Whitestone REIT(US:WSR)2020-10-30 20:25PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Whitestone REIT's unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and accompanying notes for the specified periods Consolidated Balance Sheets As of September 30, 2020, total assets increased slightly to $1.065 billion from $1.056 billion at year-end 2019, primarily driven by an increase in cash and cash equivalents Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,064,925 | $1,056,260 | | Cash and cash equivalents | $38,990 | $15,530 | | Total real estate assets, net | $947,660 | $962,022 | | Total Liabilities | $728,665 | $703,162 | | Notes payable | $666,516 | $644,699 | | Total Equity | $336,260 | $353,098 | Consolidated Statements of Operations and Comprehensive Income (Loss) For Q3 2020, total revenues remained flat at $29.9 million, while net income decreased by 50% to $0.9 million, reflecting increased expenses and bad debt Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $29,900 | $29,879 | $88,081 | $89,151 | | Total Operating Expenses | $22,730 | $21,914 | $65,328 | $63,613 | | Net Income Attributable to Whitestone REIT | $900 | $1,807 | $2,922 | $7,908 | | Diluted EPS | $0.02 | $0.04 | $0.07 | $0.19 | - Bad debt expense increased significantly, rising to $1.3 million in Q3 2020 from $0.5 million in Q3 2019, and to $4.5 million for the nine months of 2020 from $0.9 million in the prior year period, largely due to the impact of COVID-191550 Consolidated Statements of Cash Flows Net cash provided by operating activities for the nine months ended September 30, 2020, was $29.2 million, resulting in a net increase in cash of $23.5 million Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $29,220 | $29,976 | | Net Cash from Investing Activities | ($4,886) | ($9,252) | | Net Cash from Financing Activities | ($859) | ($28,865) | | Net Increase (Decrease) in Cash | $23,475 | ($8,141) | Notes to Consolidated Financial Statements Detailed notes disclose accounting policies, operations, and financial items, including COVID-19 impacts, debt, leases, and equity transactions - Due to the COVID-19 pandemic, the company received payments for approximately 90% of contractual base rent and common area maintenance for Q3 and October 2020. The company is evaluating numerous tenant rent relief requests on a case-by-case basis36 - The company recorded an adjustment to rental revenue of $4.5 million for the nine months ended September 30, 2020, due to increased bad debt and straight-line rent reserves, a significant increase from $0.9 million in the same period of 201950 - On April 30, 2020, the company received a Paycheck Protection Program (PPP) loan of $1.73 million, which accrues interest at 1.00% and matures in May 2022. The company intends to apply for forgiveness85 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial condition and operations, focusing on COVID-19 impacts, liquidity, capital resources, debt, and non-GAAP reconciliations Impact of COVID-19 The COVID-19 pandemic materially impacted operations, leading to increased rent relief requests and bad debt, prompting liquidity and cost-saving measures - As of the report date, approximately 97% of tenants (by ABR) were open and operating, and the company had collected about 90% of contractual rent for Q3 and October177 - Proactive liquidity measures include drawing down $30 million from the revolving credit facility in March 2020 and reducing the quarterly dividend, resulting in over $30 million of annualized savings177178 - For the nine months ended September 30, 2020, the company recorded a bad debt adjustment of $1.8 million and a straight-line rent reserve adjustment of $1.1 million related to credit loss from converting 84 tenants to cash basis accounting due to COVID-19177 Results of Operations Operating results for Q3 and the nine-month period ended September 30, 2020, show a 4% decrease in Same Store NOI due to higher bad debt expense Q3 2020 vs Q3 2019 Performance (in thousands) | Metric | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $29,900 | $29,879 | $21 | 0% | | Net Income Attributable to Whitestone REIT | $900 | $1,807 | ($907) | (50)% | | FFO Core | $10,112 | $10,950 | ($838) | (8)% | | Same Store NOI | $18,936 | $19,822 | ($886) | (4)% | Nine Months 2020 vs 2019 Performance (in thousands) | Metric | Nine Months 2020 | Nine Months 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $88,081 | $89,151 | ($1,070) | (1)% | | Net Income Attributable to Whitestone REIT | $2,922 | $7,908 | ($4,986) | (63)% | | FFO Core | $30,312 | $33,874 | ($3,562) | (11)% | | Same Store NOI | $57,304 | $59,959 | ($2,655) | (4)% | Liquidity and Capital Resources As of September 30, 2020, the company maintained $39.1 million in cash and $13.0 million in credit facility availability, with operating cash flow exceeding distributions - Cash flow from operations of $29.2 million for the nine months ended September 30, 2020, exceeded total distributions of $21.2 million by approximately $8.0 million217 - In March 2020, the company drew down $30 million from its revolving credit facility as a precautionary measure, leaving $13.0 million in remaining availability as of September 30, 2020218 - On May 14, 2020, the Board adopted a shareholder rights plan (a "poison pill") to protect against opportunistic takeovers, which is set to expire on May 13, 2021219220 Reconciliation of Non-GAAP Financial Measures This section defines and reconciles key non-GAAP metrics, including FFO, FFO Core, and Property Net Operating Income (NOI) FFO and FFO Core Reconciliation (in thousands) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income Attributable to Whitestone REIT | $900 | $1,807 | $2,922 | $7,908 | | FFO (NAREIT) | $8,467 | $9,231 | $26,145 | $29,104 | | Share-based compensation expense | $1,645 | $1,719 | $4,167 | $4,770 | | FFO Core | $10,112 | $10,950 | $30,312 | $33,874 | NOI Reconciliation (in thousands) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income Attributable to Whitestone REIT | $900 | $1,807 | $2,922 | $7,908 | | Adjustments | $20,372 | $20,244 | $60,043 | $59,097 | | NOI | $21,272 | $22,051 | $62,965 | $67,005 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with 79% of debt fixed-rate, alongside increased credit risk from tenants due to COVID-19 - As of September 30, 2020, 79% of the company's total outstanding debt carried a fixed interest rate, with an average effective rate of approximately 4.1%263 - The company had $139.5 million in variable-rate debt. A 1% change in interest rates would affect annual net income by about $1.4 million264 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material impact from the temporary shift to remote work - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of the end of the period266 - The shift to remote work during the first and second quarters of 2020 due to the COVID-19 pandemic did not materially affect the company's internal control over financial reporting267 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various ordinary course legal proceedings, with management expecting no material adverse effect on financial position or results - The company states that it is not involved in any legal proceedings that are expected to have a material adverse effect on its financial condition or operations268 Item 1A. Risk Factors This section highlights material risks, primarily the ongoing COVID-19 pandemic's adverse impact on tenants, rent collection, liquidity, and dividend payments - The primary risk factor discussed is the COVID-19 pandemic, which is expected to materially and adversely impact tenants' businesses and the company's own financial results, liquidity, and ability to pay dividends270 - Specific pandemic-related risks include tenants' inability to make timely rent payments, an increase in rent relief requests, potential tenant closures and bankruptcies, and difficulty in re-leasing vacant space271272273 - The pandemic could negatively impact the company's ability to access capital markets, comply with debt covenants, and could lead to substantial asset impairment charges if future cash flow estimates worsen278 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company did not sell unregistered equity securities but repurchased 1,173 common shares from employees for tax withholding - In Q3 2020, 1,173 common shares were repurchased from employees who tendered shares to cover tax withholding on vested restricted stock awards281