Whitestone REIT's (WSR) CEO Jim Mastandrea on Q2 2016 Results - Earnings Call Transcript

| About: Whitestone REIT (WSR)

Whitestone REIT (NYSEMKT:WSR)

Q2 2016 Earnings Conference Call

July 28, 2016 11:00 AM ET

Executives

Bob Aronson – Director-Investor Relations

Jim Mastandrea – Chairman and Chief Executive Officer

Dave Holeman – Chief Financial Officer

Analysts

Craig Kucera – Wunderlich

RJ Milligan – Baird Investment Bank

Nate Kennedy-Mould – BMO Capital Markets

Kevin Chang – SunTrust

Carol Kemple – Hilliard Lyons

Operator

Good day and welcome to the Whitestone REIT Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. Following the prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time.

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, Christy, good morning, and welcome to Whitestone REIT’s 2016 second 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, July 28, 2016.

Whitestone’s second quarter earnings press release and supplemental operating and financial data package has been filed with the SEC. Our Form 10-Q will be filed shortly. All of these documents will be available on our website, WhitestoneREIT.com, in the Investor Relations section. Today’s remarks 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.

With that said I would like to turn the call over to Jim.

Jim Mastandrea

Thank you, Bob, and thank you all for joining us on our call this morning. I’ll begin the call with the discussion of some of the key financial trends we monitor including operations and acquisitions to measure and guide our day to day decisions towards achieving our long-term objectives. Dave will follow with a more detailed review of our second quarter financial results.

Overall, our value-add internet resistant business model is successfully driving increased net asset value per share. The foundation of our model is acquiring and operating Class A quality retail properties and markets with high household incomes, a highly educated workforce and strong population growth that leads to greater discretionary spending, specializing in service oriented tenants such as dining, health and wellness, entertainment, education and specialty retail and meeting the needs of the communities we serve and linking our tenants directly to the neighborhoods.

This quarter marks our 23rd consecutive quarter of year-over-year growth in revenue and net operating income with increases of 14.4% and 16.6% respectively from Q2 2015 to Q2 2016. Core to our business is our people. As a team, they advanced our innovative business model, sustained and grow our profitability through increasing occupancies and retaining a large portion of our tenants through re-leasing, while attaining additional scale through development, re-development and acquisitions.

We were early to innovate an internet resistant business model in the retail space with smaller service based tenants currently accounting for over 80% of our annualized base rent. Since our IPO in 2010, the trend of our financial metrics has been positive. This quarter our leasing of small space has driven a same store net operating income increase of $559,000 or 4% for 2Q 2016 over 2Q 2015.

We approached leasing by proactively targeting specific potential tenants that meet the needs of the community. The hard of our leasing is our targeting efforts as we seek to fill vacancies rather than just sitting back and waiting for incoming calls from brokers or perspective tenants. As our tenant businesses grow and occupancy rise, our revenue and net operating increase.

During the quarter, we signed 101 new and renewal leases totaling 309,000 square feet and retail occupancy expanded to 89.6% from 87.9% in 2Q 2015. Furthermore, our overall occupancy increased to 87.2% from 86.4% during the same period. As we lease vacant space and re-lease to our existing tenants, our revenue also rises. This quarter as compared to 2Q 2015, we had a 6.6% growth in annualized base rent, which help to drive our 14.4% increase in revenues.

To support our innovative internet resistant model, we build systems and add process to scale as we expand our properties through development and redevelopment along with making accretive acquisitions. In late 2016 to early 2017, we expect to complete approximately 63,000 square feet of new development currently under construction and proper is located in affluent North Scottsdale, Arizona and Frisco, Texas.

The land to these key developments was acquired with the regional purchase of the respective properties. Our land cost was minimal as it was generally not entitled at the time of acquisition and was considered residual to our purchase of these new properties. We will be increasing Pinnacle leasing space to Scottsdale property by 24% and Starwood, our Frisco property, by 64%.

Combined the additional space projected to produce incremental net operating income in excess of $1.8 million on a total investment of approximately $19 million, representing an estimated IRR of 14.1%. We also continue to scale our business through accretive acquisitions while maintaining our discipline as we pursue and negotiate the purchase of additional properties.

For example, during the second quarter, we had two properties under contract with only due diligence expense at risk. During due diligence, we determined that these properties did not meet our underwriting criteria, nor do they have the value add potential we expected. As a result, we opted out as a two deals, which was the right decision even through we incurred additional acquisition related expenses in the quarter.

At quarter end our portfolio consisted of 69 properties, principally located in the fast growing cities within the business friendly states of Texas and Arizona including Austin, Dallas, Fort Worth, Houston, San Antonio, Phoenix, Mesa, Chandler, Gilbert, and Scottsdale. Overall, our properties are performing very well, but even more exciting is the fact that most of these properties have loan to perform at even higher levels. Furthermore, our properties in Houston are well positioned and we continue to see relatively little impact on these properties from lower quoted prices.

What energizes our management team is the opportunity to carve in the changing retail landscape were consumer behavioral and purchasing patterns are shifting. We utilized a full range of research strategy to design, market, lease and manage our centers to match tenants with the shared need of the busy families living in the nearby – neighborhood.

By creating a community environment within our properties, we’re able to promote an atmosphere for the success of our tenant whether they are national, regional or local to capture higher investment returns in enterprise value. Beyond our core business is untapped interesting value within our properties that has been created. It is the embedded opportunities we unlocked by obtaining entitlements such as additional building rights at several of our Arizona and Texas properties, totaling over 0.5 billion square feet of potential expansion. This is significant.

While we accomplished much through the first half of 2016, we still have a lot of initiatives underway to help us to sustain our momentum and drive profitable growth. Some of this work includes completing our transition to a pure play retail company through the disposal of our remaining non-core profits. Increasing our total portfolio occupancy, completing construction on two properties that I mentioned earlier in Texas and Arizona, lowering our overall debt leverage through increased cash flow and sales of legacy properties. In closing on additional accretive value add property.

Let me briefly touch on the continued disconnect and the market valuation of our company and specifically underlying net asset value of the properties. We have produced secured an impressive compounded annual growth in many key metrics of growth and profitability. Clearly, online retail sales of hard and soft goods has a door for Whitestone’s service based retail community center.

We hope that if we continue to perform, over time the market will recognize the value we are creating and that in turn we’ll begin to reflect the overall market valuation of the company. We are already seeing early signs of this in 2016.

With that I would like to turn the call over to Dave and I will provide some closing remarks following the conclusion of questions and answers. Dave, please.

Dave Holeman

Thanks, Jim. Our positive performance continued in the second quarter, reflecting the successful execution of our distinctive internet resistant business model and was highlighted by year-over-year increase of 170 basis points in our retail occupancy and solid top-line growth. Total revenues for the second quarter increased to $25.1 million, up 14% from the second quarter of 2015. Our revenue growth was driven by the combination of a 50 basis point increase in our average same store occupancy, 2% growth in our same store average revenue per leased square foot and new accretive acquisitions slightly offset by asset dispositions. Property net operating income for the quarter increased 17% from the prior year driven by strong top line growth and efficiencies in our property operating expenses.

Over the last 12 months, our real estate assets on a cost basis have increased 15% and our total property operating expenses have gone up by only 10% due to the efficiencies generated from our scalable business model. For the quarter, our same-store net operating income grew 4% from the prior year. Funds from operations for the quarter increased 13% from the prior year and adjusting for acquisition cost and the amortization of non-cash share-based compensation, funds from operations core was up 9% over last year.

On a per share basis funds from operations core was $0.32 compared to $0.35 from the prior year period. The primary reasons for the year-over-year per share decline were late last year we termed out for five to seven years and fixed the rate on $200 million of our variable rate debt and as a result we incurred higher interest expense in the quarter of approximately $0.02 per share.

Our average interest rate for the year second quarter was 3.51% as compared to 3.19% for the prior year quarter. We believe the locking in the rate on the $200 million of debt was absolutely the right thing to do. We also incurred higher professional fees of approximately $0.01 per share in the second quarter related to tenant leasing, acquisition and legal costs.

Let me provide a little more detail on our general and administrative expenses. At the quarter end, we had 95 employees and our general and administrative expense for the quarter was $5.4 million, which was up approximately $400,000 from the prior year. The increase in general, administrative expenses was primarily due to increases in salaries and benefits of approximately $120,000 or 6.7% an increase of $150,000 in our amortization of non-cash share-based compensation and higher professional fees of approximately $141,000 as I said primarily from legal costs related to tenant leasing and collection and litigation matters.

On the leasing front, we had an outstanding quarter signing a 101 new and renewal leases were 309,000 square feet, the total lease values signed in the quarter was $24.7 million an increase of 54% from the 2015 second quarter. We expect these new leases to contribute fully in the future quarters as they only contributed partially at the second quarter of 2016. Our leasing spreads for the last 12 months on a GAAP basis have been a positive 9% on renewal leases and 4% on new leases for an aggregate 8% increase.

In our retail properties, which represent 90% of our invested capital occupancy was 89.6% at quarter-end which was an increase of 170 basis points year-over-year and our average base rent per square foot on a GAAP basis expanded 5% to $16.35 per square foot.

Now let me turn to our balance sheet. We had total real estate assets on a growth book basis of $845 million at the end of the quarter producing approximately $70 million in annual net operating income. This equates to an over 8% unlevered cash on cash return on our investments. Over the last 12 months our real estate assets have increased approximately 15%.

Our capital structure remains simple and steady with one class of stock, no joint ventures and a combination of property and corporate level debt. As of the end of the second quarter approximately 74% of our debt was fixed with a weighted average interest rate of 3.9% and a weighted average remaining term of 5.6 years. Our underlying debt structure remained sound with an prudent mix of secured and unsecured debt and well lattered maturities.

This composition gives us the financial flexibility and support we need to react quickly to growth opportunities and changing conditions. Our real estate debt at quarter end net of cash was $496 million, which is down $8 million from the first quarter lowering our debt to market capitalization ratio by 6% from Q1 2016. We continue to maintain a largely unsecured debt structure with 49 unencumbered properties out of 69 as an un-depreciated cost basis of $592 million. We had a $169.4 million of availability under our credit facility at the end of the quarter with additional availability up $200 million from the exercise of the facilities accordion feature.

During the second quarter, we sold 736,000 shares of our common stock under our at the market program at an average share price of 14.66 resulting in net proceeds of approximately $10.6 million, subsequent to the end of the quarter we sold an additional 450,000 shares at an average share price up 15.56 resulting in net proceeds received of $6.9 million. These funds were used primarily to pay down debt and reduce our overall debt leverage. We continue to evaluate all sources of capital to fund our growth including recycling of capital generated from non-core asset sales, additional debt and issuances of equity.

Turning to our guidance for the year, we’re reiterating our guidance range for funds from operations core of a $1.33 to $1.39 per share. We’re adjusting our guidance per net income and FFO per share due to higher non-cash depreciation and amortization expenses related to our properties and share-based compensation. As previously communicated our 2016 guidance does not reflect the effect of any future acquisition or dispositions. We will update our guidance as necessary to reflect any new factors. Please refer to the supplemental financial information that’s posted on our website for additional details on our financial guidance.

That concludes my remarks and Jim and I will now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll take our first question from Craig Kucera with Wunderlich.

Craig Kucera

Hey good morning, guys.

Dave Holeman

Hey Craig, how are you.

Craig Kucera

Hey guys, I know earlier this year you had been and I apologies you may have discussed this earlier, but I had a hard time dialing in. But earlier this year you were looking at maybe disclosing upwards of $100 million of assets. Is that still the plan I know it’s not included in the guidance, but is that still the plan and kind of where are you in the processes from a marketing perspective.

Dave Holeman

Yes, sure. Hey Craig, it’s Dave, thanks for the question. Yes, we’re still we have communicated, we still intend to be a really disposed of our non-retail assets by year-end. We’re currently working that process on several angles, but we do expect to dispose of the remaining non-core properties and its roughly 10 industrial properties, 2 office properties and then maybe a couple of smaller retails. It’s about – probably its obviously hard to predict the dollar amount, but it’s in that $70 million to $90 million range probably from a guidance perspective. And we’re in the market and we’re expecting to get those completed by year end.

Craig Kucera

Got it. And looking at your core operations, you’ve – it was nice to see the same-store operations north of 4%, you had a good success reducing operating expenses particularly in the real estate side is – are you able – are you achieving any appeals there. Or is that just sort of where the market has gone?

Dave Holeman

Yes, Craig, we’re. Dave, again. We’re very active on the property taxes, obviously especially in Texas the taxes on the property side are higher than some states. But we actively fight to lower our taxes in our properties and did have some success during the second quarter. So with that, it gives us the ability obviously as we lower those – operating expenses to be able to charge a little higher base rents. So we’re very active and we do pursue a lot of angles to get the taxes reduced.

Craig Kucera

Got it. And one more from me, when I look at your guidance for the year, how much of that from a same-store perspective is driven by gains in occupancy. Is that getting from the current 87% up to the range you put out there of 89 to 91 by year-end?

Dave Holeman

Yes, so the guidance, but as I said just reiterate a couple of things we’ve obviously given guidance in the 133 to 139 range for FFO core. We’ve given some of the underlying drivers. I think you hit on the same-store growth of 3% to 5% and then year-end occupancy we’ve given a number most of the – frankly most of the increases from the same-store occupancy – I’m sorry, from the same-store growth, the occupancy increase which we believe we will achieve, will probably contribute more heavily to 2017 and 2016 because we’re continuing to push that we’re half way through the year. We’re moving the needle, we’ve got our ways to go. So most of the growth just it comes from the same-store growth which was 4% during the second quarter.

Jim Mastandrea

Great, great. This is Jim. I’ll add to that. We have two properties that we have under construction. We’re in the final stages of those. We expect to add about $1.8 billion in net operating income, which is significant. We have an each case the spaces are approximately 50% preleased. So as we bring those online, you begin to see that adding to it as well as increase in the occupancies.

Craig Kucera

Great, thanks.

Jim Mastandrea

You’re welcome.

Dave Holeman

Thanks, Craig. Yes.

Operator

And our next question comes from RJ Milligan with Baird Investment Bank.

RJ Milligan

Hi, good morning guys. This is Will Harman on for RJ.

Jim Mastandrea

Good morning.

Dave Holeman

Hey, Will.

RJ Milligan

Just a question just going back to transaction activity, do you guys have any plans to do any additional acquisitions in the second half of 2016 and if so what markets are you looking at?

Jim Mastandrea

We do in fact, we are constantly in the market working deals either at the LOI stage, some in the contract stage. We have two deals currently under letter of intent, and there in that $75 million to $100 million range. There are also they structured with some operating partnership units which take a little bit longer there are class A properties in the Phoenix marketplace.

Dave Holeman

I think to add that a little bit I think this is generally we absolutely want to continue to be acquisitive. We are seeing opportunities, we built scale up in our five markets we are in today. I think we think there is an opportunity to continue to fill those markets end and operate very efficiently. So our primary target markets would be our existing markets and yes, we do feel like there is an opportunity, we are going to continue to be disciplined on the acquisition front, making sure that the underwriting is accretive and adds value.

Jim Mastandrea

And we will despite forward-looking what we look – what we like to do is have a position in a marketplace once we have the infrastructure there of anywhere from 3% to 5% of the total ownership of retail assets in our class. So we’ve reached that and almost there in Phoenix I would say we are probably at the 4% or 5% level. We look to do the same thing in Austin and in San Antonio, in Dallas, in Fort Worth and in Houston. We have ways to go in each of those marketplaces but once we have the infrastructure in. The easy part is to add properties to them its very little additions to over head.

RJ Milligan

And the assets you’re looking at in those markets what are cap rates look like?

Jim Mastandrea

Good question, cap rates depending on the occupancy levels are in the 7% range. We haven’t seen, we see some sometimes bouncing off of 6% but what we are finding is the assets that we like to have some value-add component. For example the two properties that we have under contract, once we get into the due diligence did not have the upside that we look for in a property which might be rolling the tenants which might be replacing some tenants. When you look at the property it may have more covenants than you want to have because covenants that restrict covenants and leases that is – that restrict us in terms of who we can lease to has really doing more of them subsidizing one tenants business. We don’t like to do that and we like to have the free range to really maximize the value in the property. So those are the kinds of reasons why we wouldn’t do a deal. But it’s rare that we have to add properties and if it is that means we can really obtain this kind of results that we are used to having.

We have 69 properties right now, and we are just reaching the point where our – one of the properties is fully and stabilized. And we are just real close to that I think go about 2,000 square feet away. As we do then we look at should we replace that in other words sell that and replace it was more value-add opportunity. So if we have 69 like that that means we have value opportunities in a lot of our assets.

RJ Milligan

Thanks, that’s helpful. And then the last question is on comparable new leases for Q2 I think they were about 6% which is I’m wondering if you could provide any additional color there?

Jim Mastandrea

Yes, make sure, we track our leases that we sign during the quarter, we compare those to the lease that was in place for four you can see the numbers in any particular quarter. There is not a tremendous amount of number of leases coming through, I think during the second quarter we had one comparable new lease that was a larger reduction, so we tend to what I would tell you I think I tend to look at the 12 month results. And did you have a larger number there only 15 comparable new leases coming through, we did have one restaurant lease scenario owner that the previous tenant had been a pretty extensive build out then we brought a new tenant in and we obviously coming in at lower rate and that reflected in the table as the reduction. But our overall leasing spreads I think from 12 month basis on aggregate are about 8% and nothing there were just one unusual comparable new lease during the quarter, it cause that rate to be a little lower than we seen in the prior quarters that I don’t believe there is a trend there we tend to look at the longer term on those.

RJ Milligan

Okay, thanks guys. That’s all the questions for me.

Jim Mastandrea

Thank you, Will.

Operator

And our next question comes from Nate Kennedy-Mould with BMO Capital Markets.

Nate Kennedy-Mould

Good morning, guys.

Jim Mastandrea

Hi, Nate.

Dave Holeman

How you doing?

Nate Kennedy-Mould

Good. Thanks, good. I had a question about your dividend. I noticed that the AFFO coverage ratio was around 100 maybe a little bit north of 100%. I’m just wondering how you guys are currently funding that and if you could provide maybe a forecast or coverage over the next couple of years?

Dave Holeman

Sure, Nate. I think one of the things we report is we report funds from operations, core adjusted like most companies do we think it’s appropriate to do some adjustments. But largest adjustment we have from NAREIT FFO to funds from operations core is really noncash amortization of share based comp. So our funds from operations core which we think is a more appropriate measure the dividend is in the low 80% of funds from operations core and then when you calculate to a more traditional AFFO subtracting tenant improvement and lease commissions, where we write around the 100% coverage today and obviously we’ve been increasing. So I think from a dividend coverage perspective. While our dividend percentage is a little higher than some of the larger REITs we believe it’s covered and we believe its significant cash flow from lease up and lots of other levers in the company. So we are very comfortable with the dividend level.

Nate Kennedy-Mould

Got it, got it. Okay. Thank you. And about your – the two development projects that are ongoing in Scottsdale and Frisco, Texas. Have you seen any change in your cost in those projects or have your forecasted yields come down at all?

Jim Mastandrea

Actually, they come right online with budget maybe a little savings give you just a little bit of cover. The one property we have under construction is on land that we bought adjacent to Pinnacle, which is our property located at Scottsdale road and Pinnacle peak. We paid $900,000 for the entire land – parse of land next to it. We sold at [indiscernible] towards the back half of that property for $1.2 million and the buyer is sharing our improvements of the main road coming down the center of approximately $300,000. So we virtually have no land cost on that road. We have a lease that have signed which we are not permitted to name the tenant, all I can say is that they have coffee shops in excess of 900 throughout the world. And so they expect to open sometime this fall we have an upscale of Italian restaurant, its prelease it we are talking to money manager so taking the entire section of [indiscernible].

Dave Holeman

Really just an excellent property. The other property in Dallas, North of Dallas, Texas within a similar situation we’ve had the property in the 90% range occupancies and we have over 50% preleased today. Again it’s a matter of breaking down into smaller place getting the kinds of rents that we are a customer. So I mentioned also in my remarks we have approximately 500,000 square feet of potential space that we can add to our portfolio. And what we do is when we are making acquisitions we are looking for components of the property where we can either entitle or add some square footage usually we are the second or third owner of a property.

And the potential land opportunity is coupled up with [indiscernible] so we are very careful to analyze, to determine if there is residual land, give you a simple portion of the formula if you have afford to have parking space with every 1,000 square feet that’s usually a requirement. When we find that we have seven or eight or nine parking spaces per square foot we know there is an opportunity under that [indiscernible] back and to build some additional square footage which was very good at.

Nate Kennedy-Mould

Great, great, thank you for that. And then just switching over to leasing, I noticed you have about close to 25% of your annualized base rent expiring between now and the end of 2017, how much is that is in Houston and what’s the leasing environment currently like in Houston, I think you have a number of short-term leases in that market, if I’m not mistaken. I’m just wondering if you had any negotiations going out to tenant before lease, before these leases come up.

Jim Mastandrea

As you remember fundamental to our business model we very much like leases where we have the ability to increase the rental rates and we’ve done that very successfully over the last few years are typical lease range is about three years if you look at the leases we’ve signed. So we have kind of a normal roll in 2017 as we’ve had for historically as well as going forward.

Our Houston market continues to do very well, I think on the retail side, Houston is performing very well and our properties are doing great, Houston is about 20% of our overall net operating income so its – a percent is down quite a bit obviously from several years ago that we continue to see our assets in Houston doing well. I don’t know the percent of that roll specifically related to Houston. But I can tell you that there has been really no difference in the way the assets are performing in the Houston market to any of our other markets.

Nate Kennedy-Mould

Fair enough, great that’s all from my end. Thanks a lot guys.

Jim Mastandrea

Thank you.

Dave Holeman

Thank you.

Operator

And next we go to Kevin Chang from SunTrust.

Kevin Chang

Good morning guys.

Jim Mastandrea

Good morning.

Dave Holeman

Good morning.

Kevin Chang

Just a quick question on transaction actually I believe a couple of quarter you guys mentioned $200 million acquisition target for this year. I was just wondering if that kind of still stand in light of what’s going on with the acquisition pipeline and I was wondering if you can comment on that.

Jim Mastandrea

Yes, sure. I think we have communicated regularly that we didn’t give any guidance on acquisition levels obviously it’s up to predict the timing. But we have said that we are – I don’t know, very acquisitive, we’ve done over $130 million in acquisitions the last few years and we plan to do that. So I think we have communicated that we think there’s a great opportunity on the acquisition side and we remain very positive on our acquisitions for the balance of the year.

We have not specifically given a number, but we think there is opportunity and as Jim mentioned we have several acquisitions under negotiation. But we have been very disciplined, we have been looking for acquisitions that meet the criteria. So I think we still are very proud from an acquisition standpoint. We continue to see the types of properties that we can buy and add value for our shareholders.

Kevin Chang

Thank you.

Dave Holeman

Yes, one other things Kevin – one of the things I’ll just mention here. In our pipeline we’re at the point where a lot of the restructured deals of the CMBS market prior to seven years ago are starting to roll. Owners of properties are looking at refinancing or selling. And on the refinancing requirement that they have to paydown some of the debt. But we’re seeing some fairly significant opportunities there. We’re also seeing some opportunities in some of the tick [ph] markets, where some of the assets are rolling over. And we use our OP structure, which is very helpful to sellers, where they can retain their tax benefits before, and keep their basis where it is and feel comfortable with our dividend that were well covered.

Our dividend today is $1.14 in absolute numbers. And we’re predicting a coverage to this much more higher than that which Dave mentioned earlier. So there’s lot of really good real estate that’s up coming both in Dallas, Houston and Phoenix still.

Kevin Chang

Okay, great. And then another quick one, with respect to the development project at Pinnacleand Shops at Starwood, when do you expect those properties to start contributing to NOI? And what’s leasing behind the life there so far?

Dave Holeman

Sure, good question.

Jim Mastandrea

[Indiscernible] is little bit. I think Starwood in Dallas is probably four months ahead of Pinnacle. Starwood is kind of completing as we speak the construction, we’re about 50% preleased. So we will see some – there is a little bit of free ramp period in some of those leases, but we will see Starwood start contributing to our results, probably primarily in the fourth quarter. And then Pinnacle will complete later in the year and we expect really to see that contribute to the results in 2017. Both properties, as we’ve mentioned when stabilized produce about $1.8 million in NOI together, but we expect it will be very close to that in 2017?

Dave Holeman

Yes, Kevin let me add to that. We in-house in the vertical integration of our company, we manage the entire strategy, the development, which is the entitlement and the construction in-house through people that are Whitestone associates in the company.

Kevin Chang

Sure. And then just on the 50% prelease is that like new customers or I’m just wondering having existing customers of the property taking more space.

Dave Holeman

Primarily new customers, so we’re talking about the 60,000 well over 60,000 square feet in total, both of these are centers that are in great locations, the existing property is pretty well full. So I think most of the activity our new customers not tenants just moving from our existing property to the new one. I can actually can’t think of any tenants that are moving all the tenants from where were new.

Ki Bin

Hi, you guys this is Ki Bin. Couple of quick questions here, in your press release you said 4.2% same-store NOI growth in the second quarter of 2016 over last year, but when you calculate off your disclosures it’s about 3.9%. I was curious, am I just missing a line item there?

Dave Holeman

Hey, Ki Bin, it’s Dave. I don’t think so. I’m looking back at the disclosure should just be the same-store that produced in the supplemental data if you divide it like say we might have a digit left but there’s no adjustment over what’s reported in the supplemental data, I think its on Page 16.

Ki Bin

Yes.

Dave Holeman

$560,000 an increase on in $144 million. So may be just I miss-calculated the digit on the press release.

Ki Bin

Okay. And is using – so what do you think about the use of equity at this juncture, obviously your stock price has done really well. The equation of using debt versus equity I would say, probably has to change, given the changes in your stock price. As you look at your pipeline, or things you want to buy or develop going forward, is your willingness to use equity a lot higher now or has it been the same as before?

Dave Holeman

I think its all relative as you said. I mean, we did sell some shares under the asset market program. Its about 1.2 million shares with an average price of fifteen. So we do think that price obviously is better than it was a quarter or so ago. We have communicated our intent to delever overtime. Lot of that delevering will come from just increased cash flow from the operating portfolio.

So I think we continue to feel like there are adequate sources of capital to buy the kind of deals we’re looking at. Obviously the stock price increase helps the cost of capital on the equity side. And so we will continue to look at all of those sources.

Jim Mastandrea

Ki this is Jim. One other things that we’ve been doing is, we calculate it’s our own internal estimate of NAV which is north of $22. Not including any of the intrinsic value and the entitlement to that. And what we’re finding is we’ve got several deals that we’re in negotiations on where we’re using our OP units, which is either some of the tick deals that we’ve looked at, that are discounted from the $22 of share, which is significantly higher than what we’re currently doing at.

And we find that when we present our company to groups of investors that are included in some of the sales of these assets that they find it as let’s say very compelling story and that we can show them the pocket of where we’re driving revenue. So we’ll probably use more OP units in some of the deals going forward, we’ve used some in the past and we’ve find that they’ve been – our investors seem to be very satisfied with them.

Ki Bin

Okay and then I’m looking at lease summary of pages, it just seems like overall what you consider and this is not just for Whitestone this is for many REITs, but what you put in the non-comparable new lease pool versus comparable new lease pool, I mean so lot more than non-comparable bucket. So can you remind us how you determine what is comparable versus non-comparable?

Jim Mastandrea

Sure on Page 30 of the supplemental data in the footnote I think we’ve give a definition. Most often – a high percent of the renewals are comparable obviously that makes sense. And we do have a fair amount of the new leases that are not comparable. The way we define comparable leases is whether there was a tenant in the space within the last 12 months. And the new in renewals were footage was slipped into 25% of the expiring square footage. So we have kind of just obviously tried to draw a line where we think it makes sense and provides information to telcos [ph].

Ki Bin

So there’s some other criteria that might be involved besides those two?

Jim Mastandrea

No, that’s the criteria we use obviously – that is the criteria we use.

Ki Bin

And just last question. Just currently speaking it seems like your weighted average base term for what you sign is just a little bit lower than what you typically see and may be that’s nature it vendors or cost from a base. But is FX when you renewal that three years is that just what we should expect from the portfolio overtime?

Jim Mastandrea

Look what we – part of our core strategy and philosophy is that we try to pick assets and we’ve done a great job in some of the best markets with high household income. I think we’re in the top of our group there. When you do that and then you select the tenants they can meet the need and they link to the neighborhood it’s always better to have shorter term leases because as their business rose and gets stronger, then they don’t want to leap. And we find that that’s very good in terms of driving all the profitability of each of our properties.

And also what happens is when – if you expect and we don’t give any of our decision based on inflation. But when you have short term leases, if in fact you do have inflation then our shareholders will benefit from that. And in our properties the quality of our properties we have a number of assets that are sometimes triple net than some other nationals and of course that’s another component of the overall tenant base we have.

Ki Bin

Okay thank you guys.

Jim Mastandrea

Thanks.

Dave Holeman

Thanks Ki.

Operator

And next we’ll go to Carol Kemple from Hilliard Lyons.

Carol Kemple

Good morning.

Jim Mastandrea

Hi Carol how are you?

Dave Holeman

Good morning Carol.

Carol Kemple

How are you?

Jim Mastandrea

Good thank you.

Carol Kemple

Earlier in the call you mentioned a couple transactions that you have under letter-of-intent, if everything goes well would you expect those to close in the third quarter or fourth quarter?

Jim Mastandrea

So we’ve been careful about giving too much guidance around the timing of acquisitions. We have always had a – over a last couple of years had a very active pipeline on the acquisition front. We do have two deals and there’ll probably be another two deals but we had two deals that are currently we’re working on. We are hesitant to give any guidance as of the timing and we feel very good about the deals, be feel very good about the closing, but we’re going to be disciplined, we’re going to work those and make sure that everything come together in the underwriting that makes sense.

Carol Kemple

Okay. And I know you also, that there is some interest in units with those. Would those of those deals be structured with hundred percent units or will they be paid for with some cash and some units.

Dave Holeman

Now there’ll be a portion of units and that could be anywhere from 25% to 50%. And then the balance would be using cash drawing down on their line of credit. Also we’ve been – we had sold some shares in the ATM program at much higher prices. And I think you know that when you’re selling the ATM program, your commissions on that are really roughly about 1.5%, so it’s a low cost of capital for us. So we are starting to see a real nice blend as a mix of acquisitions today.

Dave Holeman

And then one final piece, we’ll be recycling the capacity cash in some capitals from the sales of some of our asset as well. So you will see that in Huston, they are in the acquisition.

Carol Kemple

And could you give any color on what you are seeing from interested buyers and in your dispositions like pricing? Is it about where you all thought as the buyer pulled larger than you’ve thought?

Dave Holeman

We are seeing – we are out there in the market. We are seeing a fair amount of activity, but this time we probably don’t have a whole lot of color, we probably rather communication when we have some of those deals closed, but it is our intent to get those assets out of Whitestone and really become a pure play REIT. So we are a seeing a fair amount of activity on those apparel. Pricing is always hard to determine until you get to the end.

Carol Kemple

Okay.

Dave Holeman

And, Carol, if you look at some of them you could see they just have very low book value on them.

Carol Kemple

Okay. Thanks.

Dave Holeman

Thank you.

Operator

And our final question comes from [indiscernible]

Unidentified Analyst

Thank you and good morning.

Dave Holeman

Good morning, Dan.

Jim Mastandrea

Good morning, Dan.

Unidentified Analyst

Good morning. I just wanted to be on the call, I mean, I cut off, sorry [indiscernible] but I just wanted to go through the Houston occupancy and for the office flex. It looks like it fell 300 basis points in the first quarter. So we're just curious what drove that? Whether lease expirations did you just have? Or did you just have some folks, bankrupt? What happened there for 300 basis point demand?

Dave Holeman

Yes, our Huston occupancy on the office side, I think I’m looking at the – office side, we only have one office building in Houston and I believe the occupancy on that is suppose to 100% and it’s been fine. The flex centers are located in Houston and we're slightly down for the quarter. We had a couple larger moves out that occurred in the quarter, but we are working to release those. Those were pretty low rates. So from a financial perspective, not a big hit; from an occupancy, we would have a little bit of a decrease in our flex product.

Unidentified Analyst

Okay, that's helpful. And so as we look at kind of Houston between now and fall of 2017, what percentage of your lease role is in that Houston office flex-type of product?

Dave Holeman

Well, I guess I would tell you it’s probably – it’s a little longer probably in the flex sense, office portfolio as it is in the retail portfolio, so probably a little longer role than we have in our retail. But I think we have communicated, it's our intent to move that flex and office out of Whitestone hopefully by year end. And so we're very – we're not comfortable with that portfolio, we just think from a pure play REIT standpoint, Whitestone is better positioned with having all retail assets.

Unidentified Analyst

And is that smoothening?

Dave Holeman

Yes, Dan, that grouping produces somewhere between [indiscernible] of NOI which is easy for us to replace the terms of other properties that have a much more potential to them.

Unidentified Analyst

Okay, all right. And then as it pertains to your other revenues in the quarter, it looks like they defined by about 9% in the second quarter versus the first quarter. I think it is about $5.5 million. We are just curious, is that a good run rate or was there something that went on in the quarter that was one-time [indiscernible] trying to get a better sense of how that's going to move going forward.

Jim Mastandrea

Yes. So the net operating income first quarter to second quarter was fairly flat, and again just a little bit, but fairly flat. We did have lower property expenses in the second quarter. Property taxes, we got the favorable refunds and then we also just the amount of repairs we’ve did. So the other revenues are primarily driven by the private path of those property expenses.

So really timing of refunds on property taxes and then also the need for spend on repairs and maintenance. I think from a net operating income standpoint if you net those two out, it’s fairly flat with the first quarter. The other piece was the – in the income tax line on the income statement which is really in Texas that’s was called a margin tax, but it's like a property tax, was down as well.

So the result of those expense decreases drove the other revenue down for the quarter. We would expect probably both of those lines to come out, but on net income – net operating income perspective, it doesn't change it much.

Unidentified Analyst

Okay, that makes sense. But just to double-check sort of the other revenue that’s comprised of mainly tenant reimbursement, is the lease termination fee coming there as well?

Jim Mastandrea

It’s very little, it’s primarily can impact insurance reimbursement. There are small other charges like late fee. We really don't have a lot of lease expirations in our portfolio, largely just expense reimbursement.

Unidentified Analyst

Okay, okay. Thank you, appreciate it. And then the increase in the non-cash share based compensation going up $1 million or $0.07 versus the prior guidance. Is that just because your stock price is higher?

Dave Holeman

It’s a combination of stock price being higher, obviously makes the cost higher, and then just the amortization period that you incurred. So we have – we obviously look at the expected results and look at an ammonization period. So price and then the period over time which we expense those grants on a non-cash basis are the two factors.

Unidentified Analyst

Okay. And once the current grant, I'm not sure what happened on the current program, if there’s going to be another program reinstituted, I'm just trying to get a sense for why you guys riding this back half so far if it's something that you're going to continue to have going forward Seems like it's going to be something that should be included, but if this was a kind of our one-time-ish program then I understand what you're doing.

Jim Mastandrea

Well, Dan, this is Jim. What's really significant to our company and I think a lot of REITs out there is, we have a performance-based program. So we've always had a long-term incentive ownership program in here in the company. And so we're really closely in line with the other REITs. So I think you're going to see that program part of the structure going forward in our REIT and other REITs.

Dave Holeman

And I think Dan, the reason, recently we added back to FFO core as we do think it’s helpful to investors because it is non-cash and it is a little bit choppy. And so we think for comparability purposes it helps to understand the better operating funds from – funds from operation. And so our recent data back is to give a little more disclosure around the true operations and take out the choppiness of the accounting which does not match the actual earning of the stock.

Jim Mastandrea

Dan, one thing I think you'll find unique to Whitestone is that we have just under 100 employees in the company. And every single employee participates in our long-term incentive ownership program. So every employee is an owner. And that really is significant in terms of how they deal with the customers and how they operate and manage a property. And I think you’d see it in our consistent performance over time.

Unidentified Analyst

Okay. And then just lastly on – it looks like you guys had about 400,000 of acquisitions in Boston in second quarter. I was just curious what that was related to? Did you acquire anything in the first or second quarter?

Jim Mastandrea

Yes, really related to the transactions we talked about that we ended up taking a path on the underwriting and then really our efforts on the acquisition front. So the activities in the company are transaction legal cost. Those sort of things related to acquisitions even though we didn't close on any. There's probably a little bit of carryover from some of the acquisitions previously. But primarily our activity relating to acquisitions, they were not closed on.

Dave Holeman

None of it relates to forfeitures or anything like that. It’s mostly when you are working with operating partnership unit type structures there's an added legal fee because you're working through tax consultants. So we are doing much more of that now than we've done in the past.

Jim Mastandrea

And some of that even though the cost was incurred benefits up on next deal we do, we've spent a fair amount of time on the structure related to operating partnership unit, tax matter agreements, they're all acquisitions rate. The costs have been expensed and will benefit us as we go forward.

Unidentified Analyst

Okay, understood. I've heard the complexity around the P&I transaction, that's quite large, so understood.

Jim Mastandrea

Yes.

Dave Holeman

Thanks, Dan.

Jim Mastandrea

All right. Great, Dan. Thanks for your questions. I appreciate them.

Operator

And we have no further questions at this time. I would like to turn our conference back over to Mr. Mastandrea f or additional or closing remarks.

Jim Mastandrea

Well, thank you, operator, and thank you all for joining us. And we really do appreciate the great questions. Before I close I do want to remind everyone on the call that we will be hosting an event at our Market Street property at DC Ranch in Scottsdale, the evening of November 14. And we've picked that date because it's particularly those who will be attending WeeWorld in Scottsdale which is the following two days, we would love to have you stop by. We have seven restaurants here at the property and only acquired, just pushing 80% and it's now over 90% occupied. It's a great example of the kind of value add, small tenant service based internet resistance properties that we have.

So anyone who's going to have WeeWorld for the convenience, we will be providing shuttle service between the JW Marriott and Phoenix which is a desert ridge resort. That's the host hotel and our Scottsdale property. And so we'll be more detailed in the future.

I just want to close by saying that we're really proud of the accomplishments since our IPO six years ago. I mean it's amazing to be able to post double-digit cagers. And what we have found is that last year that we had been doing a deep dive into the company that we really have to get out and tell our story because we're not a traditional retail REIT. And so Dave and I as we continue to be on the road leading investors, we're continuing to share our story and we believe it's starting to resonate very well. We've had some nice interest in our stock.

It's a unique story. The Internet resistant business model has been traffic and of course it’s being helped with all the problems that are going on, on the retail side where most people are beginning to take advantage of the online shopping and the technology that's available. Our history of profitable growth and our opportunities will continue. And we will be looking forward to meeting with a number of investors, trips that we've already got scheduled, trips that we've had this week even then we have in the future and towards the fall.

So we welcome any incoming calls or any incoming inquiries to visit and see the properties. And with that I'd just like to say thank you. And we appreciate your confidence and support and we look forward to a great third quarter of this year. Thank you, operator.

Operator

And that does conclude today’s call. Thank you for your participation. You may now disconnect.

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