Whitestone REIT(WSR) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Whitestone REIT's unaudited consolidated financial statements and management's analysis of financial condition Item 1. Financial Statements. This section presents the unaudited consolidated financial statements of Whitestone REIT and its subsidiaries, including balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes explaining accounting policies, debt, equity, and significant events Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time | Balance Sheet Item (in thousands) | March 31, 2025 | December 31, 2024 | Change | | :-------------------------------- | :------------- | :---------------- | :----- | | Total real estate assets | $998,822 | $1,001,689 | $(2,867) | | Cash and cash equivalents | $5,586 | $5,224 | $362 | | Total assets | $1,126,691 | $1,134,639 | $(7,948) | | Notes payable | $641,295 | $631,518 | $9,777 | | Total liabilities | $690,124 | $690,805 | $(681) | | Total equity | $436,567 | $443,834 | $(7,267) | Consolidated Statements of Operations and Comprehensive Income (Loss) This section outlines the company's financial performance over a period, including revenues, expenses, and net income or loss | Income Statement Item (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenues | $38,003 | $37,164 | $839 | 2.26% | | Total operating expenses | $26,031 | $25,567 | $464 | 1.81% | | Total other expenses | $8,097 | $1,986 | $6,111 | 307.70% | | Net income | $3,748 | $9,464 | $(5,716) | (60.39)% | | Net income attributable to Whitestone REIT | $3,701 | $9,340 | $(5,639) | (60.37)% | | Basic Earnings Per Share | $0.07 | $0.19 | $(0.12) | (63.16)% | | Diluted Earnings Per Share | $0.07 | $0.18 | $(0.11) | (61.11)% | Consolidated Statements of Changes in Equity This section details the changes in the company's equity accounts over a period, including net income, distributions, and other comprehensive income | Equity Item (in thousands) | March 31, 2025 | December 31, 2024 | | :----------------------------------- | :------------- | :---------------- | | Balance, December 31, 2024 | N/A | $443,834 | | Distributions | $(6,898) | N/A | | Unrealized loss on cash flow hedge | $(3,482) | N/A | | Net income | $3,701 | N/A | | Balance, March 31, 2025 | $436,567 | N/A | Consolidated Statements of Cash Flows This section reports the cash generated and used by the company across operating, investing, and financing activities over a period | Cash Flow Item (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by operating activities | $3,081 | $11,524 | $(8,443) | | Net cash used in investing activities | $(3,914) | $(4,584) | $670 | | Net cash provided by (used in) financing activities | $1,277 | $(5,365) | $6,642 | | Net increase in cash, cash equivalents and restricted cash | $444 | $1,575 | $(1,131) | | Cash, cash equivalents and restricted cash at end of period | $15,814 | $6,215 | $9,599 | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements 1. Interim Financial Statements This note explains the basis of presentation for the unaudited interim financial statements, consistent with U.S. GAAP and annual audited statements. It also describes Whitestone REIT's business as a REIT owning 55 commercial properties in Texas and Arizona, and details the ongoing bankruptcy proceedings and redemption claim related to its investment in Pillarstone OP - Whitestone REIT operates 55 commercial properties (50 wholly-owned, 5 land parcels for development) in major metropolitan areas of Texas and Arizona[34][35][36] - The company exercised its redemption notice for substantially all of its investment in Pillarstone OP on January 25, 2024, and has filed a claim in the Pillarstone Bankruptcies for the redemption value plus interest and costs, believing the amount collected will exceed the current carrying value of the receivable[37] 2. Summary of Significant Accounting Policies This note outlines key accounting policies including basis of consolidation, equity method for investments (ceased for Pillarstone OP post-redemption notice), accrual basis of accounting, use of estimates, and reclassifications. It also details policies for restricted cash, like-kind exchanges, derivative instruments, development properties, share-based compensation, noncontrolling interests, accrued rents, and revenue recognition - The company consolidates the Operating Partnership due to majority ownership and full legal control. Noncontrolling interests represent the share of equity and earnings allocable to other partnership interest holders[39][40] - Significant estimates include fair values of acquired properties, useful lives of assets, share-based compensation, allowance for doubtful accounts, fair value of interest rate swaps, impairment analysis, and estimates regarding Pillarstone OP's financial condition[44] - Rental income from operating leases is recognized on a straight-line basis, with tenant recoveries recognized as corresponding costs are incurred. Lease and nonlease components are combined into a single "Rental" line item[56][61] 3. Leases This note details the company's role as both a lessor and a lessee. As a lessor, all property leases are noncancelable operating leases with rental income recognized straight-line. As a lessee, the company has operating leases for automobiles and office machines, and finance leases for a ground lease and an office machine Minimum Future Rents (as Lessor, in thousands) | Minimum Future Rents (as Lessor, in thousands) | Amount | | :--------------------------------------------- | :----- | | 2025 (remaining) | $78,168 | | 2026 | $93,399 | | 2027 | $80,314 | | 2028 | $65,346 | | 2029 | $50,562 | | Thereafter | $142,298 | | Total | $510,087 | Lease Liabilities (as Lessee, in thousands) | Lease Liabilities (as Lessee, in thousands) | Operating Leases | Finance Leases | | :---------------------------------------- | :--------------- | :------------- | | Total undiscounted rental payments | $54 | $3,039 | | Less imputed interest | $3 | $2,267 | | Total lease liabilities | $51 | $772 | 4. Accrued Rents and Accounts Receivable, Net This note provides a breakdown of accrued rents and accounts receivable, net, showing a slight increase in total receivables from December 31, 2024, to March 31, 2025, primarily due to a decrease in the allowance for doubtful accounts Accrued Rents and Accounts Receivable (in thousands) | Accrued Rents and Accounts Receivable (in thousands) | March 31, 2025 | December 31, 2024 | | :------------------------------------------------- | :------------- | :---------------- | | Tenant receivables | $15,814 | $17,285 | | Accrued rents and other recoveries | $29,887 | $29,964 | | Allowance for doubtful accounts | $(13,167) | $(14,720) | | Other receivables | $1,331 | $1,291 | | Total | $33,865 | $33,820 | 5. Unamortized Lease Commissions, Legal Fees and Loan Costs This note details the deferred costs, including leasing commissions, legal costs, and financing costs, net of accumulated amortization. Total net deferred costs decreased slightly from December 31, 2024, to March 31, 2025 Deferred Costs (in thousands) | Deferred Costs (in thousands) | March 31, 2025 | December 31, 2024 | | :-------------------------------------------- | :------------- | :---------------- | | Total cost | $26,404 | $26,055 | | Less: accumulated amortization | $(12,136) | $(11,362) | | Total cost, net of accumulated amortization | $14,268 | $14,693 | 6. Investment in Real Estate Partnership This note discusses the company's former investment in Pillarstone OP, which ceased to be a majority interest after the redemption notice on January 25, 2024. Pillarstone OP subsequently filed for Chapter 11 bankruptcy. Whitestone has filed a claim for its redemption value and a subrogation claim for a loan guarantee payment, expecting to collect an amount exceeding the current carrying value of the receivable - Whitestone exercised its redemption notice for substantially all of its investment in Pillarstone OP on January 25, 2024, converting its equity investment into a receivable[67][80] - Pillarstone OP and Pillarstone REIT filed for Chapter 11 bankruptcy on March 4, 2024. Whitestone has filed a claim for its redemption claim (approximately $70 million, including interest) and a secured subrogation claim for a $13.6 million loan guarantee payment[37][76][77] - The company does not believe a probable loss will be incurred from the Pillarstone Bankruptcies and anticipates the amount collected will exceed the current carrying value of the receivable[79][81] 7. Debt This note details the company's debt structure, including fixed and floating rate notes, and the unsecured credit facility. It highlights a new $56.34 million fixed-rate mortgage loan and the terms of the 2022 Facility, including its revolving credit and term loans. The company was in compliance with all loan covenants as of March 31, 2025 Debt Type (in thousands) | Debt Type (in thousands) | March 31, 2025 | December 31, 2024 | | :----------------------- | :------------- | :---------------- | | Fixed rate notes | $539,911 | $547,483 | | Floating rate notes | $102,300 | $75,000 | | Total notes payable principal | $642,211 | $632,483 | - A new $56.34 million mortgage loan with a fixed interest rate of 6.23% was entered into on June 21, 2024, secured by three properties, with proceeds used to pay down existing floating rate indebtedness[91][92][93] - The 2022 Facility includes a $250 million unsecured revolving credit facility, a $265 million unsecured term loan, and a $20 million unsecured incremental term loan. As of March 31, 2025, $437.3 million was drawn, with $97.7 million remaining availability under the revolver[112][114] Debt Maturities (in thousands) | Debt Maturities (in thousands) | Amount Due | | :----------------------------- | :--------- | | 2025 (remaining) | $0 | | 2026 | $169,443 | | 2027 | $97,414 | | 2028 | $302,823 | | 2029 | $17,867 | | Thereafter | $54,664 | | Total | $642,211 | 8. Derivatives and Hedging Activities This note describes the company's use of interest rate swaps as cash flow hedges to manage exposure to interest rate fluctuations. The fair value of these swaps decreased significantly from December 31, 2024, to March 31, 2025, resulting in an unrealized loss on cash flow hedging activities Interest Rate Swaps (in thousands) | Interest Rate Swaps (in thousands) | March 31, 2025 (Estimated Fair Value) | December 31, 2024 (Estimated Fair Value) | | :--------------------------------- | :------------------------------------ | :--------------------------------------- | | Prepaid expenses and other assets | $2,280 | $5,792 | | Accounts payable and accrued expenses | $(15) | N/A | Interest Rate Swap Activity (in thousands) | Interest Rate Swap Activity (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Recognized as Comprehensive Income (Loss) | $(3,526) | $5,007 | | Income (Loss) Recognized in Earnings | $781 | $1,699 | 9. Earnings Per Share This note explains the calculation of basic and diluted earnings per share, which decreased significantly for the three months ended March 31, 2025, compared to the same period in 2024 Earnings Per Share Data (in thousands, except per share data) | Earnings Per Share Data (in thousands, except per share data) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :---------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income attributable to common shareholders | $3,701 | $9,340 | | Weighted average number of common shares - basic | 50,890 | 49,940 | | Basic Earnings Per Share | $0.07 | $0.19 | | Diluted Earnings Per Share | $0.07 | $0.18 | 10. Income Taxes This note states that the company generally does not provide for federal income taxes as it intends to qualify as a REIT, distributing at least 90% of its taxable income. It is subject to Texas Margin Tax, recognizing approximately $126,000 in provision for the three months ended March 31, 2025 - Whitestone REIT aims to qualify as a REIT, distributing at least 90% of its taxable income to shareholders, and is therefore generally exempt from federal income tax[130] Tax Provision (in thousands) | Tax Provision (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Texas Margin Tax | $126 | $120 | 11. Equity This note details the company's common and preferred share authorization, its universal shelf registration for up to $500 million in securities, and its at-the-market equity distribution program (no sales in Q1 2025 or Q1 2024). It also outlines the ownership structure of the Operating Partnership, with Whitestone owning 98.7% interest, and summarizes cash distributions to shareholders and OP unit holders - Whitestone REIT has authority to issue up to 400 million common shares and 50 million preferred shares. A universal shelf registration allows for the issuance of up to $500 million in various securities[132][133] - The company owns a 98.7% interest in the Operating Partnership. No shares were sold under the at-the-market equity distribution program in Q1 2025 or Q1 2024[135][136][137] Distributions (in thousands, except per share/unit) | Distributions (in thousands, except per share/unit) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Distributions Per Common Share / OP Unit | $0.1350 | $0.1200 | | Total Amount Paid | $6,932 | $6,049 | 12. Incentive Share Plan This note describes the 2018 Long-Term Equity Incentive Ownership Plan, which allows for the issuance of up to 3,433,831 common shares and OP units. It details various grants of TSR Units and time-based restricted common share units to employees, their vesting conditions, and the recognized share-based compensation expense - The 2018 Plan authorizes the issuance of up to 3,433,831 common shares and OP units, with awards vesting based on performance conditions (TSR Units) or time-based installments[140][144][146] Share-Based Compensation (in thousands) | Share-Based Compensation (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Total compensation recognized in earnings | $1,132 | $936 | - As of March 31, 2025, there was approximately $2.8 million in unrecognized compensation cost for TSR Units (expected to vest over 21 months) and $2.5 million for time-based shares (expected to vest over 27 months)[153] 13. Grants to Trustees This note reports the grant of 42,746 common shares to seven independent trustees on December 24, 2024, which vested immediately, with a grant date fair value of $14.15 per share - On December 24, 2024, 42,746 common shares were granted to seven independent trustees, vesting immediately, with a fair value of $14.15 per share[155] 14. Segment Information This note states that the company operates as a single reportable segment, as the Chief Operating Decision Maker (CODM) evaluates performance and allocates resources at the portfolio level, not geographically. Net income attributable to Whitestone REIT and total assets are key metrics used by the CODM - Whitestone REIT operates as a single reportable segment, with the CEO (CODM) evaluating performance and allocating resources at the portfolio level[156] - Key metrics for performance assessment and resource allocation include Net income attributable to Whitestone REIT and total assets[157] 15. Real Estate This note details recent property acquisitions and dispositions. In late 2024 and early 2025, the company acquired four properties totaling $55.9 million and disposed of three properties for $64.1 million, recording significant gains on sales - Acquisitions in late 2024 and early 2025 include Village Shops at Dana Park ($5.6 million, Dec 2024), Scottsdale Commons ($22.2 million, Apr 2024), Anderson Arbor Pad ($0.9 million, Apr 2024), and Garden Oaks Shopping Center ($27.2 million, Feb 2024)[161][162][163] - Dispositions in 2024 include Providence ($16.3 million, $11.9 million gain), Fountain Hills Plaza ($21.3 million, $3.6 million gain), and Mercado at Scottsdale Ranch ($26.5 million, $6.6 million gain)[165][166] 16. Related Party Transactions This note discusses the historical related party relationships with Pillarstone REIT, involving former executives and a trustee. It reiterates the cessation of equity method accounting for Pillarstone OP after the redemption notice and reclassification of the investment to a receivable - Former Chairman/CEO James C. Mastandrea and former COO John J. Dee held significant equity interests in Pillarstone REIT. A former Trustee, Paul T. Lambert, also served as a Trustee of Pillarstone REIT[168] - Following the redemption notice on January 25, 2024, the company ceased using the equity method for Pillarstone OP and reclassified its investment to a receivable[169] 17. Commitments and Contingencies This note outlines significant legal proceedings and claims, including the company's guarantee of Pillarstone OP's loan (now a subrogation claim in bankruptcy), litigation with Pillarstone REIT, and lawsuits involving former COO and CEO. Management believes these matters will not have a material adverse effect on financial position, results of operations, or liquidity - Whitestone OP guaranteed a $14.4 million loan for Pillarstone OP's Uptown Tower property, which went into default. Whitestone paid $13.6 million to satisfy the loan and asserted a subrogation claim in Pillarstone's bankruptcy[170][171][173] - The company is involved in litigation with Pillarstone REIT regarding a shareholder rights agreement and lawsuits with former COO John Dee and former CEO James Mastandrea concerning employment termination[174][175][176] - Management believes the final outcome of all legal proceedings and claims will not have a material adverse effect on the company's financial position, results of operations, cash flows, or liquidity[178][184] 18. Subsequent Events This note states that there are no subsequent events to report - No subsequent events were reported as of the filing date[185] 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 and results of operations, including an overview of its business strategy, recent performance, and discussions on liquidity, capital resources, and market risks. It also reconciles non-GAAP financial measures like FFO and NOI Forward-Looking Statements This section cautions readers that the report contains statements about future events that are subject to risks and uncertainties - The report contains forward-looking statements, which are not guarantees of future performance and are subject to risks and uncertainties[188][189] - Key risk factors include failure to qualify as a REIT, economic conditions, real estate value fluctuations, legislative changes, interest rate increases, natural disasters, and litigation risks[190] Overview This section provides a general description of Whitestone REIT's business, property portfolio, and operational strategy - Whitestone REIT is an internally managed company owning 55 commercial properties (50 operating, 5 development land parcels) in Texas and Arizona, adhering to a "Community Centered Properties®" strategy[193][194][196] - The company has 1,456 tenants, with the largest comprising 2.2% of annualized rental revenues. In Q1 2025, 84 new and renewal leases were completed, totaling 199,610 square feet and $31.3 million in value, an increase from Q1 2024[198] - The company employed 69 full-time employees as of March 31, 2025, bearing its own operating expenses as an internally managed REIT[199] Inflation This section discusses how the company's lease structures and terms help mitigate the impact of inflation on its financial performance - The majority of leases are triple-net or pass-through operating expenses, and many have terms less than five years, allowing for rental rate adjustments to mitigate inflation effects[201] Rising Interest Rates This section analyzes the company's exposure to rising interest rates, particularly on its floating-rate debt, and potential impacts on net income - As of March 31, 2025, $102.3 million (16%) of outstanding debt is subject to floating interest rates (SOFR plus 1.50% to 2.10%)[202] - A 1% change in interest rates on non-hedged variable rate debt would result in an approximate $1.0 million decrease or increase in annual net income[202] How We Derive Our Revenue This section explains the primary sources of the company's revenue and factors influencing its generation Revenue (in thousands) | Revenue (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :--------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenues | $38,003 | $37,164 | $839 | 2.26% | Rental Income This section discusses trends and factors affecting the company's rental income, including property additions and bad debt adjustments - Rental income is expected to increase year-over-year due to property additions and rent increases on renewal leases[204] - Bad debt adjustments decreased rental revenue by $0.3 million in Q1 2025, compared to $0.6 million in Q1 2024, indicating an improvement in collectability[204] Scheduled Lease Expirations This section outlines the percentage of gross leasable area subject to expiring leases and the company's renewal strategies - Approximately 24% of GLA is subject to leases expiring by December 31, 2026[205] - The company has renewed approximately 69% of expiring leases over the last three calendar years and actively seeks to re-lease space prior to expiration[205] Acquisitions This section describes the company's strategy for growing its portfolio through property acquisitions in high-growth markets - The company seeks to grow GLA by acquiring properties that fit its "Community Centered Properties®" strategy in high-growth markets[206][207] - Extensive relationships with community banks, attorneys, and title companies support an active acquisition pipeline[206] Property Acquisitions, Dispositions and Development This section details recent property transactions, including acquisitions and dispositions, and their financial impact - Acquisitions in late 2024 and early 2025 include Village Shops at Dana Park ($5.6 million, Dec 2024), Scottsdale Commons ($22.2 million, Apr 2024), Anderson Arbor Pad ($0.9 million, Apr 2024), and Garden Oaks Shopping Center ($27.2 million, Feb 2024)[208][209][210] - Dispositions include Providence ($16.3 million, Nov 2024), Fountain Hills Plaza ($21.3 million, Aug 2024), and Mercado at Scottsdale Ranch ($26.5 million, Mar 2024), resulting in significant gains on sale[212][213] Leasing Activity This section provides an overview of the company's leasing performance, including occupancy rates, new leases, and renewal terms - As of March 31, 2025, the company's occupancy rate for all properties was 93%, slightly down from 94% in Q1 2024[215] Leasing Activity (Q1 2025) | Leasing Activity (Q1 2025) | 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) | Prior Contractual Rent Per Sq. Ft. | Straight-lined Basis Increase Over Prior Rent | | :------------------------- | :---------------------- | :------------------- | :---------------------------------- | :---------------------------- | :--------------------------------- | :--------------------------------- | :-------------------------------------------- | | Comparable Renewal Leases | 58 | 136,618 | 4.4 | $3.44 | $32.29 | $28.48 | 19.9% | | Comparable New Leases | 13 | 21,889 | 6.5 | $39.46 | $37.75 | $34.46 | 22.6% | | Total Comparable Leases | 71 | 158,507 | 4.7 | $8.42 | $33.04 | $29.30 | 20.3% | | Total All Leases | 84 | 199,610 | 4.6 | $9.85 | $31.16 | N/A | N/A | Critical Accounting Policies and Estimates This section confirms that no significant changes occurred in the company's critical accounting policies and estimates during the quarter - No significant changes to critical accounting policies and estimates occurred during the three months ended March 31, 2025[217] Results of Operations This section analyzes the company's financial performance, comparing key revenue and expense items between reporting periods Comparison of the Three Months Ended March 31, 2025 and 2024 This section provides an overview of key operational and financial metrics for Q1 2025 compared to Q1 2024, showing a decrease in net income attributable to Whitestone REIT despite an increase in total revenues and Funds From Operations (FFO) Metric (in thousands, except percentages) | Metric (in thousands, except percentages) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenues | $38,003 | $37,164 | $839 | 2.26% | | Net income attributable to Whitestone REIT | $3,701 | $9,340 | $(5,639) | (60.37)% | | Funds from operations (FFO) | $13,148 | $11,818 | $1,330 | 11.25% | | Property net operating income (NOI) | $26,739 | $26,760 | $(21) | (0.08)% | | Distributions per common share and OP unit | $0.1350 | $0.1200 | $0.0150 | 12.50% | Revenues Total revenues increased by 2% year-over-year, driven by a 4% increase in Same Store revenues, primarily from higher average rent per leased square foot and increased recoveries, partially offset by a decrease in Non-Same Store revenues due to property sales Revenue Component (in thousands) | Revenue Component (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Same Store Total | $36,628 | $35,269 | $1,359 | 3.85% | | Non-Same Store Total | $1,375 | $1,895 | $(520) | (27.44)% | | Total revenue | $38,003 | $37,164 | $839 | 2.26% | - Same Store rental revenues increased by $672,000 (3%) due to higher average rent per leased square foot ($23.90 vs $23.19), despite lower average leased square feet. Same Store recoveries increased by $261,000 (3%) due to increased operating expenses[223][224] Operating expenses Total operating expenses increased by 2% year-over-year. Same Store operating and maintenance expenses increased by 13% due to higher repairs, contract services, insurance, and utilities. General and administrative expenses decreased by 12% due to lower legal and proxy fees, partially offset by increased professional fees and share-based compensation Operating Expense Component (in thousands) | Operating Expense Component (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Same Store Operating and maintenance | $6,845 | $6,071 | $774 | 12.75% | | Same Store Real estate taxes | $4,085 | $4,080 | $5 | 0.12% | | General and administrative | $5,443 | $6,180 | $(737) | (11.93)% | | Total operating expenses | $26,031 | $25,567 | $464 | 1.81% | - General and administrative expenses decreased by $737,000, primarily due to reduced legal fees ($565,000) and proxy fees ($400,000), partially offset by increases in professional fees and share-based compensation[226] Other expenses (income) Total other expenses increased significantly by 308% year-over-year, primarily due to the absence of a large gain on sale of properties recorded in Q1 2024, partially offset by a decrease in interest expense Other Expenses (Income) (in thousands) | Other Expenses (Income) (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Interest expense | $8,097 | $8,519 | $(422) | (4.95)% | | Gain on sale of properties | $0 | $(6,525) | $6,525 | N/A | | Loss on disposal of assets | $100 | $0 | $100 | N/A | | Total other expenses | $8,097 | $1,986 | $6,111 | 307.70% | - Interest expense decreased by $422,000 due to a lower effective interest rate (4.91% vs 5.14%) and a decrease in the average outstanding notes payable balance[227] Deficit in earnings of real estate partnership The company reported no deficit in earnings from its real estate partnership for Q1 2025, compared to a $28,000 deficit in Q1 2024, following the redemption of its investment in Pillarstone OP on January 25, 2024 - No deficit in earnings from real estate partnership was reported for Q1 2025, compared to a $28,000 deficit in Q1 2024, due to the redemption of the Pillarstone OP investment[229] Same Store net operating income Same Store NOI increased by 5% for the three months ended March 31, 2025, driven by a 4% increase in total property revenues, partially offset by an 8% increase in total property expenses Same Store NOI Components (in thousands) | Same Store NOI Components (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Increase (Decrease) | % Increase (Decrease) | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------ | :-------------------- | | Total property revenues | $36,628 | $35,269 | $1,359 | 3.85% | | Total property expenses | $10,930 | $10,151 | $779 | 7.67% | | Same Store NOI | $24,661 | $23,522 | $1,139 | 4.84% | Reconciliation of Non-GAAP Financial Measures This section provides reconciliations of non-GAAP financial measures, such as FFO and NOI, to their most directly comparable GAAP measures Funds From Operations ("FFO") and Core FFO This section provides a reconciliation of FFO and Core FFO to net income. FFO increased by 11.25% year-over-year, and Core FFO also increased, reflecting adjustments for real estate depreciation/amortization, gains/losses on sales, and proxy contest costs - FFO and Core FFO are non-GAAP measures used by management and investors to evaluate operating performance, as GAAP net income alone is considered insufficient for real estate companies[233][234] FFO and Core FFO (in thousands) | FFO and Core FFO (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net income attributable to Whitestone REIT | $3,701 | $9,340 | $(5,639) | (60.37)% | | FFO (NAREIT) | $13,148 | $11,818 | $1,330 | 11.25% | | Core FFO | $13,148 | $12,256 | $892 | 7.28% | Property Net Operating Income ("NOI") This section defines NOI as operating revenues less property and related expenses, used by management to evaluate property operating performance. Total NOI remained relatively stable year-over-year - NOI is a non-GAAP measure defined as operating revenues less property and related expenses, used to evaluate property operating performance by reflecting revenues and expenses directly associated with owning and operating commercial real estate[237] NOI Reconciliation (in thousands) | NOI Reconciliation (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net income attributable to Whitestone REIT | $3,701 | $9,340 | $(5,639) | (60.37)% | | NOI | $26,739 | $26,760 | $(21) | (0.08)% | Liquidity and Capital Resources This section discusses the company's short-term and long-term liquidity needs and how they are met. Short-term needs include distributions, operating expenses, and debt service, covered by operating cash flows and credit facility. Long-term needs involve debt maturities, development, and acquisitions, funded by cash from operations, debt, and equity issuances. The company increased its quarterly distribution and has $97.7 million available under its revolver - Short-term liquidity requirements include distributions, recurring/non-recurring expenditures, and debt service, met by operating cash flows and the 2022 Facility borrowing capacity[239][240] - Long-term capital requirements for debt maturities, development, and acquisitions are expected to be met through net cash from operations, long-term indebtedness, and equity issuances[241][246] - The quarterly distribution was increased to $0.135 per common share and OP unit, effective January 2025. As of March 31, 2025, $97.7 million remained available under the 2022 Revolver[241] Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents, and restricted cash increased slightly from December 31, 2024, to March 31, 2025. Operating cash flow decreased significantly, while financing activities shifted to a net cash provision Cash & Equivalents (in thousands) | Cash & Equivalents (in thousands) | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Cash, cash equivalents and restricted cash | $15,814 | $15,370 | - Cash flow from operations decreased from $11.5 million in Q1 2024 to $3.1 million in Q1 2025. Proceeds from the credit facility increased from $23.0 million to $27.3 million[252] Debt This section provides a detailed breakdown of the company's debt, including fixed and floating rate notes, scheduled maturities, and the terms of the 2022 Facility and Note Agreement. The company was in compliance with all loan covenants as of March 31, 2025 Debt Type (in thousands) | Debt Type (in thousands) | March 31, 2025 | December 31, 2024 | | :----------------------- | :------------- | :---------------- | | Fixed rate notes | $539,911 | $547,483 | | Floating rate notes | $102,300 | $75,000 | | Total notes payable principal | $642,211 | $632,483 | - The 2022 Facility includes a $250 million unsecured revolving credit facility, a $265 million unsecured term loan, and a $20 million unsecured incremental term loan[265] - The company was in compliance with all loan covenants as of March 31, 2025, 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[269][279] Capital Expenditures Total capital expenditures increased by 9% for the three months ended March 31, 2025, compared to the same period in 2024, driven by higher maintenance capital expenditures and developments/redevelopments Capital Expenditures (in thousands) | Capital Expenditures (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Tenant improvements and allowances | $2,259 | $3,267 | $(1,008) | (30.86)% | | Developments / redevelopments | $1,737 | $1,471 | $266 | 18.08% | | Maintenance capital expenditures | $1,628 | $265 | $1,363 | 514.34% | | Total capital expenditures | $6,275 | $5,757 | $518 | 9.00% | Distributions The company increased its quarterly distribution to $0.135 per common share and OP unit, effective January 2025. Total distributions paid increased by 14.6% for the three months ended March 31, 2025, compared to the same period in 2024 - The quarterly distribution was increased to $0.135 per common share and OP unit, effective January 2025[285] Distributions Paid (in thousands) | Distributions Paid (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total Amount Paid | $6,932 | $6,049 | $883 | 14.60% | Taxes The company maintains its REIT status to avoid federal income tax on distributed income and is subject to the Texas Margin Tax - Whitestone REIT operates to qualify as a REIT, generally avoiding federal income tax on distributed income[288] Environmental Matters The company has not incurred significant environmental costs or accrued liabilities and does not anticipate material adverse effects from environmental laws and regulations - The company has not incurred significant environmental costs or accrued liabilities and does not anticipate material adverse effects from environmental laws and regulations[289] Off-Balance Sheet Arrangements The company may guarantee real estate partnership debt to obtain lower funding costs, but its former guarantee for Pillarstone OP's debt is no longer in effect - The company may guarantee real estate partnership debt to secure lower funding costs, but its former guarantee for Pillarstone OP's debt is no longer in effect[290] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section discusses the company's exposure to market risk, primarily interest rate fluctuations, and its strategies to manage it through fixed-rate debt and interest rate swaps. It also addresses credit risk related to macroeconomic factors Fixed Interest Rate This section details the portion of the company's debt with fixed interest rates and the sensitivity of its fair value to rate changes - As of March 31, 2025, $539.9 million (84%) of total outstanding debt is at fixed interest rates, with an average effective rate of approximately 4.87%[294] - A 1% increase or decrease in interest rates would cause a $12.1 million decline or increase, respectively, in the fair value of fixed-rate debt[294] Variable Interest Rate Debt This section outlines the company's exposure to floating interest rates on its unhedged debt and the potential impact on net income - As of March 31, 2025, $102.3 million (16%) of outstanding debt is subject to floating interest rates (SOFR plus 1.50% to 2.10%) and is not currently hedged[295] - A 1% increase or decrease in interest rates on non-hedged variable rate debt would result in an approximate $1.0 million decrease or increase in annual net income[295] Credit Risk This section addresses the potential impact of macroeconomic factors on tenant payment ability and overall business operations - Macroeconomic factors such as inflation, rising interest rates, and financial institution disruptions may increase credit risk, potentially impacting tenant payments and business operations[296] Item 4. Controls and Procedures. Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2025. No material changes in internal control over financial reporting occurred during the quarter Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as assessed by management - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2025[297] Changes in Internal Control Over Financial Reporting This section reports that no material changes occurred in the company's internal control over financial reporting during the quarter - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2025[298] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings. The company is involved in various legal proceedings and claims arising in the ordinary course of business, generally covered by insurance. Management believes these will not have a material adverse effect on financial position, results of operations, or liquidity - The company is subject to various legal proceedings and claims, which management believes will not have a material adverse effect on its financial position, results of operations, or liquidity[299] - Further details on legal proceedings are incorporated by reference from Note 17 to the Consolidated Financial Statements[300] Item 1A. Risk Factors. There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors were reported from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[301] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The company did not sell any unregistered equity securities during the period. It repurchased 106,592 common shares in January 2025 from employees to satisfy tax withholding obligations on restricted share vesting - No unregistered equity securities were sold during the period covered by the report[309] Period | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--------------------------- | :------------------------------- | :--------------------------- | | January 1, 2025 - January 31, 2025 | 106,592 | $14.17 | | February 1, 2025 - February 28, 2025 | — | — | | March 1, 2025 - March 31, 2025 | — | — | | Total | 106,592 | $14.17 | Item 3. Defaults Upon Senior Securities. This section confirms that no defaults occurred on the company's 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 to Whitestone REIT[306] Item 5. Other Information. This section reports that no Rule 10b5-1 trading arrangements were adopted or terminated by trustees or officers during the quarter - No trustee or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q1 2025[307] Item 6. Exhibits. Lists the exhibits filed, furnished, and incorporated by reference as part of the report, including articles of amendment, bylaws, certifications, and XBRL financial information - The report includes an Exhibit Index listing various corporate documents, certifications (302, 906), and XBRL financial information[308][312] Exhibit Index Provides a detailed list of all exhibits included in the Form 10-Q filing, specifying their nature and previous filing references where applicable - The Exhibit Index details corporate governance documents (Articles of Amendment, Bylaws), certifications (31.1, 31.2, 32.1, 32.2), and financial data in Inline XBRL format (101, 104)[311][312] Signatures The report is duly signed on behalf of Whitestone REIT by its Chief Executive Officer and Chief Financial Officer - The report is signed by David K. Holeman (Chief Executive Officer) and John S. Hogan (Chief Financial Officer) on May 5, 2025[316]