Whitestone REIT(WSR) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's analysis of Whitestone REIT's financial condition and results of operations for the first quarter of 2023 Financial Statements This section presents Whitestone REIT's unaudited consolidated financial statements for Q1 2023, including balance sheets, income statements, equity changes, cash flows, and detailed notes Consolidated Balance Sheets As of March 31, 2023, total assets were $1.09 billion, a slight decrease from $1.10 billion at year-end 2022. Total liabilities decreased marginally to $675.4 million, while total equity decreased to $418.5 million from $424.5 million, primarily due to an unrealized loss on cash flow hedges and distributions paid Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,093,893 | $1,102,767 | | Total real estate assets | $986,966 | $990,755 | | Cash and cash equivalents | $3,479 | $6,166 | | Total Liabilities | $675,367 | $678,313 | | Notes payable | $630,409 | $625,427 | | Total Equity | $418,526 | $424,454 | Consolidated Statements of Operations and Comprehensive Income (Loss) For the first quarter of 2023, total revenues increased to $35.9 million from $34.1 million in the prior-year period. However, net income attributable to Whitestone REIT decreased significantly to $3.8 million from $7.1 million, driven by higher general & administrative and interest expenses. This resulted in a diluted EPS of $0.08, down from $0.14 in Q1 2022 Q1 2023 vs. Q1 2022 Performance (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Revenues | $35,851 | $34,123 | | Total Operating Expenses | $23,724 | $21,051 | | Net Income Attributable to Whitestone REIT | $3,847 | $7,078 | | Diluted EPS | $0.08 | $0.14 | - The decrease in net income was primarily due to a $2.0 million increase in general and administrative expenses and a $1.8 million increase in interest expense compared to the prior year period[14] Consolidated Statements of Changes in Equity Total equity decreased by $6.0 million during the first quarter of 2023. The decline was primarily driven by distributions of $6.0 million and an unrealized loss on cash flow hedges of $4.6 million, which were partially offset by net income of $3.9 million Changes in Equity - Q1 2023 (in thousands) | Item | Amount | | :--- | :--- | | Balance, December 31, 2022 | $424,454 | | Net income | $3,901 | | Distributions | ($6,014) | | Unrealized loss on cash flow hedge | ($4,587) | | Other (Share-based comp, etc.) | $772 | | Balance, March 31, 2023 | $418,526 | Consolidated Statements of Cash Flows For the three months ended March 31, 2023, net cash provided by operating activities was stable at $4.9 million. Net cash used in investing activities was $3.5 million for additions to real estate. Net cash used in financing activities was $4.1 million, reflecting $6.0 million in distributions offset by net proceeds from debt. This resulted in a net decrease in cash of $2.7 million Cash Flow Summary - Q1 2023 vs Q1 2022 (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,915 | $4,915 | | Net cash used in investing activities | ($3,529) | ($3,359) | | Net cash used in financing activities | ($4,069) | ($6,214) | | Net decrease in cash | ($2,683) | ($4,658) | Notes to Consolidated Financial Statements The notes provide detailed information on significant accounting policies, property portfolio, Pillarstone investment, debt structure, and other financial disclosures - The company owns 57 commercial properties, primarily focused on a 'Community Centered Properties®' strategy in markets like Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix, and San Antonio[35][36] - The company's 81.4% investment in Pillarstone OP is accounted for using the equity method. Financial reporting for this investment relies on estimates, as Pillarstone's general partner (PRLE) is delinquent in its SEC filings[37][73] - Whitestone is involved in litigation with Pillarstone REIT over a 'poison pill' rights agreement that could dilute Whitestone's investment, and with its former CEO over his employment termination. The company does not believe a probable loss will be incurred from these matters[156][157][161] - As of March 31, 2023, total debt was $630.4 million. The company was in compliance with all loan covenants[86][108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, including revenue growth, operational results, liquidity, and debt management, with analysis of non-GAAP measures Results of Operations Total revenues for Q1 2023 increased by 5% to $35.9 million compared to Q1 2022, driven by a 6% rise in Same Store revenues from higher occupancy and rental rates. However, total operating expenses grew 13%, largely due to a 67% increase in G&A expenses related to share-based compensation and a 30% rise in interest expense from higher rates. Same Store NOI increased by 3% to $23.7 million Revenue Breakdown - Q1 2023 vs Q1 2022 (in thousands) | Revenue Source | Q1 2023 | Q1 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Same Store Total | $35,147 | $33,137 | $2,010 | 6% | | Non-Same Store & Mgmt Fees | $704 | $986 | ($282) | (29)% | | Total Revenue | $35,851 | $34,123 | $1,728 | 5% | Operating Expense Breakdown - Q1 2023 vs Q1 2022 (in thousands) | Expense Category | Q1 2023 | Q1 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Same Store Property Expenses | $10,623 | $9,588 | $1,035 | 11% | | General and administrative | $5,084 | $3,049 | $2,035 | 67% | | Depreciation and amortization | $7,846 | $7,910 | ($64) | (1)% | | Total Operating Expenses | $23,724 | $21,051 | $2,673 | 13% | - Same Store Net Operating Income (NOI) increased by 3% to $23.7 million in Q1 2023 from $23.0 million in Q1 2022[206] - The company's occupancy rate for its operating portfolio increased to 93% as of March 31, 2023, compared to 91% as of March 31, 2022[196] Reconciliation of Non-GAAP Financial Measures This section provides reconciliations for key non-GAAP metrics. Funds From Operations (FFO) for Q1 2023 was $12.1 million, a decrease from $15.5 million in Q1 2022. Property Net Operating Income (NOI) for Q1 2023 was $25.6 million, a slight increase from $25.1 million in the prior-year period FFO (NAREIT) Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income attributable to Whitestone REIT | $3,847 | $7,078 | | Depreciation and amortization (real estate) | $7,805 | $7,868 | | Pro-rata D&A from real estate partnership | $403 | $394 | | Other adjustments | $60 | $126 | | FFO (NAREIT) | $12,115 | $15,466 | NOI Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income attributable to Whitestone REIT | $3,847 | $7,078 | | Add back: G&A, D&A, Interest, etc. | $21,210 | $17,092 | | Add: Pro-rata NOI of real estate partnership | $548 | $997 | | Add: Net income attributable to noncontrolling interests | $54 | $111 | | NOI | $25,605 | $25,080 | Liquidity and Capital Resources The company's primary liquidity sources are cash flow from operations and its unsecured credit facility. In Q1 2023, cash from operations was $4.9 million, while distributions totaled $6.0 million. The company maintains a $100 million at-the-market (ATM) equity program, though no shares were sold during the quarter. As of March 31, 2023, $136.9 million remained available under the revolving credit facility - Cash flow from operations of $4.9 million was less than the $6.0 million paid in distributions during Q1 2023[221][259] - The company has $136.9 million of remaining availability under its revolving credit facility as of March 31, 2023[222][240] - No shares were sold under the $100 million ATM equity program during Q1 2023[225] Quantitative and Qualitative Disclosures About Market Risk The company's principal market risk is from interest rate fluctuations. To mitigate this, approximately 90% of its total outstanding debt is at fixed interest rates. The remaining 10% is subject to floating rates, creating some exposure to rate changes - As of March 31, 2023, $567.9 million, or 90% of total debt, was fixed-rate[266] - The remaining $63.0 million (10%) of debt is variable-rate. A 1% change in interest rates would impact annual net income by approximately $0.6 million[267] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2023. There were no material changes to the company's internal control over financial reporting during the quarter - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2023[269] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[270] PART II - OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and other required disclosures Legal Proceedings The company is involved in multiple legal proceedings, including disputes with Pillarstone REIT and its former CEO, with management expecting no material adverse financial impact - Pillarstone Capital REIT has sued the company seeking over $1 million in damages related to partnership and management agreements. The company denies the claims and is defending against them[272] - Former CEO James Mastandrea has sued the company for up to $25 million in damages related to his termination. The company denies the claims and is defending vigorously[273] - Whitestone has sued Pillarstone REIT to void a rights agreement that it alleges improperly restricts its contractual redemption rights and breaches fiduciary duties[276] Risk Factors There have been no material changes in the company's risk factors from those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - No material change in risk factors from the previously filed 2022 Form 10-K[279] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2023, the company did not sell any unregistered equity securities or conduct any formal share repurchases, with only employee tax-related share tenders occurring - No equity securities were sold that were not registered under the Securities Act[287] - Share repurchases during the quarter were solely for employees to satisfy tax withholding on vested restricted shares and not part of a formal buyback program[282][287] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - The company reported no defaults upon senior securities during the period[283] Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable to the company[284] Other Information The company reported no other material information for this item - The company reported no other information for this item[285] Exhibits This section lists the exhibits filed with the report, including certifications by the CEO and CFO and financial data formatted in Inline XBRL - The exhibits filed with this report include Sarbanes-Oxley Act certifications from the CEO and CFO, and Inline XBRL data files[286][290]