Whitestone REIT's (WSR) CEO Jim Mastandrea on Q1 2016 Results - Earnings Call Transcript

| About: Whitestone REIT (WSR)

Whitestone REIT (NYSEMKT:WSR)

Q1 2016 Results Earnings Conference Call

April 28, 2016 11:00 AM ET

Executives

Bob Aronson - Director, IR

Jim Mastandrea - Chairman and CEO

Dave Holeman - CFO

Analysts

RJ Milligan - Baird

Mitch Germain - JMP Securities

Craig Kucera - Wunderlich

Paul Adornato - BMO Capital Markets

Kevin Chang - SunTrust

John Massocca - Ladenburg Thalmann

Burl East - American Assets

Operator

Good day and welcome to the Whitestone REIT First Quarter 2016 Earnings Conference Call. After today’s prepared remarks, we will have a question-and-answer session, and instructions will be given at that time. As a reminder, today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Bob Aronson, Director of Investor Relations. Please go ahead, sir.

Bob Aronson

Thank you, Aaron. Good morning and welcome to Whitestone REIT’s 2016 first quarter conference call. With us on the call this morning is Jim Mastandrea, Chairman and Chief Executive Officer; and Dave Holeman, Chief Financial Officer.

Please be aware that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from these forward-looking statements due to a number of risks and uncertainties. Please refer to the Company’s filings with the SEC, including Whitestone’s Form 10-K and Form 10-Q, for a detailed discussion of the factors and risks that could adversely affect the Company’s results. It is also important to note that today’s call includes time sensitive information accurate only as of today, April 28, 2016.

Whitestone’s first-quarter earnings press release and supplemental operating and financial data package has been filed with the SEC. Our Form 10-Q will be filed soon. All of these documents will be available on our website, WhitestoneREIT.com, in the Investor Relations section. Today’s remarks may include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings press release and supplemental data package.

I would now like to turn the call over to Jim.

Jim Mastandrea

Thank you Bob. Thank you all for joining us on our first quarter 2016 conference call. We are pleased with our financial results for the quarter and attribute these results to the successful implementation of our innovative, sustainable and scalable eCommerce resistant business model which we introduced with our IPO in August of 2010.

We are off to a great start to the year as our first quarter continues our record of long-term profitable growth on a year-over-year basis. The first quarter marks our 22nd consecutive quarter of revenue and NOI growth, and our 23rd consecutive quarter of FFO growth. For the quarter as compared to last year’s first quarter, revenues increased 19.7%. Net operating income increased 21.2%. Funds from operation core was $0.34 per share compared to our dividend of $0.285 per share, which is an 81% coverage. Rental rates on new and renewal leases signed during the quarter increased 12.8%. Occupancy of our core community center retail properties grew to over 89%.

Our business model is innovative, sustainable, and scalable and it has proven to be profitable quarter after quarter. First, innovative because we seek out eCommerce resistant tenants to fill our properties rather than swim upstream with soft and hard good tenants challenged by the Internet. Our eCommerce resistant properties are filled with tenants who are meeting the daily necessities of fast-growing communities. Our optimal mix of tenants provides convenience and high demand services that reduce risk and generate superior returns for our customers and our shareholders.

We focus on some of the fastest-growing markets in the country and within those markets, the best locations. As a result, our properties are surrounded by some of the most desirable neighborhoods in the markets we serve. Our tenants and ultimately our shareholders benefit from the high household incomes in the surrounding communities as neighbors tend to make more frequent trips to our properties and spend more on services.

Our properties are located within the top growing markets in the country, including Austin, Dallas Fort Worth, Houston, San Antonio, Phoenix, Mesa, and Scottsdale. Within these properties, within these markets, our properties are in the prime locations within affluent communities which have a median household income of $75,000 or greater. We have a large base of diversified tenants with leases that seldom contain restrictive covenants often required by large national retail tenants. As a result, our leases favor us as owners and enable us to increase rents as the market warrants.

Second, sustainable. Because the evolving retail landscape has time crunched consumers demanding the convenience of shopping online and spending more on services, consumers are spending more time doing things rather than buying things. Whitestone’s Community Centered Properties offer, offset this trend and benefit from a high frequency of customer visits and an optimal tenant mix providing daily necessities as opposed to regional center malls and power centers, for example, which have a lower frequency traffic and a higher percentage of tenants selling hard and soft goods which continue to be impacted by eCommerce.

Our position in the retail REIT service segment of the industry and our market is growing, having built our infrastructure around eCommerce Internet resistant tenants. We have been able to capitalize on the paradigm shifts in consumer purchasing patterns and we believe that changing landscape, with the bulk of soft and hard goods being made online, has revolutionized retail purchasing and the traditional use of bricks and mortar, what has not changed are people’s daily needs. And third, scalable because of our access to capital, long history of management working together and our vertical integration within the Company, including the hiring, the training, and the developing of our associates to provide them with the knowledge and tools in a performance-based culture where every single Whitestone associate is a shareholder.

With that overview, during the quarter, we expanded our development, construction, redevelopment, acquisition, and sales and leasing activity. We began construction on a 27,000 square-foot expansion at Pinnacle Scottsdale neighboring Center located in the affluent area of North Scottsdale. This addition will increase the leasable space at the center by approximately 24% and will add annual net income in excess of $700,000 on an investment of approximately $7 million. We acquired the 4.5 acres of land being used for the expansion, which is adjacent to our Pinnacle property for $950,000 in December of 2011, rezoned the land and sold a one acre portion for $1.1 million. We began construction this year with buildings at 20% preleased.

We also continued construction on the expansion of our Shops at Starwood retail center. This property is located in an affluent area of Frisco, Texas, which is north of Dallas. This addition will increase the leasable space at Starwood by approximately 62% and will add annual NOI in excess of 1.1 million on an investment of $11 million. We continue to advance our development activity to attain added entitlements for additional Arizona properties and selected properties in Texas. Occupancy at our retail properties, which are proximal a 90% of our asset base, was up 150 basis points year-over-year to 89.3%. Our leasing activity continues at a positive pace. We signed 122 new and renewable leases during the quarter for a total of 285,000 square feet and $16.1 million in leasable value.

We continue to be very active on the acquisition side of our business, maintaining a strong pipeline of opportunities sourced through deep relationships in our target markets. We expect to fund these acquisitions from our many sources of capital, which include non-core asset sales and issuance of operating partnership units. Let me update you on the disposition of our non-core assets. We have previously communicated that we expect to fully transition to a pure-play by the end of 2016. To date, we have sold five of the non-core assets with latest disposition closing in the first quarter. We will continue to update you over the coming months as we progress. We expect to continue our profitable growth while remaining intently focused on enhancing shareholder value. We have experienced little, if any, effect from oil prices on our properties. We continue to be geographically diversified with our Austin/San Antonio market now accounting for 19% of our net operating income; Phoenix, 40%; Dallas-Fort Worth 13%; and Houston 28%.

With that, I’d like to turn the call over to Dave. Dave?

Dave Holeman

Thanks Jim. As Jim said, we started the year out on a high note as our distinctive service-based neighborhood centers business model continues to deliver outstanding results. For the first quarter, total revenues increased 20% over the same period last year to 25.4 million. Same-store revenues, which represent 86% of our total revenues, grew 3% to 21.8 million. Net income tripled during the quarter versus the prior year. Included in the first quarter net income were gains generated from the sales of a non-core property and a small land parcel totaling 2.9 million. Property net operating income increased 21% from the prior year and was bolstered by a strong same-store net operating income growth of 4% versus the prior-year quarter.

Funds from operations core during the quarter grew 19% over the prior year to 9.7 million, or $0.34 per share. Our focused leasing efforts continued to pay off as leasing spreads on new and renewal leases on a GAAP basis and a cash basis increased 12.8% and 5.3% respectively. For the first quarter, our leasing team signed 122 new and renewal leases totaling 285,000 square feet and $16 million in total lease value for future rental revenue income. The total lease value signed during the quarter represents an 88% increase over the prior year. In our retail properties, which represent almost 90% of our invested capital, occupancy was 89.3%, which was an increase of 150 basis points year-over-year. We have a diverse tenant base, minimizing our individual tenant credit risk, with our largest tenant representing only 2.6% of our annualized rental revenues.

As a percentage of revenues, general and administrative expenses, excluding $170,000 of acquisition transaction costs and $2 million for the amortization of non cash share based incentive compensation, decreased by 170 basis points from last year to 10.4% of revenues. We expect our general and administrative costs as a percent of revenues to continue to decrease as we realize further growth. We continue to believe that performance based compensation and significant ownership by management and all employees is key to long-term shareholder value creation. As of quarter end, we have 96 employees.

Now let me turn to our balance sheet. Our capital structure remains sturdy with one class of stock, no joint ventures and a combination of property and corporate level debt. Approximately 73% of our debt is subject to fixed interest rates. The weighted average interest rates on all of our fixed-rate debt was 3.9% as of the end of the quarter with a weighted average remaining term of 6.1 years. Our underlying debt structure remains sound with a prudent mix of secured and unsecured debt and well-laddered maturities. This composition gives us the flexibility and support we need to react quickly to growth opportunities and changing conditions.

Our real estate debt as of the end of the quarter was $506.2 million and our ratio of net debt to EBITDA was 8.66 times, which is improved by almost 1 turn over the last six months from increases in our EBITDA driven from our forward thinking business model. We continue to maintain a largely unsecured debt structure with 49 unencumbered properties out of our 69 [indiscernible] properties with an unappreciated cost basis of $586 million.

At quarter end, we had total real estate assets on a gross book basis of $838 million producing approximately $70 million in annual net operating income. We had $165.4 million of availability remaining under our credit facility at the end of the first quarter, and the facility has an additional availability of up to $200 million from the exercise of the accordion feature.

During the first quarter, we did not issue any shares under our ATM program. We will continue to evaluate all sources of capital to fund our growth, including recycling of capital generated from non-core [indiscernible] asset sales [indiscernible] growth in occupancy of our operating portfolio.

You should be aware that our guidance reflects the asset level that we have as of the end of the first quarter and does not include the impact of potential 2016 acquisitions or dispositions. We will update our guidance as necessary to reflect any new factors, trends, acquisitions or additional disposition. Additional details are included in our supplemental data. [indiscernible] That concludes my remarks, and Jim and I will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll go first to RJ Milligan with Baird.

RJ Milligan

Good afternoon guys. Good morning. Can you guys give a little bit more color on what you are seeing on the disposition side, specifically for the non retail that you guys have opportunities to sell in those markets where cap rates are?

Dave Holeman

Sure. We are, I think, as we announced, we have, we are transitioning to a pure play retail REIT. With that, we are planning to dispose of the flex and office properties in our portfolio. Those are larger located in our Houston market. We have a couple of office buildings in Dallas. We are seeing a lot of interest on those properties. The property we sold in the first quarter, Brookhill, we did with an individual buyer, $3.1 million, and we were able to report a nice gain. So, I think we are very confident in our ability to continue our transition and to execute on transactions to go to a 100% retail company in ‘16.

RJ Milligan

Is there is a set timeline that you’re looking to dispose of those?

Dave Holeman

You know, we are going to be prudent sellers, obviously. We feel very confident about the guidance we have given as far as the timing on moving to a pure-play REIT, but to define it any tighter than that we don’t want to do at this time. But we are very confident in the ability to sell those properties. Not a large amount, I think, RJ, if you remember, it’s probably less than around $100 million of assets that we’ve identified, roughly, so it’s not a large part of our portfolio.

Jim Mastandrea

This is Jim. You’ll see more activity being announced as we pick up passing the midpoint in the year. What we usually do is stage our activity during different times in the quarter and also in the year. For example, in the first 30 days of the quarter, we are really working on the revenue side. As we get to the last 30, days we are really working on the expense side. It’s as simple as that. And I think you’ll see some similarities throughout the year in terms of the disposition.

RJ Milligan

Okay, thanks. I guess, on the flipside, in terms of acquisitions, obviously diversifying the portfolio, entering some new cities over the past two years. Curious if there’s another market that’s of particular interest to you guys in terms of diversifying or if there’s better opportunities in a market that you are already in, in terms of acquisitions.

Jim Mastandrea

That’s a good question. What we look at is we have a very specific and unique type of product property category. And we pick the very best neighborhoods with the highest income, household income, levels in usually high-traffic areas. And so we pick a certain kind of property. Once we do that in a market, we look for the large markets and then fast-growing markets. Now, once we are in there, once we are in a market and we set up our infrastructure, we then look to have a dominant position. For example, in Phoenix now, we’ve reached a point where we are in the top five owners. So we like to be in that category of maybe three to five, in the top five, so one of our goals is to achieve that in Houston, Austin, San Antonio, Dallas and Fort Worth. And then as we are working towards that objective, we’ll do the same thing in other markets that we are looking at that are outside of the markets I just mentioned but have the characteristics that we look for. We also make our acquisitions on a one-off transaction basis. And to date, we now have 69 properties, and we’ve got every one of those on a single shop base.

Operator

We’ll go next to Mitch Germain with JMP Securities.

Mitch Germain

Jim, so, I wanted just to talk about the development you’re doing at Pinnacle. The 7 million of cost, does that include the land, or is that land additional to that?

Dave Holeman

It does include the land. That’s the land, our carrying costs where we’ve owned the land, and then our additional cost of building.

Mitch Germain

So, how many other of these types of opportunities, I know you referenced one other currently exist within the portfolio?

Jim Mastandrea

If you look at it from an aggregate basis, we think it’s judicious to keep our development activities and construction activities under 10% of our total asset base. So given that criteria, as our asset base grows, you’ll see us stay within that formula. We have about a half a dozen of these now that we are queuing up. We just got through some entitlements. Then the next stage is to do our go back and re-look at and examine our market research to see which product fit and how it’s compatible with what we’re doing. And then we go through the design stage, and then the actual bidding and letting and then building. In each of our projects, we try to have about 10% to 50% preleased before we start construction.

Dave Holeman

To add a little bit, in our sub-data, we provide a breakout of our land parcels for future development. That’s not all of the opportunities, but we highlight six land parcels where we have future developments. We’ve started on two of those, being Pinnacle and Starwood. And there’s another four that are really great opportunities to develop. As Jim said, there’s additional opportunities beyond that with pad sites and other opportunities, but we’ve got a lot of development opportunity that will be judicious in how we execute.

Mitch Germain

Great. And then with regards to the sales program you guys are undertaking, I know it’s about 10 or 12 assets that are left to sell. But the buyer that exists and their ability to finance these deals, maybe if you can talk a little bit about who you’re targeting? And is this CMBS type of transactions, or is there financing available for the types of deals that they are looking at?

Dave Holeman

Yes, I think we are looking at, from a buyer perspective, it’s almost unique to individual assets, but we are being all-encompassing and looking at the market, looking at the best buyers. For instance, Brookhill was an individual. These are financeable assets, and so I think the buyers, but we are looking at all potential buyers and looking at lots of options.

Mitch Germain

Any change in tone from your tenant discussions, or are they just as positive as they’ve been the last couple of years?

Jim Mastandrea

Very good, we are starting to record some of our restaurant tenants in the percentage portion of their leases, which is always good. We have, I think we’ve shared with you that we will have a market rate or better, then we’ll pass through the triple net and then we hit a break point, and then we will get a percentage over the break point. What we find is the tenants like to be tenants with Whitestone. They like how we handle our properties. They like how they are clean and sharp and easily identified where they’re located and signage and things of that nature. So we are getting some of the really best types of tenants that you can find in the service sector of the industry and so what that’s doing is it’s producing sales for them, and their success, and with that we are starting to get into some of the percentage rents, so we like that aspect of it.

Operator

We go next to Craig Kucera with Wunderlich.

Craig Kucera

Good morning guys. I wanted to ask you about your same-store real estate package that declined year-over-year. Can you give us some color on why that occurred? Was there a decline in any appraisals or were you successful making any appeals for any other one-time adjustments?

Dave Holeman

Yes. so, property taxes, obviously, as an owner, we continue to fight our property taxes, make sure the jurisdictions value our properties in the best way we can. During the first quarter, we saw some nice movement in our Arizona cases. We are always fighting the taxes. We are always working to get those lowered as much as possible. Obviously, that impacts the amount you can bill your tenants on a base rent to the extent you could lower the operating expenses.

So specifically in the first quarter, we were able in a couple of our Arizona properties to get nice reductions. And then in Texas we fight very hard as well. Texas is a state that has a little higher property taxes than some other states, so we are very active in that. So really just continuing to work the values and saw some positive results in the first quarter.

Jim Mastandrea

Let me add to what Dave just said. We’ve specifically gone to business friendly states, which is Texas and Arizona. And what we don’t have is the pressure on taxes that you find in California, in Michigan, in Ohio, in Illinois, and all of these states that have huge pension funds that are underfunded. So, we happen to be in the states of our choosing, that we are not going to have the same kinds of impact or expect them that you might find in other states.

Craig Kucera

Great. Can you give us an update on your [indiscernible] lease and any conversations you’ve had with them as far as how they are treating that? And do you have any other tenants that are maybe on sort of watch list negative right now?

Jim Mastandrea

Let me start and Dave will jump in. We have two Haegans leases, and we never let go of the Safeway guarantee, and the other guarantees that we’ve had on those, so we are collecting rents as usual. And that term will run. We opted not to buy the stores when we had the first round. We are starting to see interest in them wanting to sell it to them. One is on a ground lease. The other is the ground and the buildings. Dave, do you want to add that?

Dave Holeman

No, I don’t think [indiscernible] As Jim said, there’s one that’s on a ground lease, so obviously if we were able to obtain the building, that would be a positive for us and our shareholders. And then the other one is a develop in Arizona. I think we feel very good about the future prospects of both of those paces. Nobody likes a dark space, but we are getting paid and we are working forward to what we believe will be a positive replacement tenant.

Jim Mastandrea

Dave, do you want to comment on what percentage of our revenues they might be?

Dave Holeman

They are a small percent. They are less than, they are the top 10 tenants. They are clearly less than 2% of our revenues.

Jim Mastandrea

That’s all of our Safeways to be less than 2%.

Dave Holeman

Just to be clear, so Safeway is 2.6% of our revenues.

Craig Kucera

Got it. Your guidance this year for occupancy, we are still looking at call it 200 to maybe 400 basis points. What gives you the confidence that you are going to be able to move up the occupancy this year? Is it getting the right people in place, or is it any other changes in operations?

Jim Mastandrea

That’s a good question. Let me just take you, just walk you back a little bit. We have been , we buy properties that have upside in them. And to get that kind of upside and what we produce [indiscernible] for our shareholders is because we don’t have the kind of occupancies you’re used to seeing at 95%, 97%. We don’t want that. But I want you to take and consider what we’ve been able to do with the existing occupancy in the range we are in. We are producing, on current occupancy, approximately $70 million in NOI. And that’s huge. For the last three years, we’ve had a compounded growth rate that included 28% in revenues, compounded, 29% in NOI, 40% in FFO core, and 14% in FFO core per share.

So, our optimism on the occupancy as we begin to transition out of the flex space and the office space, you will see the occupancy moving up. But we don’t ever want to be at 100% occupancy, because then that tells you that we are not really taking advantage of the intrinsic value embedded in the properties we buy.

Craig Kucera

One last one, just about your G&A expense, it showed a bit of a drop. I wasn’t sure if there was any seasonal items that were maybe not picked up this quarter or how we should think about G&A expense for this year.

Dave Holeman

I think it was a fairly difficult quarter. We had a little less transaction like legal costs in the first quarter than the fourth quarter. I think you will see our, I think that thinking about G&A cost for this year, the first quarter is probably a good trend rate. We expect, as I said, we expect to be able to leverage those costs over a bigger portion of assets and continue to bring that percent of revenue down. I think the fourth quarter is, I’m sorry -- the first quarter is probably a good run rate. There is a little bit of seasonality in it. You have some transactions, but the first quarter should be a good indicator.

Operator

We’ll go next to Paul Adornato with BMO Capital Markets.

Paul Adornato

Thanks. Could you tell us where bad debt is and what’s been the trend? Also, are you noticing tenants asking for rent relief just on the Houston topic?

Jim Mastandrea

Sure. How are you doing, Paul? We have not had any tenants ask for rent relief. And I think it’s part in the nature of the tenants. They are much smaller. We are not dealing with the nationals. We didn’t have any vacancies due to national tenants filing bankruptcy with the exception of which we mentioned in terms of Haegans and we’ve explained how we’ve covered that. But typically, though, we haven’t had any tenants who come back to us and ask for reductions in rent.

Dave Holeman

On the bad debt side, we continue to work the bad debt. As we talked about, we’ve built processes internally that are very focused on these smaller tenants. Our bad debt as a percent of revenue for the first quarter was 1.5%. I think that’s down. We’ve been in the probably 2% range in the past, but we’ve continued to see really positive trends in our tenants. They are paying us and they are businesses.

Operator

We’ll take our next question from Kevin Chang with SunTrust.

Kevin Chang

Good morning guys. I’m just wondering if you could provide some color on the SSNOI growth by property type and how does it compare on a year-over-year basis and sequentially?

Dave Holeman

I had a little trouble hearing you. I’m sorry -- Kevin?

Kevin Chang

Yes, it’s Kevin, Kevin Chang.

Dave Holeman

Kevin, I’m sorry. Just so I understand your question, you were asking on a little breakdown of the same-store growth by type?

Kevin Chang

Yes, so basically what the NOI growth for kind of retail office and office was.

Dave Holeman

Yes, we didn’t provide that. We will begin providing that in the future. Our overall same-store growth, as I said, NOI was 4%. Retail assets make up 90% of our total assets currently. So we can -- I apologize. I don’t have an answer for you, but I would expect the retail same-store growth was in the same range as the overall just because of the percent of the total portfolio.

Kevin Chang

Okay, great. The second question I wanted to ask, it looked like you guys had pretty strong leasing results in general. Any color on maybe the regions that were relatively stronger performers relative to others?

Dave Holeman

You know what? I think we saw really good leasing spreads across the board. We didn’t see a specific region that was performing different than others. We looked at our -- we look a lot on a property basis and we really saw good results. I think I encourage, always encourage you on leasing spreads to look at a 12-month period because just the number of releases coming due in any quarter. But we had a great quarter and we continue to have nice results on a 12-month period. And really no specific trends on a market base that are different than the overall.

Jim Mastandrea

I can add to it though that, on the horizon, we’ve got some really exciting deals that we are working on. For example, we have a 30,000 square foot box that virtually had little value to it as part of the center. When we bought it, it had $2 a square foot that we were getting in rent. We chose not to renew with the tenant and we are now in negotiations in the range of $9 to $10 a square foot with a tenant that it is much more desirable than the tenant that we had. We’ve got a couple of deals like that. We have a couple o deals working with a major coffee chain that has over 900 outlets that I think are important too because they come with very low cap rates on a property. We’ve had those kinds of tenants. We’ve got some of the pre-leases we have with restaurants, so we are starting to see more on the horizon.

Dave Holeman

The other thing I would just highlight and I’m sure you know this, but when you look at our leasing spreads, we like the short releases, so our releases tend to be that three-year range. So really the leasing spreads are probably a little bit more meaningful than some of the others you see that report their leasing spreads because of our lease term length.

Kevin Chang

Okay, great. And then I know it’s still kind of early days, but the kind of momentum being maintained in Q2 so far or --?

Dave Holeman

Say that again? I had a little difficulty hearing you.

Kevin Chang

I was just saying I was just wondering about the kind of leasing momentum and spreads into Q2 so far, like I know it’s still kind of early days, but just…

Dave Holeman

Yes. It’s early. I think we, from a leasing perspective, we see a lot of -- our pipeline continues to be good, we work with the smaller spaces, we work a lot of small tenants. So, the pipeline, the activity on the leasing side continues to be very strong. No indicator of anything different than what we’ve seen historically.

A - Jim Mastandrea,

It’s actually it’s strong. One of the things that we did do three quarters ago was we actually, in some areas, split renewals from new leases and we find that that gives us much more attention. It gives us higher rents when we are renewing. It lets the customer, which is the tenant, feel that they are partners with us as opposed to just tenants. And we find that separating that, particularly in bilingual markets, has been very positive for us.

Operator

We go next to John Massocca with Ladenburg Thalmann.

John Massocca

Most my questions have been asked, but one quick question. Was there any impact to your assets in Houston due to the adverse weather there about a week go?

Dave Holeman

We did have a little bit of flooding in Houston a week ago, right? But actually we fared very well in that our properties were really no impact. The city was shut down a little bit for a couple of days with traffic, but we had no damage to our properties to speak of at all.

Jim Mastandrea

In San Antonio, we had some roof damage with a hailstorm, and it’s 100% covered by insurance. It’s really not a, it didn’t impact any of the tenants or any of the rent rolls, but it is an insurance thing, so we will have that to deal with coming up, but we’ve been on it right away and that’s the only impact we’ve seen. What was interesting, though, is that getting to work was difficult for a lot of our employees. The road roadways were flooded and they were detoured. So we were operating at about 25% of physical presence in the office where need be. But didn’t have too much problems with any of the properties.

Operator

Our final question comes from Burl East with American Assets.

Burl East

Good morning. I have a couple of questions. The connection went down momentarily when you were describing the balance sheet, so I wanted to know where you were debt to equity, where your covenants were, and what debt capacity remained?

Dave Holeman

Sure. From a debt to equity perspective, probably the most common measure that most people look at today is the debt to EBITDA, so how many turns of EBITDA in your debt. We are at an 8.6 debt to EBITDA ratio. That’s down about a full turn from six months ago and that’s come down really from driving EBITDA and operations from revenues and lowering expenses. From a debt to market cap, that’s always tough, because the market cap is, we believe the value of our properties is probably much higher than our book value as well as the value that trades in the market.

From an availability standpoint, we have a $0.5 billion credit facility that’s led by a very strong group of banks. Under that facility, today we have about $165 million available and then we also have an accordion option which takes that up another $200 million. So we have plenty of availability under the credit facility. And then on a covenant basis, really all of our covenants have room, so we don’t have any issues any place where we are, near our covenants.

Burl East

Okay. You said debt to market cap, but then you didn’t tell me what the number was.

Dave Holeman

The equity market cap today is approximately, the equity market cap is $360 million, $370 million, we have about $500 million in debt, so that would be a $900 million trade and equity market cap and our debt is approximately $500 million, so that’s about 55%.

Jim Mastandrea

Another way to look at it, if you like, you have to make a determination in terms of what the appropriate cap rate is. But if you take $70 million of NOI and you cap that at some number given the quality of our assets and then subtract our debt, you can get an idea of how that fits.

Another measure you can look at is the book basis. Our cost on average is about $150 a square foot. Replacement costs we estimate around $300 a square foot. So there’s a couple of alternative measures you can take to give you comfort.

Burl East

So, you said that your facility, the, I was just looking at your debt covenants, and I may be mistaken, but it says, at least as per S&L, that you’re kind of capped at 60%. That’s where your debt covenants land. And it looks like you’re at 60% now [indiscernible] question. So when you tell me the covenants are okay, am I misreading the covenants?

Dave Holeman

The total asset value in the credit facility is calculated based on a cap rate, not on a gross book value or a market traded rate and that cap rate is 7.5% in the credit facility.

Burl East

Okay, great. So therefore what would the banks say your assets are worth?

Dave Holeman

What would the banks say? At a 7.5% cap rate, which we think is bankers on the debt side tends to add have some conservatism in there, but at a 7.5% cap rate on 70 million in NOI that would be 940 million in asset value.

Burl East

Right. And you said you had 560 million in debt?

Jim Mastandrea

No, about 500 million, roughly 500 million divided by 940 million that would be 53%.

Burl East

Okay. So you have a little bit of [indiscernible] room. Okay. The next question is you’re spending, as near as I can tell about $7 million a year in tenant improvement and leasing costs to renew non-comparable and comparable leases. And what you define as core FFO is $0.38. But I’m wondering what your kind of NAREIT fad would be. If you took NAREIT FFO and subtracted TI and leasing costs and did not give yourselves credit for non-cash compensation, I’m wondering how that stacks up relative to the dividend.

Dave Holeman

So when you look at a I guess an adjusted funds from operations, which would take into account the tenant improvement and the leasing costs, we would be -- our dividend is lower than our -- we have now reported adjusted funds from operations. We provide all of the data in our supplemental data to do so. And we are fully covering our adjusted funds from operations. Our dividend is less than our adjusted funds from operations in the first quarter.

Burl East

I don’t get that answer when I do the math, if you are spending $7 million in TI that’s $0.27 right there.

Dave Holeman

Probably the best way to do it is in the sub-data. We provide a table. Let me find the page number. On Page number 13 we provide a table. So some of that is the when we look at there’s a fair amount of first-generation tenant improvements in some of the properties we bought where we continue to invest in the space, so probably in your maybe in the number you’re picking up, you’re picking up some building improvements or first-gen improvements.

Burl East

So you are not counting that as a deduction from AFFO?

Dave Holeman

I think that’s very consistent in that to the extent you build out a space with value that will remain after the tenant leaves, but that would not be an ongoing tenant improvement or leasing cost, so correct.

Burl East

Okay. I was going off of a page in your supplemental. You’ve got a very, very well-laid out descriptions and stuff. I’m trying to figure out where it was, it’s page 27 and Page 28. If you simply add up the amount of money you are spending. And then it says there in the footnotes, it’s got -- does not include first-generation costs. So the number that I mean just took these two page out together is roughly 7 million does include that. So $7 million we can say as $0.27 and then when you add-in actual compensation and maintenance cost and so forth and so on, I get a fad number which is substantially less than the dividend?

Dave Holeman

If you take the delivery funds from operation you just ask for acquisition expenses and then the non-cash compensation, you released from that that, you take out things like straight-line rent, tenant improvements, lease commissions, we would have an adjusted funds from operation that would be in excess of our dividend.

Operator

This concludes today’s question-and-answer session. At this time, I’d like to turn the conference back to Jim Mastandrea for any additional or closing remarks.

Jim Mastandrea

Great. I’d like to once again thank everyone for joining us on our call today and also the great questions that you presented to us. We really like the questions. We feel that, as we’ve crafted Whitestone from almost its infancy that the questions are really great, that we know you’re interested in the Company. We thank you for your continued confidence in Whitestone.

In closing, I’d just like to reiterate that we are really well-positioned with a differentiated business model, and I have to say the business model is going to take some time for people to get used to it because it really is Internet-resistant, and most investors and REITs look at a model that’s different than this. So we are patient in terms of our investors starting to learn what we do, and begin to like it and see how profitable it’s been. We are very well positioned with this model. We have a portfolio of ideally located properties in the fastest-growing, most affluent and most desirable markets in the country, bar none.

Given our intense focus on growing the Company profitably on multiple fronts, our substantial financial resources and financial relationships throughout the country and internationally and our hard-working and dedicated associates, we are really optimistic for our prospects in 2016 and beyond.

We are going to continue on the path to be pure play and owner of retail properties. And simultaneously, we’re going to create neighborhood centers that continue to be places where people want to go and visit, that are largely eCommerce resistant.

As we continue to successfully execute our strategic initiatives and continue to deliver the financial results, I’ve shared with you some of the figures for the last few years, and even longer than that, in time, we really know and believe that the market is going to recognize the true value of this Company, apply the appropriate cap rates, arrive the appropriate net asset values, and you will see that the market value will start to come in line with the true value of the Company. With that, I’d just like to say thank you for joining us on the call today. For those who plan to attend NAREIT this fall in Scottsdale, we have a property there that we plan to showcase, and plan an investor evening with entertainment and food and all kinds of really nice things to get a chance to feel and touch and meet some of our senior management team. So, we’re going to showcase one of our properties that evening and we’ll pick a time and we will let you all know. With that, I’d like to thank you again. And operator, that’s all we have.

Operator

This does conclude today’s conference. We thank you for your participation.

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