Whitestone REIT(WSR) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial performance and position, including detailed statements, notes, management's analysis, and market risk disclosures Item 1. Financial Statements. This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations and comprehensive income, statements of changes in equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, lease arrangements, debt, equity, and other financial commitments Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time, highlighting changes over the period Total Assets, Liabilities, and Equity (in thousands) | Metric | September 30, 2023 (Unaudited) (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :--------------------------------------- | :------------------------------- | | Total assets | $1,117,549 | $1,102,767 | | Total liabilities | $684,667 | $678,313 | | Total equity | $432,882 | $424,454 | - Total assets increased by $14.782 million from December 31, 2022, to September 30, 2023. Total liabilities increased by $6.354 million, and total equity increased by $8.428 million over the same period[10] Consolidated Statements of Operations and Comprehensive Income This statement details the company's revenues, expenses, net income, and comprehensive income over specific reporting periods Key Financial Metrics (in thousands) | Metric | Three Months Ended Sep 30, 2023 (in thousands) | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenues | $37,134 | $35,383 | $109,445 | $104,503 | | Total operating expenses | $25,279 | $24,551 | $74,204 | $69,844 | | Net income attributable to Whitestone REIT | $2,486 | $3,915 | $17,639 | $15,331 | | Basic Earnings Per Share | $0.05 | $0.08 | $0.36 | $0.31 | | Diluted Earnings Per Share | $0.05 | $0.08 | $0.35 | $0.31 | | Comprehensive income attributable to Whitestone REIT | $6,524 | $9,787 | $24,150 | $29,731 | - For the three months ended September 30, 2023, total revenues increased by 4.95% YoY, while net income attributable to Whitestone REIT decreased by 36.5% YoY. Basic and diluted EPS also decreased from $0.08 to $0.05 YoY[14][17] - For the nine months ended September 30, 2023, total revenues increased by 4.73% YoY, and net income attributable to Whitestone REIT increased by 15.05% YoY. Basic EPS increased from $0.31 to $0.36, and diluted EPS increased from $0.31 to $0.35 YoY[14][17] Consolidated Statements of Changes in Equity This statement tracks the changes in the company's equity components, including common shares, additional paid-in capital, and accumulated deficit, over the reporting period Equity Components (in thousands) | Metric | Balance, December 31, 2022 (in thousands) | Balance, September 30, 2023 (in thousands) | | :-------------------------------- | :---------------------------------------- | :--------------------------------------- | | Common Shares (Amount) | $49 | $50 | | Additional Paid-In Capital | $624,785 | $626,815 | | Accumulated Deficit | $(212,366) | $(212,551) | | Accumulated Other Comprehensive Gain (Loss) | $5,980 | $12,491 | | Total Shareholders' Equity | $418,448 | $426,805 | | Noncontrolling Interests (Dollars) | $6,006 | $6,077 | | Total Equity | $424,454 | $432,882 | - Equity increased by $8.428 million from December 31, 2022, to September 30, 2023, driven by net income and unrealized gains on cash flow hedges, partially offset by distributions[22] Consolidated Statements of Cash Flows This statement categorizes cash inflows and outflows into operating, investing, and financing activities, providing insights into liquidity and solvency Cash Flow Activities (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $35,854 | $33,459 | | Net cash used in investing activities | $(24,775) | $(10,118) | | Net cash used in financing activities | $(14,361) | $(29,688) | | Net decrease in cash, cash equivalents and restricted cash | $(3,282) | $(6,347) | | Cash, cash equivalents and restricted cash at end of period | $3,073 | $9,567 | - Net cash provided by operating activities increased by $2.395 million YoY for the nine months ended September 30, 2023. Net cash used in investing activities significantly increased due to real estate acquisitions, while net cash used in financing activities decreased due to net proceeds from the credit facility[28] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the figures presented in the financial statements, covering accounting policies, commitments, and contingencies 1. Interim Financial Statements This note clarifies the basis of preparation for the unaudited interim financial statements and the company's operational structure as a REIT - The consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP for interim financial information, consistent with annual audited statements[35] - Whitestone REIT operates as a Maryland REIT, conducting operations through its Operating Partnership. As of September 30, 2023, it wholly owned 56 commercial properties, including 51 Community Centered Properties® and five parcels for future development[37][38][39] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and estimates used in preparing the financial statements, including consolidation, revenue recognition, and share-based compensation - The Company consolidates the Operating Partnership where it holds a majority interest and uses the equity method for its investment in Pillarstone OP[42][44] - Significant estimates include fair values of acquired properties, useful lives of assets, share-based compensation, allowance for doubtful accounts, and fair value of interest rate swaps[45] - Share-based compensation expense recognized for the three months ended September 30, 2023, was $1,083,000 (vs. $943,000 in 2022) and for the nine months was $2,712,000 (vs. $455,000 in 2022)[52] - The allowance for uncollectible accounts was $14.2 million as of September 30, 2023, up from $13.8 million at December 31, 2022[55] - The Company adopted ASU 2020-04 and ASU 2021-01 regarding reference rate reform, with no material impact on financial statements[60][61] 3. Leases This note details the company's lease arrangements as both a lessor and lessee, including future minimum rents and total lease costs Minimum Future Rents to be Received (Lessor) (in thousands) | Years Ended December 31, | Minimum Future Rents | | :----------------------- | :------------------- | | 2023 (remaining) | $24,923 | | 2024 | $94,137 | | 2025 | $78,458 | | 2026 | $63,066 | | 2027 | $50,484 | | Thereafter | $147,552 | | Total | $458,620 | Total Lease Costs (Lessee) (in thousands) | Lease Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating leases | $23 | $122 | $64 | $552 | | Finance lease | $21 | $0 | $72 | $0 | 4. Accrued Rents and Accounts Receivable, Net This note provides a breakdown of tenant receivables, accrued rents, and the allowance for doubtful accounts, reflecting amounts due from tenants Accrued Rents and Accounts Receivable, Net (in thousands) | Component | September 30, 2023 | December 31, 2022 | | :---------------------------------------- | :----------------- | :---------------- | | Tenant receivables | $16,719 | $16,828 | | Accrued rents and other recoveries | $24,989 | $22,103 | | Allowance for doubtful accounts | $(14,184) | $(13,822) | | Other receivables | $1,459 | $461 | | Total | $28,983 | $25,570 | 5. Unamortized Lease Commissions, Legal Fees and Loan Costs This note presents the deferred costs associated with leasing commissions, legal fees, and financing, net of accumulated amortization Deferred Costs, Net of Accumulated Amortization (in thousands) | Cost Type | September 30, 2023 | December 31, 2022 | | :---------------------------------------- | :----------------- | :---------------- | | Leasing commissions, net | $9,446 | $8,715 | | Deferred legal cost, net | $89 | $101 | | Deferred financing cost, net | $3,206 | $3,881 | | Total cost, net of accumulated amortization | $12,741 | $12,697 | 6. Investment in Real Estate Partnership This note describes the company's equity method investment in Pillarstone OP, including its financial performance and related legal disputes - Whitestone REIT owns an 81.4% majority interest in Pillarstone OP, accounted for using the equity method. The investment value was estimated at $33.2 million as of September 30, 2023, down from $34.826 million at December 31, 2022[75] Company's Share of Net Income (Loss) from Pillarstone OP (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $(375) | $65 | | Nine Months Ended September 30 | $(1,627) | $304 | - Pillarstone OP's general partner is delinquent in SEC reporting, leading Whitestone to estimate financial information for its investment. A lawsuit was filed by Whitestone OP against Pillarstone REIT challenging a Rights Agreement that could dilute Whitestone's ownership, seeking to declare the agreement unenforceable and/or monetary damages of at least $51.2 million[74][76][77] - The Company has a limited 'bad boy' carve-out guarantee on Pillarstone OP's $14.4 million Uptown Tower loan, which is currently in default. The lender has initiated foreclosure proceedings, claiming an additional $4.6 million is due, which is disputed by Whitestone[84] 7. Debt This note details the company's debt structure, including notes payable, credit facilities, and compliance with financial covenants Total Notes Payable (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :---------------- | | Total notes payable principal | $633,171 | $625,991 | | Less deferred financing costs, net | $(421) | $(564) | | Total notes payable | $632,750 | $625,427 | Scheduled Debt Maturities (in thousands) | Year | Amount Due | | :---------------- | :----------- | | 2023 (remaining) | $1,383 | | 2024 | $63,573 | | 2025 | $17,143 | | 2026 | $154,643 | | 2027 | $97,143 | | Thereafter | $299,286 | | Total | $633,171 | - The Company entered into a new $515.0 million unsecured credit facility (2022 Facility) in September 2022, comprising a $250.0 million revolving credit facility and a $265.0 million term loan. As of September 30, 2023, $402.5 million was drawn, with $112.5 million remaining availability under the revolver[102][105][104] - The 2022 Facility and Note Agreement contain financial covenants, including maximum total indebtedness to total asset value ratio of 0.60 to 1.00 and minimum EBITDA to fixed charges ratio of 1.50 to 1.00. The Company was in compliance with all loan covenants as of September 30, 2023[98][108][109] 8. Derivatives and Hedging Activities This note explains the company's use of interest rate swaps to manage exposure to interest rate fluctuations and their impact on financial results Fair Value of Interest Rate Swaps (in thousands) | Date | Estimated Fair Value | | :---------------- | :------------------- | | September 30, 2023 | $12,668 | | December 31, 2022 | $6,065 | Interest Rate Swap Activity (in thousands) | Period | Amount Recognized as Comprehensive Income | Income (Loss) Recognized in Earnings | | :-------------------------------- | :-------------------------------------- | :----------------------------------- | | Three Months Ended Sep 30, 2023 | $4,094 | $1,929 | | Three Months Ended Sep 30, 2022 | $5,962 | $52 | | Nine Months Ended Sep 30, 2023 | $6,602 | $4,833 | | Nine Months Ended Sep 30, 2022 | $14,623 | $(2,276) | - The Company uses interest rate swaps as cash flow hedges to manage exposure to interest rate fluctuations, with changes in fair value recorded in comprehensive income. New swaps were entered in March 2023 ($50 million Revolver Swap) and September 2022 ($265 million Term Loan swap) to fix SOFR portions of variable rate debt[112][113] 9. Earnings Per Share This note provides the calculation of basic and diluted earnings per share, considering net income attributable to common shareholders and weighted average shares outstanding Earnings Per Share (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $2,486 | $3,915 | $17,639 | $15,331 | | Weighted average number of common shares - basic | 49,534 | 49,274 | 49,472 | 49,211 | | Weighted average number of common shares - dilutive | 50,637 | 50,129 | 50,399 | 49,916 | | Basic EPS | $0.05 | $0.08 | $0.36 | $0.31 | | Diluted EPS | $0.05 | $0.08 | $0.35 | $0.31 | - OP units were excluded from diluted EPS calculation due to their anti-dilutive effect: 693,595 units for Q3 2023 and 694,054 units for the nine months ended September 30, 2023[117] 10. Income Taxes This note outlines the company's tax status as a REIT and its provisions for income taxes, primarily focusing on the Texas Margin Tax - The Company intends to qualify as a REIT, generally exempting it from federal income tax on distributed income[120] Texas Margin Tax Provision (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $95 | $114 | | Nine Months Ended September 30 | $339 | $315 | 11. Equity This note details the components of the company's equity, including common shares, operating partnership units, and cash distributions paid - As of September 30, 2023, 49,584,705 common shares were issued and outstanding. The Company has a universal shelf registration statement for up to $500 million in securities[10][123] - Whitestone REIT owned a 98.6% interest in the Operating Partnership as of September 30, 2023. Limited partners can redeem OP units for cash or common shares[126][127] Cash Distributions Paid (in thousands, except per share/unit data) | Period | Distributions Per Common Share/OP Unit | Amount Paid (Common Shares) | Amount Paid (Noncontrolling OP Unit Holders) | Total Amount Paid | | :---------------- | :------------------------------------- | :-------------------------- | :------------------------------------------- | :---------------- | | Q3 2023 | $0.1200 | $5,928 | $83 | $6,011 | | Q2 2023 | $0.1200 | $5,913 | $83 | $5,996 | | Q1 2023 | $0.1200 | $5,913 | $83 | $5,996 | | Total 9M 2023 | $0.3600 | $17,754 | $249 | $18,003 | | Total 9M 2022 | $0.3475 | $17,049 | $263 | $17,312 | 12. Incentive Share Plan This note describes the company's long-term equity incentive plan, including the types of awards granted and associated compensation expenses - The 2018 Long-Term Equity Incentive Ownership Plan authorizes issuance of up to 3,433,831 common shares and OP units. Awards include performance-based restricted common share units (CIC Units, TSR Units) and time-based restricted common share units[131][132][133] Share-Based Compensation Expense (in thousands) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $1,083 | $943 | | Nine Months Ended September 30 | $2,712 | $455 | - As of September 30, 2023, there was approximately $3.1 million in unrecognized compensation cost for TSR Units (expected to vest over 27 months) and $3.1 million for time-based shares (expected to vest over 33 months)[144] 13. Grants to Trustees This note reports on the issuance of common shares to independent trustees and a trustee emeritus as part of their compensation - On December 19, 2022, five independent trustees and one trustee emeritus were granted a total of 35,222 common shares, vesting immediately, with a grant fair value of $9.52 per share[146] 14. Segment Information This note clarifies that the company does not report segment information as it does not differentiate operations by property type or location - The Company does not differentiate results of operations by property type or location and therefore does not present segment information[147] 15. Real Estate This note provides details on the company's property acquisitions and dispositions, including purchase prices, sale proceeds, and recognized gains - Acquisitions in 2023 include Arcadia Towne Center for $25.5 million (June 12, 2023). Acquisitions in 2022 include Lake Woodlands Crossing for $22.5 million (December 21, 2022) and Dana Park Pad for $4.9 million (December 2, 2022)[148][149][150] - Dispositions in 2023 include Westchase for $7.8 million (gain of $4.6 million) and Sunridge for $6.7 million (gain of $5.0 million), both on June 30, 2023[151][152] 16. Related Party Transactions This note discloses transactions with related parties, specifically the management agreement with Pillarstone OP and associated revenues and expenses - The management agreement with Pillarstone OP was terminated on August 18, 2022. Prior to termination, the Company reported property management fee income[72][156] Revenue and Expenses with Pillarstone OP (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Rent (Operating & Maintenance) | $0 | $(105) | $(15) | $(471) | | Property management fee | $0 | $75 | $0 | $359 | 17. Commitments and Contingencies This note outlines the company's significant commitments and potential liabilities, including loan guarantees and ongoing litigation - The Company has a limited 'bad boy' carve-out guarantee on Pillarstone OP's $14.4 million Uptown Tower loan, which is in default. A foreclosure sale is planned for December 5, 2023, with a disputed additional claim of $4.6 million[158][290] - Ongoing litigation includes lawsuits from the former COO (John Dee) and former CEO (James Mastandrea) alleging breach of contract and other claims, seeking significant monetary relief. The Company denies these claims and is vigorously defending them[159][162][291][293] - Whitestone OP filed a lawsuit against Pillarstone REIT challenging a Rights Agreement that could dilute Whitestone's investment. A trial was held in July 2023, with post-trial briefing in October 2023, and a decision is pending. Whitestone seeks to void the agreement and/or monetary damages of at least $51.2 million[166][168][169][297][299][300] 18. Subsequent Events This note reports on events occurring after the balance sheet date that may have a material impact on the financial statements - There were no material subsequent events reported[171] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the Company's financial condition, operational performance, and future outlook, including an overview of its business strategy, revenue drivers, leasing activities, and a detailed comparison of financial results for the three and nine months ended September 30, 2023 and 2022 Forward-Looking Statement This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including those related to REIT status, economic conditions, interest rates, and litigation[174][176] - Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's view only as of the report date[175] Overview This section provides a high-level summary of Whitestone REIT's business, property portfolio, and tenant base - Whitestone REIT is an internally managed real estate company owning and operating 56 commercial properties (51 Community Centered Properties® and 5 development parcels) in Texas, Arizona, and Illinois as of September 30, 2023[179][182][183] - The Company has a diversified tenant base of 1,455 tenants, with the largest tenant comprising only 2.2% of annualized rental revenues[184] - The majority of leases are triple-net or provide for tenant reimbursement of operating expenses, mitigating inflation effects. A 1% increase in interest rates on non-hedged variable rate debt ($87.5 million) would decrease annual net income by approximately $0.9 million[188][189] How We Derive Our Revenue This section explains the primary sources of the company's revenue, mainly rental income, and factors influencing its growth Total Revenues (in millions) | Period | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Three Months Ended September 30 | $37.1 | $35.4 | | Nine Months Ended September 30 | $109.4 | $104.5 | - Rental income is expected to increase due to property additions and rent increases on renewal leases. Adjustments for cash basis tenants included a $0.03 million increase for straight-line rent reserve and a $0.2 million decrease for bad debt for Q3 2023[191] Scheduled Lease Expirations This section provides an overview of the company's lease expiration schedule and historical renewal rates - Approximately 20% of the Company's Gross Leasable Area (GLA) is subject to leases expiring prior to December 31, 2024. Over the last three calendar years, approximately 70% of expiring leases were renewed[192] Acquisitions This section outlines the company's strategy for growth through property acquisitions and development activities - The Company aims to grow GLA through acquisitions of Community Centered Properties® in high-growth markets and is evaluating development/redevelopment activities[193][194] Property Acquisitions, Dispositions and Development This section details specific property transactions, including recent acquisitions and dispositions - Acquired Arcadia Towne Center for $25.5 million in June 2023. Sold Westchase for $7.8 million (gain of $4.6 million) and Sunridge for $6.7 million (gain of $5.0 million) in June 2023[195][198][199] Leasing Activity This section reports on the company's occupancy rates and details of new and renewal lease agreements - Occupancy rate for all properties was 93% as of September 30, 2023, up from 92% in the prior year[200] Leasing Activity for Nine Months Ended September 30, 2023 (Comparable Leases) | Lease Type | Number of Leases Signed | GLA Signed (sq. ft.) | Weighted Average Lease Term (years) | TI and Incentives per Sq. Ft. | Contractual Rent Per Sq. Ft. (New) | Straight-lined Basis Increase (Decrease) Over Prior Rent | | :---------------- | :---------------------- | :------------------- | :---------------------------------- | :---------------------------- | :--------------------------------- | :------------------------------------------------------- | | Renewal Leases | 134 | 482,013 | 3.5 | $1.10 | $19.53 | 21.2% | | New Leases | 36 | 69,986 | 6.3 | $15.50 | $26.65 | 23.5% | | Total | 170 | 551,999 | 3.9 | $2.92 | $20.43 | 21.6% | Critical Accounting Policies and Estimates This section discusses the key accounting policies and estimates that require significant judgment and their potential impact on financial results - No significant changes to critical accounting policies during the nine months ended September 30, 2023, except for estimates regarding Pillarstone REIT Operating Partnership LP's financial condition and results of operations[202] Results of Operations This section provides a detailed analysis of the company's financial performance, comparing revenues and expenses across different periods Comparison of the Three Months Ended September 30, 2023 and 2022 This section compares the company's financial performance for the third quarter of 2023 against the same period in 2022 Key Financial Metrics (Three Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change | % Change | | :--------------------------------------- | :----- | :----- | :----- | :------- | | Total revenues | $37,134 | $35,383 | $1,751 | 5% | | Total operating expenses | $25,279 | $24,551 | $728 | 3% | | Net income attributable to Whitestone REIT | $2,486 | $3,915 | $(1,429) | (36)% | | Funds from operations (FFO) | $11,693 | $12,231 | $(538) | (4)% | | Property net operating income (NOI) | $26,246 | $24,307 | $1,939 | 8% | | Same Store NOI | $23,210 | $22,122 | $1,088 | 5% | - Same Store rental revenues increased by $1.207 million (5%) due to higher average leased square feet and higher average rent per leased square foot. Same Store recoveries increased by $0.516 million (5%) due to increased operating expenses[207][208] - Interest expense increased by $1.584 million (23%) due to rising interest rates, increasing the effective interest rate to 5.07% in Q3 2023 from 4.01% in Q3 2022[212] - Equity (deficit) in earnings of real estate partnership decreased by $0.440 million, moving from an equity position of $0.065 million in Q3 2022 to a deficit of $0.375 million in Q3 2023[214] Comparison of the Nine Months Ended September 30, 2023 and 2022 This section compares the company's financial performance for the first nine months of 2023 against the same period in 2022 Key Financial Metrics (Nine Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change | % Change | | :--------------------------------------- | :----- | :----- | :----- | :------- | | Total revenues | $109,445 | $104,503 | $4,942 | 5% | | Total operating expenses | $74,204 | $69,844 | $4,360 | 6% | | Net income attributable to Whitestone REIT | $17,639 | $15,331 | $2,308 | 15% | | Funds from operations (FFO) | $34,387 | $40,325 | $(5,938) | (15)% | | Property net operating income (NOI) | $77,329 | $73,924 | $3,405 | 5% | | Same Store NOI | $69,220 | $67,366 | $1,854 | 3% | - Same Store rental revenues increased by $3.704 million (5%) due to higher average leased square feet and higher average rent per leased square foot. Same Store recoveries increased by $1.770 million (6%) due to increased operating and maintenance expenses[221][222] - General and administrative expenses increased by $2.588 million (20%) primarily due to increased share-based compensation ($2.248 million) and legal expenses ($1.143 million)[224] - The Company recorded a net gain on sale of properties of $9.626 million in 2023, compared to a loss of $0.007 million in 2022, primarily from the sale of Sunridge ($5.0 million gain) and Westchase ($4.6 million gain)[225] - Equity (deficit) in earnings of real estate partnership decreased by $1.931 million, moving from an equity position of $0.304 million in 9M 2022 to a deficit of $1.627 million in 9M 2023[226] Reconciliation of Non-GAAP Financial Measures This section reconciles non-GAAP financial measures, such as FFO and NOI, to their most directly comparable GAAP measures Funds From Operations (NAREIT) ("FFO") and Normalized FFO This section defines and reconciles FFO and Normalized FFO, key metrics for evaluating REIT operating performance - FFO and Normalized FFO are non-GAAP measures used to evaluate operating performance, excluding depreciation, gains/losses from property sales, and impairment write-downs[230][231][232] FFO and Normalized FFO (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to Whitestone REIT | $2,486 | $3,915 | $17,639 | $15,331 | | FFO (NAREIT) | $11,693 | $12,231 | $34,387 | $40,325 | | Normalized FFO | $11,693 | $12,378 | $34,387 | $40,472 | Property Net Operating Income ("NOI") This section defines and reconciles Property Net Operating Income (NOI), a non-GAAP measure used to assess property-level performance - NOI is a non-GAAP measure defined as operating revenues less property and related expenses, used to evaluate property operating performance[235] Property Net Operating Income (NOI) (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to Whitestone REIT | $2,486 | $3,915 | $17,639 | $15,331 | | NOI | $26,246 | $24,307 | $77,329 | $73,924 | Liquidity and Capital Resources This section discusses the company's ability to generate and manage cash to meet its short-term and long-term financial obligations and investment needs - Short-term liquidity needs are met by cash from operations and the 2022 Facility. Cash provided by operating activities was $35.854 million for the nine months ended September 30, 2023, exceeding total distributions of $18.003 million[238] - Long-term liquidity will be funded by net cash from operations, long-term indebtedness, equity issuances, and property sales. The Company has $112.5 million remaining availability under its 2022 Revolver as of September 30, 2023[239] - Cash, cash equivalents, and restricted cash decreased from $6.355 million at December 31, 2022, to $3.073 million at September 30, 2023[248] Debt This section provides a detailed overview of the company's debt structure, including outstanding notes, credit facilities, and compliance with covenants Total Notes Payable (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :---------------- | | Total notes payable principal | $633,171 | $625,991 | | Less deferred financing costs, net | $(421) | $(564) | | Total notes payable | $632,750 | $625,427 | Scheduled Debt Maturities (in thousands) | Year | Amount Due | | :---------------- | :----------- | | 2023 (remaining) | $1,383 | | 2024 | $63,573 | | 2025 | $17,143 | | 2026 | $154,643 | | 2027 | $97,143 | | Thereafter | $299,286 | | Total | $633,171 | - The 2022 Facility includes a $250.0 million unsecured revolving credit facility and a $265.0 million unsecured term loan. The interest rate on the 2022 Revolver was 7.03% as of September 30, 2023[255] - The Company's $137.0 million in secured debt was collateralized by six properties with a carrying value of $212.9 million as of September 30, 2023. The Company was in compliance with all loan covenants[270] Capital Expenditures This section details the company's investments in property improvements, developments, and leasing-related costs Capital Expenditures (in thousands) | Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Tenant improvements and allowances | $997 | $2,266 | $4,452 | $6,880 | | Developments / redevelopments | $932 | $475 | $2,817 | $1,705 | | Leasing commissions and costs | $617 | $831 | $1,682 | $2,127 | | Maintenance capital expenditures | $1,711 | $1,206 | $5,142 | $2,558 | | Total capital expenditures | $4,257 | $4,778 | $14,093 | $13,270 | - Total capital expenditures for the nine months ended September 30, 2023, increased by $0.823 million YoY, primarily driven by higher maintenance capital expenditures and developments/redevelopments[274] Distributions This section outlines the company's distribution policy and amounts paid to shareholders and OP unit holders - REITs are generally required to distribute at least 90% of their taxable income annually. The Board of Trustees determines distributions based on FFO, debt service, capital expenditures, and REIT qualification requirements[275][277] - The quarterly distribution was increased to $0.12 per common share and OP unit, effective April 2022. Total distributions paid for the nine months ended September 30, 2023, were $18.0 million, up from $17.3 million in the prior year[276][278] Taxes This section describes the company's tax status as a REIT and its implications for federal income tax - The Company elected to be taxed as a REIT and intends to operate to maintain this qualification, generally avoiding federal income tax on distributed income[279] Environmental Matters This section addresses the company's environmental liabilities and expenditures - The Company has incurred no significant environmental costs, accrued liabilities, or expenditures to mitigate future environmental contamination[280] Off-Balance Sheet Arrangements This section discloses any material off-balance sheet arrangements that could affect the company's financial condition - The Company may guarantee the debt of real estate partnerships, such as the limited guarantee on Pillarstone OP's Uptown Tower loan, to facilitate lower funding costs[281] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section details the Company's exposure to market risks, primarily interest rate fluctuations and credit risk, and its strategies for managing these risks - The principal market risk is interest rate fluctuations. As of September 30, 2023, 86% ($545.7 million) of total outstanding debt was subject to fixed interest rates, and 14% ($87.5 million) was subject to floating interest rates[284][285] - A 1% increase or decrease in interest rates on non-hedged variable rate debt would result in an approximate $0.9 million decrease or increase in annual net income, respectively[285] - Credit risk is increased by macroeconomic factors like inflation and rising interest rates, potentially affecting tenant payments and business closures[286] Item 4. Controls and Procedures. This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes in internal control over financial reporting - The Company's disclosure controls and procedures were effective as of September 30, 2023[287] - There have been no material changes in internal control over financial reporting during the nine months ended September 30, 2023[288] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings. This section outlines various legal proceedings and claims, including a loan guarantee for Pillarstone OP, litigation involving former executives, and a lawsuit against Pillarstone REIT, with management asserting no probable material adverse effect on the Company's financial position - The Company has a limited guarantee on Pillarstone OP's $14.4 million Uptown Tower loan, which is in default, with a foreclosure sale scheduled for December 5, 2023. The lender claims an additional $4.6 million is due, which is disputed[290] - Lawsuits are ongoing with the Company's former COO (John Dee) and former CEO (James Mastandrea) for breach of contract and other claims, seeking significant monetary relief. The Company denies these claims and is vigorously defending them[291][293] - Whitestone OP filed a lawsuit against Pillarstone REIT challenging a Rights Agreement that could dilute Whitestone's investment. A trial was held in July 2023, and a decision is pending on Whitestone OP's claims for unenforceability and/or monetary damages of at least $51.2 million[297][299][300] Item 1A. Risk Factors. This section states that there have been no material changes to 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 those previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[301] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This section details the Company's repurchases of common shares from employees to satisfy tax withholding obligations related to restricted common shares - During the three months ended September 30, 2023, the Company purchased 22,831 common shares from employees at an average price of $10.32 per share to satisfy tax withholding on restricted common shares[304] Item 3. Defaults Upon Senior Securities. This section confirms that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[305] Item 4. Mine Safety Disclosures. This section states that mine safety disclosures are not applicable to the Company's operations - Mine safety disclosures are not applicable[306] Item 5. Other Information. This section reports that no trustee or officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2023 - No trustee or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended September 30, 2023[307] Item 6. Exhibits. This section lists all exhibits filed, furnished, and incorporated by reference as part of this report, including articles of amendment, bylaws, certifications, and financial information in XBRL format - The exhibit index includes various corporate governance documents, officer certifications (Sarbanes-Oxley Act Sections 302 and 906), and financial information in Inline XBRL format[311] Signatures This section contains the duly authorized signatures of the Company's Chief Executive Officer and Chief Financial Officer, affirming the submission of the report - The report is signed by David K. Holeman, Chief Executive Officer, and John S. Hogan, Chief Financial Officer, on November 1, 2023[315]