UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
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)
Maryland | 76-0594970 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
2600 South Gessner, Suite 500 | 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 class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares of Beneficial Interest, par value $0.001 per share | WSR | New 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.
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).
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 | ☐ |
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).
As of November 1, 2017,April 28, 2023, there were 38,486,707 49,425,385 common shares of beneficial interest, $0.001 par value per share, outstanding.
PART II - OTHER INFORMATION Item 1.Item 1A.Item 2.
Item 1. Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Real estate assets, at cost | ||||||||
Property | $ | 1,201,650 | $ | 1,199,041 | ||||
Accumulated depreciation | (214,684 | ) | (208,286 | ) | ||||
Total real estate assets | 986,966 | 990,755 | ||||||
Investment in real estate partnership | 34,608 | 34,826 | ||||||
Cash and cash equivalents | 3,479 | 6,166 | ||||||
Restricted cash | 193 | 189 | ||||||
Escrows and acquisition deposits | 10,031 | 12,827 | ||||||
Accrued rents and accounts receivable, net of allowance for doubtful accounts | 26,892 | 25,570 | ||||||
Receivable due from related party | 1,403 | 1,377 | ||||||
Unamortized lease commissions, legal fees and loan costs | 12,412 | 12,697 | ||||||
Prepaid expenses and other assets(1) | 7,416 | 7,838 | ||||||
Finance lease right-of-use assets | 10,493 | 10,522 | ||||||
Total assets | $ | 1,093,893 | $ | 1,102,767 | ||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Notes payable | $ | 630,409 | $ | 625,427 | ||||
Accounts payable and accrued expenses(2) | 28,311 | 36,154 | ||||||
Payable due to related party | 1,562 | 1,561 | ||||||
Tenants' security deposits | 8,343 | 8,428 | ||||||
Dividends and distributions payable | 6,009 | 6,008 | ||||||
Finance lease liabilities | 733 | 735 | ||||||
Total liabilities | 675,367 | 678,313 | ||||||
Commitments and contingencies: | — | — | ||||||
Equity: | ||||||||
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of March 31, 2023 and December 31, 2022 | — | — | ||||||
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 49,424,573 and 49,422,713 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 49 | 49 | ||||||
Additional paid-in capital | 625,557 | 624,785 | ||||||
Accumulated deficit | (214,450 | ) | (212,366 | ) | ||||
Accumulated other comprehensive income | 1,457 | 5,980 | ||||||
Total Whitestone REIT shareholders' equity | 412,613 | 418,448 | ||||||
Noncontrolling interest in subsidiary | 5,913 | 6,006 | ||||||
Total equity | 418,526 | 424,454 | ||||||
Total liabilities and equity | $ | 1,093,893 | $ | 1,102,767 | ||||
| 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.
| 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)
March 31, 2023 | December 31, 2022 | |||||||
(unaudited) | ||||||||
(1) Operating lease right of use assets (net) | $ | 107 | $ | 124 | ||||
(2) Operating lease liabilities | $ | 111 | $ | 129 | ||||
See accompanying notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)thousands)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Revenues | ||||||||
Rental(1) | $ | 35,497 | $ | 33,808 | ||||
Management, transaction, and other fees | 354 | 315 | ||||||
Total revenues | 35,851 | 34,123 | ||||||
Operating expenses | ||||||||
Depreciation and amortization | 7,846 | 7,910 | ||||||
Operating and maintenance | 6,086 | 5,725 | ||||||
Real estate taxes | 4,708 | 4,367 | ||||||
General and administrative | 5,084 | 3,049 | ||||||
Total operating expenses | 23,724 | 21,051 | ||||||
Other expenses (income) | ||||||||
Interest expense | 7,903 | 6,061 | ||||||
Loss on disposal of assets, net | 6 | 15 | ||||||
Interest, dividend and other investment income | (20 | ) | (14 | ) | ||||
Total other expenses | 7,889 | 6,062 | ||||||
Income before equity investment in real estate partnership and income tax | 4,238 | 7,010 | ||||||
Equity (deficit) in earnings of real estate partnership | (218 | ) | 280 | |||||
Provision for income tax | (119 | ) | (101 | ) | ||||
Net income | 3,901 | 7,189 | ||||||
Less: Net income attributable to noncontrolling interests | 54 | 111 | ||||||
Net income attributable to Whitestone REIT | $ | 3,847 | $ | 7,078 | ||||
| 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.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Basic Earnings Per Share: | ||||||||
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares | $ | 0.08 | $ | 0.14 | ||||
Diluted Earnings Per Share: | ||||||||
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares | $ | 0.08 | $ | 0.14 | ||||
Weighted average number of common shares outstanding: | ||||||||
Basic | 49,424 | 49,145 | ||||||
Diluted | 50,160 | 50,306 | ||||||
Consolidated Statements of Comprehensive Income (Loss) | ||||||||
Net income | $ | 3,901 | $ | 7,189 | ||||
Other comprehensive income (loss) | ||||||||
Unrealized gain (loss) on cash flow hedging activities | (4,587 | ) | 5,986 | |||||
Comprehensive income (loss) | (686 | ) | 13,175 | |||||
Less: Net income attributable to noncontrolling interests | 54 | 111 | ||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | (64 | ) | 92 | |||||
| �� | ||||||||
Comprehensive income (loss) attributable to Whitestone REIT | $ | (676 | ) | $ | 12,972 | |||
| 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 | ||||||||
See accompanying notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
(1) Rental | ||||||||
Rental revenues | $ | 25,740 | $ | 24,844 | ||||
Recoveries | 10,081 | 9,337 | ||||||
Bad debt | (324 | ) | (373 | ) | ||||
Total rental | $ | 35,497 | $ | 33,808 | ||||
| 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 | ||||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Noncontrolling | |||||||||||||||||||||||||||||||||
Common Shares | Paid-In | Accumulated | Comprehensive | Shareholders’ | Interests | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Gain (Loss) | Equity | Units | Dollars | Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2022 | 49,423 | $ | 49 | $ | 624,785 | $ | (212,366 | ) | $ | 5,980 | $ | 418,448 | 695 | $ | 6,006 | $ | 424,454 | |||||||||||||||||||
Issuance of shares under dividend reinvestment plan | 2 | — | 17 | — | — | 17 | — | — | 17 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 755 | — | — | 755 | — | — | 755 | |||||||||||||||||||||||||||
Distributions - $0.1200 per common share / OP unit | — | — | — | (5,931 | ) | — | (5,931 | ) | — | (83 | ) | (6,014 | ) | |||||||||||||||||||||||
Unrealized loss on change in value of cash flow hedge | — | — | — | — | (4,523 | ) | (4,523 | ) | — | (64 | ) | (4,587 | ) | |||||||||||||||||||||||
Net income | — | — | — | 3,847 | — | 3,847 | — | 54 | 3,901 | |||||||||||||||||||||||||||
Balance, March 31, 2023 | 49,425 | $ | 49 | $ | 625,557 | $ | (214,450 | ) | $ | 1,457 | $ | 412,613 | 695 | $ | 5,913 | $ | 418,526 | |||||||||||||||||||
See accompanying notes to Consolidated Financial Statements
| 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 | ||||
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Noncontrolling | |||||||||||||||||||||||||||||||||
Common Shares | Paid-In | Accumulated | Comprehensive | Shareholders’ | Interests | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Gain (Loss) | Equity | Units | Dollars | Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2021 | 49,144 | $ | 48 | $ | 623,462 | $ | (223,973 | ) | $ | (6,754 | ) | $ | 392,783 | 771 | $ | 6,255 | $ | 399,038 | ||||||||||||||||||
Exchange of noncontrolling interest OP units for common shares | 1 | — | — | — | — | — | (1 | ) | — | — | ||||||||||||||||||||||||||
Issuance of shares under dividend reinvestment plan | 1 | — | 15 | — | — | 15 | — | — | 15 | |||||||||||||||||||||||||||
Share-based compensation | — | — | (1,413 | ) | — | — | (1,413 | ) | — | — | (1,413 | ) | ||||||||||||||||||||||||
Distributions - $0.1075 per common share / OP unit | — | — | — | (5,897 | ) | — | (5,897 | ) | — | (92 | ) | (5,989 | ) | |||||||||||||||||||||||
Unrealized gain on change in value of cash flow hedge | — | — | — | — | 5,894 | 5,894 | — | 92 | 5,986 | |||||||||||||||||||||||||||
Net income | — | — | — | 7,078 | — | 7,078 | — | 111 | 7,189 | |||||||||||||||||||||||||||
Balance, March 31, 2022 | 49,146 | $ | 48 | $ | 622,064 | $ | (222,792 | ) | $ | (860 | ) | $ | 398,460 | 770 | $ | 6,366 | $ | 404,826 | ||||||||||||||||||
(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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,901 | $ | 7,189 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 7,846 | 7,911 | ||||||
Amortization of deferred loan costs | 277 | 274 | ||||||
Loss on disposal of assets | 6 | 15 | ||||||
Bad debt | 324 | 372 | ||||||
Share-based compensation | 755 | (1,413 | ) | |||||
(Equity) deficit in earnings of real estate partnership | 218 | (280 | ) | |||||
| Amortization of right-of-use assets - finance leases | 29 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Escrows and acquisition deposits | 2,796 | 1,874 | ||||||
Accrued rents and accounts receivable | (1,646 | ) | (1,913 | ) | ||||
Receivable due from related party | (26 | ) | (164 | ) | ||||
Unamortized lease commissions, legal fees and loan costs | (521 | ) | (697 | ) | ||||
Prepaid expenses and other assets | (1,117 | ) | 295 | |||||
Accounts payable and accrued expenses | (7,843 | ) | (8,781 | ) | ||||
Payable due to related party | 1 | 210 | ||||||
Tenants' security deposits | (85 | ) | 23 | |||||
Net cash provided by operating activities | 4,915 | 4,915 | ||||||
Cash flows from investing activities: | ||||||||
Additions to real estate | (3,529 | ) | (3,359 | ) | ||||
Net cash used in investing activities | (3,529 | ) | (3,359 | ) | ||||
Cash flows from financing activities: | ||||||||
Distributions paid to common shareholders | (5,913 | ) | (5,268 | ) | ||||
Distributions paid to OP unit holders | (83 | ) | (83 | ) | ||||
Net proceeds from credit facility | 9,500 | — | ||||||
Repayments of notes payable | (7,571 | ) | (863 | ) | ||||
Payment of finance lease liability | (2 | ) | — | |||||
Net cash used in financing activities | (4,069 | ) | (6,214 | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | (2,683 | ) | (4,658 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 6,355 | 15,914 | ||||||
Cash, cash equivalents and restricted cash at end of period (1) | $ | 3,672 | $ | 11,256 | ||||
| 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 | $ | — | ||||
| (1) | For a reconciliation of cash, cash equivalents and restricted cash, see supplemental disclosures below. |
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 7,610 | $ | 5,772 | ||||
Non cash investing and financing activities: | ||||||||
Disposal of fully depreciated real estate | $ | 864 | $ | 20 | ||||
Financed insurance premiums | $ | 3,002 | $ | 1,846 | ||||
Value of shares issued under dividend reinvestment plan | $ | 17 | $ | 15 | ||||
Change in fair value of cash flow hedge | $ | (4,587 | ) | $ | 5,986 | |||
March 31, | ||||||||
2023 | 2022 | |||||||
Cash, cash equivalents and restricted cash | ||||||||
Cash and cash equivalents | $ | 3,479 | $ | 11,136 | ||||
Restricted cash | 193 | 120 | ||||||
Total cash, cash equivalents and restricted cash | $ | 3,672 | $ | 11,256 | ||||
See accompanying notes to Consolidated Financial Statements.
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, 20162022 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, 2017March 31, 2023 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,March 31, 2023 and December 31, 2022, and the results of operations for the three and nine month periods ended September 30, 2017 March 31, 2023 and 2016,2022, the consolidated statements of changes in equity for the ninethree month periodperiods ended September 30, 2017March 31, 2023 and 2022 and cash flows for the nine month periodsthree months ended September 30, 2017 March 31, 2023 and 2016.2022. 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-K10-K for the year ended December 31, 2016.
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 ofAs of March 31, 2023, these properties consist of:
Consolidated Operating Portfolio
• | 51 |
Redevelopment, New Acquisitions Portfolio
• | one wholly owned property, Lake Woodlands Crossing, that |
• | five parcels of land held for future development. | |
As of land heldMarch 31, 2023, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in eight 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 future development.
The global health crisis caused by COVID-19 and the related responses intended to control its spread may continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. In light of the changing nature of the COVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of operations and cash flows.
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 ofNoncontrolling 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-oneone-for-one basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.
Equity Method. In accordance with ASU 2014-09 (“Topic 606”) and ASC 610, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets,” the Company recognizes its investment in Pillarstone OP under the equity method.
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.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 grant date fair value of common share units included in share-based compensation expense, 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.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(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.
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 flowDevelopment 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 endedShare-Based Compensation.
From time to time, we award nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to executive officers and employees under ourNoncontrolling Interests.
Noncontrolling interestsAccrued 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. We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. 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 March 31, 2023 and December 31, 2022, we had an allowance for uncollectible accounts of $14.0 million and $13.8 million, respectively. During the three months ending March 31, 2023 and 2022, we recorded an adjustment to rental revenue for bad debt, exclusive of straight-line rent reserve adjustments, in the amount of a $0.3 million decrease to revenue and a $0.4 million decrease to revenue, respectively. The three months ended March 31, 2023 included 71 cash basis tenants, resulting in a decrease to rental revenue for straight-line rent adjustments of $0.2 million and a decrease to rental revenue for bad debt adjustments of $0.2 million, and the three months ended March 31, 2022 included 77 cash basis tenants, resulting in decreases to rental revenue for straight-line rent adjustments of $0.4 million and a decrease to rental revenue for bad debt adjustments of $0.2 million, respectively.
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 paid us management fees for property management, leasing and day-to-day advisory and administrative services. The management agreement with Pillarstone OP was terminated on August 18, 2022. 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-K10-K for the year ended December 31, 20162022 for further discussion on significant accounting policies.
Recent Accounting Pronouncements.
In March 2020, the FASB issued Accounting Standards Update No.2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued Accounting Standards Update No.2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which clarified the scope and application of the original guidance. We have elected this option and adopted ASU 2020-04 and ASU 2021-01 effective September 2022. There was no material impact on the Company's consolidated financials statements as a result of adopting this guidance.
3.LEASES
As a Lessor. All leases on our properties are classified as noncancelable operating leases, and the FASB issued guidance requiring lesseesrelated 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 recognizeaccrued 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 lease liabilitysingle line item, Rental, within the consolidated statements of operations and comprehensive 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 March 31, 2023 is as follows (in thousands):
Years Ended December 31, | Minimum Future Rents(1) | |||
2023 (remaining) | $ | 72,459 | ||
2024 | 86,345 | |||
2025 | 69,783 | |||
2026 | 54,657 | |||
2027 | 42,932 | |||
Thereafter | 127,363 | |||
Total | $ | 453,539 | ||
(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. |
As a right-of-use asset for all leases. Lessor accounting will remain largely unchanged with the exception of changes related to costsLessee. We have office space, automobile, and office machine leases, which qualify as initial direct costs.operating leases, with remaining lease terms ofone to three years. As of March 31, 2023 the Company had one ground lease with the lease term of 99 years. The guidance will also require new qualitative and quantitative disclosures 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.
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, | Operating Leases | Finance Lease | ||||||
2023 (remaining) | $ | 45 | $ | 45 | ||||
2024 | 43 | 61 | ||||||
2025 | 28 | 63 | ||||||
2026 | 1 | 64 | ||||||
2027 | — | 65 | ||||||
Thereafter | — | 2,773 | ||||||
Total undiscounted rental payments | 117 | 3,071 | ||||||
Less imputed interest | 6 | 2,338 | ||||||
Total lease liabilities | $ | 111 | $ | 733 | ||||
For the three months ended March 31, 2023 and 2022, the total lease costs for operating leases were $ 33,000 and $ 229,000, respectively, and for the finance lease was $ 29,000 and $0. The weighted average remaining lease term for our operating and finance leases were 2.4 and 99 years at March 31, 2023. We have elected to continue estimatingdo not include renewal options in the number of shares expected to vest in order to determine compensation cost, andlease term for calculating the lease liability unless we are reasonably certain we will continueexercise the option or the lessor has the sole ability to classify cash paid by us exercise the option. The weighted average incremental borrowing rate was 4.5% for employee taxes when common shares were repurchased to cover minimum statutory requirements as financing activity.
| 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 | |||||||
| 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 | |||||||
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):
March 31, 2023 | December 31, 2022 | |||||||
Tenant receivables | $ | 17,163 | $ | 16,828 | ||||
Accrued rents and other recoveries | 23,149 | 22,103 | ||||||
Allowance for doubtful accounts | (14,005 | ) | (13,822 | ) | ||||
Other receivables | 585 | 461 | ||||||
Total | $ | 26,892 | $ | 25,570 | ||||
| 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 | ||||
5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS
Costs which have been deferred consist of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
Leasing commissions | $ | 16,397 | $ | 16,364 | ||||
Deferred legal cost | 362 | 364 | ||||||
Deferred financing cost | 4,149 | 4,149 | ||||||
Total cost | 20,908 | 20,877 | ||||||
Less: leasing commissions accumulated amortization | (7,736 | ) | (7,649 | ) | ||||
Less: deferred legal cost accumulated amortization | (267 | ) | (263 | ) | ||||
Less: deferred financing cost accumulated amortization | (493 | ) | (268 | ) | ||||
Total cost, net of accumulated amortization | $ | 12,412 | $ | 12,697 | ||||
| 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 | ||||
6. VARIABLE INTEREST ENTITIES
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 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,subsidiaries that, at the “Entities”) that owntime, owned 14 non-core properties that do did not fit our Community Centered Property
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, 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.
We rely on reporting from Pillarstone OP's general partner, Pillarstone Capital REIT (“PRLE”), for financial information regarding the Company’s investment in Pillarstone OP. PRLE is a public company that is delinquent in its SEC reporting obligations, having yet to file its Quarterly Report on Form 10-Q for the three months ended September 30, 2022, and its Annual Report on Form 10-K for the year ended December 31, 2022. Despite numerous attempts by us to obtain this information as required by the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership, PRLE has failed to produce such information. As a result, we have relied on other publicly available information as a basis to estimate the net income, depreciation and amortization, and other metrics used in our financial reporting. We also estimated certain expenses, such as legal and professional fees based on information publicly disclosed by PRLE, allocating such expenses based on what we believe can be charged to Pillarstone OP and which expenses cannot be charged to Pillarstone OP pursuant to the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership. We have requested for PRLE to characterize the fees and notify us of which fees they intend to charge to Pillarstone OP, but PRLE has not provided the information. To the extent PRLE provides updated financial information as required and requested, we will adjust our financial reporting for Pillarstone OP as appropriate. There can be no assurance that PRLE actual financial results will not differ materially from our estimates.
The table below presents the real estate partnership investment in which the Company holds an ownership interest (in thousands):
Company’s Investment as of | ||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||
Real estate partnership | Ownership Interest | |||||||||||
Pillarstone OP | 81.4% | $ | 34,608 | $ | 34,826 | |||||||
Total real estate partnership(1)(2)(3) | $ | 34,608 | $ | 34,826 | ||||||||
(1) | Representing eight property interests and 926,798 square feet of GLA, as of March 31, 2023 and December 31, 2022. |
(2) | On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of Pillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price.As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option of the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP. Because the Pillarstone Rights Agreement seeks to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s breach of the Pillarstone OP partnership agreement, breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, and breach of the implied covenant of good faith and fair dealing under the Pillarstone OP partnership agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption right is not impaired while the underlying dispute is being considered by the Court.While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time. |
(3) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated the value of the investment based on the information available to us at the time of this report. |
The table below presents the Company’s share of net income (loss) from its investment in the real estate partnership which is included in equity (deficit) in earnings of real estate partnership, net on the Company’s consolidated statements of operations and comprehensive income (loss) (in thousands):
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Pillarstone OP | $ | (218 | ) | $ | 280 | |||
Summarized financial information for the Company’s investment in real estate partnership is as follows (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
Assets: | ||||||||
Real estate, net | $ | 47,574 | $ | 47,727 | ||||
Other assets | 9,680 | 9,680 | ||||||
Total assets(1) | 57,254 | 57,407 | ||||||
Liabilities and equity: | ||||||||
Notes payable | 14,535 | 14,616 | ||||||
Other liabilities | 3,782 | 3,782 | ||||||
Equity | 38,937 | 39,009 | ||||||
Total liabilities and equity(2) | 57,254 | 57,407 | ||||||
Company’s share of equity | 31,714 | 31,773 | ||||||
Cost of investment in excess of the Company’s share of underlying net book value | 2,894 | 3,053 | ||||||
Carrying value of investment in real estate partnership(3) | $ | 34,608 | $ | 34,826 | ||||
(1) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated total assets and its components based on the information available to us at the time of this report. |
(2) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated total liabilities and equity and its components based on the information available to us at the time of this report. |
(3) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated the value of the investment based on the information available to us at the time of this report. |
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Revenues | $ | 2,003 | $ | 2,326 | ||||
Operating expenses | (2,032 | ) | (1,605 | ) | ||||
Other expenses | (206 | ) | (344 | ) | ||||
Net income (loss)(1) | $ | (235 | ) | $ | 377 | |||
(1) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated net income (loss) and its components based on the information available to us at the time of this report. Please refer to Note 6 for the full disclosure. |
The amortization of the total outstanding unitsbasis difference between the cost of investment and the Company's share of underlying net book value for both of the three months ended March 31, 2023 and 2022 is $ 27,000. 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.
| 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 | ||||
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.
Debt consisted of the following as of the dates indicated (in thousands):
| 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 | ||||
Description | March 31, 2023 | December 31, 2022 | ||||||
Fixed rate notes | ||||||||
$265.0 million, 3.18% plus 1.45% to 2.10% Note, due January 31, 2028 (1) | $ | 265,000 | $ | 265,000 | ||||
$80.0 million, 3.72% Note, due June 1, 2027 | 80,000 | 80,000 | ||||||
$19.0 million 4.15% Note, due December 1, 2024 | 17,925 | 18,016 | ||||||
$20.2 million 4.28% Note, due June 6, 2023 | 17,262 | 17,375 | ||||||
$14.0 million 4.34% Note, due September 11, 2024 | 12,638 | 12,709 | ||||||
$14.3 million 4.34% Note, due September 11, 2024 | 13,453 | 13,520 | ||||||
$15.1 million 4.99% Note, due January 6, 2024 | 13,563 | 13,635 | ||||||
$2.6 million 5.46% Note, due October 1, 2023 | 2,222 | 2,236 | ||||||
$50.0 million, 5.09% Note, due March 22, 2029 | 42,857 | 50,000 | ||||||
$50.0 million, 5.17% Note, due March 22, 2029 | 50,000 | 50,000 | ||||||
$3.0 million 6.78% Note, due December 28, 2023 | 3,002 | — | ||||||
$50.0 million, 3.71% plus 1.50% to 2.10% Note, due September 16, 2026 (2) | 50,000 | — | ||||||
Floating rate notes | ||||||||
Unsecured line of credit, SOFR plus 1.50% to 2.10%, due September 16, 2026 | 63,000 | 103,500 | ||||||
Total notes payable principal | 630,922 | 625,991 | ||||||
Less deferred financing costs, net of accumulated amortization | (513 | ) | (564 | ) | ||||
Total notes payable | $ | 630,409 | $ | 625,427 | ||||
(1) | |
Promissory note includes an interest rate swap that |
(2) | A portion of the |
On November 7, 2014, 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.
On December 16, 2022, Whitestone REIT (the “Company”) and its operating partnership, Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), amended its Note Purchase and Guarantee Agreement originally executed on March 22, 2019 (the “Existing Note Agreement”), pursuant to the terms and conditions of an Amendment No.1 to Note Purchase and Guaranty Agreement, dated as of December 16, 2022 (the Existing Note Purchase Agreement, as so amended, the “Amended Note Agreement”), by and among the Company and the Operating Partnership, together with certain subsidiary guarantors as initial guarantor parties thereto and The Prudential Insurance Company of America and the various other purchasers named therein.
Neither the term of the Existing Note Agreement, the interest rate, nor the principal amounts, were amended. The purpose of the amendment is to conform certain covenants and defined terms contained in the Amended Note Agreement with the Company’s recently amended unsecured revolving credit facility (the “2014 Facility”) with the lenders party thereto, withBank of Montreal, as administrative agent, Truist Bank, as syndication agent, and BMO Capital Markets Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,Corp., Truist Bank, Capital One, National Association, and U.S. Bank National Association, as co-lead arrangers and joint book runners, runners.
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 andDecember 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 secured recourse debt to total asset value ratio of 0.15 to 1.00; |
• | maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of 75% of the Company's total net worth as of December 31, 2021 plus 75% of the net proceeds from additional equity offerings (as defined therein); and |
• | minimum adjusted property NOI to implied unencumbered debt service ratio of 1.50 to 1.00. |
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured indebtedness not exceed the ratio of unsecured indebtedness to unencumbered asset pool of 0.60 to 1.00. 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 September 16,2022, we, through our Operating Partnership, entered into an unsecured credit facility (the “2022 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”“Administrative Agent”)., Truist Bank, as syndication agent, and BMO Capital Markets Corp., Truist Bank, Capital One, National Association, and U.S. Bank National Association, as co-lead arrangers and joint book runners. The 20142022 Facility amended and restated ourthe Company's previous unsecured revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into facility, dated January 31, 2019 (the First Amendment to the 2014“2019 Facility”).
The 2022 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.”
• | $250.0 million unsecured revolving credit facility with a maturity date of September 16,2026 (the “2022 Revolver”); |
• | $265.0 million unsecured term loan with a maturity date of January 31, 2028 (“Term Loan”). |
Borrowings under the 2014 Facility (the “Revolver”) to October 30, 2019 from November 7, 2018;
• | 2.16% plus 1.55% through October 28, 2022 |
• | 2.80% plus 1.55% from October 29, 2022 through January 31, 2024 |
• | 3.42% plus 1.55% from February 1, 2024 through January 31, 2028 |
The 2022 Facility also has a pricing provision where the applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.95% forcan be adjusted by an aggregate 0.02% per annum based on the Revolver and 1.35% to 2.25% for the Term Loans.Company’s performance on certain sustainability performance targets. Base Rate means, for any day, the higher of: (a) the Agent'sAdministrative Agent’s prime commercial rate, (b) the sum of (i) the rate per annum equal to the weighted average rate quoted byof the Agent by two or morerates on overnight 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 Governorstransactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York for such day, plus (ii) 0.50%, or (c) the sum of (i) Adjusted Term SOFR for a one-month tenor in effect on eurocurrency liabilities.such day plus (ii) 1.10%. Adjusted Term SOFR means, for any such day, the sum of (i) the SOFR-based term rate for the day two (2) business days prior and (ii) 0.10%.
The 2022 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 March 31, 2023, subject to any potential future paydowns or increases in the borrowing base, we have $136.9 million remaining availability under the 2022 Revolver. As of March 31, 2023, $378.0 million was drawn on the 2022 Facility and our unused borrowing capacity was $136.9 million, assuming that we use the proceeds of the 2022 Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base. The Company used $379.5 million of proceeds from the 2022 Facility to repay amounts outstanding under the 2019 Facility.
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 2022 Facility. The 2022 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 2022 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 $449 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 2022Facility. The2022 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 2022Facility 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.
As of September 30, 2017, $427.2 million was drawn on the Facility, andMarch 31, 2023, 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.
Scheduled maturities of our outstanding debt as of September 30, 2017March 31, 2023 were as follows (in thousands):
Year | Amount Due | |||
2023 (remaining) | $ | 23,634 | ||
2024 | 63,573 | |||
2025 | 17,143 | |||
2026 | 130,143 | |||
2027 | 97,143 | |||
Thereafter | 299,286 | |||
Total | $ | 630,922 | ||
| 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):
| 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 | ) | ||
March 31, 2023 | ||||
Balance Sheet Location | Estimated Fair Value | |||
Prepaid expenses and other assets | $ | 3,291 | ||
Accounts payable and accrued expenses | $ | (1,813 | ) | |
December 31, 2022 | ||||
Balance Sheet Location | Estimated Fair Value | |||
Prepaid expenses and other assets | $ | 6,065 | ||
On November 19, 2015, March 31, 2023, we, through our Operating Partnership, entered into an interest rate swap of $50 million (“Revolver Swap”) with Bank of Montreal that fixed the unhedged SOFR portion of the variable rate debt at 3.71%. The swap began on March 31, 2023 and will mature on September 16, 2026. We designated the interest rate swap as a cash flow hedge 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. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.
On September 16, 2022, we, through our Operating Partnership, entered an interest rate swap with Bank of Montreal that fixed the unhedged SOFR portion of Term Loan under the 2022 Facility at 3.32%. The notional amount of the swap begins at $100 million on October 29, 2022, and increases to $265 million on February 1, 2024, maturing on January 31, 2028. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned beginning and ending notionals of $20.7 million and $54.8 million of the swap, respectively, to U.S. Bank, National Association, beginning and ending notionals of $25.4 million and $67.2 million of the swap, respectively, to Truist Bank, beginning and ending notionals of $20.7 million and $54.8 million of the swap, respectively, to Capital One, National Association, and beginning and ending notionals of $5.9 million and $15.7 million of the swap, respectively, to Associated Bank. See Note 7 (Debt) for additional information regarding the 2022 Facility. We designated the interest rate swap as a cash flow hedge 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. 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 our $165 million term loan 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. Effective September 7, 2022, Regions Bank novated $29.4 million of the swap to Bank of Montreal. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on February 8, 2021 and will mature on January 31, 2024. Effective September 16, 2022, our contracts indexed to LIBOR were converted to SOFR. 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 a $100 million interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan 3our $100 million term loan under the 2018Facility 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 2018Facility. The swap began on November 30, 2015 and will maturematured 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 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.
A summary of our interest rate swap activity is as follows (in thousands):
| 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 | ) | |||
| Amount Recognized as Comprehensive Income (Loss) | Location of Income (Loss) Recognized in Earnings | Amount of Income (Loss) Recognized in Earnings (1) | |||||||
Three Months Ended March 31, 2023 | $ | (4,587 | ) | Interest expense | $ | 1,203 | |||
Three Months Ended March 31, 2022 | $ | 5,986 | Interest expense | $ | (1,331 | ) | |||
(1) | |
There was no ineffective portion of our interest rate swaps to recognize in earnings for the three |
9.EARNINGS PER SHARE
Basic earnings per share for our common shareholders is calculated by dividing net 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-classtwo-class method for the computation of basic and diluted earnings per share. During the three months ended September 30, 2017 March 31, 2023 and 2016, 1,083,6472022, 694,470 and 487,090770,184 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, 2017 and 2016, 1,089,876 and 487,510 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.
Three Months Ended March 31, | ||||||||
(in thousands, except per share data) | 2023 | 2022 | ||||||
Numerator: | ||||||||
Net Income | $ | 3,901 | $ | 7,189 | ||||
Less: Net income attributable to noncontrolling interests | (54 | ) | (111 | ) | ||||
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | 3,847 | $ | 7,078 | ||||
Denominator: | ||||||||
Weighted average number of common shares - basic | 49,424 | 49,145 | ||||||
Effect of dilutive securities: | ||||||||
Unvested restricted shares | 736 | 1,161 | ||||||
Weighted average number of common shares - dilutive | 50,160 | 50,306 | ||||||
Earnings Per Share: | ||||||||
Basic: | ||||||||
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | 0.08 | $ | 0.14 | ||||
Diluted: | ||||||||
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | 0.08 | $ | 0.14 | ||||
| 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 | ||||||||
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.
We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (
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,Equity Offerings
On April 25, 2017, we completedMay 20, 2022, our universal shelf registration statement on Form S-3 was declared effective by the SEC, which registers the issuance and sale by us of 8,018,500up to $500 million in securities from time to time, including common shares, including 1,018,500 commonpreferred shares, purchased by the underwriters upon exercise of their option to purchase additional commondebt securities, depositary 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, September 9, 2022, we entered into six amended and restatedeleven equity distribution agreements for an at-the-market equity distribution program (the “2015“2022 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.333-264881). 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 20152022 equity distribution agreements or terminate the 20152022 equity distribution agreements.
We have in the past, and expect to in the future, enter into at-the-market equity distribution programs providing for the issuance and sale of common shares. 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, capital needs and our determinations of the appropriate 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 Securities Act of 1933, as amended (the "Securities Act"). For the three months ended March 31, 2023 and 2022, we did not sell any common shares under the 2015 equity distribution agreements during the three months ended September 30, 2017. During the nine months ended September 30, 2017, we sold 567,302 common shares under the 2015 equity distribution agreements, with net proceeds to us of approximately $7.7 million. In connection with such sales, we paid compensation of approximately $139,000 to the sales agents. During the three months ended September 30, 2016, we sold 1,083,926 common shares under the 2015 equity distribution agreements, with net proceeds to us of approximately $16.1 million. In connection with such sales, we paid compensation of approximately $246,000 to the sales agents. During the nine months ended September 30, 2016, we sold 1,819,681 common shares under the 2015 equity distribution agreements, with net proceeds to us of approximately $26.7 million. In connection with such sales, we paid compensation of approximately $408,000 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,March 31, 2023, we owned a 97.3%98.6% 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
one OP unit for one 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 ofDistributions
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 2022 and the ninethree months ended September 30, 2017March 31, 2023 (in thousands, except per share/and per OP unit data):
Common Shares | Noncontrolling OP Unit Holders | Total | ||||||||||||||||||
Quarter Paid | Distributions Per Common Share | Amount Paid | Distributions Per OP Unit | Amount Paid | Amount Paid | |||||||||||||||
2023 | ||||||||||||||||||||
First Quarter | $ | 0.1200 | $ | 5,913 | $ | 0.1200 | $ | 83 | $ | 5,996 | ||||||||||
Total | $ | 0.1200 | $ | 5,913 | $ | 0.1200 | $ | 83 | $ | 5,996 | ||||||||||
2022 | ||||||||||||||||||||
Fourth Quarter | $ | 0.1200 | $ | 5,909 | $ | 0.1200 | $ | 83 | $ | 5,992 | ||||||||||
Third Quarter | 0.1200 | 5,901 | 0.1200 | 88 | 5,989 | |||||||||||||||
Second Quarter | 0.1200 | 5,880 | 0.1200 | 92 | 5,972 | |||||||||||||||
First Quarter | 0.1075 | 5,268 | 0.1075 | 83 | 5,351 | |||||||||||||||
Total | $ | 0.4675 | $ | 22,958 | $ | 0.4675 | $ | 346 | $ | 23,304 | ||||||||||
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.
| 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 | ||||||||||
12.INCENTIVE SHARE PLAN
The Company's 2008 Long-Term Equity Incentive 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 2008 Plan. On December 22, 2010, our board of trustees amended2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the 2008 Plan to allow for awards in or related to Class B common shares 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. The maximum aggregate number of common shares that may be issued under the 2008 Plan is increased upon each issuance of up to 3,433,831 common shares by Whitestone so that at any time the maximum number of common shares that may be issued under the 2008 Plan shall equal
The Compensation Committee of our board of trusteesadministered the 2008 Plan and administers the 20082018 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 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 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. On December 31, 2021, the remaining unvested 385,648 TSR Units that were granted on June 30, 2019 and September 30, 2019 vested at 0% attainment into 0 common shares. 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. On December 31, 2022, the remaining unvested 273,500 TSR Units that were granted on July 31, 2020 vested at 0% attainment into 0 common shares. The time-based restricted common share units have a grant date fair value of $5.83 and vest annually in three equal installments.
On June 30, 2021, the Compensation Committee approved the grant of an aggregate of 433,200 TSR Units and 433,200 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 $4.17 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2021 grant date to the end of the performance period, December 31, 2023. 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 $7.51 and vest annually in three equal installments. The 433,200 TSR Units granted on June 30, 2021 include 111,465 TSR Units that will be converted into the right to receive cash in the amount of the fair market value of the common shares to the extent that common shares are not available for issuance under the 2018 Plan.
On September 30, 2021, the Compensation Committee approved the grant of an aggregate of 5,500 time-based restricted common share units under the 2018 Plan to certain of our employees. The time-based common share units had a grant date fair value of $9.06 each and vest annually in three equal installments.
On March 28, 2022, the Compensation Committee approved the grant of an aggregate of 162,556 TSR Units and 162,556 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 $13.74 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2022 grant date to the end of the performance period, December 31, 2024. 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 $9.94 and vest annually in three equal installments.
A summary of the share-based incentive plan activity as of and for the ninethree months ended September 30, 2017March 31, 2023 is as follows:
| 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 | ||||||
Weighted Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Non-vested at January 1, 2023 | 1,220,945 | $ | 10.03 | |||||
Granted | — | — | ||||||
Vested | — | — | ||||||
Forfeited | (15,068 | ) | 9.76 | |||||
Non-vested at March 31, 2023 | 1,205,877 | 10.03 | ||||||
Available for grant at March 31, 2023 | 1,761,967 | |||||||
A summary of our non-vested and vested shares activity for the ninethree months ended September 30, 2017March 31, 2023 and years ended December 31, 2016, 2015 2022 and 20142021 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) | ||||||||||||||||
Three Months Ended March 31, 2023 | — | $ | — | — | $ | — | ||||||||||
Year Ended December 31, 2022 | 360,334 | $ | 11.61 | (519,003 | ) | $ | 3,442 | |||||||||
Year Ended December 31, 2021 | 904,215 | $ | 5.99 | (1,024,808 | ) | $ | 9,757 | |||||||||
| 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 | |||||||
Total compensation recognized in earnings for share-based payments was $2,704,000$829,000 and $3,042,000$(1,329,000) for the three months ended September 30, 2017 March 31, 2023 and 2016, respectively, and $7,545,000 and $6,886,000 for the nine months ended September 30, 2017 and 2016,2022, respectively.
Based on our current financial projections, we expect approximately 83%100% of the unvested awards, exclusive of 965,000455,000 CIC Units, to vest over the next 27 months. As of
We expect to record approximately $10.0$2.8 million in non-cash share-based compensation expense in 20172023 and $5.5$1.9 million subsequent to 2017.2023. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 1820 months.
13. GRANTS TO TRUSTEES
On December 21, 2016, each of our four19, 2022, five independent trustees and one trustee emeritus were granted 1,500a total of 35,222 common shares, which vested immediately.vest immediately and are prorated based on date appointed. The 7,50035,222 common shares granted to our trustees had a grant date fair value of $14.07$9.52 per share. On December 21, 2016, two of our independent trustees elected to receive a total of 3,128 common shares with a grant dateThe fair value of $14.07 in lieu of cash for board fees. The fair values of the shares granted wereduring the year ended December 31, 2022 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.
On May 3, 2017, December 2, 2022 we acquired Eldorado Plaza,Dana Park Pad, a property that meets our Community Centered Property
16.RELATED PARTY TRANSACTIONS
The Contribution. Prior to his employment termination, January 18, 2022, Mr. James C. Mastandrea, the former Chairman and Chief Executive Officer of Whitestone REIT, also served as the Chairman and Chief Executive Officer of Pillarstone REIT and beneficially owns approximately 66.7% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act of 1934, as amended (the “Exchange Act”)). He resigned as a member of the Board of Whitestone REIT on April 18, 2022. Prior to his employment termination, February 9, 2022, Mr. John J. Dee, the Company’s former Chief Operating Officer and Corporate Secretary, also served as the Senior Vice President and Chief Financial Officer of Pillarstone REIT and beneficially owns approximately 20.0% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act). In addition, Mr. Paul T. Lambert, a Trustee of the Company, also serves as a Trustee of Pillarstone REIT.
Pillarstone OP. The Company accounts for its investment in Pillarstone OP under the equity method.
During the ordinary course of business, we had 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. The management agreement was terminated on August 18, 2022.
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 March 31, 2023 and 2022 (in thousands):
Three Months Ended March 31, | |||||||||
Location of Revenue (Expense) | 2023 | 2022 | |||||||
Rent | Operating and maintenance | $ | (15 | ) | $ | (192 | ) | ||
Property management fee income | Management, transaction, and other fees | $ | — | $ | 140 | ||||
17.COMMITMENTS AND CONTINGENCIES
Litigation between the Company and Pillarstone REIT
On September 30, 201716, 2022, Pillarstone Capital REIT and 2016,Pillarstone Capital REIT Operating Partnership, L.P. filed suit against the Company and certain of its subsidiaries (Whitestone TRS, Inc. and Whitestone REIT Operating Partnership, L.P.) along with certain of its executives (Peter Tropoli, Christine Mastandrea, and David Holeman) in the District Court of Harris County, Texas, alleging claims relating to the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership, as ifwell as the termination of Management Agreements between Pillarstone Capital REIT Operating Partnership, L.P. and Whitestone TRS, Inc. On November 25, 2022, the claims against Peter Tropoli, Christine Mastandrea and David Holeman were dismissed. The claimants seek monetary relief in excess of $1,000,000 in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.
Former CEO Litigation
On February 23, 2022, the Company’s former CEO, James Mastandrea, filed suit against the Company and certain of its trustees (Nandita Berry, Jeff Jones, Jack Mahaffey, and David Taylor) and officers (David Holeman, Christine Mastandrea, Peter Tropoli) in the District Court of Harris County, Texas, alleging claims relating to the termination of his employment. Claimant purports to assert claims for breach of his employment contract, negligence, tortious interference with contract, civil conspiracy, and declaratory judgment. On September 12, 2022, the claim for breach of fiduciary duty was dismissed and a claim for negligence was added. The claimant seeks a maximum of $25 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.
Pillarstone Rights Plan
On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of BLVD Place had occurredPillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price.
As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option to pay the applicable redemption price in cash, based on January 1, 2016. Revenuethe market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and net income attributablePillarstone OP elects to BLVD Placepay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of $3.9 millionthe outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP.
Because Pillarstone REIT seeks to use the Pillarstone Rights Agreement to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s alleged (i) breach of the Pillarstone Partnership Agreement, (ii) breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, (iii) and $2.1 million, respectively,breach of the implied covenant of good faith and fair dealing under the Pillarstone Partnership Agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions.
On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption is not impaired while the underlying dispute is being considered by the Court.
While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.
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 been included ina material adverse effect on our financial position, 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.
18.SUBSEQUENT EVENTS
None.
| 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 | ||||||||||||
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(this “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, 2016.2022. 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.
Forward-Looking Statement
This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, pending acquisitions and the impact of such acquisitions on our financial condition and results of operations, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management'smanagement’s view only as of the date of this Report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:
• | the imposition of federal income taxes if we fail to qualify as a real estate investment trust (“REIT”) in any taxable year or forego an opportunity to ensure REIT status; |
• | uncertainties related to the national economy and the real estate industry, both in general and in our specific markets; |
• | legislative or regulatory changes, including changes to laws governing REITs; |
• | adverse economic or real estate developments or conditions in Texas or Arizona, Houston and Phoenix in particular, including the potential impact of resurgence of COVID-19 or other public health emergencies on our tenants’ ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments; |
• | our current geographic concentration in the Houston and Phoenix metropolitan area makes us susceptible to local economic downturns; |
• | natural disasters, such as floods and hurricanes, which may increase as a result of climate change may adversely affect our returns; |
• | increasing focus by stakeholders on environmental, social and governance matters; |
• | increases in interest rates, including as a result of inflation, operating costs or general and administrative expenses; |
• | financial institution disruptions; |
• | 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; |
• | harm to our reputation, ability to do business and results of operations as a result of improper conduct by our employees, agents or business partners; |
• | litigation risks; |
• | lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants; |
• | 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; |
• | geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine; |
• | the need to fund tenant improvements or other capital expenditures out of operating cash 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, 2016,2022, 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
In October 2006, our current management team joined the Company andwe adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties
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,March 31, 2023, we wholly owned or had a majority interest in 7257 commercial properties consisting of:
Consolidated Operating Portfolio
• | 51 |
Redevelopment, New Acquisitions Portfolio
• | one wholly owned property, Lake Woodlands Crossing, that |
• | five parcels of land held for future development that meet our Community Centered |
As of September 30, 2017,March 31, 2023, we had an aggregate of 1,6491,467 tenants. We have a diversified tenant base with our largest tenant comprising only 2.6%2.2% of our annualized rental revenues for the ninethree months ended September 30, 2017.March 31, 2023. 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 27251 new and renewal leases during the ninethree months ended September 30, 2017,March 31, 2023, totaling 727,223145,984 square feet and approximately $56.4$15.2 million in total lease value. This compares to 33685 new and renewal leases totaling 863,936216,083 square feet and approximately $57.1$23.0 million in total lease value during the same period in 2016.
We employed 10974 full-time employees as of September 30, 2017.March 31, 2023. 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.
Real Estate Partnership
As of March 31, 2023, 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 8,018,500 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,Pillarstone OP, which we contributedaccount for using the equity method.
COVID-19
The global health crisis caused by COVID-19 and the related responses intended to control its spread may continue to adversely affect business activity, particularly relating to our retail tenants, across the Operating Partnershipmarkets in exchange for OP units. The Operating Partnership used the net proceeds from the April Offering to repay a portionwhich we operate. In light of the Facility and for general corporate purposes, including funding a portionchanging nature of the purchase priceCOVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of BLVD Placeoperations and Eldorado Plaza.
Inflation
We anticipate that the majority of our leases will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results.
Rising Interest Rates
As of March 31, 2023, $63.0 million, or approximately 10% of our outstanding debt, was subject to floating interest rates of SOFR plus 1.60% and a 10 basis point credit spread adjustment 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 $0.6 million, respectively.
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$35.9 million and $25.5$34.1 million for the three months ended September 30, 2017March 31, 2023 and 2016, respectively, and $92.1 million and $76.1 million for the nine months ended September 30, 2017 and 2016, respectively.
Rental Income
We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal leases. 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 two years, we have seen modest improvement in the overall economyIncluded in our markets, which has allowed usadjustments to maintain overall occupancy rates, with slight increases in occupancy at certainrental revenue for the conversion of our properties,71 tenants to cash basis revenue was a straight-line rent reserve adjustment of $0.2 million and to recognize modest increases in rental rates. We expect this trend to continue in 2017.a bad debt adjustment of $0.2 million for the three months ending March 31, 2023.
We tend to lease space to smaller businesses that desire shorter term leases. As of September 30, 2017,March 31, 2023, approximately 21%28% of our GLA was subject to leases that expire prior to December 31, 2018.2024. Over the last twothree calendar years, we have renewed expiring leases coveringwith respect to approximately 77%69% 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, and we expect to actively pursueare carefully evaluating development and consummate additional acquisitions in the foreseeable future. We believe that over the next few years we will continue to have excellent opportunities to acquire quality properties at historically attractive prices.redevelopment activities on a case-by-case basis. 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
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
On May 3, 2017,December 2, 2022 we acquired Eldorado Plaza,Dana Park Pad, a property that meets our Community Centered Property
Leasing Activity
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.
| 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 | |||||||||||||||||
Number of Leases Signed | GLA Signed | Weighted Average Lease Term (2) | TI and Incentives per Sq. Ft. (3) | Contractual Rent Per Sq. Ft. (4) | Prior Contractual Rent Per Sq. Ft. (5) | Straight-lined Basis Increase (Decrease) Over Prior Rent | ||||||||||||||||||||||
Comparable (1) | ||||||||||||||||||||||||||||
Renewal Leases | 29 | 71,405 | 3.8 | $ | 1.69 | $ | 28.52 | $ | 24.53 | 23.0 | % | |||||||||||||||||
New Leases | 7 | 10,188 | 6.8 | 24.13 | 36.39 | 36.55 | 9.5 | % | ||||||||||||||||||||
Total | 36 | 81,593 | 4.1 | $ | 4.49 | $ | 29.50 | $ | 26.03 | 20.8 | % | |||||||||||||||||
Number of Leases Signed | GLA Signed | Weighted Average Lease Term (2) | TI and Incentives per Sq. Ft. (3) | Contractual Rent Per Sq. Ft. (4) | ||||||||||||||||
Total | ||||||||||||||||||||
Renewal Leases | 32 | 113,399 | 2.9 | $ | 1.22 | $ | 19.41 | |||||||||||||
New Leases | 19 | 32,585 | 6.0 | 23.00 | 26.72 | |||||||||||||||
Total | 51 | 145,984 | 3.6 | $ | 6.08 | $ | 21.05 | |||||||||||||
(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. |
(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. |
| 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, 2016,2022, under “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Comparison of the Three Months Ended September 30, 2017March 31, 2023 and 2016
The following table provides a summarygeneral comparison of our results of operations and other metrics for the three months ended September 30, 2017March 31, 2023 and 20162022 (dollars in thousands, except per share and per OP unit amounts):
| 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 | % | ||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Number of properties owned and operated | 57 | 60 | ||||||
Aggregate GLA (sq. ft.)(1) | 5,000,653 | 4,953,571 | ||||||
Ending occupancy rate - operating portfolio (1) | 93 | % | 91 | % | ||||
Ending occupancy rate | 93 | % | 91 | % | ||||
Total revenues | $ | 35,851 | $ | 34,123 | ||||
Total operating expenses | 23,724 | 21,051 | ||||||
Total other expense | 7,889 | 6,062 | ||||||
Income before equity investment in real estate partnership and income tax | 4,238 | 7,010 | ||||||
Equity (deficit) in earnings of real estate partnership | (218 | ) | 280 | |||||
Provision for income tax | (119 | ) | (101 | ) | ||||
Net income | 3,901 | 7,189 | ||||||
Less: Net income attributable to noncontrolling interests | 54 | 111 | ||||||
Net income attributable to Whitestone REIT | $ | 3,847 | $ | 7,078 | ||||
Funds from operations(2) | $ | 12,115 | $ | 15,466 | ||||
Property net operating income(3) | 25,605 | 25,080 | ||||||
Distributions paid on common shares and OP units | 5,996 | 5,351 | ||||||
Distributions per common share and OP unit | $ | 0.1200 | $ | 0.1075 | ||||
Distributions paid as a percentage of funds from operations | 49 | % | 35 | % | ||||
(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 |
(3) | |
For |
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 comparedMarch 31, 2023 to $25,508,000 for the three months ended September 30, 2016, an increase of $8,145,000, or 32%. The three months ended September 30, 2017 included $6,510,000 in increased revenuesMarch 31, 2022, Same Store includes properties owned during the entire period from Non-Same Store operations and $57,000 in increased revenues from our Consolidated Partnership.January 1, 2022 to March 31, 2023. 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. Same Store revenues increased $1,578,000 for the three months ended September 30, 2017 as compared to the same period in the prior year. We define “Same Stores” as properties that have been owned for the entire period being compared. For purposes of comparing the three months ended September 30, 2017 to the three months ended September 30, 2016, Same Stores include properties owned during the entire period from July 1, 2016 to 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.
Revenues. The primary components of property expensesrevenue are detailed in the table below (in thousands, except percentages):
Three Months Ended March 31, | ||||||||||||||||
Revenue | 2023 | 2022 | Change | % Change | ||||||||||||
Same Store | ||||||||||||||||
Rental revenues (1) | $ | 25,225 | $ | 24,248 | $ | 977 | 4 | % | ||||||||
Recoveries (2) | 9,902 | 9,090 | 812 | 9 | % | |||||||||||
Bad debt (3) | (333 | ) | (370 | ) | 37 | (10 | )% | |||||||||
Total rental | 34,794 | 32,968 | 1,826 | 6 | % | |||||||||||
Other revenues | 353 | 169 | 184 | 109 | % | |||||||||||
Same Store Total | 35,147 | 33,137 | 2,010 | 6 | % | |||||||||||
Non-Same Store and Management Fees | ||||||||||||||||
Rental revenues (4) | 515 | 596 | (81 | ) | (14 | )% | ||||||||||
Recoveries (4) | 179 | 247 | (68 | ) | (28 | )% | ||||||||||
Bad debt (4) | 9 | (3 | ) | 12 | (400 | )% | ||||||||||
Total rental | 703 | 840 | (137 | ) | (16 | )% | ||||||||||
Other revenues (4) | 1 | 6 | (5 | ) | (83 | )% | ||||||||||
Management fees | — | 140 | (140 | ) | (100 | )% | ||||||||||
Non-Same Store and Management Fees Total | 704 | 986 | (282 | ) | (29 | )% | ||||||||||
Total revenue | $ | 35,851 | $ | 34,123 | $ | 1,728 | 5 | % | ||||||||
(1) | The Same Store rental revenues increase of $977,000 resulted from an increase of $498,000 from higher average leased square feet from 4,558,948 to 4,652,646, and an increase of $479,000 from higher average rent per leased square foot from $21.28 to $21.69. Same Store rental revenues include straight-line rent write offs for tenants converted to cash basis accounting of a decrease of $ 151,000 and a decrease of $ 405,000 for the three months ended March 31, 2023 and 2022, respectively. |
(2) | The Same Store recoveries revenue increase of $812,000 is primarily attributable to increases in operating and maintenance expenses. Our recovery revenue from tenants generally increases as the related operating and real estate tax expenses increase. |
(3) | During the three months ended March 31, 2023 and 2022, Same Store bad debt includes an adjustment of $ 202,000 and $ 228,000, respectively, from cash basis accounting. |
(4) | Non-Same Store rental revenue includes Dana Park Pad (acquired on December 2, 2022), Lake Woodlands Crossing (acquired on December 21. 2022), Bissonnet/Beltway (sold on October 31, 2022), South Richey (sold on November 10, 2022), Desert Canyon (sold on November 16, 2022), Gilbert Tuscany Village Hard Corner (sold on November 14, 2022), and Pima Norte (sold on November 30, 2022). |
| Three Months Ended September 30, | |||||||||||||||
| Overall Property Expenses | 2017 | 2016 | Change | % Change | |||||||||||
| Real estate taxes | $ | 5,181 | $ | 3,414 | $ | 1,767 | 52 | % | |||||||
| Utilities | 1,594 | 1,354 | 240 | 18 | % | ||||||||||
| Contract services | 1,930 | 1,513 | 417 | 28 | % | ||||||||||
| Repairs and maintenance | 1,119 | 713 | 406 | 57 | % | ||||||||||
| Bad debt | 535 | 535 | — | — | % | ||||||||||
| Labor and other | 926 | 789 | 137 | 17 | % | ||||||||||
| Total property expenses | $ | 11,285 | $ | 8,318 | $ | 2,967 | 36 | % | |||||||
| Three Months Ended September 30, | |||||||||||||||
| Same Store Property Expenses | 2017 | 2016 | Change | % Change | |||||||||||
| Real estate taxes | $ | 3,346 | $ | 2,812 | $ | 534 | 19 | % | |||||||
| Utilities | 1,096 | 963 | 133 | 14 | % | ||||||||||
| Contract services | 1,300 | 1,247 | 53 | 4 | % | ||||||||||
| Repairs and maintenance | 833 | 585 | 248 | 42 | % | ||||||||||
| Bad debt | 327 | 436 | (109 | ) | (25 | )% | |||||||||
| Labor and other | 606 | 580 | 26 | 4 | % | ||||||||||
| Total property expenses | $ | 7,508 | $ | 6,623 | $ | 885 | 13 | % | |||||||
| Three Months Ended September 30, | ||||||||||||||
| Non-Same Store Property Expenses | 2017 | 2016 | Change | % Change | ||||||||||
| Real estate taxes | $ | 934 | $ | 12 | $ | 922 | Not meaningful | |||||||
| Utilities | 244 | 11 | 233 | Not meaningful | ||||||||||
| Contract services | 347 | 5 | 342 | Not meaningful | ||||||||||
| Repairs and maintenance | 108 | 9 | 99 | Not meaningful | ||||||||||
| Bad debt | 148 | (2 | ) | 150 | Not meaningful | |||||||||
| Labor and other | 102 | 16 | 86 | Not meaningful | ||||||||||
| Total property expenses | $ | 1,883 | $ | 51 | $ | 1,832 | Not meaningful | |||||||
Operating expenses. The real estate tax increase was comprisedprimary components 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 largeroperating 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.
| 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 | % | |||||||
Three Months Ended March 31, | ||||||||||||||||
Operating Expenses | 2023 | 2022 | Change | % Change | ||||||||||||
Same Store | ||||||||||||||||
Operating and maintenance (1) | $ | 6,009 | $ | 5,336 | $ | 673 | 13 | % | ||||||||
Real estate taxes (2) | 4,614 | 4,252 | 362 | 9 | % | |||||||||||
Same Store total | 10,623 | 9,588 | 1,035 | 11 | % | |||||||||||
Non-Same Store and affiliated company rents | ||||||||||||||||
Operating and maintenance (3) | 62 | 197 | (135 | ) | (69 | )% | ||||||||||
Real estate taxes (3) | 94 | 115 | (21 | ) | (18 | )% | ||||||||||
Affiliated company rents (4) | 15 | 192 | (177 | ) | (92 | )% | ||||||||||
Non-Same Store and affiliated company rents total | 171 | 504 | (333 | ) | (66 | )% | ||||||||||
Depreciation and amortization | 7,846 | 7,910 | (64 | ) | (1 | )% | ||||||||||
General and administrative (5) | 5,084 | 3,049 | 2,035 | 67 | % | |||||||||||
Total operating expenses | $ | 23,724 | $ | 21,051 | $ | 2,673 | 13 | % | ||||||||
(1) | The $673,000 Same Store operating and maintenance cost increase included $254,000 in increased labor, $210,000 in increased contract services costs, $153,000 in increased repair costs, and $56,000 in other costs. |
(2) | Same Store real estate taxes increase includes $288,000 less of real estate property tax refunds from successful property tax protests. |
(3) | Non-Same Store rental revenue includes Dana Park Pad (acquired on December 2, 2022), Lake Woodlands Crossing (acquired on December 21. 2022), Bissonnet/Beltway (sold on October 31, 2022), South Richey (sold on November 10, 2022), Desert Canyon (sold on November 16, 2022), Gilbert Tuscany Village Hard Corner (sold on November 14, 2022), and Pima Norte (sold on November 30, 2022). |
(4) | Affiliated company rents are spaces that we lease from Pillarstone OP. Eight lease agreements were terminated on August 23, 2022, and the two remaining leases expired on January 31, 2023 and February 28, 2023. |
(5) | The general and administrative expense increase is attributable to increased share based compensation of $2,168,000, $86,000 in legal expenses, and $32,000 in other costs, offset by decreases from $126,000 in payroll costs and $125,000 in professional fees. The increase in share based compensation during the three months ended March 31, 2023 compared to the prior year period primarily relates to forfeitures from the leadership changes in 2022. |
| 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 | % | |||||||
Other expenses decreased approximately $637,000, or 10%,(income). The primary components of other expenses (income) 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 feesMarch 31, 2023 and $109,000 in decreased acquisition expenses, offset by $50,000 in increased other expenses.
| 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 | % | ||||
| Nine Months Ended September 30, | |||||||||||||||
| Overall Property Expenses | 2017 | 2016 | Change | % Change | |||||||||||
| Real estate taxes | $ | 13,588 | $ | 10,072 | $ | 3,516 | 35 | % | |||||||
| Utilities | 4,091 | 3,590 | 501 | 14 | % | ||||||||||
| Contract services | 5,361 | 4,507 | 854 | 19 | % | ||||||||||
| Repairs and maintenance | 3,212 | 2,445 | 767 | 31 | % | ||||||||||
| Bad debt | 1,442 | 1,298 | 144 | 11 | % | ||||||||||
| Labor and other | 2,867 | 2,541 | 326 | 13 | % | ||||||||||
| Total property expenses | $ | 30,561 | $ | 24,453 | $ | 6,108 | 25 | % | |||||||
| Nine Months Ended September 30, | |||||||||||||||
| Same Store Property Expenses | 2017 | 2016 | Change | % Change | |||||||||||
| Real estate taxes | $ | 9,883 | $ | 8,382 | $ | 1,501 | 18 | % | |||||||
| Utilities | 2,800 | 2,597 | 203 | 8 | % | ||||||||||
| Contract services | 3,799 | 3,746 | 53 | 1 | % | ||||||||||
| Repairs and maintenance | 2,428 | 1,946 | 482 | 25 | % | ||||||||||
| Bad debt | 1,107 | 1,170 | (63 | ) | (5 | )% | |||||||||
| Labor and other | 1,941 | 1,900 | 41 | 2 | % | ||||||||||
| Total property expenses | $ | 21,958 | $ | 19,741 | $ | 2,217 | 11 | % | |||||||
| Nine Months Ended September 30, | ||||||||||||||
| Non-Same Store Property Expenses | 2017 | 2016 | Change | % Change | ||||||||||
| Real estate taxes | $ | 1,537 | $ | 56 | $ | 1,481 | Not meaningful | |||||||
| Utilities | 403 | 38 | 365 | Not meaningful | ||||||||||
| Contract services | 678 | 22 | 656 | Not meaningful | ||||||||||
| Repairs and maintenance | 237 | (2 | ) | 239 | Not meaningful | |||||||||
| Bad debt | 213 | (25 | ) | 238 | Not meaningful | |||||||||
| Labor and other | 231 | 84 | 147 | Not meaningful | ||||||||||
| Total property expenses | $ | 3,299 | $ | 173 | $ | 3,126 | Not meaningful | |||||||
Three Months Ended March 31, | ||||||||||||||||
Other Expenses (Income) | 2023 | 2022 | Change | % Change | ||||||||||||
Interest expense (1) | $ | 7,903 | $ | 6,061 | $ | 1,842 | 30 | % | ||||||||
(Gain) loss on sale or disposal of assets, net | 6 | 15 | (9 | ) | (60 | )% | ||||||||||
Interest, dividend and other investment income | (20 | ) | (14 | ) | (6 | ) | 43 | % | ||||||||
Total other expense | $ | 7,889 | $ | 6,062 | $ | 1,827 | 30 | % | ||||||||
(1) | The $1,842,000 increase in interest expense is attributable to rising interest rates, which led to an increase in our effective interest rate to 4.86% for the three months ended March 31, 2023 as compared to 3.60% for the three month ended March 31, 2022, resulting in a $1,978,000 increase in interest expense partially offset by a decrease in our average outstanding notes payable balance of $15,442,000. |
Equity (deficit) in earnings of real estate taxes.
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.
Three Months Ended March 31, | Increase | % Increase | ||||||||||||||
2023 | 2022 | (Decrease) | (Decrease) | |||||||||||||
Same Store (50 properties, excluding development land) | ||||||||||||||||
Property revenues | ||||||||||||||||
Rental | $ | 34,794 | $ | 32,968 | $ | 1,826 | 6 | % | ||||||||
Management, transaction and other fees | 353 | 169 | 184 | 109 | % | |||||||||||
Total property revenues | 35,147 | 33,137 | 2,010 | 6 | % | |||||||||||
Property expenses | ||||||||||||||||
Property operation and maintenance | 6,009 | 5,336 | 673 | 13 | % | |||||||||||
Real estate taxes | 4,614 | 4,252 | 362 | 9 | % | |||||||||||
Total property expenses | 10,623 | 9,588 | 1,035 | 11 | % | |||||||||||
Total property revenues less total property expenses | 24,524 | 23,549 | 975 | 4 | % | |||||||||||
Same Store straight-line rent adjustments | (439 | ) | (321 | ) | (118 | ) | 37 | % | ||||||||
Same Store amortization of above/below market rents | (218 | ) | (218 | ) | — | — | % | |||||||||
Same Store lease termination fees | (214 | ) | (9 | ) | (205 | ) | 2278 | % | ||||||||
Same Store NOI(1) | $ | 23,653 | $ | 23,001 | $ | 652 | 3 | % | ||||||||
(1) | See below for a reconciliation of property net operating income to net income. |
| 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 | % | ||||||||||
Three Months Ended March 31, | ||||||||
PROPERTY NET OPERATING INCOME (“NOI”) | 2023 | 2022 | ||||||
Net income attributable to Whitestone REIT | $ | 3,847 | $ | 7,078 | ||||
General and administrative expenses | 5,084 | 3,049 | ||||||
Depreciation and amortization | 7,846 | 7,910 | ||||||
(Equity) deficit in earnings of real estate partnership(1) | 218 | (280 | ) | |||||
Interest expense | 7,903 | 6,061 | ||||||
Interest, dividend and other investment income | (20 | ) | (14 | ) | ||||
Provision for income taxes | 119 | 101 | ||||||
Management fee, net of related expenses | — | 52 | ||||||
Loss on sale or disposal of assets, net | 6 | 15 | ||||||
NOI of real estate partnership (pro rata)(1) | 548 | 997 | ||||||
Net income attributable to noncontrolling interests | 54 | 111 | ||||||
NOI | $ | 25,605 | $ | 25,080 | ||||
Non-Same Store NOI (2) | (533 | ) | (534 | ) | ||||
NOI of real estate partnership (pro rata)(1) | (548 | ) | (997 | ) | ||||
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata) | 24,524 | 23,549 | ||||||
Same Store straight-line rent adjustments | (439 | ) | (321 | ) | ||||
Same Store amortization of above/below market rents | (218 | ) | (218 | ) | ||||
Same Store lease termination fees | (214 | ) | (9 | ) | ||||
Same Store NOI (3) | $ | 23,653 | $ | 23,001 | ||||
(1) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated equity in earnings and pro rata share of NOI of real estate partnership based on the information available to us at the time of this report. Please refer to Note 6 for the full disclosure. |
(2) | 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 March 31, 2023 to the three months ended March 31, 2022, Non-Same Store includes properties acquired between January 1, 2022 and March 31, 2023 and properties sold between January 1, 2022 and March 31, 2023, but not included in discontinued operations. |
(3) | We define “Same Store” as properties that have been owned during the entire period being compared. For purposes of comparing the three months ended March 31, 2023 to the three months ended March 31, 2022, Same Store includes properties owned before January 1, 2022 and not sold before March 31, 2023. Straight-line rent adjustments, above/below market rents, and lease termination fees are excluded. |
| 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 | )% | ||||||
| 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 | % | |||||||
Reconciliation of Non-GAAP Financial Measures
Funds From Operations (“FFO”(NAREIT) (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to common shareholders computedWhitestone REIT (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.
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.
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 | 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 | ||||||||
Three Months Ended March 31, | ||||||||
FFO (NAREIT) | 2023 | 2022 | ||||||
Net income attributable to Whitestone REIT | $ | 3,847 | $ | 7,078 | ||||
Adjustments to reconcile to FFO:(1) | ||||||||
Depreciation and amortization of real estate | 7,805 | 7,868 | ||||||
Depreciation and amortization of real estate assets of real estate partnership (pro rata)(2) | 403 | 394 | ||||||
Loss on sale or disposal of assets, net | 6 | 15 | ||||||
Net income attributable to noncontrolling interests | 54 | 111 | ||||||
FFO (NAREIT) | $ | 12,115 | $ | 15,466 | ||||
(1) | Includes pro-rata share attributable to |
(2) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated depreciation and amortization of real estate assets based on the information available to us at the time of this report. Please refer to Note 6 for the full disclosure. |
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,equity or deficit in earnings of real estate partnership, interest expense, interest, dividend and other investment income, provision for income taxes, gain on sale of property from discontinued operations, management fee (net of related expenses) and gain or loss on sale or disposition of assets, and includes NOI of real estate partnership (pro rata) and net income attributable to noncontrolling interest, it provides a performance measure that, when compared year over year,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 expendituresexpenditure and leasing costs necessary to maintain the operating performance of our properties.
Below is the calculation of NOI and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| PROPERTY NET OPERATING INCOME | 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 | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
PROPERTY NET OPERATING INCOME | 2023 | 2022 | ||||||
Net income attributable to Whitestone REIT | $ | 3,847 | $ | 7,078 | ||||
General and administrative expenses | 5,084 | 3,049 | ||||||
Depreciation and amortization | 7,846 | 7,910 | ||||||
(Equity) deficit in earnings of real estate partnership | 218 | (280 | ) | |||||
Interest expense | 7,903 | 6,061 | ||||||
Interest, dividend and other investment income | (20 | ) | (14 | ) | ||||
Provision for income taxes | 119 | 101 | ||||||
Management fee, net of related expenses | — | 52 | ||||||
Loss on sale or disposal of assets, net | 6 | 15 | ||||||
NOI of real estate partnership (pro rata)(1) | 548 | 997 | ||||||
Net income attributable to noncontrolling interests | 54 | 111 | ||||||
NOI | $ | 25,605 | $ | 25,080 | ||||
(1) | We rely on reporting provided to us by Pillarstone OP's general partner for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of March 31, 2023 have not been made available to us, we have estimated equity in earnings and pro rata share of NOI of real estate partnership based on the information available to us at the time of this report. Please refer to Note 6 for the full disclosure. |
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$0.1200 per common 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 ninethree months ended September 30, 2017,March 31, 2023, our cash provided fromby operating activities was $27,999,000$4,915,000 and our total distributions were $30,805,000. $5,996,000. Therefore, we had distributions in excess of cash flow from operations of approximately $2,806,000. $1,081,000. 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 abilityOn February 22, 2022, the Company announced an increase to incur additional debtits quarterly distribution to $0.12 per common share and OP unit, equal to a monthly distribution of $0.04, beginning with the April 2022 distribution. The Board will be dependent on a numberregularly reassess the dividend in light of factors, including our degreeeconomic conditions. As of leverage,March 31, 2023, subject to any potential future paydowns in the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. base, we have $136.9 million remaining availability under the revolving credit facility.
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.
On May 3, 2017, we acquired Eldorado Plaza. We funded20, 2022, our universal shelf registration statement on Form S-3 was declared effective by the purchase priceSEC, which registers the issuance and sale by us of Eldorado Plazaup to $500 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and related transaction expenses with borrowings under our Facility and a portion of the net proceeds from the April Offering. subscription rights.
On May 26, 2017, we acquired BLVD Place. We funded the purchase price of BLVD Place 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.
To the extent we sell shares in the future under the 2022 equity distribution agreements, with net proceeds to us of approximately $7.7 million. In connection with such sales, we paid compensation of approximately $139,000 to the sales agents. We have used and anticipate using net proceeds from common shares issued pursuant to the 2015 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.
We expect that our rental income will increase as we continue to acquire additional properties, subsequently increasing our cash flows generated from operating activities. We intend to finance the continued acquisition of such additional properties through equity issuances and through debt financing.
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 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
We had cash, and cash equivalents and restricted cash of approximately $6,338,000$3,672,000 as of September 30, 2017,March 31, 2023, as compared to $4,168,000$6,355,000 on December 31, 2016. The increase2022. Sources and uses of $2,170,000 was primarilycash during the result of the following:
Sources of Cash
• | Cash flow from operations of $4,915,000 for the three months ended March 31, 2023, compared to $4,915,000 for the three months ended March 31, 2022; |
Uses of Cash
• | Payment of distributions to common shareholders and OP unit holders of $5,996,000 for the three months ended March 31, 2023, compared to $5,351,000 for the three months ended March 31, 2022; |
• | Additions to real estate of $3,529,000 for the three months ended March 31, 2023, compared to $3,359,000 for the three months ended March 31, 2022; |
• | Payments of notes payable of $7,571,000 for the three months ended March 31, 2023, compared to $863,000 for the three months ended March 31, 2022; |
• | Payment of finance lease liability of $2,000 for the three months ended March 31, 2023, compared to $0 for the three months ended March 31, 2022; |
| • | Proceeds from credit facility of $9,500,000 for the three months ended March 31, 2023, compared to $0 for the three months ended March 31, 2022 |
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Debt consisted of the following as of the dates indicated (in thousands):
| 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 | |||||
Description | March 31, 2023 | December 31, 2022 | ||||||
Fixed rate notes | ||||||||
$265.0 million, 3.18% plus 1.45% to 2.10% Note, due January 31, 2028 (1) | $ | 265,000 | $ | 265,000 | ||||
$80.0 million, 3.72% Note, due June 1, 2027 | 80,000 | 80,000 | ||||||
$19.0 million 4.15% Note, due December 1, 2024 | 17,925 | 18,016 | ||||||
$20.2 million 4.28% Note, due June 6, 2023 | 17,262 | 17,375 | ||||||
$14.0 million 4.34% Note, due September 11, 2024 | 12,638 | 12,709 | ||||||
$14.3 million 4.34% Note, due September 11, 2024 | 13,453 | 13,520 | ||||||
$15.1 million 4.99% Note, due January 6, 2024 | 13,563 | 13,635 | ||||||
$2.6 million 5.46% Note, due October 1, 2023 | 2,222 | 2,236 | ||||||
$50.0 million, 5.09% Note, due March 22, 2029 | 42,857 | 50,000 | ||||||
$50.0 million, 5.17% Note, due March 22, 2029 | 50,000 | 50,000 | ||||||
$3.0 million 6.78% Note, due December 28, 2023 | 3,002 | — | ||||||
$50.0 million, 3.71% plus 1.50% to 2.10% Note, due September 16, 2026 (2) | 50,000 | — | ||||||
Floating rate notes | ||||||||
Unsecured line of credit, SOFR plus 1.50% to 2.10%, due September 16, 2026 | 63,000 | 103,500 | ||||||
Total notes payable principal | 630,922 | 625,991 | ||||||
Less deferred financing costs, net of accumulated amortization | (513 | ) | (564 | ) | ||||
Total notes payable | $ | 630,409 | $ | 625,427 | ||||
(1) | Promissory note includes an interest rate swap that |
(2) | A portion of the |
Scheduled maturities of our outstanding debt as of March 31, 2023 were as follows (in thousands):
Year | Amount Due | |||
2023 (remaining) | $ | 23,634 | ||
2024 | 63,573 | |||
2025 | 17,143 | |||
2026 | 130,143 | |||
2027 | 97,143 | |||
Thereafter | 299,286 | |||
Total | $ | 630,922 | ||
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 price of the acquisition of BLVD Place.
The 2022 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.”
• | $250.0 million unsecured revolving credit facility with a maturity date of September 16, 2026 (the “2022 Revolver”); |
• | $265.0 million unsecured term loan with a maturity date of January 31, 2028 (“Term Loan”). |
Borrowings under the 2014 Facility (the “Revolver”) to October 30, 2019 from November 7, 2018;
| • | 2.16% plus 1.55% through October 28, 2022 |
• | 2.80% plus 1.55% from October 29, 2022 through January 31, 2024 |
• | 3.42% plus 1.55% from February 1, 2024 through January 31, 2028 |
The 2022 Facility also has a pricing provision where the applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.95% forcan be adjusted by an aggregate 0.02% per annum based on the Revolver and 1.35% to 2.25% for the Term Loans.Company’s performance on certain sustainability performance targets. Base Rate means, for any day, the higher of: (a) the Agent'sAdministrative Agent’s prime commercial rate, (b) the sum of (i) the rate per annum equal to the weighted average rate quoted byof the Agent by two or morerates on overnight 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 Governorstransactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York for such day, plus (ii) 0.50%, or (c) the sum of (i) Adjusted Term SOFR for a one-month tenor in effect on eurocurrency liabilities.such day plus (ii) 1.10%. Adjusted Term SOFR means, for any such day, the sum of (i) the SOFR-based term rate for the day two (2) business days prior and (ii) 0.10%.
The 2022 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 March 31, 2023, subject to any potential future paydowns or increases in the borrowing base, we have $136.9 millionremaining availability under the 2022 Revolver. As of March 31, 2023, $378.0 million was drawn on the 2022 Facility and our unused borrowing capacity was $136.9 million, assuming that we use the proceeds of the 2022 Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base. The Company used $379.5 million of proceeds from the 2022 Facility to repay amounts outstanding under the 2019 Facility.
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 2022 Facility. The 2022 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 2022 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 secured recourse debt to total asset value ratio of 0.15 to 1.00; |
• | maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of 75% of the Company's total net worth as of December 31, 2021 plus 75% of the net proceeds from additional equity offerings (as defined therein); and |
• | minimum adjusted property NOI to implied unencumbered debt service ratio of 1.50 to 1.00. |
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2022 Facility. The 2022 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 2022 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 March 22, 2019, we, through 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.
The principal of the lenders party theretoSeries A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Agent. PursuantNotes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the Second Amendment, followingexcess, if any, of the Contribution, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC were permitteddiscounted value of the remaining scheduled payments with respect to remain Material Subsidiariesthe Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Facility)Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and Guarantorsunpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:
• | maximum total indebtedness to total asset value ratio of 0.60 to 1.00; |
• | maximum secured debt to total asset value ratio of 0.40 to 1.00; |
• | minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00; |
• | maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and |
• | maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein). |
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Facility and their respective Pillarstone Properties were each permitted to remain an Eligible Property (as definedNote Agreement could result in the Facility)Purchasers accelerating the payment of all obligations under the Notes. The financial and be includedrestrictive covenants and default provisions in the Borrowing Base (as definedNote Agreement are substantially similar to those contained in the Facility)Operating Partnership’s existing credit facility.
Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and will not be registered under the Facility. In addition,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 December 8, 2016, Pillarstone entered into the Limited Guarantee (the “Limited Guarantee”) withexemption from registration provided by Section 4(a)(2) of 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. Securities Act.
As of September 30, 2017, Pillarstone accounted for approximately $15.5 million of the total amount drawn on the Facility.
| Year | Amount Due | |||
| 2017 | $ | 8,767 | ||
| 2018 | 12,136 | |||
| 2019 | 235,249 | |||
| 2020 | 82,827 | |||
| 2021 | 51,918 | |||
| Thereafter | 273,727 | |||
| Total | $ | 664,624 | ||
Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding debt.
Capital Expenditures
We continually evaluate our properties’ performance and value. 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.
The following is a summary of the Company's capital expenditures for the three month periods ended March 31, 2023 and 2022 (in thousands):
| Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Capital expenditures: | ||||||||
Tenant improvements and allowances | $ | 1,463 | $ | 2,592 | ||||
Developments / redevelopments | 543 | 385 | ||||||
Leasing commissions and costs | 414 | 633 | ||||||
Maintenance capital expenditures | 1,523 | 382 | ||||||
Total capital expenditures | $ | 3,943 | $ | 3,992 | ||||
Distributions
U.S. federal income tax law generally requires that a REIT distribute annually to its shareholders at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates on any taxable income that it does not distribute. We currently, and intend to continue to, accrue distributions quarterly and make distributions in three monthly installments following the end of each quarter. For a discussion of our cash flow as compared to dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
The timing and frequency of our distributions are authorized and declared by our board of trustees in exercise of its business judgment based upon a number of factors, including:
• | our funds from operations; |
• | our debt service requirements; |
• | our capital expenditure requirements for our properties; |
• | our taxable income, combined with the annual distribution requirements necessary to maintain REIT qualification; |
• | requirements of Maryland law; |
• | our overall financial condition; and |
• | other factors deemed relevant by our board of trustees. |
Any distributions we make will be at the discretion of our board of trustees and we cannot provide assurance that our distributions will be made or sustained in the future.
On February 22, 2022, the Company announced an increase to its quarterly distribution to $0.12 per common share and OP unit, equal to a monthly distribution of $0.04, beginning with the April 2022 distribution. The Board will continue to regularly reassess the dividend level.
During the ninethree months ended September 30, 2017, there were no material changes outsideMarch 31, 2023, we paid distributions to our common shareholders and OP unit holders of $6.0 million, compared to $5.4 million in the ordinary coursethree months ended March 31, 2022. Common shareholders and OP unit holders receive monthly distributions. Payments of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2016.
| 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 | ||||||||||
Common Shares | Noncontrolling OP Unit Holders | Total | ||||||||||||||||||
Quarter Paid | Distributions Per Common Share | Amount Paid | Distributions Per OP Unit | Amount Paid | Amount Paid | |||||||||||||||
2023 | ||||||||||||||||||||
First Quarter | $ | 0.1200 | $ | 5,913 | $ | 0.1200 | $ | 83 | $ | 5,996 | ||||||||||
Total | $ | 0.1200 | $ | 5,913 | $ | 0.1200 | $ | 83 | $ | 5,996 | ||||||||||
2022 | ||||||||||||||||||||
Fourth Quarter | $ | 0.1200 | $ | 5,909 | $ | 0.1200 | $ | 83 | $ | 5,992 | ||||||||||
Third Quarter | 0.1200 | 5,901 | 0.1200 | 88 | 5,989 | |||||||||||||||
Second Quarter | 0.1200 | 5,880 | 0.1200 | 92 | 5,972 | |||||||||||||||
First Quarter | 0.1075 | 5,268 | 0.1075 | 83 | 5,351 | |||||||||||||||
Total | $ | 0.4675 | $ | 22,958 | $ | 0.4675 | $ | 346 | $ | 23,304 | ||||||||||
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.
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.
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, $437.4March 31, 2023, $567.9 million, or approximately 66%90% 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, 2017March 31, 2023 of approximately 3.82%4.70% per annum with scheduled maturities ranging from 20172023 to 2027 (see2029. See Note 7 (Debt) to the accompanying consolidated financial statements for further detail).detail. Holding other variables constant, a 1% increase or decrease in interest rates would cause a $17.7$18.8 million decline or increase, respectively, in the fair value for our fixed rate debt.
Variable Interest Rate Debt
As of September 30, 2017, $227.2March 31, 2023, $63.0 million, or approximately 34%10% of our outstanding debt, was subject to floating interest rates of LIBORSOFR plus 1.40%1.50% to 1.95%2.10% 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$0.6 million, respectively.
Credit Risk
Credit risk may be increased as a result of macroeconomic factors such as inflation, rising interest rates, and financial institution disruptions. Actions taken by the U.S. and international governments to decrease the impact of inflation, including rising interest rates, may 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.
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 March 31, 2023, 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).
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
Litigation between the Company and Pillarstone REIT
On September 16, 2022, Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership, L.P. filed suit against the Company and certain of its subsidiaries (Whitestone TRS, Inc. and Whitestone REIT Operating Partnership, L.P.) along with certain of its executives (Peter Tropoli, Christine Mastandrea, and David Holeman) in the District Court of Harris County, Texas, alleging claims relating to the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership, as well as the termination of Management Agreements between Pillarstone Capital REIT Operating Partnership, L.P. and Whitestone TRS, Inc. On November 25, 2022, the claims against Peter Tropoli, Christine Mastandrea and David Holeman were dismissed. The claimants seeks monetary relief in excess of $1,000,000 in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.
Former CEO Litigation
On February 23, 2022, the Company’s former CEO, James Mastandrea, filed suit against the Company and certain of its trustees (Nandita Berry, Jeff Jones, Jack Mahaffey, and David Taylor) and officers (David Holeman, Christine Mastandrea, Peter Tropoli) in the District Court of Harris County, Texas, alleging claims relating to the termination of his employment. Claimant purports to assert claims for breach of his employment contract, negligence, tortious interference with contract, civil conspiracy, and declaratory judgment. On September 12, 2022, the claim for breach of fiduciary duty was dismissed and a claim for negligence was added. The claimant seeks a maximum of $25 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.
Pillarstone Rights Plan
On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of Pillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price.
As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option to pay the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares.
To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP. Because Pillarstone REIT seeks to use the Pillarstone Rights Agreement to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s alleged (i) breach of the Pillarstone Partnership Agreement, (ii) breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, and (iii) breach of the implied covenant of good faith and fair dealing under the Pillarstone Partnership Agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions.
On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption is not impaired while the underlying dispute is being considered by the Court. While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.
There 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, 2016 and Quarterly Report on Form 10-Q for the period ended March 31, 2017.2022.
(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 March 31, 2023, 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 March 31, 2023. |
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2023 - January 31, 2023 | ||||||||||||||||
| — | $ | — | N/A | N/A | ||||||||||||
February 1, 2023 - February 28, 2023 | — | — | N/A | N/A | ||||||||||||
March 1, 2023 - March 31, 2023 | — | — | N/A | N/A | ||||||||||||
Total | — | $ | — |
(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. |
None.
Not applicable.
None.
The exhibits listed on the accompanying Exhibit Index are filed, furnished and incorporated by reference (as stated therein) as part of this Report.
Exhibit No. | Description |
101 | The following financial information of the Registrant for the quarter ended March 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three month periods ended March 31, 2023 and 2022 (unaudited), (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, 2023 and 2022 (unaudited), (iv) the Consolidated Statement of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited). |
104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document and in Exhibit 101. |
________________________
* | Filed herewith. |
** | Furnished herewith. |
+ | Denotes management contract or compensatory plan or arrangement. |
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: | May 3, 2023 | /s/ David K. Holeman | ||
David K. Holeman | ||||
Chief Executive Officer | ||||
(Principal Executive |
Date: | May 3, 2023 | /s/ John S. Hogan | ||
John S. Hogan | ||||
Chief Financial Officer | ||||
(Principal Financial and Principal Accounting Officer) | ||||