Whitestone REIT Management Discusses Q4 2012 Results - Earnings Call Transcript

 |  About: Whitestone REIT (WSR)
by: SA Transcripts

Whitestone REIT (NYSE:WSR)

Q4 2012 Earnings Call

March 12, 2013 5:00 pm ET


Juanita Baker

James C. Mastandrea - Chairman of the Board of Trustees, Chief Executive Officer and President

David K. Holeman - Chief Financial Officer and Principal Accounting Officer


Paul E. Adornato - BMO Capital Markets U.S.

Carol L. Kemple - Hilliard Lyons, Research Division


Good day and welcome to the Whitestone REIT Fourth Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juanita Baker, Head of Investor Relations at Whitestone REIT. You may now begin.

Juanita Baker

Thank you, operator. Good afternoon, and thank you, all, for joining the Whitestone REIT Fourth Quarter 2012 Earnings Conference Call. Joining me on today's call will be Jim Mastandrea, our Chairman and CEO; and Dave Holeman, our Chief Financial Officer.

Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please refer to the company's filings with the Securities and Exchange Commission, including the company's Form 10-K and Form 10-Q for a detailed discussion of these risks.

Acknowledging the fact that this call may be webcast for a period of time, it's also important to note that today's call includes time-sensitive information that may be accurate only as of today's date, March 12, 2013.

The company's earnings press release and fourth quarter supplemental operating and financial data package have been filed with the SEC, and the Form 10-K will be filed tomorrow. The filings are or will be on our website, whitestonereit.com, in the Investor Relations section. Also, included in the supplemental data package are reconciliations from GAAP financial measures to non-GAAP financial measures.

And with that, let me pass the call to Jim Mastandrea.

James C. Mastandrea

Thank you, Juanita, and thank you, all, for joining us today on our call. Today, we're going to review our fourth quarter and annual operating results and update you on the recent progress of our initiatives. Today's portion of our call will focus on our financial results and the overall strong financial condition of Whitestone. As we have stated on our previous calls, this year has been about creating value in our Community Center operating portfolio through lease-up, redevelopment and repositioning, in addition to the select acquisition of accretive value-add properties.

Now let me review our progress in 2012 and highlight some of our accomplishments. We strengthened our balance sheet and capital base by financially engineering our capital structure to assure the lowest cost of capital with relatively modest leverage and a broad diversification of tenants. We strive to maintain our financial flexibility to protect against unforeseen economic climate changes. Having survived numerous real estate downturns since the 1980s and most recently the recession of 2007 to 2009, I've learned that leading through these cycles provides the reward of upside opportunities to capitalize upon when others may find themselves financially constrained and gives us a competitive advantage when making acquisitions and then attracting new tenants. We grew our asset base to over $400 million in 2012, with the acquisition of 5 Community Centers totaling $107.6 million, each located in the Phoenix marketplace, where we now own 13 Community Centers and approximately 1.3 million square feet of gross-leased square area, plus 2 development sites. Our Phoenix properties were acquired in single off-market purchases since late 2010 from property owners, banks and special services. And we closed at a pace that has earned us high marks for a certain day of closing, doing what we say we were going to do. We own 51 Community Center properties, located in Houston, Dallas, San Antonio, Phoenix and Chicago, totaling 4.3 million square feet. We have over 1,000 tenants, 70% of which are small businesses, whose services target their surrounding local communities. In essence, we create a culture of engagement with our tenants and their customers by improving their experience and profitability through the people we hire, the tenant mix we assemble and then adjusting the layout or design of our properties.

It is not just what we own, it is what we do with what we own that creates value.

We transform properties to meet the community ethnic and demographic profiles. Our progress in 2012 was in adding programs, processes that will provide returns in the coming quarters and years, by lowering overall cost and increasing profit margins. These new initiatives sharpen our competitive edge in each and every community where we own real estate, helping to drive traffic to the centers, which in turn drives new tenants.

Our progress is highlighted in the following 5 key efforts: first, we repositioned and rebranded our centers, enhancing their visibility and visual appeal, with a mix of new paint colors, enhanced lighting and then rich landscaping to set the localized target scene and achieve the proper tenant mix. It is imperative to compete against the repetitive nature of sameness in today's retail shopping centers. We strive to identify which tenants drive traffic to our Community Centers and then fine tune a compatible yet unique tenant mix that meets the needs of their shared customer base. For example, our shops at Pinnacle Center, located in Scottsdale, Arizona, is comprised of predominantly women-owned businesses that target female customers. Our new paint color and our lighting was designed to appeal to our tenants' customers, and they love it. Second, we improved traffic circulation and parkings so our tenants can better serve their customers, creating the right flow of circulation of the physical aspects of the property, comforts the tenant, and blends the mix of uses to provide a competitive advantage and synergy, strengthening rental pricing in our Community Centers.

Third, we added a signature community-gathering area. Whenever -- wherever we could by opening up such areas in an open-space around a Starbucks or a cigar store, we will install outdoor misting systems for days that might be extremely hot, or gas fireplaces for cool evenings. We seek entrepreneurial tenants that have a good prospect for success, and we strive to understand what our tenants' customers truly value. When needed, we will redevelop the Center to create our signature space.

Fourth, we implemented a Customer Relationship Management or CRM system, to enhance our competitive edge. Our system interfaces important information between property managers, leasing agents, space planners, construction and management, and utilizes technology to bring us closer to our tenants and properties.

And finally, we utilize technology to drive efficiency. Specifically, we beta-tested mobile technology to monitor our tenants and collect rent. Our overall goal is to have an advanced warning system to alert us if a tenant needs more space, is in a financial trouble, or simply needs us to fix a broken pipe. This technology provides for us to have monthly contact with the tenant, as opposed to simply mailing an invoice for rent. We believe that by enhancing the tenant experience and providing on-the-spot payment convenience, such as using the iPad Square, we can increase productivity, efficiency, data collection and profitability.

The beta test was successful, we are now rolling out a program to all our property managers. We will continue to look to utilize technology to drive efficiency in other areas of our business and to drive margins. The result of these efforts is that our property net operating income grew 34% from the prior year and our funds from operations core also increased 35% from the prior year.

In August 2010, we owned just 1 property in the Phoenix marketplace. Today, we have invested in nearly $200 million in 12 additional high-quality value-added Community Centers, consisting of 1.3 million square feet and in 2 future development parcels. Our average per square foot investment is approximately $148, which is significantly below replacement cost. All of our Centers we have purchased in Phoenix were under some level of financial distress, ranging from bank-owned foreclosures to over-leveraged sellers. As a result, most of the Centers have been under-managed and under-capitalized. They have ranged from 20% occupied high value-add Centers, to 100% occupied, more stabilized Centers. The aggregate occupancy of our Centers in our Phoenix region is approximately 76% and currently produces an annual rent operating income of approximately 7% of our gross investment. When we fully lease up these Centers into stabilized 93% to 95% range, our annual net operating income will exceed 10% of our gross investment amount.

In Texas and Illinois, since 2010, we have invested over $30 million in improvements to our Community Centers, adding new, high-quality tenants and 1 strategic acquisition in Dallas, bringing our total investments in these regions to approximately $220 million. Our aggregate market-level occupancy increased to 88% from 86% at the end of 2011. Our annual net operating income is approximately 9.5% of our gross investment. When fully leased, we expect annual net operating income in the double-digit range soon.

Now I'd like to bring you up-to-date on some developments at our Centers. We have begun the planning and site designs of our 2 expansion parcels, with construction expected to begin in late 2013 or early 2014 and occupancy slated for 2014. They include a 4.5-acre parcel at Pinnacle of Scottsdale in Arizona and a 2.7-acre parcel at The Shops of Starwood in Frisco, Texas. Let me turn to our acquisitions for the quarter and comment briefly on our acquisition strategy.

During the fourth quarter, we closed on the off-market purchase of The Shops at Pecos Ranch, a 78,700 square-foot 100% leased Community Center in Chandler, Arizona for $18.95 million in an all-cash short sale transaction. The Center has in-placed cash flow of approximately $1.6 million, or 8.4% of the purchase price. The Shops at Pecos Ranch, a Class A stabilized Community Center completed in 2010, is located in a densely populated trade area serving Chandler, a Phoenix suburb in the growing Southeast Valley. Traffic is enhanced by the property's 1-mile proximity to Intel Corporation's nearby new corporate 682-acre campus, with approximately 11,000 employees, as well as office submarket developing in areas surrounding the coming Intel semiconductor manufacturing plant, projected for completion later this year.

Our Center has 7 popular restaurants, 4 exercise fitness-related tenants and 6 other service tenants to support the market area. Additionally, we expect to benefit from enhanced economies of scale through our in-house property management and leasing team, due to the proximity to 3 other Whitestone Centers. Our pipeline of off-market opportunities remains very attractive and strong, and is in excess of $500 million. We currently have 1 property under contract, 100 under letter of intent, and 2 additional properties going under a letter of intent. We are confident in our ability to close on these targeted acquisitions, all of which are accretive to FFO per share.

With that, I would like to turn things over to Dave Holeman, our Chief Financial Officer. David?

David K. Holeman

Thank you, Jim. I will start by reviewing our balance sheet or financial position, then turn to a review of our key operating results, and conclude with a few comments regarding our outlook. During the quarter, we continued to strengthen our balance sheet by growing our real estate assets by $20 million or 5% from the third quarter and $117 million or 40% from 1 year ago.

We strengthened the balance sheet by lowering our weighted average interest cost as of the quarter end to 4.7%, as compared to 5.4% a year ago; by continuing to grow our total market capitalization to $432 million as of year end, which is up from $392 million at the end of the third quarter and $275 million as of December 31, 2011; by increasing our pool of unencumbered properties, that is, properties without secured mortgage financing, to 24, the cost basis of our pool of unencumbered assets now exceeds $200 million which represents approximately 1/2 of the cost basis of our total assets; and by improving our unsecured credit facility. Subsequent to year end, we amended our current unsecured credit facility, increasing the borrowing capacity by $50 million to $175 million. We added an accordion feature that will allow the facility to further increase to $225 million. We reduced the interest rate by approximately 1%, which translates to $700,000 or $0.04 per share on the balance currently drawn. We extended the term of the credit facility by 2 years to 2017, and we eased the overall financial covenants including the lowering of the capitalization rate to value assets. The new credit agreement provides us the ability to execute contracts and quickly close on value-add acquisitions as we continue to accelerate our growth. We believe the increased facility reducing -- reduced pricing and expanded access to capital exemplifies the progress we have made over the past 6 years to create shareholder value. Our new $175 million unsecured credit facility remains largely available with $106 million undrawn.

Now let's turn to the operating statement. The company's fourth quarter and annual results, except FFO-Core, include a $2.2 million expense related to a previously disclosed contingency, related to the disposition of our Chief Executive Officer's former residence in Cleveland, Ohio, which has been on the market for more than 5 years. The impact of this $2.2 million expense is $0.12 per fully diluted share for the fourth quarter and $0.15 per fully diluted share for the year.

FFO-Core, which adjusts the NAREIT definition of FFO by excluding acquisition expenses and the previously discussed executive relocation expense, for the quarter, was $3.9 million, a 26% increase from the fourth quarter of 2011. FFO-Core for the full year 2012 increased $3.4 million or 35% to $13 million as compared to 2011. On a per share basis, FFO-Core was $0.22 per share in the fourth quarter due to the timing of the deployment of capital and the additional issuance of shares during the year, as compared to $0.25 per share a year ago. FFO-Core for the full year 2012 was $0.90 per fully diluted share as compared to $0.89 in 2011. FFO-Core this quarter included only 3 days for our most recent acquisition, The Shops at Pecos Ranch. FFO-Core for 2012 included only a partial year for our 2012 acquisitions.

It is expected that our 2012 acquisitions will contribute an incremental $3.2 million to FFO in 2013, as compared to 2012, based on a full 12 months of ownership. Property revenues for the quarter were $13.5 million, an increase of 35% or $3.5 million from the fourth quarter of 2011. Property revenues for the year were $46.6 million, an increase of 34% or $11.7 million from 2011. The increase in property revenues for the year was a result of same-store revenue growth of $475,000 or 1.5%, and revenue from new acquisitions of approximately $11.2 million. The increase in same-store revenues was attributable to increased average occupancy of 0.9% and a 0.6% increase in the revenue rate per average-leased square foot. Property NOI increased 31% or $2 million to $8.4 million for the fourth quarter. Property NOI increased 34% or $7.3 million to $28.9 million for the year.

The increase in property NOI for the year was primarily the result of new acquisitions.

Interest expense for the quarter increased 50% or $766,000 from the prior year. Interest expense for the year increased 38% or $2.4 million from the prior year. These period increases are the result of increased debt, which has been used for financing of acquisitions, offset by a lowering of our effective interest rate, which was 4.7% at year end, down from 5.4% a year ago.

During 2012, we continued to scale our general and administrative expenses across a larger base of assets and revenue. Our headcount has increased only slightly over the last 12 months, and as a percentage of our revenue, G&A expenses, excluding acquisition expenses, were 15% for 2012, down from 17% a year ago. We remain focused on our cost-savings efforts and expect our G&A costs, as a percentage of revenue, to continue to decrease as we grow over time. Now let me turn to some of our key operating measures.

Our total occupancy rate, which represents physical occupancy and does not include tenants under lease, which have not yet moved into our property, grew to 85% as of the end of the quarter. This was up 1% from the fourth quarter of 2011. Same-store occupancy increased approximately 0.9% year-over-year.

Our total operating portfolio occupancy, which excludes new acquisitions through the earlier -- of the attainment of 90% occupancy or 18 months, and properties that are undergoing significant redevelopment or retenanting, was 87% as of the end of 2012. We have grown our tenant base by 17% to 1,066 tenants, up from 915 a year ago. And during 2012, we signed 323 new and renewal leases, representing $35.2 million in total lease value, with an average term of 4 years and an average size of 2,100 square feet. Our unique leasing strategy continues to be effective, producing increased occupancy and a positive 2% spread on comparable new and renewal leases signed during the last 12 months.

Since our IPO in August 2010, and 2 follow-on offerings, raising a total of $140 million, we have completed approximately $200 million in new acquisitions. As with any growing company, the current financials reflect only a partial amount for many of these acquisitions and thus, do not fully reflect the impact from this growth. As a result, we thought it would be helpful to provide some additional perspective and discuss the key drivers of our near-term financial results and value-creation efforts.

First, regarding our 2012 acquisitions. As they were only owned during a portion of the year, and so they only partially contributed to our 2012 operating results. We expect these 5 new Centers to contribute $7.5 million in net operating income in 2013 and incremental $5.1 million from what is included in the 2012 results. After the cost of debt for these 2012 acquisitions, we expect these 5 new Centers to contribute $4.2 million in FFO to 2013, an incremental $3.2 million from what is included in the 2012 results.

Next let me provide a few more details on the lowering of our overall debt cost. We have approximately $98 million of fixed-rate debt, with $87 million maturing in 2013 and early 2014. The weighted fixed-rate for this debt is approximately 6.1%. We expect to renew this debt with the current lenders or new lenders at 3% to 4% fixed interest rates. The expected reduction in these interest rates will result in approximately $1.8 million to $2.7 million in annual interest expense savings or $0.10 to $0.16 per share. Due to the timing of the renewals, we will receive only a partial year in 2013 and almost a full year of savings in 2014. In the near term, we plan to add $40 million to $50 million of acquisitions that will be funded entirely through debt, bringing our debt leverage from today's level of approximately 40%, to a still modest 50% level.

We estimate that the initial spread between property NOI yield and interest cost on these acquisitions will be 4.5% to 5.5%, resulting in $1.8 million to $2.8 million of incremental annual FFO-Core. Based on the current number of shares, these acquisitions, at an 8% assumed going-in cap rate, should produce $0.10 to $0.16 per share on an annual basis.

Lastly, let me touch on capturing the potential cash flow from the intrinsic value that is embedded in our portfolio of Community Center Properties. We will capture this cash flow from the embedded value in 2 ways. The first way is the lease-up of our portfolio of assets. As previously stated, the Community Centers in our Phoenix region are in aggregate, currently 76% leased, and the Centers in our Houston region are in aggregate, 88% leased. While it is difficult to predict timing, we are fully confident in our ability to lease these Centers into an aggregate, stabilized 93% to 95% occupancy range, which should result in incremental annual FFO of approximately $4 million to $7 million in the coming years. We also expect to capture additional cash flow from the value embedded in our portfolio that can be created from the development of our vacant land and out parcels. We estimate that we can develop an additional 300,000 square feet of gross leasable area that will produce at least $2.5 million of annual FFO.

We also have ample financial capacity to support our potential development and growth, as we harvest from an outstanding pipeline of actionable off-market acquisitions. With that, let me turn the call back to Jim.

James C. Mastandrea

Thank you, Dave. Before we close the prepared remarks, I would like to comment on where we think we can improve, and give you a brief look to the future. The key area we can improve is to capture the cash flow from the intrinsic value we have embedded in our real estate as quickly as possible. We buy Community Center Properties off-market and at the right price. These Centers have ranged from 20% occupancy to 95% occupancy, in some cases, 100% occupancy. When we make an acquisition, we look for cash-on-cash returns in excess of 70% on an unleveraged basis, including the vacant portion of the real estate, as well as the land that we acquire along with the asset itself. When we increase the occupancy to a stabilized 93% to 95%, we expect double-digit returns on our initial investment. The cost of the land and out parcels are built into that purchase price. When we build on or develop land and/or the out parcels, we look to achieve returns in the high teens, mid-20s. Any tailwind from the economy and/or inflation we just count as a bonus. We look for the double-digit returns short of any of that help. We continue to build on our strength and we have adjusted our course, making some timing and people changes as we work towards our goals and objectives.

As I look to the future, our core strength is our people. We select and retain only those who have demonstrated a passion, and I mean, a passion, and a desire to continue to hone their skills for the real estate business within the Whitestone culture. We train, educate and provide the necessary tools for our associates to be successful. Specifically, our in-house training and the development of our people allows us to meet our growing needs and effectively serve our tenants. Our accomplishments and progress this year are the result of our working together toward our common goal of increasing shareholder value.

We realize we have room to improve and we have made some necessary changes to advance our strategic plan and unique business model, and capture the embedded cash flow, or as we refer to, the intrinsic value within our portfolio.

We believe that with our business model, in the near to long term, we can grow and operate $1 billion in assets and with only modest increases in overhead. And beyond that, at least another $2 billion in added assets. As we look at 2013, we want to focus on driving FFO per share to exceed our current dividend by extracting additional embedded cash flow, initiate our first development project on land that we own, and make further alignments to our management team for our growth.

In closing, I would like to thank you for your continued confidence and support, and for the privilege to lead Whitestone. I would also like to invite all of you to our Spring Investor Tour, which is on March 21 and 22 in Scottsdale, Arizona. On the evening of the 21st, we will have some fun activities including an Arizona Diamondbacks spring training baseball game. On the 22nd, we will begin in the morning with a short presentation, followed by a property tour, which will conclude at 2 p.m. at the airport. With that, I would like to conclude the review of our results. And operator, I will turn the call back over to you, and I want to thank you for participating in our call today. Operator?

Question-and-Answer Session


[Operator Instructions] And we'll go first to Paul Adornato with BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

If we look at the expiration schedule for 2013, it looks pretty heavy in terms of the percentage of base rents that are expiring. So I was wondering if you could talk a little bit about the activity that you've had to-date and what the outlook is for the rest of the year. And also, are there any large spaces in there that might affect the numbers one way or the other?

David K. Holeman

Paul, this is Dave. I'll start out and Jim may jump in as well. So if you look at our lease expirations, typically, we have signed shorter leases, 3 to 5 years. So typically, we see 10% to 20% of our portfolio roll each year. We're very comfortable with that. During the last couple of years, our renewal rate has remained consistent in the mid-70s, I believe about 75%. We also do not have any big spaces rolling in '13. Our largest tenant is 1.2% of our revenues. So really from a big space or big tenant perspective, we, as a company, we don't have any of those. We see a -- our pipeline of leasing, right now, is robust. As you know the timing of tenant leases doesn't always match up with the timing of financial quarters. But we had a lot of activity, specifically even in the Phoenix region, that we see in our pipeline of leasing and leasing activity.

James C. Mastandrea

Yes, Paul, I'd like to add to that. A couple of things we've done, we've added 2 additional leasing people to our Houston operation and we expect to add 1 or 2 to our Phoenix operation. We've also have shifted almost entirely to a total compensation pay-per-performance program, and we used to have our leasing people on a base salary. And then on top of that, we would pay a commission and then some bonuses and some stock. What we've done is we've shifted to a draw, a draw system. So it starts with a draw, we add to that commission and then we add to that bonuses and then we add to that stocks. So it's a program that makes our folks really earn their base as well as any of the upside. And it's more rewarding than the initial program that we had. But we think that it really puts everybody in line with what we're doing. And it also focuses on -- the percentages adjust themselves for space that has to be released versus space that's new space. Now, one of the things I touched on in my formal remarks is we have gone to an iPad system. That iPad system, and I'll give you the short version of it, each of our property managers now carries an iPad, and they go around and they meet each tenant each month. So normally, we would send out a rent invoice around the 15th to get payment right around the fifth of the following month. They now approach each tenant and they ask them 4 basic questions, along the lines of, does the space work for them, whether their co-tenants would help their business, things like that. But they actually talk to them each month, and they -- while they're there, they ask them if they can take a -- their rent payment. And because of the size of our tenants, we can do that with a credit card. So these iPads are now equipped with a Square, and you've probably seen some of those. So they can swipe that and take the rent at that time. But what it also does for us, it give us a heads up if there's a problem with the tenant. And if we think there's a payment problem or we think they're struggling, we can come back the next week and come back the next week. And we think that's going to go a considerable way to avoiding the higher turnaround and losing some of those leases that are coming due this year. Finally, the last thing I'd say is that we've been doing surveys in our properties and one of the questions we ask tenants is, if you were to expand, do you need more space? And the first property -- we just started doing this about 2 weeks ago. The first property came back and said 70% of our tenants, that are small-based tenants, would like more space. So we're doing a lot of hands-on, I mean, really detailed hands-on programs, and part of the progress we've made is just implementing some of these systems and processes.

David K. Holeman

One other thing I just like to add, real quickly, is that if you look at the near-term roll, in a few of our Centers, we have executive suites where you have really smaller-spaced tenants that tend to be 1-year leases. So you'll always see a larger amount of tenants in that first year just due to the -- some of the executive suite tenants who roll annually.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. I appreciate the detail there. If we were to look at comparable space rent spreads, are we still burning off prerecession leases? Or I guess another way to ask the question is, when do you expect rent spreads to turn positive in general?

David K. Holeman

I think if you -- if you look at the markets we operate in, obviously, you start with the Phoenix market, that had a more significant downturn than the Houston market. We really are seeing lots of great signs in Phoenix, of recovery. You're seeing housing inventories at low levels. So we really think that we'll see a quicker upturn in the Phoenix market. If you look at our Houston properties, Houston has performed fairly well through the downcycle, and just had not nearly the big impact that was in the Phoenix market. The spreads, I think for the most recent quarter for comparable leases were up 3.3% on a straight-line basis and up 2% on a 12-month roll. We expect for that trend to continue. I think if you look at the properties we bought in Phoenix, we bought properties under stress that most of the leases have been reset. So when we reset at the lower levels, so we believe as the economy continues to come back, we'll be able to increase those rents.

James C. Mastandrea

Let me add to that, Dave. Paul, one of the things that we do is that we put money into our properties right after we buy it. And we're beginning to go back into Texas, and some of our properties that we're recycling, we're putting money into these properties. If we watch closely and then track it, and we'll try to do this in one of our future calls, is to show the effect of that to -- once we invest the money and say it's $25,000 or $100,000 in a property, for example, we're looking at 1 property now to invest $60,000 and it's just in some changing, some patios and, things like that. Usually, when you do something to a property, you then have the opportunity to go back and ask for $0.05, $0.10 or $0.25 more per square foot. And often some of that, too, is translated into common area maintenance. So we like to do something for our tenants first, and then we usually follow-up and we'll look at rents when the leases roll over, because we've now captured them on our property.


And we'll go next to Carol Kemple with Hilliard Lyons.

Carol L. Kemple - Hilliard Lyons, Research Division

I think on the third quarter call, you all talked about possibly doing some dispositions, maybe some of your properties in Houston. Where are you at on that? And is there anything on the market right now?

David K. Holeman

We talked on our third quarter call that we had identified 11 properties to dispose of over the next -- over a couple of years. I think we said that we had 3 of those properties targeted to be marketed in the fourth quarter. We have done that and that we are -- they're listed with brokers. There's no urgency on our part to sell, so we want to sell those for the right price. So we currently have 3 smaller properties in our -- they were legacy assets. After -- when we joined the company, they are listed for sale, and we still continue to do that. It's about $30 million to $40 million in assets. Not a large amount of assets, but there's $30 million to $40 million in assets that we think we could use the money by recycling that capital, use the money for better, better items.

James C. Mastandrea

Yes, normally, Carol, we would not press release or 8-K when we list them, but when we sell them, we'll definitely do that.

Carol L. Kemple - Hilliard Lyons, Research Division

What kind of feedback are you getting on the potential tenant, potential buyers about the properties? Or I guess, who are your potential buyers? Are they mom-and-pops, or pension funds, or who's looking at those?

James C. Mastandrea

That's a good question. They're usually small, ethnic families. Like small might be 3 or 4 like family members coming together to buy it. It helps the children and the business. I think we mentioned we have these 1 property that's a legacy property, it's like 26 townhomes. I want to say that there's now -- it's either 19 or 26, it's in that low number. It was converted to office buildings and for whatever reasons, it was in the portfolio. We have an ethnic family that is looking at that because it's a small-enough size. They think they could buy it and manage it themselves. Those units were originally built as residential. They're now being office-leased and they're thinking about converting them. So usually it's smaller investors, and we don't have a lot of those properties but we have a few. And in all of them, the book value on them is under $100 per square foot.

Carol L. Kemple - Hilliard Lyons, Research Division

Okay. And then I know you mentioned earlier in the call, you would like your FFO to exceed your dividend payout this year. At this point, are you still comfortable with the current dividend payout?

David K. Holeman

Yes. We -- one of our key initiatives, and it's been a key initiative for a while, is ensuring that we continue to drive our FFO. I think on the call, we pointed out probably 4 key areas this year for driving FFO. We're going to do the $40 million to $50 million in acquisitions in the near-term using low-cost debt, which will significantly contribute to FFO. We've got the lease-up embedded value in our properties that will contribute to FFO. You've got the renewal of our debt at significantly lower interest rates that will contribute to FFO. And then I just went blank on the fourth one...

James C. Mastandrea

The intrinsic value.

David K. Holeman

The intrinsic value in lease-up of the portfolio. So we, as management, Carol, feel there's absolutely significant value that's going to come through on the operating statement as a result of the hard work of the Whitestone folks. And because of that, we think we're very confident in our ability to get FFO in excess of the dividend this year. From a corporate governance standpoint, our Board clearly evaluates our dividend level each quarter and declares a dividend and they do look at lots of factors. They obviously look at all those ways we add value and ensure that we are producing the results that we need to.

James C. Mastandrea

Carol, just to give you an idea, that the numbers that we reported are based on the existing in-place real estate that is rented and generating cash. We have, in addition to that, approximately 600,000 square feet of space, that is either shell to fully completed space, so the cost to complete it and lease it is not that significant. We have 6 pads, we have 2 small development parcels we're going to start this year, we have 1 larger development parcel. If we took all of that property and we put the cost to it to get it to a 93% to 95% lease over the next 2.5 years, that would add an excess of $0.50 per share in terms of what we call intrinsic value. It's already there, we own it, all we have to do is extract it. Now we don't see ourselves being able to pull that out in a year. But we know what we have and it's manageable. And we're pretty excited about that. And that's why we look at it and we see it. If you just take that intrinsic value per share and it converts to net asset value per share and you add a multiple to it, I think there's some significant upside in the portfolio that we have.

Carol L. Kemple - Hilliard Lyons, Research Division

Okay. And what is the size of your total acquisition pipeline right now?

James C. Mastandrea

We would put that somewhere between $400 million and $600 million. The assets that we have, we have -- the one that we have under contract is approximately $21 million. The one under LOI is $26 million. We have a portfolio of 3 properties. We have another portfolio of -- but these aren't really portfolios, it's just the same seller, another one of 2 properties, and then we have 3 other properties, just those total there in excess of $300 million.


[Operator Instructions] And we'll take our follow-up question from Paul Adornato with BMO Capital.

Paul E. Adornato - BMO Capital Markets U.S.

On the relocation expense, I was wondering if you could just tell us a little bit more about the circumstances there. Has the home been sold? And when it is sold, is it possible that some of that will come back to the company?

David K. Holeman

Sure, Paul. I'd be glad to give a little more detail on the relocation expense that was recorded in the fourth quarter. I'll remind everyone that we, as any public company, have governance in effect. We have an independent Board of Trustees and an independent Compensation Committee. That Board and Compensation Committee, in July 2010, approved a relocation agreement for Mr. Mastandrea, and it has been fully disclosed in our SEC filings since that time. If you remember 6 years ago, Jim was asked to leave the company and relocated to Houston, and Whitestone's corporate offices, more than 5 years ago. And over those 5 years, Jim has had his house for sale. Pay has incurred security taxes, insurance, maintenance costs, and all of the headaches of owning a residence that's been located thousands of miles from where he is working. In December '12, Jim received an offer for the sale of his home after marketing the home for more than 5 years. The offer was from an unrelated third party and our Board felt it was the best interest of the company and our shareholders for Jim to go ahead and accept this offer and really bring closure to this situation that's been in place for many years. So the company does not own a house.


This does conclude our question-and-answer session. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

James C. Mastandrea

I would just like to say thank you very much for, #1, your interest and your investment in Whitestone. We're excited about it. We've been excited, we've been at it here now for over 6 years, and it still continues to get our juices going each and every morning we get up. We've got a great team. We're still number -- its SKU is in the 60s, and it is really a business model that we think has a tremendous amount of future and opportunity, and building the infrastructure, we're finding new and better ways to add things to it each and every day, like the iPad system with a Square on in to [indiscernible] friends. So we're excited about it. We thank you. We invite any of you, if you like, to call us, or at anytime, and ask questions and even come to our investor meeting the next week. And with that, I'm going to say goodbye. Thank you, Dave, and thank you, Juanita.


Thank you. That does conclude our conference. You may now disconnect.

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