%. The primary components of other expenses are detailed in the table below (in thousands, except percentages):
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
| | September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
General and administrative | | $ | 17,598 |
| | $ | 16,467 |
| | $ | 1,131 |
| | 7 | % |
Depreciation and amortization | | 19,936 |
| | 16,362 |
| | 3,574 |
| | 22 | % |
Interest expense | | 17,158 |
| | 14,221 |
| | 2,937 |
| | 21 | % |
Interest, dividend and other investment income | | (381 | ) | | (339 | ) | | (42 | ) | | 12 | % |
Total other expenses | | $ | 54,311 |
| | $ | 46,711 |
| | $ | 7,600 |
| | 16 | % |
General and administrative. General and administrative expenses increased approximately $1,131,000, or 7%, for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase was comprised of $659,000 in increased share-based compensation expense, $357,000 in increased salaries and benefits, $103,000 in increased acquisition costs, and $12,000 in increased other expenses.
Total compensation recognized in earnings for share-based payments was $7,545,000 and $6,886,000 for the nine months ended September 30, 2017 and 2016, respectively.
We expect to record approximately $10.0 million in non-cash share-based compensation expense in 2017 and $5.5 million subsequent to 2017. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 18 months.
Depreciation and amortization. Depreciation and amortization increased $3,574,000, or 22%, for the nine months ended September 30, 2017 as compared to the same period in 2016. Depreciation for improvements to Same Store properties increased $1,364,000 for the nine months ended September 30, 2017 as compared to the same period in 2016. Depreciation for Non-Same Store properties increased $1,885,000 and depreciation for Consolidated Partnership properties increased $194,000. Lease commission amortization and depreciation of corporate assets increased $131,000 for the nine months ended September 30, 2017 as compared to the same period in 2016.
Interest expense. Interest expense increased approximately $2,937,000, or 21%, for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in interest expense is comprised of approximately $2,373,000 in increased interest expense resulting from a $92,065,000 increase in our average notes payable balance, a $555,000 increase in interest expense resulting from an increase in the average effective interest rate on our average notes payable from 3.44% to 3.56% and an increase in amortized loan fees included in interest expense of $9,000.
Interest, dividend and other investment income. Interest, dividend and other investment income increased approximately $42,000, or 12%, for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in interest, dividend and other investment income for the nine months ended September 30, 2017 as compared to the same period in 2016 is comprised of approximately $39,000 in increased interest income and $5,000 in increased realized gains on sales of available-for-sale securities, offset by a $2,000 decrease in dividend income.
Reconciliation of Non-GAAP Financial Measures
Funds From Operations (NAREIT) (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to common shareholders computed(calculated in accordance with U.S. GAAP,GAAP), excluding depreciation and amortization related to real estate, gains or losses from salesthe sale of operatingcertain real estate assets, gains and losses from change in control, and impairment charges on properties held for investment and extraordinary items, plus depreciation and amortizationwrite-downs of operating properties, including our share of unconsolidatedcertain real estate joint venturesassets and partnerships.investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We calculate FFO in a manner consistent with the NAREIT definition.definition and also include adjustments for our unconsolidated real estate partnership.
Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using U.S. GAAP net income (loss) alone as the primary measure of our operating performance.
Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself. In addition, securities analysts, investors and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs.
FFO should not be considered as an alternative to net income or other measurements under U.S. GAAP, as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Although our calculation of FFO is consistent with that of NAREIT, there can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs.
Funds From Operations Core (“FFO Core”)
Management believes that the computation of FFO in accordance with NAREIT'sNAREIT’s definition includes certain items
that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include, but are not limited to, legal settlements, proxy contest fees, debt extension costs, non-cash share-based compensation expense, rent support agreement payments received from sellers on acquired assets, management fees from Pillarstone and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of other REITs.
Below are the calculations of FFO and FFO Core and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
FFO (NAREIT) AND FFO-CORE | | 2020 | | 2019 | | 2020 | | 2019 |
Net income attributable to Whitestone REIT | | $ | 900 | | | $ | 1,807 | | | $ | 2,922 | | | $ | 7,908 | |
Adjustments to reconcile to FFO:(1) | | | | | | | | |
Depreciation and amortization of real estate | | 7,125 | | | 6,718 | | | 20,943 | | | 19,657 | |
Depreciation and amortization of real estate assets of real estate partnership (pro rata) | | 386 | | | 651 | | | 1,262 | | | 1,921 | |
Loss on disposal or impairment of assets and properties of continuing operations, net | | 18 | | | — | | | 882 | | | 115 | |
Gain on sale of property from discontinued operations, net | | — | | | — | | | — | | | (701) | |
Loss on sale or disposal of properties or assets of real estate partnership (pro rata)(2) | | 24 | | | 13 | | | 78 | | | 20 | |
Net income attributable to noncontrolling interests | | 14 | | | 42 | | | 58 | | | 184 | |
FFO (NAREIT) | | $ | 8,467 | | | $ | 9,231 | | | $ | 26,145 | | | $ | 29,104 | |
| | | | | | | | |
Share-based compensation expense | | $ | 1,645 | | | $ | 1,719 | | | $ | 4,167 | | | $ | 4,770 | |
| | | | | | | | |
FFO Core | | $ | 10,112 | | | $ | 10,950 | | | $ | 30,312 | | | $ | 33,874 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
FFO and FFO CORE | | 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to Whitestone REIT | | $ | 2,993 |
| | $ | 949 |
| | $ | 6,412 |
| | $ | 7,430 |
|
Adjustments to reconcile to FFO:(1) | | | | | | | | |
Depreciation and amortization of real estate assets | | 7,015 |
| | 5,405 |
| | 19,255 |
| | 16,195 |
|
(Gain) loss on sale or disposal of assets and properties | | 37 |
| | (26 | ) | | 114 |
| | (2,900 | ) |
Net income attributable to redeemable operating partnership units | | 84 |
| | 15 |
| | 201 |
| | 131 |
|
FFO | | 10,129 |
| | 6,343 |
| | 25,982 |
| | 20,856 |
|
| | | | | | | | |
Adjustments to reconcile to FFO Core: | | | | | | | | |
Share-based compensation expense | | 2,704 |
| | 3,042 |
| | 7,545 |
| | 6,886 |
|
Acquisition costs | | 264 |
| | 427 |
| | 1,398 |
| | 990 |
|
FFO Core | | $ | 13,097 |
| | $ | 9,812 |
| | $ | 34,925 |
| | $ | 28,732 |
|
(1) Includes pro-rata share attributable to real estate partnership.
| |
(1)
| Includes pro-rata share attributable to Pillarstone. |
(2) Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).
Property Net Operating Income (“NOI”)
Management believes that NOI is a useful measure of our property operating performance and is useful to securities analysts in estimating the relative net asset values of REITs.performance. We define NOI as operating revenues (rental and other revenues) less property and related expenses (property operation and maintenance and real estate taxes). Other REITs may use different methodologies for calculating NOI and, accordingly, our NOI may not be comparable to other REITs. Because NOI excludes general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes, and gain or loss on sale or disposition of assets, and our pro rata share of NOI of equity method investments, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not immediately apparent from net income. We use NOI to evaluate our operating performance since NOI allows us to evaluate the impact that factors such as occupancy levels, lease structure, lease rates and tenant base have on our results, margins and returns. In addition, management believes that NOI provides useful information to the investment community about our property and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of property performance in the real estate industry. However, NOI should not be viewed as a measure of our overall financial performance since it does not reflect general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes and gain or loss on sale or disposition of assets, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties.
Below is the calculation of NOI and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
PROPERTY NET OPERATING INCOME | | 2020 | | 2019 | | 2020 | | 2019 |
Net income attributable to Whitestone REIT | | $ | 900 | | | $ | 1,807 | | | $ | 2,922 | | | $ | 7,908 | |
General and administrative expenses | | 5,860 | | | 5,597 | | | 15,604 | | | 16,514 | |
Depreciation and amortization | | 7,171 | | | 6,789 | | | 21,112 | | | 19,865 | |
Equity in earnings of real estate partnership | | (196) | | | (524) | | | (752) | | | (1,480) | |
Interest expense | | 6,400 | | | 6,679 | | | 19,561 | | | 19,738 | |
Interest, dividend and other investment income | | (71) | | | (141) | | | (206) | | | (550) | |
Provision for income taxes | | 105 | | | 102 | | | 288 | | | 324 | |
Gain on sale of property from discontinued operations, net | | — | | | — | | | — | | | (701) | |
Management fee, net of related expenses | | 81 | | | (14) | | | 246 | | | (64) | |
Loss on sale or disposal of assets and assets held for sale of continuing operations, net | | 18 | | | — | | | 882 | | | 115 | |
NOI of real estate partnership (pro rata) | | 990 | | | 1,714 | | | 3,250 | | | 5,152 | |
Net income attributable to noncontrolling interests | | 14 | | | 42 | | | 58 | | | 184 | |
NOI | | $ | 21,272 | | | $ | 22,051 | | | $ | 62,965 | | | $ | 67,005 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
PROPERTY NET OPERATING INCOME | | 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to Whitestone REIT | | $ | 2,993 |
| | $ | 949 |
| | $ | 6,412 |
| | $ | 7,430 |
|
General and administrative expenses | | 5,581 |
| | 6,218 |
| | 17,598 |
| | 16,467 |
|
Depreciation and amortization | | 7,247 |
| | 5,449 |
| | 19,936 |
| | 16,362 |
|
Interest expense | | 6,376 |
| | 4,669 |
| | 17,158 |
| | 14,221 |
|
Interest, dividend and other investment income | | (142 | ) | | (164 | ) | | (381 | ) | | (339 | ) |
Provision for income taxes | | 126 |
| | 80 |
| | 296 |
| | 247 |
|
Gain on sale of properties | | — |
| | — |
| | (16 | ) | | (2,890 | ) |
(Gain) loss on disposal of assets | | 40 |
| | (26 | ) | | 135 |
| | (10 | ) |
Net income attributable to noncontrolling interests | | 147 |
| | 15 |
| | 429 |
| | 131 |
|
NOI | | $ | 22,368 |
| | $ | 17,190 |
| | $ | 61,567 |
| | $ | 51,619 |
|
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of distributions to holders of our common shares and OP units, including those required to maintain our REIT status and satisfy our current quarterly distribution target of $0.2850$0.105 per share and OP unit, recurring expenditures, such as repairs and maintenance of our properties, non-recurring expenditures, such as capital improvements and tenant improvements, debt service requirements, and, potentially, acquisitions of additional properties.
During the nine months ended September 30, 2017,2020, our cash provided from operating activities was $27,999,000$29,220,000 and our total distributions were $30,805,000.$21,201,000. Therefore, we had distributionscash flow from operation in excess of cash flow from operationsdistributions of approximately $2,806,000.$8,019,000. We anticipate that cash flows from operating activities and our borrowing capacity under our unsecured revolving credit facility will provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT for federal income tax purposes.
Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements, development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness, sales of common shares, issuance of OP units, sales of underperforming properties and non-core properties and other financing opportunities, including debt financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million remaining availability under the revolving credit facility. In addition, in light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares, including under the 2019 equity distribution agreements, until the price of our common shares increases significantly.
On May 14, 2020, the Board authorized a dividend of one preferred share purchase right (a “Right”) for each outstanding common share payable on May 26, 2020 (the “Record Date”), to the holders of record of common shares as of 5:00 P.M., New York City time, on the Record Date. In connection with the Rights, the Company and American Stock Transfer & Trust Company, LLC, as rights agent, entered into a Rights Agreement, dated as of May 14, 2020 (the “Rights Agreement”). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series A Preferred
Share, par value $0.001 per share (each a “Preferred Share”), of the Company at a purchase price of $30.00 per Unit, subject to adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a one-for-one basis. The Rights will expire on the earliest of (i) the close of business on May 13, 2021, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement.
Our ability to access the equitycapital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our Company. In light of the dynamics in the capital markets impacted by the COVID-19 pandemic and the economic slowdown, our access to capital may be diminished due to, among other things:
•the potential reduction in the borrowing base under our 2019 Facility due to the potential reduction in real estate values and a reduction in our NOI as a result of our tenants’ inability or unwillingness to pay rent timely or at all and increased vacancy rates due to the risk of tenants closing their businesses and delays in leasing vacant space due to potential lack of demand for retail space;
•the price of our common shares being below our estimates of our net asset value, which would result in any offering of our common shares to be dilutive to our existing shareholders.
Despite these challenges, we believe we have sufficient access to capital for the foreseeable future, but we can provide no assurance that, if the impact of the COVID-19 pandemic continues for an extended period of time significantly worsens, that such capital will be available to us on attractive terms or at all.
We expectare unable to predict and determine the impact that the COVID-19 pandemic will have on our rental incomefinancial condition, results of operations and cash flows in the long term. We have taken a number of proactive measures to maintain the strength of our business and manage the impact of the COVID-19 pandemic on our operations and liquidity, including the following:
•To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of the revolving credit facility as a precautionary measure to preserve our financial flexibility. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million remaining availability under the revolving credit facility. As of September 30, 2020, we have cash, cash equivalents and restricted cash of approximately $39.1 million.
•We have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on an individual basis.
•Our board of trustees (the “Board”) has reduced our quarterly dividend resulting in over $30 million of annualized savings. The Board will increaseregularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.
•We have put in place a temporary response team to address tenant concerns. The response team is in ongoing communication with our tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”).
•We are proactively implementing expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability.
•The health and safety of our employees and their families is a top priority. We adapted our operations to protect employees, including by implementing a work from home policy in the first quarter of 2020. All employees returned to work in the second quarter of 2020.
We believe that we will continue to acquire additional properties, subsequently increasingsee significant decreases in our cash flows generatedcollection of contracted rent from operating activities. Weour tenants and may see tenant closures or bankruptcies. If and when economic conditions improve and favorable opportunities arise, we intend to continue acquiring such additional properties that meet our Community Centered Property® strategy through equity issuances and debt financing. For example,
On April 30, 2020, the Company entered into a loan in the principal amount of $1,733,510 from U.S. Bank National Association, one of the Company’s existing lenders, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the
CARES Act. The PPP Loan matures on April 25, 2017, we completedMay 6, 2022 (the “Maturity Date”), accrues interest at 1.00% per annum and may be prepaid in whole or in part without penalty. Principal and interest are payable in 18 monthly installments of $96,864.28, beginning on December 6, 2020, plus a final payment equal to all unpaid principal and accrued interest on the April Offering. On May 3, 2017, we acquired Eldorado Plaza. We fundedMaturity Date. Pursuant to the purchase price of Eldorado PlazaCARES Act, the Company can apply for, and related transaction expenses with borrowings under our Facility andbe granted, forgiveness for all or a portion of the netPPP Loan and such forgiveness will be determined, subject to limitations and ongoing rulemaking by the U.S. Small Business Administration, based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company intends to use all proceeds from the April Offering. PPP Loan to retain employees and maintain payroll and make mortgage payments, lease payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act. However, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
On May 26, 2017, we acquired BLVD Place. We funded15, 2019, our universal shelf registration statement on Form S-3 was declared effective by the purchase price of BLVD PlaceSEC, allowing us to offer up to $750 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and related transaction expenses through a combination of borrowings under our Facility and the BLVD Note (as defined below) and a portion of the net proceeds from the April Offering. Included in the purchase of Eldorado Plaza was approximately 1.86 acres of developable land that will give us the ability to build an estimated 24,000 square feet of additional leasable space for an estimated cost to acquire and develop the land parcel of approximately $4.0 million, based on current plans. Further, included in the purchase of BLVD Place was approximately 1.43 acres of developable land. We currently intend to develop a six-story, 137,000 square foot mixed-use building, which we refer to as the BLVD Phase II-B development, on the developable land at BLVD Place, for an estimated cost to acquire and develop the land parcel of $55 million, including the $10.5 million of the aggregate purchase price of BLVD Place allocated to the acquisition of the land parcel.subscription rights.
As discussed in Note 11 (Equity) to the accompanying consolidated financial statements, on June 4, 2015,On May 31, 2019, we entered into the 2015 equity distribution agreements. Pursuant to the terms and conditions of the 2015nine equity distribution agreements we can issuefor an at-the-market equity distribution program (the “2019 equity distribution agreements”) providing for the issuance and sellsale of up to an aggregate of $50$100 million of the Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, intocapital needs and our determinations of the existing trading market at current market prices or at negotiated prices throughappropriate sources of funding for us, and were made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the placement agents over a period of time and from timeSecurities Act. We have no obligation to time. We did not sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. In light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares under the 20152019 equity distribution agreements until the price of our common shares increases significantly. However, if necessary, we could choose to issue shares at prevailing market prices if our liquidity position so requires. As a result, during the three months ended September 30, 2017.2020, we did not sell shares under the 2019 equity distribution agreements. During the nine months ended September 30, 2017,2020, we sold 567,302170,942 common shares under the 20152019 equity distribution agreements, with net proceeds to us of approximately $7.7$2.2 million. In connection with such sales, we paid compensation of approximately $139,000$34,000 to the sales agents. During the three months ended September 30, 2019, we sold 374,077 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $4.8 million. In connection with such sales, we paid compensation of approximately $74,000 to the sales agents. During the nine months ended September 30, 2019, we sold 679,216 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $8.7 million. In connection with such sales, we paid compensation of approximately $132,000 to the sales agents.
We have used and anticipate using net proceeds from common shares issued pursuant to the 20152019 equity distribution agreements for general corporate purposes, which may include acquisitions of additional properties, the repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment and/or re-tenanting of properties in our portfolio, working capital and other general purposes.
Our capital structure includes non-recourse mortgage debt that we have assumed or originated on certain properties. We may hedge the future cash flows of certain variable rate debt transactions principally through interest rate swaps with major financial institutions. See Note 8 (Derivatives and Hedging Activities) to the accompanying consolidated financial statements for a description of our current cash flow hedges.
As discussed in Note 7 (Debt) to the accompanying consolidated financial statements, on May 26, 2017, we, through our subsidiary, Whitestone Houston BLVD Place LLC, a Delaware limited liability company, issued a $80.0 million promissory note to American General Life Insurance Company (the “BLVD Note”). The BLVD Note has a fixed interest rate of 3.72% and a maturity date of June 1, 2027. The BLVD Notes requires interest only payments with all principal repayable upon maturity. The BLVD Note is a non-recourse loan secured by the real property located at BLVD Place, including the related equipment, fixtures, personal property and other assets, with a limited carve-out guarantee by the Operating Partnership. Proceeds from the BLVD Note were used to fund a portion of the BLVD Place acquisition.
As discussed in Note 2 (Summary of Significant Accounting Policies) to the accompanying consolidated financial statements, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7 (Debt) to the accompanying consolidated financial statements), which is collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize such promissory note. Amounts in the cash management account are classified as restricted cash.
Cash, and Cash Equivalents and Restricted Cash
We had cash, and cash equivalents and restricted cash of approximately $6,338,000$39,118,000 as of September 30, 2017,2020, as compared to $4,168,000$15,643,000 on December 31, 2016.2019. The increase of $2,170,000$23,475,000 was primarily the result of the following:
Sources of Cash
•Cash flow from operations of $27,999,000$29,220,000 for the nine months ended September 30, 2017;2020;
•Net proceeds of $40,600,000$30,000,000 from the 2019 Facility;
•Net proceeds of $107,619,000$1,734,000 from notes payable;
•Proceeds from issuance of common shares;
shares pursuant to the 2019 equity distribution agreements, net of offering costs of $2,198,000;
Proceeds of $26,000 from sale of property;
Proceeds of $306,000 from sale of marketable securities;
Uses of Cash
•Payment of distributions to common shareholders and OP unit holders and noncontrolling interests in Consolidated Partnership of $30,805,000;$21,201,000;
Acquisitions of real estate of $124,557,000;
•Additions to real estate of $13,499,000;$5,808,000;
Change in restricted cash of $49,000;
Payments of loan origination costs of $695,000;
•Repurchase of common shares of $1,987,000;$2,076,000; and
•Payments of notes payable of $2,788,000.$11,514,000.
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Debt
Debt consisted of the following as of the dates indicated (in thousands):
| | | | | | | | | | | | | | |
Description | | September 30, 2020 | | December 31, 2019 |
Fixed rate notes | | | | |
$10.5 million, 4.85% Note, due September 24, 2020 (1) | | $ | — | | | $ | 9,260 | |
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (2) | | 100,000 | | | 100,000 | |
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (3) | | 165,000 | | | 165,000 | |
$80.0 million, 3.72% Note, due June 1, 2027 | | 80,000 | | | 80,000 | |
$19.0 million 4.15% Note, due December 1, 2024 | | 18,768 | | | 19,000 | |
$20.2 million 4.28% Note, due June 6, 2023 | | 18,323 | | | 18,616 | |
$14.0 million 4.34% Note, due September 11, 2024 | | 13,300 | | | 13,482 | |
$14.3 million 4.34% Note, due September 11, 2024 | | 14,073 | | | 14,243 | |
$15.1 million 4.99% Note, due January 6, 2024 | | 14,228 | | | 14,409 | |
$2.6 million 5.46% Note, due October 1, 2023 | | 2,351 | | | 2,386 | |
$50.0 million, 5.09% Note, due March 22, 2029 | | 50,000 | | | 50,000 | |
$50.0 million, 5.17% Note, due March 22, 2029 | | 50,000 | | | 50,000 | |
$1.7 million 1.00% Note, due May 6, 2022 | | 1,734 | | | — | |
$1.1 million 4.53% Note, due November 28, 2020 | | 270 | | | — | |
Floating rate notes | | | | |
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023 | | 139,500 | | | 109,500 | |
Total notes payable principal | | 667,547 | | | 645,896 | |
Less deferred financing costs, net of accumulated amortization | | (1,031) | | | (1,197) | |
Total notes payable | | $ | 666,516 | | | $ | 644,699 | |
(1) Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term through September 24, 2018 and 4.85% beginning September 25, 2018 through September 24, 2020. The promissory note was paid off in September 2020.
|
| | | | | | | | |
Description | | September 30, 2017 | | December 31, 2016 |
Fixed rate notes | | | | |
$10.5 million, LIBOR plus 2.00% Note, due September 24, 2018 (1) | | $ | 9,800 |
| | $ | 9,980 |
|
$50.0 million, 0.84% plus 1.35% to 1.90% Note, due October 30, 2020 (2) | | 50,000 |
| | 50,000 |
|
$50.0 million, 1.50% plus 1.35% to 1.90% Note, due January 29, 2021 (3) | | 50,000 |
| | 50,000 |
|
$100.0 million, 1.73% plus 1.65% to 2.25% Note, due October 30, 2022 (4) | | 100,000 |
| | 100,000 |
|
$80.0 million, 3.72% Note, due June 1, 2027 | | 80,000 |
| | — |
|
$37.0 million 3.76% Note, due December 1, 2020 (5) | | 33,406 |
| | 34,166 |
|
$6.5 million 3.80% Note, due January 1, 2019 | | 5,887 |
| | 6,019 |
|
$19.0 million 4.15% Note, due December 1, 2024 | | 19,000 |
| | 19,000 |
|
$20.2 million 4.28% Note, due June 6, 2023 | | 19,449 |
| | 19,708 |
|
$14.0 million 4.34% Note, due September 11, 2024 | | 14,000 |
| | 14,000 |
|
$14.3 million 4.34% Note, due September 11, 2024 | | 14,300 |
| | 14,300 |
|
$16.5 million 4.97% Note, due September 26, 2023 (5) | | 16,119 |
| | 16,298 |
|
$15.1 million 4.99% Note, due January 6, 2024 | | 14,919 |
| | 15,060 |
|
$9.2 million, Prime Rate less 2.00% Note, due December 29, 2017 (6) | | 7,844 |
| | 7,869 |
|
$2.6 million 5.46% Note, due October 1, 2023 | | 2,483 |
| | 2,512 |
|
$1.1 million 2.97% Note, due November 28, 2017 | | 217 |
| | — |
|
Floating rate notes | | | | |
Unsecured line of credit, LIBOR plus 1.40% to 1.95%, due October 30, 2019 (7) | | 227,200 |
| | 186,600 |
|
Total notes payable principal | | 664,624 |
| | 545,512 |
|
Less deferred financing costs, net of accumulated amortization | | (1,949 | ) | | (1,492 | ) |
| | $ | 662,675 |
| | $ | 544,020 |
|
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion at 1.73%.
| |
(1)
| Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term. |
| |
(2)
| (3)Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 1 (as defined below) at 0.84% through February 3, 2017 and 1.75% beginning February 3, 2017 through October 30, 2020. |
| |
(3)
| Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 2 (as defined below) at 1.50%. |
| |
(4)
| Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%, |
| |
(5)
| Promissory notes were assumed by Pillarstone in December 2016. |
| |
(6)
| Promissory note includes an interest rate swap that fixed the interest rate at 5.72% for the duration of the term. As part of our acquisition of Paradise Plaza in August 2012, we recorded a discount on the note of $1.3 million, which amortizes into interest expense over the life of the loan and results in an imputed interest rate of 4.13%. |
| |
(7)
| Unsecured line of credit includes certain Pillarstone Properties described in more detail below in determining the amount of credit available under the Facility. |
On May 26, 2017, we, through our subsidiary, Whitestone Houston BLVD Place LLC, a Delaware limited liability company, issued a $80.0 million promissory note to American General Life Insurance Company (the “BLVD Note”). The BLVD Note has a fixed interest rate of 3.72% and a maturity date of June 1, 2027. Proceeds from the BLVD Note were used to fund a portion of the purchase priceinterest rate at an average rate of 2.24% for the duration of the acquisitionterm through January 31, 2024.
Scheduled maturities of BLVD Place.our outstanding debt as of September 30, 2020 were as follows (in thousands):
| | | | | | | | |
| | |
Year | | Amount Due |
| | |
2020 (remaining) | | $ | 964 | |
2021 | | 2,762 | |
2022 | | 102,170 | |
2023 | | 167,363 | |
2024 | | 228,573 | |
Thereafter | | 165,715 | |
Total | | $ | 667,547 | |
On November 7, 2014,January 31, 2019, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the “2014“2019 Facility”) with the lenders party thereto, with BMO Capital Markets, Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and Bank of Montreal, as administrative agent (the “Agent”)., SunTrust Robinson Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 20142019 Facility amended and restated our previous unsecured revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the 20142018 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to the 2014(as defined below).
The 2019 Facility as amended by the First Amendment, as the “Facility.”
Pursuant to the First Amendment, the Company madeis comprised of the following amendments to the 2014 Facility:three tranches:
extended the maturity date of the $300•$250.0 million unsecured revolving credit facility under the 2014 Facilitywith a maturity date of January 1, 2023 (the “Revolver”“2019 Revolver”) to October 30, 2019 from November 7, 2018;;
converted $100 million of outstanding borrowings under the Revolver to a new $100•$165.0 million unsecured term loan under the 2014 Facilitywith a maturity date of January 31, 2024 (“Term Loan 3”A”); and
•$100.0 million unsecured term loan with a maturity date of October 30, 2022;
extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility2022 (“Term Loan 1”) to October 30, 2020 from February 17, 2017; and
extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2”B” and together with Term Loan 1 andA, the “2019 Term Loan 3, the “Term Loans”) to January 29, 2021 from November 7, 2019..
Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of September 30, 2020, the interest rate on the 2019 Revolver was 1.81%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.95%1.90% for the 2019 Revolver and 1.35% to 2.25%1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent'sAgent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to such alternate interest rate. LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. As of September 30, 2020, $404.5 million was drawn on
the 2019 Facility. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, customary representations and warranties and affirmative and negative covenants including, without limitation, information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019 Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status.
The Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity to $700 million, upon the satisfaction of certain conditions, including new commitments from lenders. As of September 30, 2017, $427.2 million was drawn on the Facility, and our remaining borrowing capacity was $72.8 million. Proceeds from the Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and retenanting of properties in our portfolio and working capital. We intend to use the additional proceeds from the Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditure, the expansion, redevelopment and re-tenanting of properties in our portfolio and working capital.
On December 8, 2016, in connection with the Contribution, theMarch 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement (the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary Guarantors”) and The Prudential Insurance Company of America and the Second Amendmentvarious other purchasers named therein (collectively, the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50 million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations under the Facility and Reaffirmation of Guaranties (the “Second Amendment”) with Pillarstone,Notes are unconditionally guaranteed by the Company and by the other Guarantors party thereto,Subsidiary Guarantors.
The principal of the lenders party theretoSeries A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Agent. PursuantNotes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the Second Amendment, followingexcess, if any, of the Contribution, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC were permitteddiscounted value of the remaining scheduled payments with respect to remain Material Subsidiariesthe Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Facility)Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and Guarantorsunpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Facility and their respective Pillarstone Properties were each permitted to remain an Eligible Property (as definedNote Agreement could result in the Facility)Purchasers accelerating the payment of all obligations under the Notes. The financial and be includedrestrictive covenants and default provisions in the Borrowing Base (as definedNote Agreement are substantially similar to those contained in the Facility)Operating Partnership’s existing credit facility.
Net proceeds from the Private Placement will be used to refinance existing indebtedness. The Notes have not been and will not be registered under the Facility. In addition, on December 8, 2016, Pillarstone entered intoSecurities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the Limited Guarantee (the “Limited Guarantee”) withUnited States absent registration or an applicable exemption from the Agent, pursuant to which Pillarstone agreed to be joined as a party to the Facility to provide a limited guarantee up to the amount of availability generated by the Pillarstone Properties owned by Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC. As of September 30, 2017, Pillarstone accounted for approximately $15.5 millionregistration requirements of the total amount drawnSecurities Act. The Notes were sold in reliance on the Facility.exemption from registration provided by Section 4(a)(2) of the Securities Act.
As of September 30, 2017,2020, our $237.2$161.0 million in secured debt was collateralized by 20seven properties with a carrying value of $342.0$251.7 million. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of September 30, 2017,2020, we were in compliance with all loan covenants.
Scheduled maturities of our outstanding debt as of September 30, 2017 were as follows (in thousands):Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding debt.
|
| | | | |
| | |
Year | | Amount Due |
| | |
2017 | | $ | 8,767 |
|
2018 | | 12,136 |
|
2019 | | 235,249 |
|
2020 | | 82,827 |
|
2021 | | 51,918 |
|
Thereafter | | 273,727 |
|
Total | | $ | 664,624 |
|
Capital Expenditures
We continually evaluate our properties’ performance and value. In light of the COVID-19 pandemic, we are continuing to monitor and, if necessary, reduce our capital expenditures to maintain financial flexibility. We may determine it is in our shareholders’ best interest to invest capital in properties that we believe have potential for increasing value. We also may have unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to continue investing in similar properties outside of the markets on which we focus in cities with exceptional demographics to diversify market risk, and we may incur significant capital expenditures or make improvements in connection with any properties we may acquire.
Contractual Obligations
DuringOn March 22, 2019, we, through our Operating Partnership, entered into the nine months ended September 30, 2017, there were no material changes outsideNote Agreement together with the Purchasers providing for the issuance and sale of $100 million of senior unsecured notes of the ordinary courseOperating Partnership that mature in March 2029, with annual amortization of businessprincipal beginning in 2023 on $50 million of the senior unsecured notes in the amount of $7.1 million and in 2025 on $50 million of the senior unsecured notes in the amount of $10.0 million. Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding specified contractual obligations contained inthe Note Agreement.
On January 31, 2019, we, through our Annual ReportOperating Partnership, entered into the 2019 Facility. The 2019 Facility amended and restated our previous unsecured revolving credit facility, dated November 7, 2014, as amended on Form 10-KOctober 30, 2015 and December 8, 2016. Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding the year ended December 31, 2016.2019 Facility.
Distributions
On March 24, 2020 we announced that, in further pursuit of ensuring our financial flexibility, the Board determined to conserve additional liquidity by reducing our distribution in response to the COVID-19 pandemic. The distribution reduction is expected to result in over $30 million of annualized cash savings.
The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.
The following table summarizes the cash distributions paid or payable to holders of our common shares and noncontrolling OP units during each quarter during 2016of 2019 and the nine months ended September 30, 20172020 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Noncontrolling OP Unit Holders | | Total |
Quarter Paid | | Distributions Per Common Share | | Amount Paid | | Distributions Per OP Unit | | Amount Paid | | Amount Paid |
2020 | | | | | | | | | | |
Third Quarter | | $ | 0.1050 | | | $ | 4,430 | | | $ | 0.1050 | | | $ | 81 | | | $ | 4,511 | |
Second Quarter | | 0.1050 | | | 4,413 | | | 0.1050 | | | 91 | | | 4,504 | |
First Quarter | | 0.2850 | | | 11,928 | | | $ | 0.2850 | | | 258 | | | 12,186 | |
Total | | $ | 0.4950 | | | $ | 20,771 | | | $ | 0.4950 | | | $ | 430 | | | $ | 21,201 | |
| | | | | | | | | | |
2019 | | | | | | | | | | |
Fourth Quarter | | $ | 0.2850 | | | $ | 11,580 | | | $ | 0.2850 | | | $ | 262 | | | $ | 11,842 | |
Third Quarter | | 0.2850 | | | 11,430 | | | 0.2850 | | | 264 | | | 11,694 | |
Second Quarter | | 0.2850 | | | 11,316 | | | 0.2850 | | | 265 | | | 11,581 | |
First Quarter | | 0.2850 | | | 11,301 | | | 0.2850 | | | 264 | | | 11,565 | |
Total | | $ | 1.1400 | | | $ | 45,627 | | | $ | 1.1400 | | | $ | 1,055 | | | $ | 46,682 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Noncontrolling OP Unit Holders | | Total |
Quarter Paid | | Distributions Per Common Share | | Amount Paid | | Distributions Per OP Unit | | Amount Paid | | Amount Paid |
2017 | | | | | | | | | | |
Third Quarter | | $ | 0.2850 |
| | $ | 10,948 |
| | $ | 0.2850 |
| | $ | 309 |
| | $ | 11,257 |
|
Second Quarter | | 0.2850 |
| | 10,093 |
| | 0.2850 |
| | 310 |
| | 10,403 |
|
First Quarter | | 0.2850 |
| | 8,453 |
| | 0.2850 |
| | 313 |
| | 8,766 |
|
Total | | $ | 0.8550 |
| | $ | 29,494 |
| | $ | 0.8550 |
| | $ | 932 |
| | $ | 30,426 |
|
| | | | | | | | | | |
2016 | | | | | | | | | | |
Fourth Quarter | | $ | 0.2850 |
| | $ | 8,305 |
| | $ | 0.2850 |
| | $ | 314 |
| | $ | 8,619 |
|
Third Quarter | | 0.2850 |
| | 8,109 |
| | 0.2850 |
| | 138 |
| | 8,247 |
|
Second Quarter | | 0.2850 |
| | 7,786 |
| | 0.2850 |
| | 138 |
| | 7,924 |
|
First Quarter | | 0.2850 |
| | 7,711 |
| | 0.2850 |
| | 139 |
| | 7,850 |
|
Total | | $ | 1.1400 |
| | $ | 31,911 |
| | $ | 1.1400 |
| | $ | 729 |
| | $ | 32,640 |
|
Taxes
We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 1999. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We believe that we are organized and operate in a manner to qualify and be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.
Income earned by our taxable REIT subsidiary, Whitestone Davenport TRS LLC (“Davenport TRS”), is subject to federal income tax. For the nine months ended September 30, 2016, we recognized $45,000 in income tax expense related to Davenport TRS taxable year. Davenport TRS was dissolved in the fourth quarter of 2016.
Environmental Matters
Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.
Off-Balance Sheet Arrangements
Guarantees. We had no significant off-balance sheet arrangements asmay guarantee the debt of September 30, 2017a real estate partnership primarily because it allows the real estate partnership to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the real estate partnership on its investment, and December 31, 2016.a higher return on our investment in the real estate partnership. We may receive a fee from the real estate partnership for providing the guarantee. Additionally, when we issue a guarantee, the terms of the real estate partnership’s partnership agreement typically provide that we may receive indemnification from the real estate partnership or have the ability to increase our ownership interest. See Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for information related to our guarantee of our real estate partnership’s debt.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our future income, cash flows and fair value relevant to our financial instruments depend upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable.
All of our financial instruments were entered into for other than trading purposes.
Fixed Interest Rate Debt
As of September 30, 2017, $437.42020, $528.0 million, or approximately 66%79% of our total outstanding debt, was subject to fixed interest rates, which limit the risk of fluctuating interest rates. ThoughAlthough a change in the market interest rates affects the fair market value of our fixed interest rate debt, it does not impact net income to shareholders or cash flows. Our total outstanding fixed interest rate debt had an average effective interest rate as of September 30, 20172020 of approximately 3.82%4.1% per annum with scheduled maturities ranging from 20172020 to 20272029 (see Note 7 (Debt) to the accompanying consolidated financial statements for further detail). Holding other variables constant, a 1% increase or decrease in interest rates would cause a $17.7$18.7 million decline or increase, respectively, in the fair value for our fixed rate debt.
Variable Interest Rate Debt
As of September 30, 2017, $227.22020, $139.5 million, or approximately 34%21% of our outstanding debt, was subject to floating interest rates of LIBOR plus 1.40% to 1.95%1.90% and not currently subject to a hedge. The impact of a 1% increase or decrease in interest rates on our non-hedged variable rate debt would result in a decrease or increase of annual net income of approximately $2.3$1.4 million, respectively.
Credit Risk
Credit risk may be increased as a result of the COVID-19 pandemic. We expect that the actions taken by the U.S. and international governments to decrease the impact of the COVID-19 pandemic will result in a continued decline in global economic activity generally, and may adversely affect the financial condition of our tenants in particular. Although the full extent of the adverse impacts on our tenants cannot be predicted, in future periods we may experience reductions in on-time payments or closures of tenants’ businesses, which could have a material adverse effect on our results of operations, cash flows and financial condition.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management of Whitestone REIT, under the supervisionis responsible for establishing and with the participation of our principal executive and financial officers, has evaluated the effectiveness of ourmaintaining adequate disclosure controls and procedures as defined in ensuring that the information required to be disclosed in our filingsRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC'sSEC’s rules and forms, including ensuringforms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to Whitestone REIT'sthe Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on suchthe evaluation of our disclosure controls and procedures as of September 30, 2020, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of September 30, 2017 (the end of the period covered by this Report).effective.
Changes in Internal Control Over Financial Reporting
DuringAs a result of the three months ended September 30, 2017, there wereCOVID-19 pandemic, our employees worked remotely in part of the first quarter of 2020 and part of the second quarter of 2020.This shift to working remotely was implemented quickly and all employees returned to work in the second quarter of 2020. Our remote working arrangements did not had a material effect on our internal control over financial reporting. There have been no significant changes in our internal control over financial reporting during the nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 1A. Risk Factors.
Other than the addition of the risk factor below, there haveThere has been no material changes from thechange in our risk factors from those previously disclosed in the “Risk Factors” sectionsPart I, Item 1A of Whitestone’sour Annual Report on Form 10-K for the year ended December 31, 20162019 and in our Quarterly Report on Form 10-Q for the period ended March 31, 2017.June 30, 2020 other than the following.
Because a majorityThe COVID-19 pandemic is expected to, and the future outbreak of other highly infectious or contagious diseases may, materially and adversely impact the businesses of many of our GLA istenants and materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our stockholders.
In March 2020, the World Health Organization declared COVID-19 a pandemic, and the United States declared a national emergency due to the impact of the pandemic. As a result, the U.S. and many local governments implemented measures intended to control the spread of COVID-19, including enhanced screenings, quarantine or shelter in place requirements and travel restrictions. For example, local governments in Texas and Arizona, where all but one of our properties are located, mandated a stay in place order, closed non-essential businesses, and closed other types of service businesses, such as bars and restaurants, though they can continue to provide take out and drive through services. As of the Houstondate of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Phoenix metropolitan areas,Arizona. However, the timing and ultimate impact of any such steps on the economy as a downturnwhole and on our and our tenants’ businesses and financial condition remains uncertain.
A number of our tenants operate service and retail businesses that require in-person interactions with their customers to generate revenues, and the spread of COVID-19 has decreased customers’ willingness to frequent, and mandated stay in the Houston or Phoenix marketplace orders have prevented customers from frequenting, some of our tenants’ businesses. Even as such orders are lifted, customer traffic may continue to be adversely impacted. Some tenants may also seek concessions from us for paying lease charges as a result of economicsuch mandatory closures or other conditionsreduced hours. As of the date of this Quarterly Report on Form 10-Q, we have received payment of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period. In fact, to date, we have included in our adjustments to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis.
Also, some of our tenants have closed or may close and may not re-open even after the aforementioned restrictions are lifted, which could have a material impact on occupancy at our properties which could result in an increase in the number of co-tenancy claims due to falling below required occupancy thresholds and may impact our results. Additionally, a decrease in retail demand could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates, or at all, and we could incur significant re-leasing costs. The current decreased customer traffic or continued decreased traffic in the future could adversely affect our operations and ability to make distributions to our shareholders.
A majority of our assets and revenues are currently derived from properties located in the Houston and Phoenix metropolitan areas. As of December 31, 2016, on a pro forma basis giving effect to the acquisition of Eldorado Plaza and BLVD Place, approximately 29% of our wholly-owned GLA and 29% of our retail NOI would have been located in Houston, approximately 46% of our wholly-owned GLA and 42% of our retail NOI would have been located in Phoenix and approximately 11% of our wholly-owned GLA and 13% of our retail NOI would have been located in Dallas. Our results of operations are directly affected byimpact our ability to attract financially soundsuccessfully execute our leasing strategy and operational objectives.
Furthermore, in the event of any default by a tenant for non-payment of lease charges or early or limited cessation of operations, we might not be able to fully recover and/or experience delays and additional costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with such parties due to potential moratoriums imposed by various jurisdictions in light of the COVID-19 pandemic on landlord initiated commercial tenants. A significant economic downturn in Houston, includingeviction and collection actions. Further, one or more of our tenants may seek the protection of the bankruptcy laws as a result of the recentprolonged impact of the COVID-19 pandemic which could result in the termination of its lease causing a reduction in our income. Tenant bankruptcies may make it more difficult for us to lease the remainder of the property or future significant declineproperties in oil prices, or as a result of Hurricane Harvey or other natural disasters which may significantly impact our tenants, their customersthe bankrupt tenant operates and suppliers and, as a result, their businesses, Dallas or the Phoenix metropolitan area may adversely impact our ability to locatesuccessfully execute our re-leasing strategy.
The outbreak has triggered a period of global economic slowdown. A sustained downturn in the U.S. economy and retain financially soundreduced consumer spending as well as consumer activity at brick-and-mortar commercial establishments due to the prolonged existence and threat of the COVID-19 pandemic could impose an economic recession in the U.S. which could impact our tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons and therefore decrease the revenue generated by our properties or the value of our properties. Our ability to lease space and negotiate and maintain favorable rents could also be negatively impacted by a prolonged recession in the U.S. economy. Moreover, the demand for leasing space in our properties could substantially decline during a significant downturn in the U.S. economy which could result in a decline in our occupancy percentage and reduction in rental revenues.
In addition, the COVID-19 pandemic has also led to complete or partial shutdowns of manufacturing facilities and distribution centers in many countries, which could result in temporary or long-term disruptions in our tenants’ supply chains from suppliers, or otherwise delay the delivery of inventory or other goods necessary for our tenants’ operations.
Our tenants may also be negatively impacted if the outbreak of COVID-19 occurs within their workforce or otherwise disrupts their management. Further, certain of our tenants may not be eligible for or may not be successful in securing stimulus funds under the CARES Act. Many aspects of the CARES Act have expired or are expected to expire in the fourth quarter of 2020.While the U.S. Congress is currently negotiating an additional stimulus relief bill, there can be no assurance that any such bill, if passed, will include relief available to us or our tenants.
As a result of these and other factors, some of our tenants have been unable to and others may become unable to operate their businesses and make rental payments to us on a timely basis or otherwise under their leases. Because substantially all of our income is derived from rentals of commercial real property, our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our shareholders would be adversely affected if a significant number of tenants are unable to meet their obligations or their revenues decline.
In addition, the COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our shareholders due to, among other factors:
•during the first quarter of 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, after which we have $13.0 million remaining availability. Difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants’ abilities to fund their business operations and meet their obligations to us;
•in the second quarter of 2020, we reduced our quarterly dividends, and the financial impact of the COVID-19 pandemic could continue to negatively impact our ability to pay dividends to our stockholders;
•the financial impacts could negatively impact our future compliance with financial covenants of our 2019 Credit Facility and other debt agreements and could result in a default and potentially an acceleration of indebtedness, which non-compliance could also negatively impact our ability to make additional borrowings under our 2019 Credit Facility or otherwise pay dividends to our shareholders; the worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our adversely impacted properties could result in the recognition of substantial impairment charges imposed on our assets;
•the credit quality of our tenants could be negatively impacted and we may significantly decrease our revenues;
•a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties, or to sell properties as part of our capital recycling strategy;
•as a result of remote working arrangements we implemented in response to the COVID-19 pandemic in the first and second quarters of 2020, we may have been subject to increased risk of an information or cyber-security incident, fraud, a failure to maintain the uninterrupted operation of our information systems due to, among other things, an increase in remote work; and
•the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.
The extent to which the COVID-19 pandemic, or a future pandemic, impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope,
severity and duration of such pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic, but a prolonged outbreak as well as related mitigation efforts could continue to have a material impact on our existing tenants' revenues costs and could materially and adversely affect our business, results of operations and may adversely affect their ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Consequently, because of the geographic concentration among our current assets, if the Houston, Dallas or Phoenix metropolitan area experiences an economic downturn, our operations and ability to make distributions to our shareholders could be adversely impacted. In addition, a substantial component of the Houston and Dallas economy is the oil and gas industry, and the current low prices of oil and natural gas could adversely affect companies in that industry and their employees, which could adversely affect the businesses of our Houston and Dallas tenants.financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| |
(a) | During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. |
(a) During the period covered by this Quarterly Report on Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
(b) Not applicable.
(c) During the three months ended September 30, 2020, certain of our employees tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under the 2018 Plan. The following table summarizes all of these repurchases during the three months ended September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
July 1, 2020 through July 31, 2020 | | — | | | $ | — | | | N/A | | N/A |
August 1, 2020 through August 31, 2020 | | — | | | — | | | N/A | | N/A |
September 1, 2020 through September 30, 2020 | | 1,173 | | | 6.00 | | | N/A | | N/A |
Total | | 1,173 | | | $ | 6.00 | | | | | |
(1) The number of shares purchased represents common shares held by employees who tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under the 2018 Plan. With respect to these shares, the price paid per share is based on the fair market value at the time of tender.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed, furnished and incorporated by reference (as stated therein) as part of this Report.
|
| |
Exhibit No. | DescriptionEXHIBIT INDEX |
|
| | | | |
101.INS***101 | The following financial information of the Registrant for the quarter ended September 30, 2020, formatted in Inline XBRL Instance Document(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 (unaudited), (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, June 30, and September 30, 2020 and 2019 (unaudited), (iv) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited). |
| | | | | |
104 | |
101.SCH*** | Cover Page Interactive Data File - the cover page XBRL Taxonomy Extension Schema Document |
| |
101.CAL*** | tags are embedded within the Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Documentdocument. |
________________________
* Filed herewith.
** Furnished herewith.
*** The following financial information of the Registrant for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited), (iii) the Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017 (unaudited), (iv) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited).
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | | | | |
| | | | WHITESTONE REIT |
Date: | November 3, 2017October 30, 2020 | | | /s/ James C. Mastandrea |
| | | | James C. Mastandrea |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
|
| | | | | | | | | | | | | |
Date: | November 3, 2017October 30, 2020 | | | /s/ David K. Holeman |
| | | | David K. Holeman |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Principal Accounting Officer) |