Whitestone REIT(WSR) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements. This section presents the unaudited consolidated financial statements of Whitestone REIT, including balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, and recent events for the three months ended March 31, 2020 and 2019 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :--------------- | :---------------- | | Total assets | $1,071,326 | $1,056,260 | | Cash and cash equivalents | $36,774 | $15,530 | | Total real estate assets (net) | $956,802 | $962,022 | | Notes payable | $675,409 | $644,699 | | Total liabilities | $730,208 | $703,162 | | Total equity | $341,118 | $353,098 | Consolidated Statements of Operations and Comprehensive Loss Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenues | $30,584 | $29,694 | +$890 | +3.0% | | Total operating expenses | $22,204 | $20,939 | +$1,265 | +6.0% | | Net income attributable to Whitestone REIT | $1,612 | $2,774 | -$1,162 | -41.9% | | Basic Earnings Per Share | $0.04 | $0.07 | -$0.03 | -42.9% | | Diluted Earnings Per Share | $0.04 | $0.07 | -$0.03 | -42.9% | | Comprehensive loss attributable to Whitestone REIT | $(9,109) | $(616) | -$8,493 | +1378.7% | - Unrealized loss on cash flow hedging activities significantly increased from $(3,470) thousand in Q1 2019 to $(10,952) thousand in Q1 2020, contributing to the higher comprehensive loss[15] Consolidated Statements of Changes in Equity Key Changes in Equity (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :--------------- | :---------------- | | Total Whitestone REIT shareholders' equity | $333,672 | $345,317 | | Total equity | $341,118 | $353,098 | - Unrealized loss on change in value of cash flow hedge was $(10,721) thousand for the three months ended March 31, 2020, compared to $(3,390) thousand for the same period in 2019[20][22] - Distributions of $0.285 per common share/OP unit resulted in a total of $(4,544) thousand for Q1 2020, compared to $(11,615) thousand for Q1 2019[20][22] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by operating activities | $5,213 | $6,065 | -$852 | | Net cash used in investing activities | $(1,593) | $(2,455) | +$862 | | Net cash provided by (used in) financing activities | $17,616 | $(12,716) | +$30,332 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $21,236 | $(9,106) | +$30,342 | | Cash, cash equivalents and restricted cash at end of period | $36,879 | $4,680 | +$32,199 | - The significant increase in cash from financing activities in Q1 2020 was primarily due to $30,000 thousand net proceeds from the credit facility, compared to net payments of $(90,200) thousand in Q1 2019[26] Notes to Consolidated Financial Statements 1. Interim Financial Statements This section explains the basis of preparation for the unaudited interim financial statements, confirming adherence to U.S. GAAP and consistency with annual audited statements. It also provides a business overview of Whitestone REIT, its properties, and its investment in Pillarstone OP - Whitestone REIT was formed in 1998 (Texas) and reorganized to Maryland in 2004, operating primarily through Whitestone REIT Operating Partnership, L.P[35] - As of March 31, 2020, the company wholly-owned 58 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix, and San Antonio[35] - The portfolio includes 52 wholly-owned Community Centered Properties®, one additional wholly-owned Community Centered Property®, and five parcels of land for future development[36][38] - The company holds an 81.4% majority interest in eight Pillarstone Properties, which are accounted for using the equity method and do not meet the Community Centered Property® strategy[37] 2. Summary of Significant Accounting Policies This section details the key accounting principles applied, including basis of consolidation, equity method for Pillarstone OP, accrual basis of accounting, and the use of estimates. It also highlights the impact of the COVID-19 pandemic on estimates and recent accounting pronouncements, particularly Topic 842 on leases - The company consolidates the Operating Partnership due to its sole general partner status and majority ownership[40] - Pillarstone OP is accounted for under the equity method since January 1, 2018, following the adoption of Topic 606 and ASC 610[42] - The COVID-19 pandemic introduces significant uncertainty to estimates, potentially impacting revenues, expenses, reserves, fair value measurements, and asset impairment charges[44] - Share-based compensation expense was $1,326,000 for Q1 2020, down from $1,951,000 in Q1 2019[52] - Allowance for uncollectible accounts increased to $11.9 million as of March 31, 2020, from $11.2 million as of December 31, 2019, with a $0.4 million adjustment to rental revenue due to COVID-19 related credit loss for approximately 40 tenants[56] - Adopted Topic 842 (Leases) effective January 1, 2019, recognizing a lease liability and right-of-use asset of approximately $1.1 million each, with no material impact on net income[64] 3. Leases This section details the company's lease accounting as both a lessor and a lessee under Topic 842. It provides a summary of minimum future rents to be received from operating leases and fixed, future minimum rental payments for operating leases where the company is the lessee Minimum Future Rents to be Received (in thousands) | Years Ended December 31, | Minimum Future Rents | | :----------------------- | :------------------- | | 2020 (remaining) | $63,781 | | 2021 | $75,214 | | 2022 | $63,673 | | 2023 | $51,764 | | 2024 | $39,767 | | Thereafter | $114,195 | | Total | $408,394 | Total Lease Liabilities as Lessee (in thousands) | Years Ended December 31, | March 31, 2020 | | :----------------------- | :--------------- | | Total undiscounted rental payments | $1,148 | | Less imputed interest | $40 | | Total lease liabilities | $1,108 | - Weighted average remaining lease term for operating leases as lessee was 1.5 years at March 31, 2020, with a weighted average incremental borrowing rate of 4.5%[73][75] 4. Accrued Rents and Accounts Receivable, Net This section provides a breakdown of accrued rents and accounts receivable, net, including tenant receivables, accrued rents, allowance for doubtful accounts, and other receivables Accrued Rents and Accounts Receivable, Net (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------- | :--------------- | :---------------- | | Tenant receivables | $17,396 | $16,741 | | Accrued rents and other recoveries | $17,060 | $16,983 | | Allowance for doubtful accounts | $(11,945) | $(11,173) | | Other receivables | $385 | $303 | | Total | $22,896 | $22,854 | 5. Unamortized Lease Commissions, Legal Fees and Loan Costs This section details the deferred costs, including leasing commissions, deferred legal costs, and deferred financing costs, net of accumulated amortization Deferred Costs, Net of Amortization (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :--------------- | :---------------- | | Total cost | $14,421 | $14,169 | | Less: accumulated amortization | $(5,646) | $(5,209) | | Total cost, net of accumulated amortization | $8,775 | $8,960 | 6. Investment in Real Estate Partnership This section describes the company's investment in Pillarstone OP, including the contribution agreement, management agreements, and tax protection agreement. It also provides summarized financial information for Pillarstone OP and the company's share of its net income - Whitestone contributed 14 non-core properties to Pillarstone OP in 2016 for approximately $84 million, consisting of Pillarstone OP Units and assumption of liabilities[79] - Whitestone TRS provides property management, leasing, and advisory services to Pillarstone Properties, earning monthly fees[80] - As of March 31, 2020, Whitestone holds an 81.4% ownership interest in Pillarstone OP, which owns eight properties with 926,798 square feet of GLA[85][86] Company's Share of Net Income from Pillarstone OP (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Equity in earnings of real estate partnership | $192 | $492 | - The decrease in equity in earnings is primarily due to lower net income from Pillarstone OP following the sale of three properties in October 2019[235] - The company has a performance guarantee to Pillarstone OP, with a noncontingent liability of $462,000 recognized at inception, amortized over seven years[89] 7. Debt This section details the company's debt structure, including fixed and floating rate notes, the 2019 unsecured credit facility, and the 2019 Note Purchase and Guarantee Agreement. It also outlines scheduled maturities and compliance with loan covenants Debt Composition (in thousands) | Type of Debt | March 31, 2020 | December 31, 2019 | | :----------------------- | :--------------- | :---------------- | | Fixed rate notes | $537,050 | $532,396 | | Floating rate notes (unsecured line of credit) | $139,500 | $109,500 | | Total notes payable principal | $676,550 | $645,896 | Scheduled Debt Maturities (in thousands) | Year | Amount Due | | :--- | :----------- | | 2020 | $11,605 | | 2021 | $1,611 | | 2022 | $101,683 | | 2023 | $167,363 | | 2024 | $228,573 | | Thereafter | $165,715 | | Total | $676,550 | - The 2019 Facility includes a $250 million unsecured revolving credit facility, a $165 million unsecured term loan (Term Loan A), and a $100 million unsecured term loan (Term Loan B)[109][273] - On March 20, 2020, the company drew down $30 million under the 2019 Revolver as a precautionary measure due to COVID-19, leaving $8.7 million remaining availability as of March 31, 2020[107][198] - The company issued $100 million of senior unsecured notes in March 2019, with Series A ($50M) amortizing from March 2023 and Series B ($50M) from March 2025[95][97] - As of March 31, 2020, $171.0 million in secured debt was collateralized by eight properties with a carrying value of $268.8 million, and the company was in compliance with all loan covenants[116][286] - LIBOR is expected to be discontinued after 2021, and the company is monitoring developments to ensure minimal impact on financial condition[94][273] 8. Derivatives and Hedging Activities This section discusses the company's use of interest rate swaps as cash flow hedges to manage interest rate fluctuations. It provides the fair value of these swaps and details various swap agreements Fair Value of Interest Rate Swaps (in thousands) | Balance Sheet Location | March 31, 2020 | December 31, 2019 | | :----------------------- | :--------------- | :---------------- | | Prepaid expenses and other assets | $0 | $59 | | Accounts payable and accrued expenses | $(16,553) | $(5,660) | - The company entered into multiple interest rate swaps in January 2019 and September 2018 to fix LIBOR portions of Term Loan A and other notes, maturing between November 2020 and January 2024[120][121][123][124] - Unrealized loss on cash flow hedging activities recognized in comprehensive income (loss) was $(10,952) thousand for Q1 2020, compared to $(3,470) thousand for Q1 2019[130] 9. Earnings Per Share This section explains the calculation of basic and diluted earnings per share, noting the exclusion of anti-dilutive OP units and distributions on unvested restricted shares Earnings Per Share Calculation (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to common shareholders (excluding unvested restricted shares) | $1,612 | $2,733 | | Weighted average number of common shares - basic | 42,048 | 39,649 | | Weighted average number of common shares - dilutive | 43,009 | 40,626 | | Basic Earnings Per Share | $0.04 | $0.07 | | Diluted Earnings Per Share | $0.04 | $0.07 | - 904,550 OP units in Q1 2020 and 928,070 OP units in Q1 2019 were excluded from diluted EPS calculation as they were anti-dilutive[132] 10. Income Taxes This section states the company's intent to qualify as a REIT, exempting it from federal income taxes on distributed income. It also details the Texas Margin Tax incurred - Whitestone REIT intends to qualify as a REIT, distributing at least 90% of taxable income to shareholders to avoid federal income tax[137] Texas Margin Tax Provision (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Provision for income tax | $87 | $118 | 11. Equity This section describes the company's common and preferred share authorization, equity offerings, and the structure of Operating Partnership Units. It also provides a summary of distributions paid to shareholders and OP unit holders - Authorized to issue up to 400 million common shares and 50 million preferred shares[139] - In Q1 2020, 170,942 common shares were sold under the 2019 at-the-market equity distribution program, generating net proceeds of approximately $2.2 million[141] - As of March 31, 2020, Whitestone owned a 97.9% interest in the Operating Partnership, with 42,917,552 OP units outstanding[142][143] Distributions Paid (in thousands, except per share/unit data) | Quarter Paid | Distributions Per Common Share/OP Unit | Amount Paid (Common Shares) | Amount Paid (Noncontrolling OP Unit Holders) | Total Amount Paid | | :----------- | :------------------------------------- | :-------------------------- | :------------------------------------------- | :---------------- | | Q1 2020 | $0.2850 | $11,928 | $258 | $12,186 | | Q1 2019 | $0.2850 | $11,301 | $264 | $11,565 | - On March 24, 2020, the Board reduced the monthly cash distribution for Q2 2020 to $0.035 per share/unit (quarterly $0.105, annualized $0.42), expecting over $30 million in annualized cash savings due to COVID-19[146] 12. Incentive Share Plan This section details the company's long-term equity incentive plans (2008 Plan and 2018 Plan), including the types of awards granted (restricted common shares, restricted common share units, performance awards) and their vesting conditions. It also summarizes share-based compensation expense and unrecognized costs - The 2018 Long-Term Equity Incentive Ownership Plan, effective July 30, 2018, allows for the issuance of up to 3,433,831 common shares and OP units[152] - Total compensation recognized for share-based payments was $1,326,000 for Q1 2020, down from $1,951,000 for Q1 2019[162] - As of March 31, 2020, there was approximately $3.4 million in unrecognized compensation cost for TSR Units (expected to vest over 21 months) and $3.6 million for time-based shares (expected to vest over 30 months)[163] - The company expects to record approximately $5.0 million in non-cash share-based compensation expense in 2020 and $3.3 million subsequent to 2020[164] - 895,000 CIC Units (Change in Control Units) are considered improbable to vest, so no expense has been recognized for them[164] 13. Grants to Trustees This section reports on common shares granted to independent trustees and a trustee emeritus in December 2019, including those elected in lieu of cash for board fees - On December 12, 2019, 19,562 common shares were granted to six independent trustees and one trustee emeritus, with a grant fair value of $13.54 per share[167] - Two independent trustees elected to receive 3,398 common shares (fair value $13.54) in lieu of cash for board fees[167] 14. Segment Information This section states that management does not differentiate results of operations by property type or location, and therefore does not present segment information - The company does not present segment information as management does not differentiate results of operations by property type or location[168] 15. Real Estate This section provides updates on property acquisitions and development activities - On December 6, 2019, Las Colinas Village (104,919 sq ft, 86% leased) was acquired for $34.8 million in cash[169] - Construction at Anthem Marketplace Phase II (6,853 sq ft, 100% occupied) was substantially completed as of March 31, 2020, with $1.4 million in construction costs incurred[170] 16. Related Party Transactions This section describes transactions with Pillarstone OP, including rental income, interest expense, and management fees, following the adoption of the equity method of accounting Revenue and Expenses with Pillarstone OP (in thousands) | Location of Revenue (Expense) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Rent (Operating and maintenance) | $(264) | $(167) | | Property management fee income (Management, transaction, and other fees) | $156 | $66 | | Interest income (Interest, dividend and other investment income) | $0 | $56 | - A $15.4 million financed receivable from Pillarstone OP was paid off on October 17, 2019[172] 17. Commitments and Contingencies This section discusses legal proceedings and claims in the ordinary course of business, noting management's belief that their resolution will not materially adversely affect the company's financial position. It specifically mentions a $2.3 million claim against Whitestone Pinnacle - Management believes that ongoing legal proceedings and claims will not have a material adverse effect on financial position, results of operations, cash flows, or liquidity[174] - A $2.3 million breach of contract claim against Whitestone Pinnacle is being vigorously defended, with management believing a loss is not probable[175] 18. Subsequent Events This section details the significant impact of the COVID-19 pandemic, including government mandates, rent relief requests, and the company's proactive measures. It also reports on the Paycheck Protection Program (PPP) loan received in April 2020 - COVID-19 pandemic declared a 'Public Health Emergency of International Concern' and characterized as a pandemic, leading to stay-in-place orders and non-essential business closures in Texas and Arizona[176] - As of the report date, the company received approximately 64% of contractual base rent and common area maintenance reimbursables billed for April, and is evaluating rent deferral requests on a case-by-case basis[177] - On April 30, 2020, the company received a $1,733,510 PPP Loan under the CARES Act, maturing May 6, 2022, with a 1.00% interest rate, intending to use proceeds for payroll, mortgage, rent, and utilities, with potential for forgiveness[178][180] - The company has implemented a temporary response team for tenant concerns, paused acquisition activity, and reduced its quarterly dividend to conserve liquidity[177][203][204] 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, results of operations, and future outlook, with a significant focus on the impact of the COVID-19 pandemic and related mitigation strategies Overview - Whitestone REIT owns and operates commercial properties in Texas, Arizona, and Illinois, focusing on "Community Centered Properties®" in culturally diverse neighborhoods[188][189] - As of March 31, 2020, the company wholly-owned 58 commercial properties, including 52 Community Centered Properties® (4.9 million sq ft GLA, $903.7 million carrying amount), one additional property (0.1 million sq ft GLA, $34.5 million carrying amount), and five land parcels for development ($18.6 million carrying value)[191][194] - The company had 1,404 tenants as of March 31, 2020, with the largest tenant comprising only 2.9% of annualized rental revenues[192] - Completed 80 new and renewal leases totaling 221,139 square feet and $22.0 million in total lease value during Q1 2020, compared to 81 leases, 199,643 square feet, and $15.8 million in Q1 2019[192] - The company holds an 81.4% majority interest in eight Pillarstone Properties (926,798 sq ft GLA) that do not fit its core strategy, accounted for using the equity method[195] Impact of COVID-19 - COVID-19 has led to government-mandated closures and stay-in-place orders in Texas and Arizona, impacting tenant operations[197] - As of May 11, 2020, approximately 63% of tenants (by ABR) are open and operating, and the company collected about 64% of contractual base rent and common area maintenance for April[199] - The company drew down $30 million from its revolving credit facility, reduced its quarterly dividend (over $30 million annualized savings), paused acquisitions, and established a tenant response team to manage COVID-19 impacts[198][204] - The full impact of the pandemic on future financial condition, results of operations, and cash flows remains highly uncertain and difficult to predict[197] How We Derive Our Revenue Total Revenues (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------- | :-------------------------------- | :-------------------------------- | | Total revenues | $30,584 | $29,694 | Known Trends in Our Operations; Outlook for Future Results Rental Income This section anticipates year-over-year rental income increases from property additions and rent increases, but acknowledges significant uncertainty due to COVID-19's impact on rent collection and acquisition activity - Expected rental income increase year-over-year from property additions and rent increases on renewal leases[203] - Due to COVID-19, the company has paused acquisition activity and is carefully evaluating development/redevelopment[203] - As of the report date, only 64% of contractual base rent and common area maintenance for April was collected, with numerous rent relief requests being evaluated[203] Scheduled Lease Expirations This section addresses the company's lease expiration schedule, tenant renewal rates, and strategies for re-leasing space, noting potential adverse impacts from market and macroeconomic conditions - Approximately 24% of GLA is subject to leases that expire prior to December 31, 2021[204] - Over the last three years, the company renewed approximately 95% of expiring leases[204] - Market conditions and macroeconomic factors (e.g., employment, interest rates, COVID-19) could adversely impact renewal rates and rental rates[205] Acquisitions This section states the company's goal to grow GLA through acquisitions but notes a prudent pause in activity due to the COVID-19 pandemic, with uncertainty about when acquisition levels will return to normal - The company seeks to grow GLA through acquisitions but has paused activity due to COVID-19[206] - Expects future opportunities to acquire quality properties at attractive prices once COVID-19 impact decreases, but no assurance on timing[206] Property Acquisitions, Dispositions and Development This section reaffirms the strategy to acquire properties fitting the "Community Centered Properties®" model and provides updates on recent acquisitions and development projects - Acquired Las Colinas Village (104,919 sq ft, 86% leased) for $34.8 million on December 6, 2019[208] - Substantially completed construction at Anthem Marketplace Phase II (6,853 sq ft, 100% occupied) by March 31, 2020, with $1.4 million in construction costs[209] Leasing Activity This section presents a summary of leasing activity for the three months ended March 31, 2020, including comparable and non-comparable new and renewal leases, square footage, lease terms, and rent changes - As of March 31, 2020, the company owned 58 properties with 4,953,571 square feet of GLA and an occupancy rate of 90%[211] Leasing Activity (Three Months Ended March 31, 2020) | Lease Type | Number of Leases Signed | GLA Signed (sq ft) | Weighted Average Lease Term (years) | TI and Incentives per Sq. Ft. | Straight-lined Basis Increase (Decrease) Over Prior Rent | | :---------------- | :---------------------- | :----------------- | :---------------------------------- | :---------------------------- | :------------------------------------------------------- | | Comparable Renewal | 55 | 166,435 | 4.3 | $2.05 | 8.4% | | Comparable New | 8 | 12,579 | 4.6 | $8.51 | (3.8)% | | Total Comparable | 63 | 179,014 | 4.4 | $2.50 | 7.3% | | Non-Comparable Renewal | 1 | 1,795 | 5.4 | $41.72 | N/A | | Non-Comparable New | 16 | 40,330 | 4.4 | $11.81 | N/A | | Total Non-Comparable | 17 | 42,125 | 4.4 | $13.09 | N/A | Capital Expenditures This section reports on capital expenditures for Q1 2020 and Q1 2019, noting a pause in acquisitions and careful evaluation of development/redevelopment due to COVID-19 - Due to the impact of the COVID-19 pandemic, the company has taken a prudent pause in acquisitions activity and is carefully evaluating development and redevelopment activities on a case-by-case basis[215] Capital Expenditures (in thousands) | Type of Expenditure | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Tenant improvements and allowances | $688 | $645 | +$43 | | Developments / redevelopments | $187 | $919 | -$732 | | Leasing commissions and costs | $376 | $399 | -$23 | | Maintenance capital expenditures | $718 | $891 | -$173 | | Total capital expenditures | $1,969 | $2,854 | -$885 | Results of Operations Comparison of the Three Months Ended March 31, 2020 and 2019 This section presents a summary comparison of key operational and financial metrics for the three months ended March 31, 2020, and 2019, noting the potential significant impact of COVID-19 on future comparability Key Operational and Financial Metrics (in thousands, except percentages) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Number of properties owned and operated | 58 | 57 | +1 | +1.8% | | Aggregate GLA (sq. ft.) | 4,848,652 | 4,841,660 | +6,992 | +0.1% | | Ending occupancy rate - operating portfolio | 90% | 90% | 0% | 0% | | Total revenues | $30,584 | $29,694 | +$890 | +3.0% | | Total operating expenses | $22,204 | $20,939 | +$1,265 | +6.0% | | Net income attributable to Whitestone REIT | $1,612 | $2,774 | -$1,162 | -41.9% | | Funds from operations (FFO) | $9,265 | $9,860 | -$595 | -6.0% | | Funds from operations core (FFO Core) | $10,591 | $11,811 | -$1,220 | -10.3% | | Property net operating income (NOI) | $21,655 | $22,972 | -$1,317 | -5.7% | | Distributions paid on common shares and OP units | $12,186 | $11,565 | +$621 | +5.4% | | Distributions per common share and OP unit | $0.2850 | $0.2850 | $0.0000 | 0% | | Distributions paid as a percentage of FFO Core | 115% | 98% | +17% | +17.3% | Revenues This section analyzes the components of revenue, including rental revenues, recoveries, bad debt, and other revenues, for Same Store and Non-Same Store properties, highlighting the impact of COVID-19 on rent collection Revenue Components (in thousands, except percentages) | Revenue Type | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Same Store Total | $29,548 | $29,461 | +$87 | 0% | | Non-Same Store and Management Fees Total | $1,036 | $233 | +$803 | +345% | | Total revenue | $30,584 | $29,694 | +$890 | +3% | - Same Store rental revenues decreased by $267,000 (1%) due to a slight decrease in average leased square feet and average rent per leased square foot[225] - Same Store recoveries revenue increased by $1,120,000 (15%) primarily due to increases in recoverable operations and maintenance costs[226] - Same Store bad debt increased by $534,000 (196%) due to converting approximately 40 tenants to cash basis accounting as a result of COVID-19 collectability analysis, resulting in an $853,000 decrease to revenue[227] - Non-Same Store total rental revenue increased due to the acquisition of Las Colinas Village in December 2019[229] - The company anticipates significantly lower rental revenue for Q2 2020 due to COVID-19, with only 64% of April's contractual rent collected[230] Operating expenses This section details the changes in operating expenses, including operating and maintenance, real estate taxes, and general and administrative expenses, for Same Store and Non-Same Store properties Operating Expenses (in thousands, except percentages) | Operating Expenses | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Same Store total | $9,564 | $8,248 | +$1,316 | +16% | | Non-Same Store and affiliated company rents total | $569 | $225 | +$344 | +153% | | Depreciation and amortization | $6,971 | $6,464 | +$507 | +8% | | General and administrative | $5,100 | $6,002 | -$902 | -15% | | Total operating expenses | $22,204 | $20,939 | +$1,265 | +6% | - Same Store operating and maintenance costs increased by $1,018,000 (24%), primarily due to repairs and maintenance, and contract services[231] - General and administrative expenses decreased by $902,000 (15%), mainly due to a $625,000 decrease in share-based compensation expense and a $230,000 decrease in legal expense[233] Other expenses (income) This section presents the components of other expenses (income), including interest expense, gain/loss on property sales, and investment income Other Expenses (Income) (in thousands, except percentages) | Other Expenses (Income) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Interest expense | $6,693 | $6,533 | +$160 | +2% | | Gain on sale of properties | $(46) | $0 | -$46 | Not Meaningful | | Loss on sale or disposal of assets | $253 | $2 | +$251 | Not Meaningful | | Interest, dividend and other investment income | $(62) | $(245) | +$183 | -75% | | Total other expense | $6,838 | $6,290 | +$548 | +9% | - The increase in interest expense is primarily due to an increase in the average notes payable balance from $620.6 million in Q1 2019 to $660.1 million in Q1 2020[234] Equity in earnings of real estate partnership This section reports on the decrease in equity in earnings from Pillarstone OP, primarily due to property sales - Equity in earnings of real estate partnership decreased by $300,000 (from $492,000 in Q1 2019 to $192,000 in Q1 2020)[235] - This decrease is mainly attributed to lower net income from Pillarstone OP following the sale of three properties in October 2019[235] Same Store net operating income This section provides a detailed breakdown of Same Store Net Operating Income (NOI), showing a slight decrease for the three months ended March 31, 2020, compared to 2019 Same Store NOI (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total property revenues | $29,548 | $29,461 | +$87 | 0% | | Total property expenses | $9,564 | $8,248 | +$1,316 | +16% | | Total property revenues less total property expenses | $19,984 | $21,213 | -$1,229 | -6% | | Same Store straight line rent adjustments | $350 | $(460) | +$810 | -176% | | Same Store amortization of above/below market rents | $(217) | $(272) | +$55 | -20% | | Same Store lease termination fees | $(30) | $(209) | +$179 | -86% | | Same Store NOI | $20,087 | $20,272 | -$185 | -1% | Reconciliation of Non-GAAP Financial Measures Funds From Operations (NAREIT) ("FFO") This section defines FFO according to NAREIT guidelines and explains its use as a supplemental measure for evaluating operating performance in the real estate industry, distinct from GAAP net income - FFO is defined as GAAP net income (loss) excluding real estate depreciation/amortization, gains/losses from property sales, change in control gains/losses, and impairment write-downs of real estate assets[242] - FFO is used by management, analysts, and investors as the primary metric for comparing equity REIT performance, as historical cost accounting for real estate can be insufficient[243][244] Funds From Operations Core ("FFO Core") This section introduces FFO Core as an adjusted FFO measure that excludes certain non-indicative items to improve period-over-period comparability of operating portfolio performance - FFO Core excludes items like legal settlements, proxy contest fees, debt extension costs, non-cash share-based compensation, rent support payments, management fees from Pillarstone, and acquisition costs to provide a more comparable measure of operating performance[246] Property Net Operating Income ("NOI") This section defines NOI as operating revenues less property and related expenses, explaining its utility in evaluating property operating performance by focusing on revenues and expenses directly associated with real estate ownership and operation - NOI is defined as operating revenues (rental and other) less property and related expenses (operation, maintenance, real estate taxes)[250] - NOI helps evaluate operating performance by reflecting trends in occupancy, rental rates, and operating costs, providing a perspective not immediately apparent from net income[250] FFO, FFO Core, and NOI Reconciliation (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to Whitestone REIT | $1,612 | $2,774 | | FFO (NAREIT) | $9,265 | $9,860 | | FFO Core | $10,591 | $11,811 | | NOI | $21,655 | $22,972 | Liquidity and Capital Resources - Short-term liquidity needs include distributions, recurring/non-recurring expenditures, debt service, and potential acquisitions[253] - Long-term capital requirements include debt maturities, development costs, and potential acquisitions, expected to be met by cash from operations, long-term debt, equity issuances, and property sales[255] - Cash provided from operating activities was $5,213,000 for Q1 2020, while total distributions were $12,186,000, resulting in distributions exceeding cash flow from operations by $6,973,000[254] - The company drew down $30 million from its revolving credit facility as a precautionary measure due to COVID-19, leaving $8.7 million remaining availability as of March 31, 2020[255][261] - Access to capital may be diminished due to potential reduction in borrowing base (from reduced real estate values/NOI) and common share price being below net asset value[255][256] - On April 30, 2020, the company received a $1,733,510 PPP Loan under the CARES Act, intended for payroll, mortgage, rent, and utilities, with potential for forgiveness[259] - Cash, cash equivalents, and restricted cash increased by $21,236,000 to $36,879,000 as of March 31, 2020, primarily due to $30 million from the 2019 Facility and $2.2 million from common share issuance, offset by distributions and real estate additions[266][268] Contractual Obligations - The company has a Note Agreement for $100 million senior unsecured notes maturing in March 2029, with principal amortization starting in 2023 and 2025[289] - The 2019 Facility is an unsecured credit facility comprising a $250 million revolving credit facility and two term loans ($165 million and $100 million), with maturities ranging from January 2023 to January 2024[273] Distributions - On March 24, 2020, the Board reduced the monthly cash distribution for Q2 2020 to $0.035 per share/unit (quarterly $0.105, annualized $0.42), expecting over $30 million in annualized cash savings[291] - The Board will regularly reassess the dividend based on clarity regarding the COVID-19 crisis and business conditions[292] Distributions Paid (in thousands, except per share data) | Quarter Paid | Distributions Per Common Share | Amount Paid (Common Shares) | Distributions Per OP Unit | Amount Paid (Noncontrolling OP Unit) | Total Amount Paid | | :----------- | :----------------------------- | :-------------------------- | :------------------------ | :----------------------------------- | :---------------- | | Q1 2020 | $0.2850 | $11,928 | $0.2850 | $258 | $12,186 | | Q1 2019 | $0.2850 | $11,301 | $0.2850 | $264 | $11,565 | Taxes - The company intends to operate to remain qualified as a REIT for federal income tax purposes, distributing at least 90% of taxable income to shareholders[293] Environmental Matters - No significant environmental costs, accrued liabilities, or expenditures have been incurred to mitigate or eliminate future environmental contamination[294] Off-Balance Sheet Arrangements - The company may guarantee real estate partnership debt to help obtain lower-cost funding, receiving a fee or increased ownership interest in return[295] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section addresses the company's exposure to market risk, primarily interest rate fluctuations, and its strategies for managing this risk through fixed-rate debt and derivative instruments. It also discusses increased credit risk due to COVID-19 Fixed Interest Rate Debt - As of March 31, 2020, $537.1 million (79%) of total outstanding debt was subject to fixed interest rates, with an average effective interest rate of approximately 4.1%[298] - A 1% increase or decrease in interest rates would cause a $20.7 million decline or increase, respectively, in the fair value of fixed-rate debt[298] Variable Interest Rate Debt - As of March 31, 2020, $139.5 million (21%) of outstanding debt was subject to floating interest rates (LIBOR plus 1.40% to 1.90%) and not currently hedged[299] - A 1% increase or decrease in interest rates on non-hedged variable rate debt would result in a decrease or increase of annual net income by approximately $1.4 million, respectively[299] Credit Risk - Credit risk is increased due to the COVID-19 pandemic, potentially leading to reductions in on-time payments or tenant closures[300] - While Q1 rental income was consistent, future periods may see adverse effects on results of operations, cash flows, and financial condition due to tenant financial challenges[300] Item 4. Controls and Procedures. This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, and states that remote working arrangements due to COVID-19 have not materially affected internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were effective as of March 31, 2020[301] Changes in Internal Control Over Financial Reporting - Remote working arrangements due to COVID-19 have not had a material effect on internal control over financial reporting during Q1 2020[303] PART II - OTHER INFORMATION Item 1. Legal Proceedings. This section states that the company is subject to various legal proceedings and claims in the ordinary course of business, which management believes will not have a material adverse effect on its financial position. It specifically mentions a $2.3 million claim against Whitestone Pinnacle - Management believes that the final outcome of ordinary course legal proceedings will not materially adversely affect the company's financial position, results of operations, or liquidity[304] - A $2.3 million breach of contract claim against Whitestone Pinnacle is being vigorously defended, with management believing a loss is not probable[305] Item 1A. Risk Factors. This section updates the risk factors, primarily focusing on the material and adverse impacts of the COVID-19 pandemic on the company's business, tenants, financial condition, and ability to service debt and pay dividends. It also mentions potential changes to U.S. federal income tax laws - The COVID-19 pandemic is expected to materially and adversely impact tenant businesses, the company's income, cash flow, results of operations, financial condition, liquidity, and ability to service debt and pay dividends[307] - As of the report date, only 64% of contractual base rent and common area maintenance for April was collected, and rent relief requests are being evaluated[309] - Potential risks include tenant closures/bankruptcies, difficulty renewing leases, increased co-tenancy claims, delays in enforcing landlord rights, and a general decline in demand for retail space[310][311][312][313] - COVID-19 could lead to reduced access to debt and equity capital, negative impact on dividend payments, potential non-compliance with financial covenants, and increased cybersecurity risks due to remote work[317] - Changes to U.S. federal income tax laws, including the Tax Cuts and Jobs Act and CARES Act, could adversely impact the business and financial results[319] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This section reports on the repurchase of common shares from employees to satisfy tax withholding obligations on restricted share vesting Common Shares Repurchased from Employees (Q1 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--------------------------------------- | :----------------------------- | :--------------------------- | | January 1, 2020 through January 31, 2020 | 119,693 | $13.62 | | March 1, 2020 through March 31, 2020 | 33,218 | $8.04 | | Total | 152,911 | $12.41 | - Shares were purchased from employees to satisfy tax withholding on the lapse of restrictions on restricted common shares[323] Item 3. Defaults Upon Senior Securities. This section states that there were no defaults upon senior securities - No defaults upon senior securities[324] Item 4. Mine Safety Disclosures. This section states that mine safety disclosures are not applicable to the company - Not applicable[325] Item 5. Other Information. This section states that there is no other information to report - None[326] Item 6. Exhibits. This section lists the exhibits filed, furnished, and incorporated by reference as part of the report, including financial information in XBRL format and various articles of amendment and certifications - Includes XBRL financial information (Consolidated Balance Sheets, Statements of Operations, Changes in Equity, Cash Flows, Notes) for Q1 2020 and Q1 2019[331] - Various Articles of Amendment and Restatement, Bylaws, and Certifications (Sarbanes-Oxley Act) are filed as exhibits[332] Signatures This section contains the signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - Report signed by James C. Mastandrea (CEO) and David K. Holeman (CFO) on May 11, 2020[336]