Thank you, everyone, for joining us today for the Whitestone REIT panel. My name is Anthony Hall and I'm an analyst at Truist Securities. I'm pleased to introduce Whitestone CEO Dave Holeman, COO Christine Mastandrea, and CFO Scott Hogan. Whitestone REIT, ticker WSR, is a community-centered REIT with a focus in Sunbelt markets and has a $630 million equity market cap. We'll leave time near the end for audience to ask questions, but I'll kick things off. Before we get into the market fundamentals and other topics, you know, Dave, for investors out there who are less familiar with Whitestone, maybe you can give a very brief overview of the company and your broad strategy.
Thanks, Anthony. I'll, yeah, let me make sure I talk to Mike. Thanks, Anthony. I'll try to be brief, but it's a pleasure to be with you all today and love to tell you a little bit about Whitestone. We own, I would say, some of the best neighborhood shopping centers in the sector, where 100% of our portfolio is focused in the fast-growth, low-regulation states of Arizona and Texas. We have a tenant base that's really well-diversified: 1,400 service-oriented tenants, and they operate on a bit shorter duration leases. We'll get into that a bit. If you think about what differentiates Whitestone is we've leaned into the really high-value shop space. 77% of our portfolio are the optimal 1,500-3,000 sq ft size spaces, where we see a ton of demand today. It gives you a lot of durability of cash flows.
They're flexible. Just a number of business types are looking for those spaces. From a strategy perspective, obviously, we've targeted really driving long-term shareholder value. How we do that is we anchor our centers to great neighborhoods, and then we fill those centers with tenants. They're primarily shop-space tenants. We believe we can leverage our position in the states we're in, the type of products to have really strong earnings growth. We've given some visibility into our earnings of having like 5%-7% FFO per share core growth in the future. Really, through our differentiated strategy, through our focus on strong markets, we've been able to have same-store NOI growth that's a CAGR of about 5.5% since 2021. If you look at our FFO per share growth, it's been around 5.5% since 2021.
You know, from a dividend perspective, we've also grown our dividend in tandem with our earnings, and then we've strengthened our balance sheet over that time. That's a quick, quick version of Whitestone.
With macro uncertainty and consumer confidence sitting at multi-year lows, how have those headwinds affected tenants' leasing decision in your Sunbelt market today? Are you seeing longer decision cycles, greater concessions, or shifts in preferred lease term or other clauses? If so, how does today's leasing velocity compare to the pace you have experienced over the last 12 to 18 months?
We haven't seen that much slowdown in leasing. What we've seen is there's longer terms that are associated with build-out times. I think just the difficulty of getting projects approved and getting things through the local community governments has been really challenging since 2022 and become more challenging. By and large, we haven't seen a slowdown in leasing. We haven't seen much change, even in TI. We've kept our TIs to a minimum. It's just a longer time in build-outs. The only thing I've seen, too, is there's just been a tremendous increase in rents in any type of pads. It wasn't unusual, it seemed so quaint that you would have a pad building that was maybe you'd charge $50 in rent. Now it's getting close to double what you need to charge in order to build out a pad on your locations.
You know, in terms of like other metrics, right, what are you seeing in terms of like real-time foot traffic or tenant sales across your core markets? Are you still seeing service-focused tenants such as medical, fitness, restaurant, and, you know, personal care still outperforming soft goods merchants?
I think there's a couple of trends that we're seeing. Services are still running high. We're close to a 7% increase in our foot traffic. Some of our centers are well over a 10% increase in foot traffic. Again, we lean into the service economy. With that, we're starting to see an interesting change with the incumbents being challenged. I think this is across the board. For example, Starbucks, you know, losing out to Dutch Bros. I think you're seeing it in food as well, and also in grocery, where you're seeing Safeway and Kroger getting challenged by some of the strong regionals like Publix, H-E-B, Meijer, in addition to Aldi and Trader Joe's. Mostly what I'm seeing is that there's a big shift and change in the dynamic of, you know, a new customer being served and how you serve that customer.
If you're not investing in your brand, you're going to get behind relatively quickly, and there's new brands that are ready to overtake you.
Just to add a couple of things. I think Christine started out with the foot traffic. We did get an updated report a couple of days ago, I think, that showed 6%-7% for the year. Interestingly enough, I think one of the markers was Liberation Day, which is incredible now, all the things going on. Since that time, we'd had an 8% increase in traffic. I have no reason for that, but I do think that clearly we focus on the types of tenants that are growing, that are more attractive to the consumer today. Christine said that. You know, foot traffic is something we're always watching, always looking for, making sure we bring in businesses and services that drive people to our centers and allow them to have repeat visits and stay for a while.
You know, who's on your tenant watch list today? Which tenant categories do you believe are positioned to hold up in a weaker consumer backdrop, and which segments are you proactively flagging as high risk? Do you expect a wave of bankruptcy this year?
I'll start real quick, and then I'll hand it to Christine. I would say in the environment we're in today, every tenant is on our watch list, meaning for us in the retail sector, it's a good time. If you look at the supply-demand dynamics, there's been very little product built in our sector type for the last several years. We're consistently looking at upgrading our tenant base. I don't want to, I'll let Christine dive in and say more, but I would say almost every tenant, we are looking, we're sharpening the sword right now. We're continuing to strengthen the tenant base and really look at, in this time when you've got a supply-demand dynamic like we have, making sure we're continuing to upgrade the quality of our revenue.
One of the things that we talk about in our business is that we want to successfully serve our communities. In order to do so, we have to have the tenants that serve that community well. We've been actually taking back where we can some of our, I would say, transitioning some of our tenants that maybe have an older business model and retenanting. Re-merchandising is a very active part of what we do, in particular whenever we buy a new asset. Along with that, though, I'd have to say that what I've seen is operators over the last number of years, especially our regional operators, are very strong. I've seen an improvement on entrepreneurs and their business models. They're very sophisticated. It's a lot different than what would be considered the mom-and-pop operators of about 10 years ago.
The world has changed a lot as far as the type of tenant that we see. They come in with a level of sophistication that we have not seen before, whether it's the point-of-sale systems they use, the cash they have available to invest, the organic growth that they provide, and also the teams to scale.
The portfolio occupancy dipped, you know, 70 basis points year over year in the first quarter to 92.9%, largely due to a deleasing at Terravita. Guidance assumes, you know, 94%-95% by year-end. Can you guys help us bridge that gap?
Sure. I'll, once again, just maybe start off with the concepts around occupancy. If you look at where we are, our occupancy, as we ended year-end 2024, was a little over 94%, which was up almost 300 basis points from 2021. We expect to be higher than that by year-end this year. From a big-picture perspective, our occupancy is in a really good place, and it's continuing to move in an upward fashion. You know, our portfolio is a little smaller than some of our peers. We've got about 5 million sq ft. You do see some, a little bit of volatility quarter to quarter with our strengthening of our tenant base, our releasing, and we saw some of that in Q1 2025, as Anthony pointed out. Maybe I'll let Scott or Christine talk about maybe the specifics of what we're doing from retenanting.
Q1 was one where we've got some exciting things going on that's continuing to strengthen the tenant base.
Again, we don't have that many large boxes, but the few that we've had, if we have an underperforming tenant in that box, we like to retenant with a stronger position for the market. In this example that you were talking about with Terravita, it was an older box that, again, had been underperforming as a ground lease for quite some time. We took that back, put in an ACE Hardware in The Picklr . As you can imagine, when you're talking about a ground lease, our rents getting the building back were triple from what we got from before.
And then, you know, for The Picklr, like when do you expect the timing of a grand commencement?
I can't give you the exact date yet because we're just turning the space over. One thing I like working with The Picklr, they're very, very quick to turn their space. It doesn't take much to retrofit the building and position it for an opening. That's one of the reasons why we like working with them. Also, they're extremely profitable. We like the sticky traffic. They play to a very young male demographic that's looking for a sense of community right now. I think when we opened our first one, it was profitable day one.
Does your guidance assume that The Picklr is, okay, gotcha.
It does. And I think what you're getting at is you should see steady occupancy progression. I think I'd started off by saying where we were 2024, we expect to be, I think we've given guidance in the 94%-95% occupancy level. So with the retenanting, we were at 92.9% in Q1. What you should see from us for the next few quarters is a nice uptick in occupancy as we bring in some of the activities we've been talking about. Super positive on that. And, you know, probably the result of that is, you know, if you look at our same-store growth from those leasing efforts, very solid. We've reiterated our 3%-4.5% same-store guidance. I think we started out the year with a very strong first quarter. And so feeling very good about the occupancy.
You're going to continue to see us look for ways to strengthen this tenant base. That means, you know, testing the tenants, making sure we have best-in-class tenants. We stay very close to our tenants. From a company perspective, we've got probably a more targeted geographic approach than many of our peers. We are very real estate intensive. We spend time with the tenants. We understand the business. We are going to continue right now in this environment, strengthening that base as much as we can.
Are there any notable vacant space that must be backfilled to reach this target, and where are those negotiations today?
Yeah, I think there's a couple of centers that we're doing in the market right now. What we like to do is, especially a newer center, because that's where we get the most upside opportunities. There's a couple that we have that we're doing in redevelopment at this point. We'll be turning some space. I would say that really our box size is not that big on average. If you consider our boxes, they're about 10,000 sq ft. Most of our large boxes we've filled at this point. More to come on that.
Yeah. So I mean, Whitestone is an operating business very much. We have, as I said, we have 1,400 tenants. We have an average lease term of about 4 years. We roll, you know, 20%-25% of our leases every year. We love that. That's one of the things that differentiates Whitestone right now is if you look at the mark-to-market, I think I heard, I walked in on the panel before us and heard the PICO guys talking about the replacement cost dynamic and the pricing power we have today in this environment with the cost to build new product being much higher. Whitestone also has leases that are rolling right now. For us, we're able to capture that mark-to-market spread much quicker than many of our peers.
Now roughly like 60% of your ABR comes from small shop space. Most of these tenants are local or regional operators. Could you guys walk us through the credit underwriting process for these tenants? Do you guys require, you know, quarterly sales reporting? Which KPIs carry the most weight when you screen and monitor these operators?
Yeah. We begin just like a bank does. We look at the 4 Cs, collateral, capacity, credit, character. We also look for the commitment to the business. I think the most important thing when you're working with local and regional operators that you're looking for, not an investor that invests in a business. We're that investor, so to speak, because we've invested in the real estate. What I'm looking for is the commitment of the operator. I'm looking for operators that have the ability to scale, have the teams in place to scale, have the metrics with their business, know and fine-tune their businesses really well to show that they can go from 3 to 5 operations in a location. We have specialized in that.
I think that's made us in a really good position to know our local markets well and to serve them quickly with a change whenever we buy a new center. Along with that, we also like working with franchises as well. Why? Because those are tested and proven operations. That's worked really well for us. I just want to mention with this, we do talk about being, again, local and regional. When COVID came, we were a top in the class as far as our collections. We had very few losses. It should speak well to our business model and the resiliency and also the robustness of how we operate.
In terms of the balance sheet, I'll start with a very open-ended question for maybe for Scott. You know, what can you tell us about your financing strategy, target leverage, access to capital, cost of capital, and et cetera?
Thanks, Anthony. Our financing strategy centers around flexibility, discipline, and momentum. First, on flexibility, we've made significant progress in strengthening our balance sheet. Since the leadership transition in 2022, we've meaningfully improved our leverage profile, bringing annualized fourth-quarter debt-to-EBITDA RE from 10.4 times in 2020 down to 6.6 times in 2024. That's been supported by strong operating performance, proactive capital management, and discipline allocation. We maintain ample liquidity with current revolver availability of approximately $98 million at the end of Q1 and no maturities for the balance of 2025. We're actively preparing to recast our credit facility and term loans. Based on strong engagement, including interest from new banks, we expect to both extend maturities and increase overall capacity with the potential to tighten spreads as well. In 2023, we achieved an investment-grade credit rating, which reflects financial progress and improved risk profile of the business.
That's opened up new avenues of capital and continues to enhance our cost of borrowing. We approach capital allocation with clear hurdle rate discipline. The dollars we deploy are tested against a risk-adjusted cost of capital, not as a static number, but as a dynamic number that reflects market conditions and our evolving capital structure. We have multiple capital sources available today, a stable and supportive bank group and ATM program to issue equity opportunistically, growing interest from private capital providers, which gives us optionality, and the possibility of joint venture partnerships that can enhance returns and mitigate risk. As a smaller public REIT, we recognize that our cost of capital is a little higher than some of our peers, which is why we've refined our acquisition strategy to focus on targeted high-impact opportunities where we can move the needle and generate FFO accretive results.
On the transaction side, we remain selective. Our recent transactions have closed at cap rates around 7.6%, while recent dispositions have executed at 6.5%, reinforcing the value we've created in the discipline in our underwriting. We also continue our efforts to monetize the Pillarstone assets, which will further enhance our financial flexibility. Ultimately, the strategy is not just about managing the balance sheet. It's about positioning the company to capitalize on opportunities. We're focused on investments where projected returns outpace our blended cost of capital, whether that's in acquisitions, ground-up developments, or strategic developments. We remain committed to creating durable accretive value for our shareholders.
Maybe you can take a pause here and open up the Q&A for the audience.
Yeah, I have 2 questions. In my area, you're dealing with.
Hi.
Christine, you mentioned that the PAD development costs have doubled. Can you just address that? I'm assuming it's inflated.
I'd say it's not the.
Let me repeat the question real quick.
Yeah. You had said about the PAD development costs. Actually, the rents have doubled. It was not long, maybe about 10 years ago, we were doing deals around $45 a sq ft. Now we are going up to $90 just to make sure to cover the cost of development. I cannot say where, but the challenge always with the PAD is you are carving it out of already an existing center that you have. It is a question of your site costs and how much you need to improve the site. What I am finding is that the merchant builders are not able to compete like they used to be because they cannot acquire the land and make the deals work. Competitively, that is forcing rates up as well.
One of the benefits for us as well is in the markets we're in, we've acquired centers that have a little more land. We're in markets that are more open. We have those PAD abilities on land that we own already in the portfolio. While when we underwrite it, obviously we allocate the cost of that land to the underwriting, we do have an embedded, you know, already in our assets today. It is opportunity that helps us move the needle by building small PADs every year and doing that in a way that really adds to our earnings.
In the balance sheet summary there, you mentioned some assets that you're selling. I didn't pick up on that.
I'll repeat the question, Scott, and you get it. I think the question was, on the balance sheet, you mentioned some assets you were selling potentially, and you said something about Pillarstone. Scott.
Yeah, sure. Pillarstone is a group of assets that we have in a joint venture that are returning no dollars today that are wrapped up in a bankruptcy process. We are just in the process of liquidating that. We think by the time we liquidate it, we should get anywhere from $40 million-$60 million of cash. The timing of it is very hard to predict because it is in a bankruptcy process. Those dollars would be totally accretive. Some of our legal fees that we have in G&A today would go away.
Just to add a couple of things on that, many of you know the kind of the turnaround of Whitestone that's happened over the last couple of years. Those assets came out of a relationship with the former CEO and a related party investment that we're almost out of. What it means is we'll have, you know, $50-$70 million of cash that we don't, that's been tied up for a number of years, and will provide a return. We're nearing the end with those proceeds coming to Whitestone. We haven't put any of that in our guidance because the difficulty of predicting the timing is difficult. It's an opportunity for us. When Scott uses things like bankruptcy, you want to make sure people know that's not us.
That's cleanup of the old regime that we came in in 2022 and really have done a number of things. Clearly, we have changed a lot of the governance. We brought on a new refresh board, excited that we have a couple new board members that just joined Whitestone. Many of you may know them. Just to add to that.
You guys recently cited $20-$30 million of past site redevelopment projects for 2025 and 2026 that could lift same-store NOI up to 100 basis points. How many additional PAD or expansion sites remain untapped across the portfolio? What could the potential investment represent?
I love the fact that Anthony is very detailed in his building his model. I'll give a more general answer, and then Scott or Christine can give the details that they would like. I mean, obviously, one of the things we did in the first quarter is we tried to give investors a view of the Whitestone earnings potential for a number of years, right? A lot of what we've done over the last couple of years has been cleaning up a great portfolio, getting it in a good position to now be able to show investors what this portfolio can do. We put forward a view of kind of 5%-7% earnings, FFO growth for the next few years. Part of that was, I think, about 1% coming from redevelopment or PAD sites. I'll let my teammates share if they'd like about that.
We think, as I mentioned earlier, we consistently look across our portfolio. We've got opportunities to add some GLA, add real estate that's on land we already own. We do all of that driven by demand coming from tenants, which is very strong.
I think so we try to do about 3 PAD sites a year. A lot of that has to do with, too, we look for land or we look for assets that we can acquire and also develop PAD sites on those locations. You know, we try to be conservative in saying that we can do about 3 a year because they do take a heavy lift. You do have to get them approved. You have to go through a whole process. Some of them are built. Some of them are ground leases. It depends on the location. Along with that, though, we have a couple of larger projects that have additional GLA, in some cases anywhere between 20%-25% plus where we can add additional GLA on those locations.
At this point, we're going through, again, some of the approval process and the design and working towards starting those up and getting those into execution.
What cap rates are for what are the cap rates for neighborhood centers trading in your core markets today? Do you expect to be a net buyer, seller, or balance in 2025? What unlevered IRR or rent growth are you underwriting today for acquisitions?
I'll take a crack at those. I think from a cap rate perspective, we are seeing some settling of cap rates. One of the things that Whitestone always does is we're trying to compete in a little bit different space than some of the others. So we typically look for a little smaller center, probably in the $20 million to $40 million range, as opposed to some of our peers who may look for the larger centers. So we try to compete in a space where we can compete well. You know, we're seeing, and I think when you talk about cap rates, what we talk about is going in, what is the cap rate? What's the cash flow versus the purchase price? To me, that's very different than what we expected to be a couple of years later.
We're always looking for centers where we can apply what we do and drive probably a couple hundred basis points of just unlevered return. Today we're seeing assets in that probably 6.25%-6.75% to 7% kind of going in cap rate where we can apply our model and drive that 150-200 basis points over a couple of years. I think that when you look at IRRs, what are you doing with the exit cap? A lot of things factor into that, right? I think we generally take a conservative approach to that and are looking at terminal cap rates that are 50 basis points higher than what we're going in with. We're looking for, we're being conservative.
With those types of underwriting, we're seeing kind of unlevered, I'm sorry, we're seeing levered IRRs probably in the low teens on the assets we're typically looking at today. Obviously, we're looking for assets where we can come in and apply our model and the surrounding area is growing. First, that was cap rate. Second one, I think was net buyer, net seller. If you look back at what we've done in the last couple of years, about $125 million in sales and buys. We do think this is a portfolio that we can scale and grow. That said, we're going to be disciplined. We work for shareholders. Our job is to grow shareholder value. Our job is to grow earnings per share. We think there's benefit in scale for Whitestone, but we're going to do that in a disciplined way.
We do think there's going to be opportunities for us to apply this model and grow from an overall scale perspective. I think the last one was, I think I hit it, was IRR. I don't know if I hit all those.
Net buyer then.
Yeah. What should investors be most excited about for Whitestone? Why should investors buy your stock today? What is the bull case scenario?
Yeah. I think there's a lot to be excited about. I think if you're an investor looking to benefit from migration and from a time when there's a dynamic, a supply-demand dynamic that's in a really good space in a sector, that leads you to Whitestone. That leads you to our sector. If you look at geography, I think Whitestone has best-in-class geography. We've been in this space for a number of years. We started out with a model that was focused on smaller spaces. There's a number of others that have got into that space now and done a really good job of explaining the opportunity. We've been doing this. We know how to do this. If you look at the growth profile that we present to investors, I think it's probably top of group.
I think if you look at a valuation perspective, as a smaller REIT, our valuation is attractive as well. I think what we offer to investors is a consistent earnings growth, a very stable portfolio, extremely targeted, high-quality assets in some of the best markets with the growth perspective, growth you'd like to see.
On the flip side, what do you see as potential risks? Or said differently, what keeps you up at night?
I took the bull and you took the risk. I like it.
I'm not used to it. I think the big thing that we have to be mindful of is that retail is very bespoke to the neighborhood. It is not, I think over the years, what we've seen is just an overconcentration in the mall and the power space. You have seen the risk that's come along with that. It is just too much of the same, too much of the same approach. A lot of those retailers are in trouble now because there's a concentration in risk because the risk was with hard goods and soft goods. It is why we went to services. We saw the growth in the opportunity in services. We also saw the dispersion of risk in small being a lot less risky, not having the same concentrated tail risk that the others had. It is why we built the model the way we did.
That being said, what keeps me up at night? It's always the economy. I do think that what we've been seeing, even with the volatility of today, we really have not seen that much change with our traffic to our centers. As we had mentioned, it's increased. What we do see is the need and the importance of really understanding the right client for our community. It takes a lot more understanding and research to be able to find out, especially if you have changing communities. Our communities are high growth right now. We focus in areas of HHIs well over $100,000. We look for corners that are VPDs 50 and up. That being said, I want to make sure that I'm meeting the needs of that community. I don't have a lot of competition coming into our markets because it's hard to build right now.
That being said, what might change economically is always something that we have to deal with. We also focus to make sure that we're looking at things that have a relative price ticket that's affordable to a broad range of people. Instead of staying at the high end, we try to stay in the mid-range so we have that repeat customer coming in. I think one of the most important things that we do is a focus on community itself. There's a need for people to be with each other. We look for those opportunities and reasons for the right clients that provide that for our communities.
Thank you, everyone, for everyone's time. Thank you.
Yep. Thanks, everybody.