UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
[x]☒QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2020
For the quarterly period ended September 30, 2017

OR

[ ]OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 001-34855
WHITESTONE REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland76-0594970
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

For the transition period from ____________ to ____________

Commission File Number 001-34855
WHITESTONE REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland76-0594970
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification No.)
2600 South Gessner,Suite 500
Houston, Texas
77063
Houston,Texas
(Address of Principal Executive Offices)(Zip Code)


(713) 827-9595
(Registrant'sRegistrant’s Telephone Number, Including Area Code)
 
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per shareWSRNew York Stock Exchange
Preferred Stock Purchase RightsN/ANew York Stock Exchange

Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ýYes     ¨No☒Yes     ☐No


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ýYes    ¨No☒Yes    ☐No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer☐Accelerated filer☒
Non-accelerated filer☐Small reporting company☐
Emerging growth company☐
 
Large accelerated filer ¨                                                                                      Accelerated filer ý
Non-accelerated filer ¨   (Do not check if a smaller reporting company)         Smaller reporting company ¨

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes   ý☐Yes   ☒ No


As of November 1, 2017,October 29, 2020, there were 38,486,70742,354,265 common shares of beneficial interest, $0.001 par value per share, outstanding.







PART I - FINANCIAL INFORMATION

Item 1.
Item 2.
Item 3.
Item 4.


PART II - OTHER INFORMATION

Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

September 30, 2020December 31, 2019
(unaudited)
ASSETS
Real estate assets, at cost
Property$1,104,963 $1,099,955 
Accumulated depreciation(157,303)(137,933)
Total real estate assets947,660 962,022 
Investment in real estate partnership34,849 34,097 
Cash and cash equivalents38,990 15,530 
Restricted cash128 113 
Escrows and acquisition deposits7,866 8,388 
Accrued rents and accounts receivable, net of allowance for doubtful accounts23,604 22,854 
Receivable due from related party1,302 477 
Unamortized lease commissions, legal fees and loan costs8,082 8,960 
Prepaid expenses and other assets(1)
2,444 3,819 
Total assets$1,064,925 $1,056,260 
LIABILITIES AND EQUITY
Liabilities:
Notes payable$666,516 $644,699 
Accounts payable and accrued expenses(2)
49,861 39,336 
Payable due to related party845 307 
Tenants' security deposits6,915 6,617 
Dividends and distributions payable4,528 12,203 
Total liabilities728,665 703,162 
Commitments and contingencies:0 0 
Equity:
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2020 and December 31, 20190 0 
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 42,353,309 and 41,492,117 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively42 41 
Additional paid-in capital560,129 554,816 
Accumulated deficit(214,468)(204,049)
Accumulated other comprehensive loss(15,707)(5,491)
Total Whitestone REIT shareholders' equity329,996 345,317 
Noncontrolling interest in subsidiary6,264 7,781 
Total equity336,260 353,098 
Total liabilities and equity$1,064,925 $1,056,260 
  September 30, 2017 December 31, 2016
  (unaudited)  
ASSETS(1)
Real estate assets, at cost    
Property $1,144,558
 $920,310
Accumulated depreciation (124,268) (107,258)
Total real estate assets 1,020,290
 813,052
Cash and cash equivalents 6,338
 4,168
Restricted cash 105
 56
Marketable securities 242
 517
Escrows and acquisition deposits 9,116
 6,620
Accrued rents and accounts receivable, net of allowance for doubtful accounts 22,212
 19,951
Unamortized lease commissions and loan costs 8,397
 8,083
Prepaid expenses and other assets 3,448
 2,762
Total assets $1,070,148
 $855,209
     
LIABILITIES AND EQUITY(2)
Liabilities:    
Notes payable $662,675
 $544,020
Accounts payable and accrued expenses 35,041
 28,692
Tenants' security deposits 6,746
 6,125
Dividends and distributions payable 11,401
 8,729
Total liabilities 715,863
 587,566
Commitments and contingencies: —
 —
Equity:    
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2017 and December 31, 2016, respectively —
 —
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 38,524,480 and 29,468,563 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively 38
 29
Additional paid-in capital 509,774
 396,494
Accumulated deficit (167,397) (141,695)
Accumulated other comprehensive gain 1,004
 859
Total Whitestone REIT shareholders' equity 343,419
 255,687
Noncontrolling interests:    
Redeemable operating partnership units 11,002
 11,941
Noncontrolling interest in Consolidated Partnership (136) 15
Total noncontrolling interests 10,866
 11,956
Total equity 354,285
 267,643
Total liabilities and equity $1,070,148
 $855,209



See accompanying notes to Consolidated Financial Statements.

1
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS - Continued
(in thousands, except share and per share data)
   
  September 30, 2017 December 31, 2016
  (unaudited)  
(1) Assets of consolidated Variable Interest Entities included in the total assets above:
Real estate assets, at cost    
Property $93,505
 $92,338
Accumulated depreciation (35,089) (32,533)
Total real estate assets 58,416
 59,805
Cash and cash equivalents 2,246
 1,236
Escrows and acquisition deposits 2,087
 2,274
Accrued rents and accounts receivable, net of allowance for doubtful accounts 2,556
 2,313
Unamortized lease commissions and loan costs 1,180
 1,150
Prepaid expenses and other assets 130
 82
Total assets $66,615
 $66,860
     
(2) Liabilities of consolidated Variable Interest Entities included in the total liabilities above:
Notes payable $49,137
 $50,001
Accounts payable and accrued expenses 3,480
 3,481
Tenants' security deposits 1,129
 996
Distributions payable 112
 —
Total liabilities $53,858
 $54,478
Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)



September 30, 2020December 31, 2019
(unaudited)

(1) Operating lease right of use assets (net)
$813 $1,328 

(2) Operating lease liabilities
$819 $1,331 




See accompanying notes to Consolidated Financial Statements.





2
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues
Rental(1)
$28,868 $29,368 $86,116 $87,527 
Management, transaction, and other fees1,032 511 1,965 1,624 
Total revenues29,900 29,879 88,081 89,151 
Operating expenses
Depreciation and amortization7,171 6,789 21,112 19,865 
Operating and maintenance5,029 5,118 15,021 14,760 
Real estate taxes4,670 4,410 13,591 12,474 
General and administrative5,860 5,597 15,604 16,514 
Total operating expenses22,730 21,914 65,328 63,613 
Other expenses (income)
Interest expense6,400 6,679 19,561 19,738 
Loss on sale or disposal of assets and assets held for sale18 0 882 115 
Interest, dividend and other investment income(71)(141)(206)(550)
Total other expense6,347 6,538 20,237 19,303 
Income before equity investments in real estate partnerships and income tax823 1,427 2,516 6,235 
Equity in earnings of real estate partnership196 524 752 1,480 
Provision for income tax(105)(102)(288)(324)
Income from continuing operations914 1,849 2,980 7,391 
Gain on sale of property from discontinued operations0 0 0 701 
Income from discontinued operations0 0 0 701 
Net income914 1,849 2,980 8,092 
Less: Net income attributable to noncontrolling interests14 42 58 184 
Net income attributable to Whitestone REIT$900 $1,807 $2,922 $7,908 


See accompanying notes to Consolidated Financial Statements.
3
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Basic Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.18 
Income from discontinued operations attributable to Whitestone REIT0.00 0.00 0.00 0.02 
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.20 
Diluted Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.17 
Income from discontinued operations attributable to Whitestone REIT0.00 0.00 0.00 0.02 
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.19 
Weighted average number of common shares outstanding:
Basic42,346 40,187 42,202 39,942 
Diluted43,440 41,446 43,040 41,084 
Consolidated Statements of Comprehensive Income (Loss)
Net income$914 $1,849 $2,980 $8,092 
Other comprehensive income (loss)
Unrealized gain (loss) on cash flow hedging activities1,241 (2,235)(10,395)(11,740)
Comprehensive income (loss)2,155 (386)(7,415)(3,648)
Less: Net income attributable to noncontrolling interests14 42 58 184 
Less: Comprehensive income (loss) attributable to noncontrolling interests43 (51)(203)(266)
Comprehensive income (loss) attributable to Whitestone REIT$2,098 $(377)$(7,270)$(3,566)

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Property revenues        
Rental revenues $24,891
 $19,844
 $69,197
 $58,915
Other revenues 8,762
 5,664
 22,931
 17,157
Total property revenues 33,653
 25,508
 92,128
 76,072
         
Property expenses        
Property operation and maintenance 6,104
 4,904
 16,973
 14,381
Real estate taxes 5,181
 3,414
 13,588
 10,072
Total property expenses 11,285
 8,318
 30,561
 24,453
         
Other expenses (income)        
General and administrative 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)
Total other expense 19,062
 16,172
 54,311
 46,711
         
Income before gain (loss) on sale or disposal of properties or assets and income taxes 3,306
 1,018
 7,256
 4,908
         
Provision for income taxes (126) (80) (296) (247)
Gain on sale of properties —
 —
 16
 2,890
Gain (loss) on sale or disposal of assets (40) 26
 (135) 10
         
Net income 3,140
 964
 6,841
 7,561
         
Redeemable operating partnership units 84
 15
 201
 131
Non-controlling interests in Consolidated Partnership 63
 —
 228
 —
Less: Net income attributable to noncontrolling interests 147
 15
 429
 131
         
Net income attributable to Whitestone REIT $2,993
 $949
 $6,412
 $7,430








See accompanying notes to Consolidated Financial Statements.

4
Table of Contents

Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)thousands)



  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Basic Earnings Per Share:        
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares $0.07
 $0.03
 $0.18
 $0.25
Diluted Earnings Per Share:        
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares $0.07
 $0.03
 $0.17
 $0.25
         
Weighted average number of common shares outstanding:        
Basic 37,992
 28,195
 34,406
 27,210
Diluted 38,589
 29,024
 35,211
 28,013
         
Distributions declared per common share / OP unit $0.2850
 $0.2850
 $0.8550
 $0.8550
         
Consolidated Statements of Comprehensive Income        
         
Net income $3,140
 $964
 $6,841
 $7,561
         
Other comprehensive gain (loss)        
         
Unrealized gain (loss) on cash flow hedging activities 172
 1,529
 124
 (6,962)
Unrealized gain (loss) on available-for-sale marketable securities (7) (11) 26
 20
         
Comprehensive income 3,305
 2,482
 6,991
 619
         
Less: Net income attributable to noncontrolling interests 147
 15
 429
 131
Less: Comprehensive gain (loss) attributable to noncontrolling interests 5
 26
 5
 (120)
         
Comprehensive income attributable to Whitestone REIT $3,153
 $2,441
 $6,557
 $608
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019

    (1) Rental
Rental revenues$21,808 $21,623 $65,591 $64,752 
Recoveries8,339 8,240 24,976 23,701 
Bad debt(1,279)(495)(4,451)(926)
Total rental$28,868 $29,368 $86,116 $87,527 




See accompanying notes to Consolidated Financial Statements.





5
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)

Accumulated
AdditionalOtherTotalNoncontrolling
Common SharesPaid-InAccumulatedComprehensiveShareholders’InterestsTotal
SharesAmountCapitalDeficitGain (Loss)EquityUnitsDollarsEquity
Balance, December 31, 201941,492 $41 $554,816 $(204,049)$(5,491)$345,317 909 $7,781 $353,098 
Exchange of noncontrolling interest OP units for common shares5 — 44 — — 44 (5)(44)0 
Issuance of common shares - ATM Program, net of offering costs171 — 2,241 — — 2,241 — — 2,241 
Exchange offer costs— — (32)— — (32)— — (32)
Issuance of shares under dividend reinvestment plan4 — 42 — — 42 — — 42 
Repurchase of common shares (1)
(153)— (1,630)— — (1,630)— — (1,630)
Share-based compensation616 — 1,248 — — 1,248 — — 1,248 
Distributions - $0.285 per common share / OP unit— — — (4,449)— (4,449)— (95)(4,544)
Unrealized loss on change in value of cash flow hedge— — — — (10,721)(10,721)— (231)(10,952)
Net income— — — 1,612 — 1,612 — 35 1,647 
Balance, March 31, 202042,135 41 556,729 (206,886)(16,212)333,672 904 7,446 341,118 
Exchange of noncontrolling interest OP units for common shares127 1 1,082 — — 1,083 (127)(1,083)0 
Exchange offer costs— — (11)— — (11)— — (11)
Issuance of shares under dividend reinvestment plan2 — 16 — — 16 — — 16 
Repurchase of common shares (1)
(23)— (440)— — (440)— — (440)
Share-based compensation103 — 1,140 — — 1,140 — — 1,140 
Distributions - $0.105 per common share / OP unit— — — (4,446)— (4,446)— (81)(4,527)
Unrealized loss on change in value of cash flow hedge— — — — (669)(669)— (15)(684)
Reallocation of ownership between parent and subsidiary— — — 1 (34)(33)— 33 0 
Net income— — — 410 — 410 — 9 419 
Balance, June 30, 202042,344 42 558,516 (210,921)(16,915)330,722 777 6,309 337,031 
Exchange of noncontrolling interest OP units for common shares1 — 11 — — 11 (1)(11)0 
Exchange offer costs— — — — — — — — 0 
Issuance of shares under dividend reinvestment plan3 — 16 — — 16 — — 16 
Repurchase of common shares (1)
(2)— (6)— — (6)— — (6)
Share-based compensation7 — 1,592 — — 1,592 — — 1,592 
Distributions - $0.105 per common share / OP unit— — — (4,446)— (4,446)— (82)(4,528)
Unrealized gain on change in value of cash flow hedge— — — — 1,198 1,198 — 43 1,241 
Reallocation of ownership between parent and subsidiary— — — (1)10 9 — (9)0 
Net income— — — 900 — 900 — 14 914 
Balance, September 30, 202042,353 $42 $560,129 $(214,468)$(15,707)$329,996 776 $6,264 $336,260 
              Noncontrolling Interests  
                  General  
          Accumulated   Redeemable Partners'  
    Additional   Other Total Operating Interest in  
  Common Shares Paid-In Accumulated Comprehensive Shareholders' Partnership Consolidated Total
  Shares Amount Capital Deficit Gain Equity Units Dollars Partnership Equity
                     
Balance, December 31, 2016 29,468
 $29
 $396,494
 $(141,695) $859
 $255,687
 1,103
 $11,941
 $15
 $267,643
                     
Exchange of noncontrolling interest OP units for common shares 19
 —
 206
 —
 —
 206
 (19) (206) —
 —
    ��                
Issuance of shares under dividend reinvestment plan 7
 —
 95
 —
 —
 95
 —
 —
 —
 95
                     
Issuance of common shares - ATM Program, net of offering costs 567
 1
 7,723
 —
 —
 7,724
 —
 —
 —
 7,724
                     
Issuance of common shares - Overnight, net of offering costs 8,019
 8
 99,887
 —
 —
 99,895
 —
 —
 —
 99,895
                     
Repurchase of common shares (1)
 (154) —
 (1,987) —
 —
 (1,987) —
 —
 —
 (1,987)
                     
Share-based compensation 598
 —
 7,347
 —
 —
 7,347
 —
 —
 —
 7,347
                     
Distributions —
 —
 —
 (32,114) —
 (32,114) —
 (930) (379) (33,423)
                     
Unrealized gain on change in fair value of available-for-sale marketable securities —
 —
 —
 —
 25
 25
 —
 1
 —
 26
                     
Unrealized gain on change in value of cash flow hedge —
 —
 —
 —
 120
 120
 —
 4
 —
 124
                     
Reallocation of ownership percentage between parent and subsidiary —
 —
 9
 —
 —
 9
 —
 (9) —
 —
                     
Net income —
 —
 —
 6,412
 —
 6,412
 —
 201
 228
 6,841
                     
Balance, September 30, 2017 38,524
 $38
 $509,774
 $(167,397) $1,004
 $343,419
 1,084
 $11,002
 $(136) $354,285


(1)
During the nine months ended September 30, 2017, the Company acquired 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.




See accompanying notes to Consolidated Financial Statements.




6
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
Accumulated
AdditionalOtherTotalNoncontrolling
Common SharesPaid-InAccumulatedComprehensiveShareholders’InterestsTotal
SharesAmountCapitalDeficitGain (Loss)EquityUnitsDollarsEquity
Balance, December 31, 201839,778 $39 $527,662 $(181,361)$4,116 $350,456 929 $8,694 $359,150 
Exchange of noncontrolling interest OP units for common shares1 — 5 — — 5 (1)(5)0 
Stock issuance costs— — (6)— — (6)— — (6)
Issuance of shares under dividend reinvestment plan3 — 34 — — 34 — — 34 
Repurchase of common shares (1)
(64)— (762)— — (762)— — (762)
Share-based compensation111 1 1,882 — — 1,883 — — 1,883 
Distributions - $0.285 per common share / OP unit— ��� — (11,351)— (11,351)— (264)(11,615)
Unrealized loss on change in value of cash flow hedge— — — — (3,390)(3,390)— (80)(3,470)
Net income— — — 2,774 — 2,774 — 65 2,839 
Balance, March 31, 201939,829 40 528,815 (189,938)726 339,643 928 8,410 348,053 
Exchange of noncontrolling interest OP units for common shares— — 5 — — 5 — (5)0 
Issuance of common shares - ATM Program, net of offering costs305 — 3,716 — — 3,716 — — 3,716 
Stock issuance costs— — 1 — — 1 — — 1 
Issuance of shares under dividend reinvestment plan2 — 35 — — 35 — — 35 
Repurchase of common shares (1)
— — (14)— — (14)— — (14)
Share-based compensation— — 1,025 — — 1,025 — — 1,025 
Distributions - $0.285 per common share / OP unit— — — (11,445)— (11,445)— (265)(11,710)
Unrealized loss on change in value of cash flow hedge— — — — (5,898)(5,898)— (137)(6,035)
Net income— — — 3,327 — 3,327 — 77 3,404 
Balance, June 30, 201940,136 40 533,583 (198,056)(5,172)330,395 928 8,080 338,475 
Exchange of noncontrolling interest OP units for common shares3 — 27 — — 27 (3)(27)0 
Issuance of common shares - ATM Program, net of offering costs374 — 4,830 — — 4,830 — — 4,830 
Issuance of shares under dividend reinvestment plan3 — 35 — — 35 — — 35 
Share-based compensation1 — 1,641 — — 1,641 — — 1,641 
Distributions - $0.285 per common share / OP unit— — — (11,575)— (11,575)— (263)(11,838)
Unrealized loss on change in value of cash flow hedge— — — — (2,184)(2,184)— (51)(2,235)
Net income— — — 1,807 — 1,807 — 42 1,849 
Balance, September 30, 201940,517 $40 $540,116 $(207,824)$(7,356)$324,976 925 $7,781 $332,757 

(1)    The Company acquired 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.



See accompanying notes to Consolidated Financial Statements.

7
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
 September 30,
 20202019
Cash flows from operating activities:  
Net income from continuing operations$2,980 $7,391 
Net income from discontinued operations0 701 
  Net income2,980 8,092 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization21,112 19,865 
Amortization of deferred loan costs839 814 
Loss on sale or disposal of assets and assets held for sale882 115 
Bad debt4,451 926 
Share-based compensation3,980 4,548 
Equity in earnings of real estate partnership(752)(1,480)
Changes in operating assets and liabilities:
Escrows and acquisition deposits522 48 
Accrued rents and accounts receivable(6,123)(1,762)
Receivable due from related party(825)15 
Distributions from real estate partnership0 1,005 
Unamortized lease commissions, legal fees and loan costs(958)(202)
Prepaid expenses and other assets2,145 (6,838)
Accounts payable and accrued expenses131 5,206 
Payable due to related party538 15 
Tenants' security deposits298 310 
Net cash provided by operating activities29,220 29,976 
Cash flows from investing activities:  
Additions to real estate(5,808)(9,953)
Proceeds from note receivable922 0 
Net cash used in investing activities(4,886)(9,953)
Net cash provided by investing activities of discontinued operations0 701 
Cash flows from financing activities:  
Distributions paid to common shareholders(20,771)(34,047)
Distributions paid to OP unit holders(430)(793)
Proceeds from issuance of common shares, net of offering costs2,241 8,546 
Payments of exchange offer costs(43)(5)
Proceeds from notes payable1,734 0 
Proceeds from bonds payable0 100,000 
Net proceeds from (payments of) credit facility30,000 (90,200)
Repayments of notes payable(11,514)(7,502)
Payments of loan origination costs0 (4,088)
Repurchase of common shares(2,076)(776)
Net cash used in financing activities(859)(28,865)
Net increase (decrease) in cash, cash equivalents and restricted cash23,475 (8,141)
Cash, cash equivalents and restricted cash at beginning of period15,643 13,786 
Cash, cash equivalents and restricted cash at end of period (1)
$39,118 $5,645 
  Nine Months Ended
  September 30,
  2017 2016
Cash flows from operating activities:    
Net income $6,841
 $7,561
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 19,936
 16,362
Amortization of deferred loan costs 953
 1,202
Amortization of notes payable discount 447
 241
Gain on sale of marketable securities (5) —
Loss (gain) on sale or disposal of assets and properties 119
 (2,900)
Bad debt expense 1,442
 1,298
Share-based compensation 7,347
 6,874
Changes in operating assets and liabilities:    
Escrows and acquisition deposits (2,496) 485
Accrued rent and accounts receivable (3,703) (2,802)
Unamortized lease commissions (2,196) (2,126)
Prepaid expenses and other assets 411
 725
Accounts payable and accrued expenses (1,718) 261
Tenants' security deposits 621
 812
Net cash provided by operating activities 27,999
 27,993
Cash flows from investing activities:    
Acquisitions of real estate (124,557) (60,616)
Additions to real estate (13,499) (15,362)
Proceeds from sales of properties 26
 3,957
Proceeds from sales of marketable securities 306
 —
Net cash used in investing activities (137,724) (72,021)
Cash flows from financing activities:    
Distributions paid to common shareholders (29,494) (23,606)
Distributions paid to OP unit holders (932) (415)
Distributions paid to noncontrolling interest in Consolidated Partnership (379) —
Proceeds from issuance of common shares, net of offering costs 107,619
 26,686
Net proceeds from credit facility 40,600
 64,000
Repayments of notes payable (2,788) (13,552)
Payments of loan origination costs (695) —
Change in restricted cash (49) 18
Repurchase of common shares (1,987) (2,904)
Net cash provided by financing activities 111,895
 50,227
     
Net increase in cash and cash equivalents 2,170
 6,199
Cash and cash equivalents at beginning of period 4,168
 2,587
Cash and cash equivalents at end of period $6,338
 $8,786
(1)     For a reconciliation of cash, cash equivalents and restricted cash, see supplemental disclosures below.


See accompanying notes to Consolidated Financial Statements.

8
Table of Contents
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

Nine Months Ended
September 30,
20202019
Supplemental disclosure of cash flow information:  
Cash paid for interest$18,790 $19,176 
Cash paid for taxes$353 $396 
Non cash investing and financing activities:
Disposal of fully depreciated real estate$34 $203 
Financed insurance premiums$1,431 $1,238 
Value of shares issued under dividend reinvestment plan$74 $104 
Value of common shares exchanged for OP units$1,138 $37 
Change in fair value of cash flow hedge$(10,395)$(11,740)

  Nine Months Ended
  September 30,
  2017 2016
Supplemental disclosure of cash flow information:    
Cash paid for interest $16,311
 $13,700
Cash paid for taxes $329
 $284
Non cash investing and financing activities:    
Disposal of fully depreciated real estate $995
 $544
Financed insurance premiums $1,115
 $1,060
Value of shares issued under dividend reinvestment plan $95
 $83
Value of common shares exchanged for OP units $206
 $125
Change in fair value of available-for-sale securities $26
 $20
Change in fair value of cash flow hedge $124
 $(6,962)
Acquisition of real estate in exchange for OP units $—
 $8,738
Reallocation of ownership percentage between parent and subsidiary $9
 $—
September 30,
20202019
Cash, cash equivalents and restricted cash
Cash and cash equivalents$38,990 $5,539 
Restricted cash128 106 
Total cash, cash equivalents and restricted cash$39,118 $5,645 










See accompanying notes to Consolidated Financial Statements.



7
9
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

The use of the words “we,” “us,” “our,” “Company” or “Whitestone” refers to Whitestone REIT and our consolidated subsidiaries, except where the context otherwise requires.


1.  INTERIM FINANCIAL STATEMENTS
 
The consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 20162019 are derived from our audited consolidated financial statements as of that date.  The unaudited consolidated financial statements as of and for the period ended September 30, 20172020 have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information on a basis consistent with the annual audited consolidated financial statements and with the instructions to Form 10-Q.
 
The consolidated financial statements presented herein reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of Whitestone and our subsidiaries as of September 30, 2017,2020 and December 31, 2019, and the results of operations for the three and nine month periods ended September 30, 20172020 and 2016,2019, the consolidated statements of changes in equity for the nine month periodthree months periods ended March 31, June 30, and September 30, 20172020 and 2019 and cash flows for the nine month periods ended September 30, 20172020 and 2016.2019.  All of these adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results expected for a full year.  The statements should be read in conjunction with the audited consolidated financial statements and the notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
 
Business.  Whitestone was formed as a real estate investment trust (“REIT”) pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998.  In July 2004, we changed our state of organization from Texas to Maryland pursuant to a merger where we merged directly with and into a Maryland REIT formed for the sole purpose of the reorganization and the conversion of each of the outstanding common shares of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity.  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.  As of September 30, 20172020 and December 31, 2016,2019, Whitestone owned or held a majority interest in 72 and 69wholly-owned 58 commercial properties respectively, in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.


TheseAs of September 30, 2020, these properties consist of:


Consolidated Operating Portfolio


•
51 wholly-owned properties that meet our Community Centered Properties® strategy; and

•52 wholly-owned properties that meet our Community Centered Properties® strategy;
•
through our 81.4% majority interest in our consolidated subsidiary, Pillarstone Capital REIT Operating Partnership LP (“Pillarstone OP”) an interest in 14 consolidated properties that do not meet our Community Centered Properties® strategy.


Redevelopment, New Acquisitions Portfolio

•
two retail properties that meet our Community Centered Properties® strategy; and


five•1 wholly-owned property that meets our Community Centered Properties®strategy; and

•5 parcels of land held for future development.



As of September 30, 2020, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in 8 properties that do not meet our Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.



In December 2019, a novel strain of coronavirus ("COVID-19") was reported to have surfaced in China. 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 requirements and travel restrictions. For example, in the first half of 2020, 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
8
10
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

can continue to provide take out and drive through services. As of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona. However, many experts warn that cases in these areas may continue to increase in the coming weeks or months. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise continue to occupy their space. We are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and markets, including how it will impact the businesses of its tenants. The Company has put in place a temporary response team to address tenant concerns in light of the COVID-19 pandemic. The response team is in ongoing communication with the Company’s 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 CARES Act. To date, the Company has received a number of rent relief requests from tenants, most often in the form of rent deferral requests, as a result of the COVID-19 pandemic. The Company is evaluating each tenant rent relief request on an case-by-case basis, considering a number of factors. Not all tenant requests will ultimately result in lease concessions, nor is the Company forgoing its contractual rights under its lease agreements at this time. 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.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Consolidation.  We are the sole general partner of the Operating Partnership and possess full legal control and authority over the operations of the Operating Partnership. As of September 30, 20172020 and December 31, 2016,2019, we owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements include the accounts of the Operating Partnership. We also consolidate a variable interest entity (“VIE”) when we are determined to be the primary beneficiary. Determination of the primary beneficiary is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary considers all relationships between us and the VIE, including management and other contractual agreements. See Note 6 for additional disclosure on our VIE.


Noncontrolling interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income or loss is allocated to noncontrolling interests based on the weighted-average percentage ownership of the Operating Partnership during the period. Issuance of additional common shares of beneficial interest in Whitestone (the “common shares”) and units of limited partnership interest in the Operating Partnership that are convertible into cash or, at our option, common shares on a one-for-one1-for-1 basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.
    
Equity Method. For the years prior to December 31, 2017, Pillarstone OP was accounted for under the profit-sharing method. In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification (“ASC”) 360-20, “Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets,” we adopted Topic 606 and ASC 610 as of January 1, 2018, resulting in the derecognition of the underlying assets and liabilities associated with the Contribution (defined below) as of January 1, 2018 and the recognition of the Company’s investment in Pillarstone OP under the equity method. See Note 6 (Investment in Real Estate Partnership) for additional disclosure on Pillarstone OP.

In these financial statements, unless otherwise indicated, we do not include the Pillarstone Properties when we refer to our properties.
Basis of Accounting.  Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.
 
11
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Use of Estimates.   The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts, the estimated fair value of interest rate swaps and the estimates supporting our impairment analysis for the carrying values of our real estate assets.  Actual results could differ from those estimates. In particular, the coronavirus (“COVID-19”) pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s operations and the operations of its tenants. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements, and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, the impact on our tenants’ businesses and financial condition, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Reclassifications.  We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity.
 
Restricted Cash. We classify all cash pledged as collateral to secure certain obligations and all cash whose use is limited as restricted cash. During 2015, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7)7 (Debt)), 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. As a result, these amounts are reported in the consolidated statements of cash flows under cash flows from financing activities as change in restricted cash.


Marketable Securities. We classify our existing marketable equity securities as available-for-sale in accordance with the Financial Accounting Standards Board's (“FASB”) Investments-Debt and Equity Securities guidance. These securities are carried at fair value with unrealized gains and losses reported in equity as a component of accumulated other comprehensive income or loss. The fair value of the marketable securities is determined using Level 1 inputs under FASB Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date. Gains and losses on securities sold are based on the specific identification method, and are reported as a component of interest, dividend and other investment income.


9
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

Derivative Instruments and Hedging Activities. We utilize derivative financial instruments, principally interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a cash flow hedges'hedges’ change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using Level 2 inputs under ASC 820.820, “Fair Value Measurements and Disclosures.” Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whosein which significant inputs and significant value drivers are observable. As of September 30, 2017,2020, we consider our cash flow hedges to be highly effective.
        
Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying charges (interest, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction), are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. For the three months ended September 30, 2017,2020, approximately $146,000$122,000 and $96,000$71,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2017,2020, approximately $302,000$362,000 and $189,000$231,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended September 30, 2016,2019, approximately $103,000$127,000 and $16,000$77,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2016,2019, approximately $235,000$365,000 and $48,000$251,000 in interest expense and real estate taxes, respectively, were capitalized. Due to 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.


Real Estate Held for Sale and Discontinued Operations. We consider a commercial property to be held for sale when it meets all of the criteria established under ASC 205, “Presentation of Financial Statements.” For commercial properties classified as held for sale, assets and liabilities are presented separately for all periods presented.

In accordance with ASC 205,a discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component of an entity or group of components of an entity is classified as held for sale, disposed of by sale or disposed of other than by sale, respectively. In addition, ASC 205 requires us to provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not meet the criteria for a discontinued operation.

Share-Based Compensation.   From time to time, we awardgrant nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to executive officers and employees under our 20082018 Long-Term Equity Incentive Ownership Plan (the “2008“2018 Plan”).  The vast majority of the awardedAwarded shares and units vest when certain performance conditions are met.  We recognize compensation expense when achievement of the performance conditions is probable based on management'smanagement’s most recent estimates using the fair value of the shares as of the grant date.  We recognized $2,704,000$1,645,000 and $3,042,000$1,719,000 in share-based compensation for the three months ended September 30, 20172020 and 2016,2019, respectively, and we recognized $7,545,000$4,167,000 and $6,886,000$4,770,000 in share-based compensation for the nine months ended September 30, 20172020 and 2016,2019, respectively. We recognize forfeitures as they occur.

12
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

Noncontrolling Interests.  Noncontrolling interests isare the portion of equity in a subsidiary not attributable to a parent.  The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, we have reported noncontrolling interests in equity on the consolidated balance sheets but separate from Whitestone'sWhitestone’s equity.  On the consolidated statements of operations and comprehensive income (loss), subsidiaries are reported at the consolidated amount, including both the amount attributable to Whitestone and noncontrolling interests.  The consolidated statementstatements of changes in equity is included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders'shareholders’ equity, noncontrolling interests and total equity.

Accrued Rents and Accounts Receivable.  Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. With the adoption of ASC No. 842, Leases Topic 842, as of January 1, 2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of September 30, 2020 and December 31, 2019, we had an allowance for uncollectible accounts of $15.5 million and $11.2 million, respectively. During the three months ending September 30, 2020 and 2019, we recorded an adjustment to rental revenue in the amount of $1.3 million and $0.5 million, respectively, and during the nine months ending September 30, 2020 and 2019, we recorded an adjustment to rental revenue in the amount of $4.5 million and $0.9 million, respectively. Included in the adjustment 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.

Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met.  Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). Additionally, we have tenants who pay real estate taxes directly to the taxing authority. We exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense.

Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly. Revenues are governed by the Management Agreements (as defined in Note 6 (Investment in Real Estate Partnership)). Refer to Note 6 (Investment in Real Estate Partnership) for additional information regarding the Management Agreements with Pillarstone OP. Additionally, we recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.
 
See our Annual Report on Form 10-K for the year ended December 31, 20162019 for further discussion on significant accounting policies.
 

1013
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

Recent Accounting Pronouncements.  Pronouncements. In April 2020, the FASB issued guidance on the application of Topic 842, relating to concessions being made by lessors in response to the COVID-19 pandemic. The guidance notes that it would be acceptable for entities to make an election to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed, even if such enforceable rights and obligations are not explicitly contained in the lease contract. Thus, for concessions relating to the COVID-19 pandemic, an entity would not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract, and would have the option to apply, or not to apply, the general lease modification guidance in Topic 842 as it stands. We have elected this option to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed. Therefore, such concessions are not accounted for as a lease modification under Topic 842.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-2 which provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance requiringand targeted improvements to Topic 842 were made through the issuance of supplementary ASUs in July 2018, December 2018 and March 2019.

Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $1.1 million, which represents the present value of the remaining lease payments of approximately $1.2 million discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately $1.1 million. The adoption of Topic 842 did not have a material impact to our net income and related per share amounts.

Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:

•Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements as well as leases that commenced after that date. Under this method, prior comparative periods presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented, a cumulative-effect adjustment is recognized at that date.

•Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would not be adjusted under this method.

We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the date of adoption, and to recognize a lease liabilitycumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and a right-of-use asset for all leases. Lessor accountingwe will remain largely unchanged withnot make any adjustment to retained earnings at the exceptiondate of changes relatedadoption to costs which qualify as initial directwrite off unamortized legal costs. The guidance will also require new qualitative and quantitative disclosuresWe continued to help financial statement users better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance will be effective for reporting periods beginning on or after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of this guidance and its impact on our consolidated financial statements.

In March 2016, the FASB issued guidance simplifying the accounting for share-based payment transactions, including the income tax consequences, balance sheet classification of awards and the classification on the statement of cash flows. We have adopted this guidanceamortize unamortized legal costs as of January 1, 2017. The main provision regarding excess tax benefitsDecember 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles.

Topic 842 requires lessors to account for leases using an impactapproach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our consolidated financial statements due toelection of the package of practical expedients, our status as a REIT for taxation purposes. We have elected to continue estimatingexisting commercial leases, where we are the number of shares expected to vest in order to determine compensation cost, and we willlessor, continue to classify cash paid by us for employee taxes when common shares were repurchased to cover minimum statutory requirements as financing activity.

In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will become effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of this guidance and its impact on our consolidated financial statements.

In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of assetsleases that could result in us recognizing certain long-term leases entered into or businesses. This guidancemodified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will become effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of this guidance and its impact on our consolidated financial statements.

In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance will become effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of this guidance and its impact on our consolidated financial statements.

3. MARKETABLE SECURITIES

All of our marketable securities were classified as available-for-sale securities as of September 30, 2017 and December 31, 2016. Available-for-sale securities consisted of the following (in thousands):

14
  September 30, 2017
  Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value
Real estate sector common stock $353
 $—
 $(111) $242
Total available-for-sale securities $353
 $—
 $(111) $242


11
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards.

  December 31, 2016
  Amortized Cost Gains in Accumulated Other Comprehensive Income Losses in Accumulated Other Comprehensive Income Estimated Fair Value
Real estate sector common stock $654
 $—
 $(137) $517
Total available-for-sale securities $654
 $—
 $(137) $517

DuringWe elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). For the three months ended September 30, 2017, available-for-sale securities were sold2020, we had rent revenues of $21.8 million and rental recoveries of $8.3 million compared to $21.6 million and $8.2 million, respectively, for total proceeds of $306,000. The gross realized gain on these sales during the three months ended September 30, 2017 was $5,000. During2019. For the three and nine months ended September 30, 2016, no available-for-sale securities were sold. For purposes2020, we had rent revenues of determining gross realized gains$65.6 million and losses, the costrental recoveries of securities sold is based on specific identification. A net unrealized holding loss on available-for-sale securities in the amount of $111,000$25.0 million compared to $64.8 million and $198,000$23.7 million, respectively, for the nine months ended September 30, 20172019.

We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and 2016, respectively, has beeneconomic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. Each tenant is included in accumulatedone of several portfolios and an allowance is calculated using the calculation methodology for the respective portfolio. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Tenant portfolios will be converted to cash basis if collectability is of great concern. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.

3.  LEASES
Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. See Note 2 (Summary of Significant Accounting Policies) for additional disclosure on Topic 842.

As a Lessor. All leases on our properties are classified as noncancelable operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met.  Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income.income (loss).

A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, contingent rents, and collectability adjustments under Topic 842) under noncancelable operating leases in existence as of September 30, 2020 is as follows (in thousands):

Years Ended December 31,
Minimum Future Rents(1)
2020 (remaining)$21,140 
202179,101 
202268,060 
202356,561 
202444,593 
Thereafter125,900 
Total$395,355 

(1) These amounts do not reflect future rental revenues from the renewal or replacement of existing leases and exclude reimbursements of operating expenses and rental increases that are not fixed.

15
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
As a Lessee. We have office space, automobile, and office machine leases, which qualify as operating leases, with remaining lease terms of one to three years.

The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by our weighted average incremental borrowing rates to calculate the lease liabilities for our operating leases in which we are the lessee (in thousands):
Years Ended December 31,September 30, 2020
2020 (remaining)$226 
2021447 
202285 
202340 
202435 
202523 
Total undiscounted rental payments856 
Less imputed interest37 
Total lease liabilities$819 

For the three months ended September 30, 2020 and 2019, the total lease costs were $253,000 and $245,000, respectively, and for the nine months ended September 30, 2020 and 2019, the total lease costs were $809,000 and $740,000, respectively. The weighted average remaining lease term for our operating leases was 1.9 years at September 30, 2020. We do not include renewal options in the lease term for calculating the lease liability unless we are reasonably certain we will exercise the option or the lessor has the sole ability to exercise the option. The weighted average incremental borrowing rate was 4.5% at September 30, 2020.

4. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET


Accrued rents and accounts receivable, net consists of amounts accrued, billed and due from tenants, allowance for doubtful accounts and other receivables as follows (in thousands):

September 30, 2020December 31, 2019
Tenant receivables$22,944 $16,741 
Accrued rents and other recoveries15,926 16,983 
Allowance for doubtful accounts(15,465)(11,173)
Other receivables199 303 
Total$23,604 $22,854 

16
  September 30, 2017 December 31, 2016
     
Tenant receivables $14,420
 $12,972
Accrued rents and other recoveries 15,996
 14,237
Allowance for doubtful accounts (8,204) (7,258)
Total $22,212
 $19,951
Table of Contents

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS


Costs which have been deferred consist of the following (in thousands):
September 30, 2020December 31, 2019
Leasing commissions$10,320 $9,868 
Deferred legal cost374 393 
Deferred financing cost3,898 3,908 
Total cost14,592 14,169 
Less: leasing commissions accumulated amortization(4,807)(4,200)
Less: deferred legal cost accumulated amortization(206)(179)
Less: deferred financing cost accumulated amortization(1,497)(830)
Total cost, net of accumulated amortization$8,082 $8,960 
  September 30, 2017 December 31, 2016
     
Leasing commissions $10,263
 $8,720
Deferred legal cost 326
 —
Deferred financing cost 4,071
 4,071
Total cost 14,660
 12,791
Less: leasing commissions accumulated amortization (4,394) (3,597)
Less: deferred legal cost accumulated amortization (45) —
Less: deferred financing cost accumulated amortization (1,824) (1,111)
Total cost, net of accumulated amortization $8,397
 $8,083



12
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

6. VARIABLE INTEREST ENTITIESINVESTMENT IN REAL ESTATE PARTNERSHIP


On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the “Contribution Agreement”) with Pillarstone Capital REIT Operating Partnership LP (“Pillarstone,” “Pillarstone OP” or the “Consolidated Partnership”)OP and Pillarstone Capital REIT (“Pillarstone REIT”) pursuant to which we contributed all of the equity interests in four4 of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower,” and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own 14 non-core properties that do not fit our Community Centered Property® strategy (the “Pillarstone Properties”), to Pillarstone OP for aggregate consideration of approximately $84 million, consisting of (1) approximately 18.1$18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“Pillarstone OP Units”), issued at a price of $1.331 per Pillarstone OP Unit; and (2) the assumption of approximately $65.9 million of liabilities, consisting of (a) approximately $15.5 million of our liability under the 20142018 Facility (as defined in Note 7)7 (Debt)); (b) an approximately $16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26, 2013, between Uptown Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory Note”) of Industrial-Office issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan Agreement”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Contribution”).

In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into an OP Unit Purchase Agreement (the “OP Unit Purchase Agreement”) with Pillarstone REIT and Pillarstone OP pursuant to which the Operating Partnership agreed to purchase up to an aggregate of $3.0 million of Pillarstone OP Units at a price of $1.331 per Pillarstone OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit Purchase Agreement contains customary closing conditions and the parties have made certain customary representations, warranties and indemnifications to each other in the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit Purchase Agreement, in the event of a Change of Control (as defined therein) of the Company, Pillarstone OP shall have the right, but not the obligation, to repurchase the Pillarstone OP Units issued thereunder from the Operating Partnership at their initial issue price of $1.331 per Pillarstone OP Unit.


In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. The initial term of each Management Agreement expired on December 31, 2017, after which each Management Agreement became automatically renewable on a month to month basis; provided that each Management Agreement can be terminated by either party thereto upon not less than thirty days’ prior written notice to the other party. None of the Management Agreements had been terminated as of September 30, 2020.

17
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection Agreement with Pillarstone REIT and Pillarstone OP pursuant to which Pillarstone OP agreed to indemnify the Operating Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or if Pillarstone OP fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that must be paid to maintain its REIT status for federal income tax purposes.



As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the equity method.
The table below presents the real estate partnership investment in which the Company holds an ownership interest (in thousands):
Company’s Investment as of
September 30, 2020December 31, 2019
Real estate partnershipOwnership Interest
Pillarstone OP(1)
81.4%$34,849 $34,097 
Total real estate partnership(2)
$34,849 $34,097 

(1) The Company manages these real estate partnership investments and, where applicable, earns acquisition fees, leasing commissions, property management fees, and asset management fees.

(2) Representing 8 property interests and 926,798 square feet of GLA, as of September 30, 2020 and December 31, 2019.
The table below presents the Company’s share of net income from its investment in the real estate partnership which is included in equity in earnings of real estate partnership, net on the Company’s consolidated statements of operations and comprehensive income (loss) (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
  
Pillarstone OP$196 $524 $752 $1,480 

13
18
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

Summarized financial information for the Company’s investment in real estate partnership is as follows (in thousands):
As
 September 30,December 31,
20202019
 
Assets:
   Real estate, net$49,512 $50,338 
   Other assets8,926 6,742 
Total assets58,438 57,080 
Liabilities and equity:
   Notes payable15,250 15,434 
   Other liabilities4,102 3,575 
   Equity39,086 38,071 
Total liabilities and equity58,438 57,080 
Company’s share of equity31,835 31,008 
Cost of investment in excess of the Company’s share of underlying net book value3,014 3,089 
Carrying value of investment in real estate partnership$34,849 $34,097 

 Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
 
Revenues$2,371 $3,863 $7,396 $11,536 
Operating expenses(1,713)(2,410)(5,195)(7,218)
Other expenses(391)(776)(1,184)(2,341)
Net income$267 $677 $1,017 $1,977 
The amortization of the basis difference between the cost of investment and the Company's share of underling net book value for both of the three months periods ended September 30, 2017, we owned approximately 81.4%2020 and 2019 is $27,000 and for both of the total outstanding unitsnine months periods ended September 30, 2020 and 2019 is $81,000. The Company amortized the difference into equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).

The Company has evaluated its guarantee to Pillarstone OP. Additionally, certainOP pursuant to ASC 460, “Guarantees,” and has determined the guarantee to be a performance guarantee, for which ASC 460 contains initial recognition and measurement requirements, and related disclosure requirements. The Company is obligated in two respects: (i) a noncontingent liability, which represents the Company’s obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering event(s) occur; and (ii) the contingent liability, which represents the Company’s obligation to make future payments if those triggering events occur. The fair value of our officers and trustees serve as officers and trustees of Pillarstone REIT. We have determined that we are the primary beneficiary ofloan guarantee to Pillarstone OP through our power to direct the activities of Pillarstone OP, additional working capital requiredis estimated on a Level 3 basis (as provided by Pillarstone OP under the OP Unit Purchase Agreement and our obligation to absorb losses and receive benefitsASC 820), using a probability-weighted discounted cash flow analysis based on our ownership percentage. Accordingly, we account for Pillarstone OP as a VIE and fully consolidate in our consolidated financial statements.

discount rate, discounting the loan balance. The carrying amounts and classificationCompany recognized a noncontingent liability of certain assets and liabilities for Pillarstone OP in our$462,000 at the inception of the guarantee at fair value which is recorded on the Company’s consolidated balance sheets, asnet of accumulated amortization. The Company will amortize the guarantee liability into income over seven years. For the three months ended September 30, 20172020 and December 31, 2016 consists2019, the amortization of the following (in thousands):guarantee liability was $10,000 and $23,000, respectively, and for the nine months ended September 30, 2020 and 2019, the amortization of the guarantee liability was $29,000 and $140,000, respectively.


19
  September 30, 2017 December 31, 2016
Real estate assets, at cost    
  Property $93,505
 $92,338
  Accumulated depreciation (35,089) (32,533)
    Total real estate assets 58,416
 59,805
Cash and cash equivalents 2,246
 1,236
Escrows and acquisition deposits 2,087
 2,274
Accrued rents and accounts receivable, net of allowance for doubtful accounts(1)
 2,556
 2,313
Unamortized lease commissions and loan costs 1,180
 1,150
Prepaid expenses and other assets(2)
 130
 82
     Total assets $66,615
 $66,860
     
Liabilities    
  Notes payable(3)
 $49,137
 $50,001
  Accounts payable and accrued expenses(4)
 3,480
 3,481
  Tenants' security deposits 1,129
 996
  Distributions payable (5)
 112
 —
     Total liabilities $53,858
 $54,478
Table of Contents

(1)
Excludes approximately $2.1 million and $0.5 million in accounts receivable due from Whitestone that were eliminated in consolidation as of September 30, 2017 and December 31, 2016, respectively.

(2)
Excludes approximately $0.9 million in prepaid expenses due from Whitestone that were eliminated in consolidation as of December 31, 2016.

(3)
Excludes approximately $15.5 million and $15.5 million in notes payable due to Whitestone that were eliminated in consolidation as of September 30, 2017 and December 31, 2016, respectively.

(4)
Excludes approximately $1.3 million and $0.3 million in accounts payable due to Whitestone that were eliminated in consolidation as of September 30, 2017 and December 31, 2016, respectively.

(5)
Excludes approximately $0.5 million in distributions payable to Whitestone that were eliminated in consolidation as of September 30, 2017.

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
7. DEBT


Certain subsidiaries of Whitestone are the borrowers under various financing arrangements. These subsidiaries are separate legal entities, and their respective assets and credit are not available to satisfy the debt of Whitestone or any of its other subsidiaries.

14
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)



Debt consisted of the following as of the dates indicated (in thousands):
DescriptionSeptember 30, 2020December 31, 2019
Fixed rate notes
$10.5 million, 4.85% Note, due September 24, 2020 (1)
$0 $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, 202780,000 80,000 
$19.0 million 4.15% Note, due December 1, 202418,768 19,000 
$20.2 million 4.28% Note, due June 6, 202318,323 18,616 
$14.0 million 4.34% Note, due September 11, 202413,300 13,482 
$14.3 million 4.34% Note, due September 11, 202414,073 14,243 
$15.1 million 4.99% Note, due January 6, 202414,228 14,409 
$2.6 million 5.46% Note, due October 1, 20232,351 2,386 
$50.0 million, 5.09% Note, due March 22, 202950,000 50,000 
$50.0 million, 5.17% Note, due March 22, 202950,000 50,000 
$1.7 million 1.00% Note, due May 6, 20221,734 0 
$1.1 million 4.53% Note, due November 28, 2020270 0 
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023139,500 109,500 
Total notes payable principal667,547 645,896 
Less deferred financing costs, net of accumulated amortization(1,031)(1,197)
Total notes payable$666,516 $644,699 
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)
Total notes payable $662,675
 $544,020



(1)
Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term.

(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.
(2)

(2)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 (as defined and described in more detail below) in determining the amount of credit available under the Facility (as defined and described in more detail below).

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 1.73%.

(3)     Promissory note includes an interest rate swap that fixed the LIBOR portion of the acquisitioninterest rate at an average rate of BLVD Place (See Note 15 below).2.24% for the duration of the term through January 31, 2024.


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 is monitoring 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.

15
20
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

On April 30, 2020, we 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 Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 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 Maturity Date.  Pursuant to the CARES Act, the Company can apply for, and be granted, forgiveness for all or a portion of the PPP 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.  We intend to use all proceeds from the 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 we will obtain forgiveness of the PPP Loan in whole or in part. Based on the guidance in FASB ASC 405-20, “Liabilities - Extinguishment of Liabilities,” the PPP loan remains a liability until either (1) it is wholly or partially forgiven and we have been legally released, or (2) it is paid off. If the loan is partially or wholly forgiven and legal release is received, the liability is reduced by the amount forgiven and a gain on extinguishment is recognized.


On March 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 various 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 Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.

The principal of the Series 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 Notes, 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 excess, if any, of the discounted value of the remaining scheduled payments with respect to the 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 Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid 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).

21
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
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 Note Agreement could result in the Purchasers accelerating the payment of all obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are substantially similar to those contained in the Operating Partnership’s existing credit facility.

Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019 Facility”) with the lenders party thereto, 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 2019 Facility amended and restated the 2018 Facility (as defined below).

The 2019 Facility is comprised of the following three tranches:

•$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);

•$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and

•$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term Loan A, the “2019 Term Loans”).

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 1.90% for the 2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’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.

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. On March 20, 2020, as a precautionary measure to preserve our financial flexibility in response to potential credit risks posed by the COVID-19 pandemic, the Company drew down approximately $30.0 million under the 2019 Revolver. 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 2019 Revolver. 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.
22
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
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.
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the “2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., 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”). The 2014 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 2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to the 2014 Facility, as amended by the First Amendment, as the “Facility.“2018 Facility.”


Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:


•extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “Revolver”“2018 Revolver”) to October 30, 2019 from November 7, 2018;


•converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;


•extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“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” and together with Term Loan 1 and Term Loan 3, the “Term“2018 Term Loans”) to January 29, 2021 from November 7, 2019.
    
23
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Borrowings under the 2018 Facility accrueaccrued 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. The applicable margin for Adjusted LIBOR borrowings rangesranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 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.


We serve as the guarantor for funds borrowed by the Operating Partnership under the Facility. The 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 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 2018 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.


16
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

On December 8, 2016, in connection with the Contribution, the Operating Partnership entered into the Second Amendment to the Facility and Reaffirmation of Guaranties (the “Second Amendment”) with Pillarstone, the Company and the other Guarantors party thereto, the lenders party thereto and the Agent. Pursuant to the Second Amendment, following the Contribution, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC were permitted to remain Material Subsidiaries (as defined in the Facility) and Guarantors under the Facility and their respective Pillarstone Properties were each permitted to remain an Eligible Property (as defined in the Facility) and be included in the Borrowing Base (as defined in the Facility) under the Facility. In addition, on December 8, 2016, Pillarstone entered into the Limited Guarantee (the “Limited Guarantee”) with 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 million of the total amount drawn on the Facility.


As of September 30, 2017,2020, our $237.2$161.0 million in secured debt was collateralized by 207 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, 20172020 were as follows (in thousands):
YearAmount Due
 
2020 (remaining)$964 
20212,762 
2022102,170 
2023167,363 
2024228,573 
Thereafter165,715 
Total$667,547 
Year Amount Due
   
2017 $8,767
2018 12,136
2019 235,249
2020 82,827
2021 51,918
Thereafter 273,727
Total $664,624

8.  DERIVATIVES AND HEDGING ACTIVITIES


The fair value of our interest rate swaps is as follows (in thousands):
September 30, 2020
Balance Sheet LocationEstimated Fair Value
Accounts payable and accrued expenses$(15,995)
December 31, 2019
Balance Sheet LocationEstimated Fair Value
Prepaid expenses and other assets$59 
Accounts payable and accrued expenses$(5,660)

24
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
  Balance Sheet Location Estimated Fair Value
Interest rate swaps:    
September 30, 2017 Accounts payable and accrued expenses $(1,050)
December 31, 2016 Accounts payable and accrued expenses $(662)
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $65 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $12.9 million of the swap to U.S. Bank, National Association, $11.6 million of the swap to Regions Bank, $15.7 million of the swap to SunTrust Bank, and $5.9 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on February 7, 2019 and will mature on November 9, 2020. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.


On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $115 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $22.7 million of the swap to U.S. Bank, National Association, $20.5 million of the swap to Regions Bank, $27.9 million of the swap to SunTrust Bank, and $10.5 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap will begin on November 9, 2020 and will mature on February 8, 2021. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $165 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $32.6 million of the swap to U.S. Bank, National Association, $29.4 million of the swap to Regions Bank, $40.0 million of the swap to SunTrust Bank, and $15.0 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap will begin on February 8, 2021 and will mature on January 31, 2024. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan 3 under the FacilityB at 1.725%1.73%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $35.0 million of the swap to U.S. Bank, National Association, and $15.0 million of the swap to SunTrust Bank. See Note 7 (Debt) for additional information regarding the 2018 Facility. The swap began on November 30, 2015 and will mature on October 28, 2022. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.


17
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)


On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap of $50 million with Bank of Montreal that fixed the LIBOR portion of Term Loan 1 under the FacilityA at 1.75%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See Note 7 for additional information regarding the Facility. The swap began on February 3, 2017 and will mature on October 30, 2020. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.


25
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap of $50 million with Bank of Montreal that fixed the LIBOR portion of Term Loan 2 under the FacilityA at 1.50%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See Note 7 for additional information regarding the Facility. The swap began on December 7, 2015 and will mature on January 29, 2021. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

A summary of our interest rate swap activity is as follows (in thousands):
Amount Recognized as Comprehensive Income (Loss)Location of Income (Loss) Recognized in Earnings
Amount of Income (Loss) Recognized in Earnings (1)
Three months ended September 30, 2020$1,241 Interest expense$(1,217)
Three months ended September 30, 2019$(2,235)Interest expense$274 
Nine months ended September 30, 2020$(10,395)Interest expense$(2,388)
Nine months ended September 30, 2019$(11,740)Interest expense$1,091 
  Amount Recognized as Comprehensive Income Location of Loss Recognized in Earnings 
Amount of Loss Recognized in Earnings (1)
Three months ended September 30, 2017 $172
 Interest expense $(317)
Three months ended September 30, 2016 $1,529
 Interest expense $(602)
       
Nine months ended September 30, 2017 $124
 Interest expense $(1,266)
Nine months ended September 30, 2016 $(6,962) Interest expense $(1,810)


(1)
There was no ineffective portion of our interest rate swaps to recognize in earnings for the three and nine months ended September 30, 2017 and 2016.

(1)    There was no ineffective portion of our interest rate swaps to recognize in earnings for the three and nine months ended September 30, 2020 and 2019.

9.  EARNINGS PER SHARE
 
Basic earnings per share for our common shareholders is calculated by dividing income from continuing operations excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by our weighted average common shares outstanding during the period.  Diluted earnings per share is computed by dividing the net income attributable to common shareholders, excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by the weighted average number of common shares including any dilutive unvested restricted common shares.
 
Certain of our performance-based restricted common shares are considered participating securities that require the use of the two-class method for the computation of basic and diluted earnings per share.  During the three months ended September 30, 20172020 and 2016, 1,083,6472019, 776,233 and 487,090926,639 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive, and during the nine months ended September 30, 20172020 and 2016, 1,089,8762019, 836,148 and 487,510926,986 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.
 

18
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

For the threenine months ended September 30, 2017 and 2016,2019, distributions of $152,000 and $158,000, respectively,$41,000 were made to holders of certain restricted common shares, $4,000 and $12,000, respectively, of which were charged against earnings, and for the nine months ended September 30, 2017 and 2016, distributions of $356,000 and $510,000, respectively, were made to holders of certain restricted common shares, $12,000 and $12,000, respectively, of which were charged against earningsshares. See Note 12 (Incentive Share Plan) for information related to restricted common shares under the 2018 Plan and the 2008 Plan.

26
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
(in thousands, except per share data)2020201920202019
Numerator:
Net income$914 $1,849 $2,980 $7,391 
Less: Net income attributable to noncontrolling interests(14)(42)(58)(168)
Distributions paid on unvested restricted shares0 0 0 (41)
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares900 1,807 $2,922 $7,182 
Income from discontinued operations0 0 0 701 
Less: Net income attributable to noncontrolling interests0 0 0 (16)
Income from discontinued operations attributable to Whitestone REIT0 0 0 685 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares$900 $1,807 $2,922 $7,867 
Denominator:
Weighted average number of common shares - basic42,346 40,187 42,202 39,942 
Effect of dilutive securities:
Unvested restricted shares1,094 1,259 838 1,142 
Weighted average number of common shares - dilutive43,440 41,446 43,040 41,084 
Earnings Per Share:
Basic:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.18 
Income from discontinued operations attributable to Whitestone REIT0.00 0.00 0.00 0.02 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.20 
Diluted:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.17 
Income from discontinued operations attributable to Whitestone REIT0.00 0.00 0.00 0.02 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares$0.02 $0.04 $0.07 $0.19 

27
  Three Months Ended Nine Months Ended
  September 30, September 30,
(in thousands, except per share data) 2017 2016 2017 2016
Numerator:        
Net income $3,140
 $964
 $6,841
 $7,561
Less: Net income attributable to noncontrolling interests (147) (15) (429) (131)
Distributions paid on unvested restricted shares (148) (146) (344) (498)
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares $2,845
 $803
 $6,068
 $6,932
         
Denominator:        
Weighted average number of common shares - basic 37,992
 28,195
 34,406
 27,210
Effect of dilutive securities:        
Unvested restricted shares 597
 829
 805
 803
Weighted average number of common shares - dilutive 38,589
 29,024
 35,211
 28,013
         
Earnings Per Share:        
Basic:        
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares $0.07
 $0.03
 $0.18
 $0.25
Diluted:        
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares $0.07
 $0.03
 $0.17
 $0.25
Table of Contents

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
10. INCOME TAXES

With the exception of our taxable REIT subsidiaries, federal income taxes are generally not provided because we intend to and believe we continue to qualify as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and because we have distributed and intend to continue to distribute all of our taxable income to our shareholders.  As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain income sources and investment restriction requirements.  In addition, REITs are subject to a number of organizational and operational requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.
 
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.

We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (0.75%(0.75% for us) to the profit margin, which generally will be determined for us as total revenue less a 30% standard deduction.  Although the Texas Margin Tax is not an income tax, FASB ASC 740, “Income Taxes” applies to the Texas Margin Tax.  For the three months ended September 30, 20172020 and 2016,2019, we recognized approximately $122,000$105,000 and $75,000$101,000 in margin tax provision, respectively, and for the nine months ended September 30, 20172020 and 2016,2019, we recognized approximately $292,000$285,000 and $237,000$324,000 in margin tax provision, respectively.



19
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

11.  EQUITY


Common Shares


Under our declaration of trust, as amended, we have authority to issue up to 400,000,000 common shares of beneficial interest, $0.001$0.001 par value per share, and up to 50,000,000 preferred shares of beneficial interest, $0.001$0.001 par value per share.
  
Equity Offerings


On April 25, 2017, we completed the sale of 8,018,500 common shares, including 1,018,500 common shares purchased by the underwriters upon exercise of their option to purchase additional common shares, at a public offering price per share of $13.00 (the “April Offering”). Total net proceeds from the April Offering, after deducting offering expenses, were approximately $99.9 million, which we contributed to the Operating Partnership in exchange for OP units. The Operating Partnership used the net proceeds from the April Offering to repay a portion of the Facility and for general corporate purposes, including funding a portion of the purchase price of BLVD Place and Eldorado Plaza.

On June 4, 2015,May 31, 2019, we entered into six amended and restated9 equity distribution agreements for an at-the-market equity distribution program (the “2015“2019 equity distribution agreements”). Pursuant to providing for the termsissuance and conditionssale of the 2015 equity distribution agreements, we can issue and sell up to an aggregate of $50$100 million of the Company’s common shares pursuant to our common shares.Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors to be determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and will bewere made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time suspend offers under the 20152019 equity distribution agreements or terminate the 20152019 equity distribution agreements. We did not sell any common shares under the 2015 equity distribution agreements duringDuring the three months ended September 30, 2017. During the nine months ended September 30, 2017,2019, we sold 567,302374,077 common shares under the 20152019 equity distribution agreements, with net proceeds to us of approximately $7.7$4.8 million. In connection with such sales, we paid compensation of approximately $139,000$74,000 to the sales agents. During the threenine months ended September 30, 2016,2019, we sold 1,083,926679,216 common shares under the 20152019 equity distribution agreements, with net proceeds to us of approximately $16.1$8.7 million. In connection with such sales, we paid compensation of approximately $246,000$132,000 to the sales agents. 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 2019 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, 2020, we did not sell shares under the 2019 equity distribution agreements. During the nine months ended September 30, 2016,2020, we sold 1,819,681170,942 common shares under the 20152019 equity distribution agreements, with net proceeds to us of approximately $26.7$2.2 million. In connection with such sales, we paid compensation of approximately $408,000$34,000 to the sales agents.


Operating Partnership Units


Substantially all of our business is conducted through our Operating Partnership.  We are the sole general partner of the Operating Partnership.  As of September 30, 2017,2020, we owned a 97.3%98.2% interest in the Operating Partnership.
 
Limited partners in the Operating Partnership holding OP units have the right to redeem their OP units for cash or, at our option, common shares at a ratio of one1 OP unit for one1 common share.  Distributions to OP unit holders are paid at the same rate per unit as distributions per share to holders of Whitestone common shares.  As of September 30, 20172020 and December 31, 2016,2019, there were 39,487,30543,008,051 and 30,450,37742,279,849 OP units outstanding, respectively.  We owned 38,403,65842,232,469 and 29,347,74141,371,277 OP units as of September 30, 20172020 and December 31, 2016,2019, respectively. The balance of the OP units is owned by
28
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
third parties, including certain members of our board of trustees.  Our weighted average share ownership in the Operating Partnership was approximately 97.3%98.2% and 98.3%97.7% for the three months ended September 30, 20172020 and 2016,2019, respectively, and approximately 97.0%98.1% and 98.3%97.7% for the nine months ended September 30, 20172020 and 2016.2019, respectively. During the three months ended September 30, 20172020 and 2016, 02019, 1,331 and 2,4342,857 OP units, respectively, were redeemed for an equal number of common shares, and duringduring the nine months ended September 30, 20172020 and 2016, 18,9892019, 132,990 and 15,4503,938 OP units, respectively, were redeemed for an equal number of common shares.common shares.


20
Table of ContentsDistributions
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)


Distributions

The following table summarizes the cash distributions paid or payable to holders of common shares and to holders of noncontrolling OP units during each quarter during 2016of 2019 and the nine months ended September 30, 20172020 (in thousands, except per share/and per OP unit data):

Common SharesNoncontrolling OP Unit HoldersTotal
Quarter PaidDistributions Per Common ShareAmount PaidDistributions Per OP UnitAmount Paid Amount Paid
2020
Third Quarter$0.1050 $4,430 $0.1050 $81 $4,511 
Second Quarter0.1050 4,413 0.1050 91 4,504 
First Quarter0.2850 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 Quarter0.2850 11,430 0.2850 264 11,694 
Second Quarter0.2850 11,316 0.2850 265 11,581 
First Quarter0.2850 11,301 0.2850 264 11,565 
Total$1.1400 $45,627 $1.1400 $1,055 $46,682 

On March 24, 2020 we announced that, in further pursuit of ensuring our financial flexibility, our board of trustees (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.

Shareholders' Rights Plan

On May 14, 2020, the Board authorized a dividend of 1 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 1-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
29
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
  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
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.


12.  INCENTIVE SHARE PLAN
 
OnThe Company’s 2008 Long-Term Equity Incentive Ownership Plan (as amended, the “2008 Plan”) expired in July 29, 2008,2018. At the Company’s annual meeting of shareholders on May 11, 2017, our shareholders approvedvoted to approve the 20082018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common shares and OP units pursuant to awards under the 2018 Plan. On December 22, 2010, our board of trustees amendedThe 2018 Plan became effective on July 30, 2018, which is the day after the 2008 Plan to allow for awards in or related to Class B common shares pursuantexpired. Pursuant to the 2008 Plan. On June 27, 2012, our Class B common shares were redesignated as “common shares.” The 2008 Plan, as amended, provides that awards may be made with respect to common shares of Whitestone or OP units, which may be redeemed for cash or, at our option, common shares of Whitestone. Thethe maximum aggregate number of common shares that may be issuedwere issuable under the 2008 Plan iswas increased upon each issuance of common shares by Whitestonethe Company so that at any time the maximum number of common shares that may be issuedwere issuable under the 2008 Plan shall equal equaled 12.5% of the aggregate number of common shares of Whitestonethe Company and OP units issued and outstanding (other than common shares and/or OP units issued to or held by Whitestone)the Company).


The Compensation Committee of our board of trustees administersadministered the 2008 Plan and administers the 2018 Plan except, in each case, with respect to awards to non-employee trustees, for which the 2008 Plan was and the 2018 Plan is administered by ourthe board of trustees. The Compensation Committee is authorized to grant share options, including both incentive share options and non-qualified share options, as well as share appreciation rights, either with or without a related option. The Compensation Committee is also authorized to grant restricted common shares, restricted common share units, performance awards and other share-based awards.

On April 2, 2014, the Compensation Committee approved the modification of the vesting provisions with respect to awards of an aggregate of 633,704 restricted common shares and restricted common share units for certain of our employees. The modified time-based shares will vest annually in three equal installments. The modified performance-based restricted common shares and restricted common share units were modified to include performance-based vesting based on achievement of certain absolute financial goals, as well as one to two years of time-based vesting post achievement of financial goals. Continued employment is required through the applicable vesting date. Additionally, 2,049,116 restricted performance-based common share units were granted with the same vesting conditions as the modified performance-based grants described above. If the performance targets are not met prior to December 31, 2018, any unvested performance-based restricted common shares and restricted common share units will be forfeited.


21
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

The Compensation Committee approved the grant of an aggregate of 320,000 and 143,000 time-based restricted common share units on June 30, 2016 and 2015, respectively, to James C. Mastandrea and David K. Holeman.

On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 267,783 performance-based restricted common share units under the 2008 Plan with market-based vesting conditions (the “TSR Units”) to certain of our employees. Vesting is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company's ranking in the peer group (the “TSR Peer Group Ranking”). Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $12.37 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the September 30, 2017 grant date to the end of the performance period, December 31, 2019. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.

On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 965,000 performance-based restricted common share units under the 2008 Plan which only vest immediately prior to the consummation of a Change in Control (as defined in the 2008 Plan) that occurs on or before September 30, 2024 (the “CIC Units”) to certain of our employees. Continued employment is required through the vesting date. If a Change in Control does not occur on or before September 30, 2024, the CIC Units shall be immediately forfeited. The Company considers a Change in Control on or before September 30, 2024 to be improbable, and no expense has been recognized for the CIC Units. If a Change in Control occurs, any outstanding CIC Units would be expensed immediately on the date of the Change in Control using the grant date fair value. The grant date fair value for each CIC Unit of $13.05 was determined based on the Company'sCompany’s closing share price on the grant date.

On March 16, 2018, the Compensation Committee approved the grant of an aggregate of 387,499 time-based restricted common share units under the 2008 Plan, which vest annually in three equal installments, and 4,300 performance-based restricted common share units to certain of our employees.

On December 1, 2018, the Compensation Committee approved the grant of an aggregate of 229,684 performance-based restricted common share units with market-based vesting conditions (“TSR Units”) under the 2018 Plan to certain of our employees.. Vesting is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $14.89 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the December 1, 2018 grant date to the end of the performance period, December 31, 2020. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.

On June 30, 2019, the Compensation Committee approved the grant of an aggregate of 405,417 TSR Units and 317,184 time-based restricted common share units under the 2018 Plan to certain of our employees. On September 30, 2019, the Compensation Committee approved the grant of 17,069 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR
30
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Unit of $8.22 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2019 grant date to the end of the performance period, December 31, 2021. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $10.63 and $11.69 and vest annually in three equal installments for the June 30, 2019 and September 30, 2019 grants, respectively.

On July 31, 2020, the Compensation Committee approved the grant of an aggregate of 545,000 TSR Units and 530,000 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $5.55 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the July 31, 2020 grant date to the end of the performance period, December 31, 2022. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $5.83 and vest annually in three equal installments.

A summary of the share-based incentive plan activity as of and for the nine months ended September 30, 20172020 is as follows:
SharesWeighted Average
Grant Date
Fair Value
Non-vested at January 1, 20202,339,932 $11.52 
Granted1,075,000 5.69 
Vested(478,607)11.07 
Forfeited(32,479)10.80 
Non-vested at September 30, 20202,903,846 9.45 
Available for grant at September 30, 2020409,344 
  Shares 
Weighted Average
Grant Date
Fair Value
Non-vested at January 1, 2017 2,044,334
 $14.48
Granted 1,335,933
 12.90
Vested (399,005) 14.62
Forfeited (31,883) 14.43
Non-vested at September 30, 2017 2,949,379
 $13.74
Available for grant at September 30, 2017 775,050
  


A summary of our non-vested and vested shares activity for the nine months ended September 30, 20172020 and years ended December 31, 2016, 20152019 and 20142018 is presented below:
  Shares Granted Shares Vested
  Non-Vested Shares Issued Weighted Average Grant-Date Fair Value Vested Shares Total Vest-Date Fair Value
        (in thousands)
Nine Months Ended September 30, 2017 1,335,933
 $12.90
 (399,005) $5,832
Year Ended December 31, 2016 545,778
 $14.85
 (734,261) $10,577
Year Ended December 31, 2015 327,122
 $13.49
 (348,786) $4,969
Year Ended December 31, 2014 2,058,930
 $14.40
 (133,774) $1,721
Shares GrantedShares Vested
Non-Vested Shares IssuedWeighted Average Grant-Date Fair ValueVested SharesTotal Vest-Date Fair Value
(in thousands)
Nine Months Ended September 30, 20201,075,000 $5.69 (478,607)$5,297 
Year Ended December 31, 2019762,630 $9.46 (284,964)$3,352 
Year Ended December 31, 2018653,472 $11.07 (560,126)$7,978 
    

22
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

Total compensation recognized in earnings for share-based payments was $2,704,000$1,645,000 and $3,042,000$1,719,000 for the three months ended September 30, 20172020 and 2016,2019, respectively, and $7,545,000$4,167,000 and $6,886,000$4,770,000 for the nine months ended September 30, 20172020 and 2016,2019, respectively.


31
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)
Based on our current financial projections, we expect approximately 83%100% of the unvested awards, exclusive of 965,000890,000 CIC Units, to vest over the next 2734 months. As of September 30, 2017,2020, there was approximately $2.8 million in unrecognized compensation cost related to outstanding non-vested performance-based shares, which are expected to vest over a period of 18 months, $3.1$4.8 million in unrecognized compensation cost related to outstanding non-vested TSR Units, which are expected to vest over a period of 2728 months, and approximately $2.1$5.5 million in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a period of approximately six34 months beginning on October 1, 2017.2020.


We expect to record approximately $10.0$6.0 million in non-cash share-based compensation expense in 20172020 and $5.5$8.4 million subsequent to 2017.2020. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 1824 months. The dilutive impact of the performance-based shares will be included in the denominator of the earnings per share calculation beginning in the period that the performance conditions are expected to be met. The dilutive impact of the TSR Units is based on the Company'sCompany’s TSR Peer Group Ranking as of the reporting date and weighted according to the number of days outstanding in the period. AsThe TSR Units issued in 2017 vested at 200% attainment based on the TSR Peer Group Ranking, and, as of September 30, 2017,2020, the TSR Peer Group Ranking called for 200% attainment.100% attainment for the shares issued in 2018, 0% attainment for the shares issued in 2019, and 50% attainment for the shares issued in 2020. The dilutive impact of the CIC Units is based on the probability of a Change in Control. Because the Company considers a Change in Control on or before September 30, 2024 to be improbable, no CIC Units are included in the Company'sCompany’s dilutive shares.

At our annual meeting of shareholders on May 11, 2017, our shareholders voted to approve the 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common shares and OP units pursuant to awards under the 2018 Plan. The 2018 Plan will become effective on July 30, 2018, which is the day after the 2008 Plan expires.

13. GRANTS TO TRUSTEES


On December 21, 2016,12, 2019, each of our four6 independent trustees and one1 trustee emeritus were granted 1,500approximately 3,000 common shares, which vested immediately.vest immediately and are prorated based on date appointed. The 7,50019,562 common shares granted to our trustees had a grant date fair value of $14.07$13.54 per share. On December 21, 2016, two12, 2019, 2 of our independent trustees each elected to receive a total of 3,1283,398 common shares with a grant date fair value of $14.07$13.54 in lieu of cash for board fees. The fair valuesvalue of the shares granted wereduring the year ended December 31, 2019 was determined using quoted prices available on the date of grant.


14. SEGMENT INFORMATION


Historically, our management has not differentiated results of operations by property type or location and, therefore, does not present segment information.


15. REAL ESTATE


Property acquisitions. Acquisitions. On May 26, 2017,December 6, 2019, we acquired BLVD Place,Las Colinas Village, a property that meets our Community Centered Property® strategy, for $158.0 million, including $80.0 million of asset level mortgage financing and $78.0$34.8 million in cash and net prorations using borrowings under our Facility andprorations. Las Colinas Village, a portion of the net proceeds from the April Offering. BLVD Place, a 216,944104,919 square foot property, was 99%86% leased at the time of purchase and is located in Houston,Irving, Texas. Included in the purchase of BLVD Place is approximately 1.43 acres of developable land.
    
On May 3, 2017, we acquired Eldorado Plaza, a property that meets our Community Centered Property® strategy, for $46.6 million in cash and net prorations using borrowings under our Facility and a portion of the net proceeds from the April Offering. Eldorado Plaza, a 221,577 square foot property, was 96% leased at the time of purchase and is located in McKinney, Texas, a suburb of Dallas, Texas.

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.16.  RELATED PARTY TRANSACTIONS
 

During the ordinary course of business, we have transactions with Pillarstone OP that include, but are not limited to, rental income, interest expense, general and administrative costs, commissions, management and asset management fees, and property expenses.
23
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)

Unaudited pro forma financial information.The following unaudited pro formatable presents the revenue and expenses with Pillarstone OP included in our consolidated operating data is presentedstatements of operations and comprehensive income (loss) for the three and nine months ended September 30, 20172020 and 2016, as if the acquisition of BLVD Place had occurred on January 1, 2016. Revenue and net income attributable to BLVD Place of $3.9 million and $2.1 million, respectively, have been included in our results of operations for the three months ended September 30, 2017, and revenue and net income attributable to BLVD Place of $5.4 million and $3.0 million, respectively, have been included in our results of operations for the nine months ended September 30, 2017. The related acquisition expenses of $0.4 million for the nine months ended September 30, 2017 have been reflected as a pro forma expense as of January 1, 2016. The unaudited pro forma consolidated operating data is not necessarily indicative of what the actual results of operations of the Company would have been, assuming the transaction had been completed as set forth above, nor do they purport to represent the Company's results of operations for future periods.2019 (in thousands):

Three Months Ended September 30,Nine Months Ended September 30,
Location of Revenue (Expense)2020201920202019
RentOperating and maintenance$(225)$(213)$(701)$(628)
Property management fee incomeManagement, transaction, and other fees$145 $228 $456 $693 
Interest incomeInterest, dividend and other investment income$0 $52 $0 $161 
32
  Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data) 2017 2016 2017 2016
Total property revenues $33,653
 $29,051
 $97,924
 $86,701
Net income $3,140
 $1,717
 $9,079
 $10,588
Net income attributable to Whitestone REIT (1)
 $2,993
 $1,689
 $8,582
 $10,405
         
Basic Earnings Per Share: $0.07
 $0.04
 $0.22
 $0.28
         
Diluted Earnings Per Share: $0.07
 $0.04
 $0.21
 $0.27
         
Weighted-average common shares outstanding:        
Basic (2)
 37,992
 36,214
 37,755
 35,229
Diluted (2)
 38,589
 37,043
 38,560
 36,032

(1)
Net income attributable to Whitestone REIT reflects historical ownership percentages and does not reflect the effects of the April Offering, assuming the sale of the common shares took place on January 1, 2016, as the related impact on ownership percentage is minimal.

(2)
Pro forma weighted averages reflect the April Offering, assuming the sale of the common shares took place on January 1, 2016.

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.

Property dispositions. On March 3, 2016, we completed the sale of Brookhill, located in Houston, Texas, for $3.1 million. This disposition was pursuant to our strategy of recycling capital by disposing of non-core properties, primarily properties that we owned at the time our current management team assumed the management of the Company, that do not fit our Community Centered Property® strategy. We recorded a gain on sale of $1.9 million. The sale was structured as a like-kind exchange within the meaning of Section 1031 of the Code and sales proceeds were deposited into a Section 1031 exchange escrow account with a qualified intermediary and subsequently distributed for general corporate purposes. We have not included Brookhill in discontinued operations as it did not meet the definition of discontinued operations.


24
Table of Contents
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
(Unaudited)

On February 17,December 8, 2016, we completedreceived a $15.4 million financed receivable from Pillarstone OP to provide the salefinancing for the ordinary course of approximately 0.5 acresbusiness transactions for Pillarstone OP. The financed receivable has an interest rate of 1.4%-1.95% plus Libor and a maturity date of December 31, 2019. The financed receivable was paid off on October 17, 2019.

17.  COMMITMENTS AND CONTINGENCIES
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 4.5 acre Pinnacle Phase II development parcel, located in Scottsdale, Arizona, for $1.1 million. We recorded a gain on salefinancial position, results of $1.0 million.operations, cash flows or liquidity.



18.  SUBSEQUENT EVENTS

Management has evaluated subsequent events through October 30, 2020, the date the consolidated financial statements were available to be issued, and has determined that there are no subsequent events to be reported.
33
Table of Contents
Item 2.  Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.


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:


•uncertainties related to the COVID-19 pandemic, including the unknown duration and economic, operational and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by U.S. and local governmental authorities or others in response to the pandemic on our business, employees and tenants, including, among others, (a) changes in tenant demand for our properties, (b) financial challenges confronting major tenants, including as a result of decreased customers’ willingness to frequent, and mandated stay in place orders that have prevented customers from frequenting, some of our tenants’ businesses and the impact of these issues on our ability to collect rent from our tenants; (c) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (d) significant reduction in our liquidity due to the lack of further availability under our 2019 Facility and limited ability to access the capital markets and other sources of financing on attractive terms or at all, and (e) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19;
•adverse economic or real estate developments or conditions in Texas or Arizona, Houston and Phoenix in particular, including as a result of a surge in COVID-19 cases in such areas and the impact on our tenants’ ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments;
•the imposition of federal income taxes if we fail to qualify as a REITreal estate investment trust (“REIT”) in any taxable year or forego an opportunity to ensure REIT status;
•the risk of government investigation of the Paycheck Protection Program loan (the “PPP Loan”);
•uncertainties related to the national economy, the real estate industry in general and in our specific markets;markets, including, but not limited to, the significant volatility and disruption in the global financial markets caused by the COVID-19 pandemic and potential volatility as a result of the upcoming U.S. presidential election;
•legislative or regulatory changes, including changes to laws governing REITs;REITs and the impact of the legislation commonly known as the Tax Cuts and Jobs Act;
adverse economic or real estate developments or natural disasters in Texas, Arizona or Illinois;
•increases in interest rates, operating costs or general and operating costs;administrative expenses;
•availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures;
•decreases in rental rates or increases in vacancy rates;
•litigation risks;
•lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants;
our ability to successfully finance and complete acquisitions and related development projects and, if completed, the ability of such newly acquired and new development properties to perform as we expect;
34
Table of Contents
•our inability to renew tenant leases or obtain new tenant leases upon the expiration of existing leases;
•our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws; and
•the need to fund tenant improvements or other capital expenditures out of operating cash flow.flow; and
•the risk that we are unable to raise capital for working capital, acquisitions or other uses on attractive terms or at all.
 
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.
 
Overview


We are a fully-integrated real estate company that primarily owns manages, and redevelops high quality retailoperates commercial properties whichin culturally diverse markets in major metropolitan areas. Founded in 1998, we refer to as Community Centered Properties®. Ourare internally managed with a portfolio of commercial properties are located in attractiveTexas, Arizona and affluent neighborhoods within high growth markets located primarily in the Sunbelt, such as Austin, Dallas-Fort Worth, Houston, Phoenix and San Antonio. We believe that gaining critical mass within these target markets, combined with our local market intelligence, existing platform, access to capital and broad network of industry relationships, gives us a competitive advantage and allows us to generate long-term return opportunities and added value for our shareholders.Illinois.



In October 2006, our current management team joined the Company and adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties®.  We define Community Centered Properties® as visibly located properties in established or developing culturally diverse neighborhoods in our target markets. We market, lease and manage our centers to match tenants with the shared needs of the surrounding neighborhood.  Those needs may include specialty retail, grocery, restaurants and medical, educational and financial services, and entertainment.services.  Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property.  We employ and develop a diverse group of associates who understand the needs of our multicultural communities and tenants.


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.


As of September 30, 2017,2020, we owned or had a majority interest in 72wholly-owned 58 commercial properties consisting of:


Consolidated Operating Portfolio


•
51 wholly-owned properties that meet our Community Centered Properties® strategy containing approximately 4.9 million square feet of gross leasable area (“GLA”) and having a total carrying amount (net of accumulated depreciation) of $901.7 million;

•52 wholly-owned properties that meet our Community Centered Properties® strategy containing approximately 4.9 million square feet of gross leasable area (“GLA”) and having a total carrying amount (net of accumulated depreciation) of $894.0 million;
•
as a result of the Contribution (as defined below), a majority interest in 14 consolidated properties that do not meet our Community Centered Properties® strategy containing approximately 1.5 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $60.0 million; plus


Redevelopment, New Acquisitions Portfolio

•
two retail properties that meet our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying value (net of accumulated depreciation) of $42.7 million; and


•one wholly-owned property that meets our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $34.7 million; and

•five parcels of land held for future development that meet our Community Centered Properties® strategy having a total carrying value of $15.9$19.0 million.


As of September 30, 2017,2020, we had an aggregate of 1,6491,386 tenants.  We have a diversified tenant base with our largest tenant comprising only 2.6%2.8% of our annualized rental revenues for the nine months ended September 30, 2017.2020.  Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants.  Our leases include minimum monthly lease payments and generally provide for tenant reimbursements for payment of taxes, insurance and maintenance. We completed 272222 new and renewal leases during the nine months ended September 30, 2017,2020, totaling 727,223658,754 square feet and approximately $56.4$56.5 million in total lease value.  This compares to 336241 new and renewal leases totaling 863,936659,134 square feet and approximately $57.1$60.6 million in total lease value during the same period in 2016.2019.


We employed 10985 full-time employees as of September 30, 2017.2020.  As an internally managed REIT, we bear our own expenses of operations, including the salaries, benefits and other compensation of our employees, office expenses, legal, accounting and investor relations expenses and other overhead costs.


April Offering
35
Table of Contents

Real Estate Partnership
On April 25, 2017,
As of September 30, 2020, we, completedthrough our investment in Pillarstone OP, owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 926,798 square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the saletotal outstanding units of 8,018,500Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.

Impact of COVID-19

The following discussion is intended to provide our shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our portfolio and tenants are estimates based on information available to us as of October 30, 2020. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition, and that of our tenants, for future periods.

During the first half of 2020, 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 date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona. However, the timing and ultimate impact of any such steps to reopen the economy as a whole and on our and our tenants’ businesses and financial condition remains uncertain. Cases of COVID-19 in these areas continued to rise in the third quarter of 2020 and many experts warn of a potential “second wave” of the outbreak in the coming months. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise continue to occupy their space. We are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Our portfolio and tenants have been impacted by these and other factors as follows:

•As of the date of this Quarterly Report on Form 10-Q, all of our properties are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates.
•Approximately 97% of our tenants (based on annualized base rent (“ABR”)) are open and operating.
•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.
•As of the date of this Quarterly Report on Form 10-Q, we have received payments of approximately 90% of contractual base rent and common shares,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. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.

We have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including 1,018,500 common shares purchasedthe following:

•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 of remaining availability under our revolving credit facility. We have cash, cash equivalents and restricted cash of approximately $39.1 million as of September 30, 2020.
•We have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on an individual basis.
36
Table of Contents
•Our board of trustees has reduced our quarterly dividend resulting in over $30 million of annualized savings. The board of trustees 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.
•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 CARES Act and/or under the additional stimulus relief bill that is expected to be passed by the underwriters upon exerciseU.S. Congress in the fourth quarter of 2020.
•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 optionfamilies is a top priority. We adapted our operations to purchaseprotect 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.

While we believe these steps have been effective to date, we expect there will be additional common shares, atchallenges ahead that may impact either our operations or those of our tenants, which could have an adverse effect on our and our tenants’ businesses and financial performance. We expect to continue to implement proactive measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees and tenants. As a public offering price per share of $13.00 (the “April Offering”). Total net proceeds from the April Offering, after deducting offeringresult, we may incur additional expenses were approximately $99.9 million, which we contributedin future periods in response to the Operating Partnership in exchange for OP units. The Operating Partnership usedpandemic, which could adversely affect our results of operations. In addition, we may revise our approach to these initiatives or take additional actions to meet the net proceeds from the April Offering to repay a portionneeds of the Facilityour employees and for general corporate purposes, including funding a portion of the purchase price of BLVD Place and Eldorado Plaza.tenants.


How We Derive Our Revenue
 
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.



Known Trends in Our Operations; Outlook for Future Results

Rental Income

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.

37
Table of Contents
Scheduled Lease Expirations
    
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.
     
Acquisitions
 
We have continuedseek to successfully grow our GLA through the acquisition of additional properties,properties. Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and we expect to actively pursueare carefully evaluating development and consummate additional acquisitions in the foreseeable future.redevelopment activities on a case-by-case basis. We believe that over the next few years we will continue to have excellent opportunities to acquire quality properties at historically attractive prices.prices once we recommence acquisition activity as the impact of COVID-19 decreases; however, there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term or at all. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe enables us to take advantage of these market opportunities and maintain an active acquisition pipeline.

Property Acquisitions, Dispositions and Development
 
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties® strategy.  We define Community Centered Properties® as visibly located properties in established or developing, culturally diverse neighborhoods in our target markets, primarily in and around Austin, Dallas-Fort Worth, Houston, Phoenix and San Antonio.  We may acquire properties in other high-growth cities in the future. We market, lease and manage our centers to match tenants with the shared needs of the surrounding neighborhood.  Those needs may include specialty retail, grocery, restaurants, medical, educational and financial services and entertainment.  Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property.


Property dispositions.Acquisitions. On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the “Contribution Agreement”) with Pillarstone Capital REIT Operating Partnership LP (“Pillarstone," "Pillarstone OP" or the "Consolidated Partnership") and Pillarstone Capital REIT (“Pillarstone REIT”) pursuant to which we contributed all of the equity interests in four of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower,” and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own 14 non-core properties that do not fit our Community Centered Property® strategy (the “Pillarstone Properties”), to Pillarstone for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million Class A units representing limited partnership interests in Pillarstone (“Pillarstone OP Units”), issued at a price of $1.331 per Pillarstone OP Unit; and (2) the assumption of approximately $65.9 million of liabilities, consisting of (a) approximately $15.5 million of our liability under the 2014 Facility (See Note 7 (Debt) to the accompanying consolidated financial statements); (b) an approximately $16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26, 2013, between Uptown Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory Note”) of Industrial-Office issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan Agreement”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Contribution”).

In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into an OP Unit Purchase Agreement (the “OP Unit Purchase Agreement”) with Pillarstone REIT and Pillarstone pursuant to which the Operating Partnership agreed to purchase up to an aggregate of $3.0 million of Pillarstone OP Units at a price of $1.331 per Pillarstone OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit Purchase Agreement contains customary closing conditions and the parties have made certain customary representations, warranties and indemnifications to each other in the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit Purchase Agreement, in the event of a Change of Control (as defined therein) of the Company, Pillarstone shall have the right, but not the obligation, to repurchase the Pillarstone OP Units issued thereunder from the Operating Partnership at their initial issue price of $1.331 per Pillarstone OP Unit.

In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.

In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection Agreement with Pillarstone REIT and Pillarstone pursuant to which Pillarstone agreed to indemnify the Operating Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or if Pillarstone fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that must be paid to maintain its REIT status for federal income tax purposes.

As of September 30, 2017, we owned approximately 81.4% of the total outstanding Pillarstone OP Units. Accordingly, we account for Pillarstone OP as a VIE and fully consolidate in our consolidated balance sheets and related consolidated statement of operations and comprehensive income.


Property acquisitions. On May 26, 2017,6, 2019, we acquired BLVD Place,Las Colinas Village, a property that meets our Community Centered Property® strategy, for $158.0 million, including $80.0 million of asset level mortgage financing and $78.0$34.8 million in cash and net prorations using borrowings under our Facility andprorations. Las Colinas Village, a portion of the net proceeds from the April Offering. BLVD Place, a 216,944104,919 square foot property, was 99%86% leased at the time of purchase and is located in Houston,Irving, Texas. Included in the purchase of BLVD Place is approximately 1.43 acres of developable land.


On May 3, 2017, we acquired Eldorado Plaza, a property that meets our Community Centered Property® strategy, for $46.6 million in cash and net prorations using borrowings under our Facility and a portion of the net proceeds from the April Offering. Eldorado Plaza, a 221,577 square foot property, was 96% leased at the time of purchase and is located in McKinney, Texas, a suburb of Dallas, Texas.
38

Table of Contents
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 SignedGLA 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 Leases143 474,778 3.9 $1.31 $17.70 $17.08 11.6 %
   New Leases37 83,529 5.1 11.55 22.43 22.98 1.9 %
   Total180 558,307 4.1 $2.85 $18.41 $17.96 9.8 %
Number of Leases SignedGLA Signed
Weighted Average Lease Term (2)
TI and Incentives per Sq. Ft. (3)
Contractual Rent Per Sq. Ft. (4)
Non-Comparable
   Renewal Leases2 2,563 4.7 $30.64 $46.08 
   New Leases40 97,884 4.7 8.82 19.24 
   Total42 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Capital expenditures:
    Tenant improvements and allowances$1,820 $1,790 $3,048 $3,185 
    Developments / redevelopments95 728 474 3,576 
    Leasing commissions and costs235 625 913 1,993 
    Maintenance capital expenditures840 1,205 2,286 3,190 
      Total capital expenditures$2,990 $4,348 $6,721 $11,944 
39
Table of Contents
  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.



40
Table of Contents
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,
 20202019
Number of properties owned and operated58 57 
Aggregate GLA (sq. ft.)(1)
4,848,652 4,848,652 
Ending occupancy rate - operating portfolio(1)
89 %90 %
Ending occupancy rate89 %90 %
Total revenues$29,900 $29,879 
Total operating expenses22,730 21,914 
Total other expense6,347 6,538 
Income from operations before equity investments in real estate partnerships and income tax823 1,427 
Equity in earnings of real estate partnership196 524 
Provision for income taxes(105)(102)
Income from continuing operations914 1,849 
Net income914 1,849 
Less: Net income attributable to noncontrolling interests14 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 units4,511 11,694 
Distributions per common share and OP unit$0.1050 $0.2850 
Distributions paid as a percentage of funds from operations core45 %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.

41
Table of Contents
  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,
Revenue20202019Change% 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 rental28,060 29,368 (1,308)(4)%
Other revenues (4)
887 283 604 213 %
Same Store Total28,947 29,651 (704)(2)%
Non-Same Store and Management Fees
Rental revenues591 — 591 Not meaningful
Recoveries329 — 329 Not meaningful
Bad debt(112)— (112)Not meaningful
Total rental (5)
808 — 808 Not meaningful
Management fees145 228 (83)(36)%
Non-Same Store and Management Fees Total953 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.
42
Table of Contents

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 Expenses20202019Change% Change
Same Store
Operating and maintenance (1)
$4,649 $4,888 $(239)(5)%
Real estate taxes4,437 4,410 27 1 %
Same Store total9,086 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 total613 230 383 167 %
Depreciation and amortization7,171 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.

43
Table of Contents
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)20202019Change% Change
Interest expense$6,400 $6,679 $(279)(4)%
Loss on sale or disposal of assets and assets held for sale18 — 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.
44
Table of Contents
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
20202019(Decrease)(Decrease)
Same Store (51 properties, excluding development land)
Property revenues
Rental$28,060 $29,368 $(1,308)(4)%
Management, transaction and other fees887 283 604 213 %
Total property revenues28,947 29,651 (704)(2)%
Property expenses
Property operation and maintenance4,649 4,888 (239)(5)%
Real estate taxes4,437 4,410 27 1 %
Total property expenses9,086 9,298 (212)(2)%
Total property revenues less total property expenses19,861 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”)20202019
Net income attributable to Whitestone REIT$900 $1,807 
General and administrative expenses5,860 5,597 
Depreciation and amortization7,171 6,789 
Equity in earnings of real estate partnership(196)(524)
Interest expense6,400 6,679 
Interest, dividend and other investment income(71)(141)
Provision for income taxes105 102 
Management fee, net of related expenses81 (14)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net18 — 
NOI of real estate partnership (pro rata)990 1,714 
Net income attributable to noncontrolling interests14 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 
45
Table of Contents

(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):



46
  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%

Table of Contents
  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,
 20202019
Number of properties owned and operated58 57 
Aggregate GLA (sq. ft.)(1)
4,848,652 4,848,652 
Ending occupancy rate - operating portfolio(1)
89 %90 %
Ending occupancy rate89 %90 %
Total revenues$88,081 $89,151 
Total operating expenses65,328 63,613 
Total other expense20,237 19,303 
Income from operations before equity investments in real estate partnerships and income tax2,516 6,235 
Equity in earnings of real estate partnership752 1,480 
Provision for income taxes(288)(324)
Income from continuing operations2,980 7,391 
Gain on sale of property from discontinued operations— 701 
Net income2,980 8,092 
Less: Net income attributable to noncontrolling interests58 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 units21,201 34,840 
Distributions per common share and OP unit$0.4950 $0.8550 
Distributions paid as a percentage of funds from operations core70 %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.

47
Table of Contents
  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,
Revenue20202019Change% 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 rental83,673 87,527 (3,854)(4)%
Other revenues (4)
1,475 931 544 58 %
Same Store Total85,148 88,458 (3,310)(4)%
Non-Same Store and Management Fees
Rental revenues1,825 — 1,825 Not meaningful
Recoveries882 — 882 Not meaningful
Bad debt(264)— (264)Not meaningful
Total rental (5)
2,443 — 2,443 Not meaningful
Other revenues34 — 34 Not meaningful
Management fees456 693 (237)(34)%
Non-Same Store and Management Fees Total2,933 693 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.
48
Table of Contents
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 Expenses20202019Change% Change
Same Store
Operating and maintenance$13,895 $14,015 $(120)(1)%
Real estate taxes12,972 12,474 498 4 %
Same Store total26,867 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 total1,745 745 1,000 134 %
Depreciation and amortization21,112 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.



49
Table of Contents
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)20202019Change% Change
Interest expense$19,561 $19,738 $(177)(1)%
Loss on sale or disposal of assets and assets held for sale882 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
20202019(Decrease)(Decrease)
Same Store (51 properties, excluding development land)
Property revenues
Rental$83,673 $87,527 $(3,854)(4)%
Management, transaction and other fees1,475 931 544 58 %
Total property revenues85,148 88,458 (3,310)(4)%
Property expenses
Property operation and maintenance13,895 14,015 (120)(1)%
Real estate taxes12,972 12,474 498 4 %
Total property expenses26,867 26,489 378 1 %
Total property revenues less total property expenses58,281 61,969 (3,688)(6)%
Same Store straight-line rent adjustments640 (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.

50
Table of Contents
Nine Months Ended September 30,
PROPERTY NET OPERATING INCOME (“NOI”)20202019
Net income attributable to Whitestone REIT$2,922 $7,908 
General and administrative expenses15,604 16,514 
Depreciation and amortization21,112 19,865 
Equity in earnings of real estate partnership(752)(1,480)
Interest expense19,561 19,738 
Interest, dividend and other investment income(206)(550)
Provision for income taxes288 324 
Gain on sale of property from discontinued operations, net— (701)
Management fee, net of related expenses246 (64)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net882 115 
NOI of real estate partnership (pro rata)3,250 5,152 
Net income attributable to noncontrolling interests58 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 adjustments640 (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.
51
  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%

Table of Contents
  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.


52
Table of Contents

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-CORE2020201920202019
Net income attributable to Whitestone REIT$900 $1,807 $2,922 $7,908 
  Adjustments to reconcile to FFO:(1)
Depreciation and amortization of real estate7,125 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, net18 — 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 interests14 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.

53
Table of Contents
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 EndedNine Months Ended
 September 30,September 30,
PROPERTY NET OPERATING INCOME2020201920202019
Net income attributable to Whitestone REIT$900 $1,807 $2,922 $7,908 
General and administrative expenses5,860 5,597 15,604 16,514 
Depreciation and amortization7,171 6,789 21,112 19,865 
Equity in earnings of real estate partnership(196)(524)(752)(1,480)
Interest expense6,400 6,679 19,561 19,738 
Interest, dividend and other investment income(71)(141)(206)(550)
Provision for income taxes105 102 288 324 
Gain on sale of property from discontinued operations, net— — — (701)
Management fee, net of related expenses81 (14)246 (64)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net18 — 882 115 
NOI of real estate partnership (pro rata)990 1,714 3,250 5,152 
Net income attributable to noncontrolling interests14 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
54
Table of Contents
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
55
Table of Contents
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:
 
56
Table of Contents
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):
DescriptionSeptember 30, 2020December 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, 202780,000 80,000 
$19.0 million 4.15% Note, due December 1, 202418,768 19,000 
$20.2 million 4.28% Note, due June 6, 202318,323 18,616 
$14.0 million 4.34% Note, due September 11, 202413,300 13,482 
$14.3 million 4.34% Note, due September 11, 202414,073 14,243 
$15.1 million 4.99% Note, due January 6, 202414,228 14,409 
$2.6 million 5.46% Note, due October 1, 20232,351 2,386 
$50.0 million, 5.09% Note, due March 22, 202950,000 50,000 
$50.0 million, 5.17% Note, due March 22, 202950,000 50,000 
$1.7 million 1.00% Note, due May 6, 20221,734 — 
$1.1 million 4.53% Note, due November 28, 2020270 — 
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023139,500 109,500 
Total notes payable principal667,547 645,896 
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.
57
Table of Contents
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):
 
YearAmount Due
 
2020 (remaining)$964 
20212,762 
2022102,170 
2023167,363 
2024228,573 
Thereafter165,715 
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
58
Table of Contents
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:
59
Table of Contents

•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.


60
Table of Contents
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 SharesNoncontrolling OP Unit HoldersTotal
Quarter PaidDistributions Per Common Share Amount PaidDistributions Per OP Unit Amount PaidAmount Paid
2020
Third Quarter$0.1050 $4,430 $0.1050 $81 $4,511 
Second Quarter0.1050 4,413 0.1050 91 4,504 
First Quarter0.2850 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 Quarter0.2850 11,430 0.2850 264 11,694 
Second Quarter0.2850 11,316 0.2850 265 11,581 
First Quarter0.2850 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.



61
Table of Contents
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.

62
Table of Contents
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.



63
Table of Contents
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.
64
Table of Contents

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,
65
Table of Contents
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.

(b)Not applicable.

(c)Not applicable.


(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 ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2020 through July 31, 2020— $— N/AN/A
August 1, 2020 through August 31, 2020— — N/AN/A
September 1, 2020 through September 30, 20201,173 6.00 N/AN/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.



66
Table of Contents
EXHIBIT INDEX
Exhibit No.DescriptionEXHIBIT INDEX
Exhibit No.Description
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
3.23.1.8
3.1.9
3.2
12.110.1**
31.110.2**
31.1*
31.231.2**
32.132.1****
32.232.2****
101.INS***101The 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.


Table of Contents
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)



57
68