Whitestone REIT
Q2 2016 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Good day and welcome to the Whitestone REIT Third Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will be given at that time. Today conference is being recorded. At this time, I would like to turn the conference over to Mr. Bob Aronson, Director of Investor Relations at Whitestone REIT. Please go ahead, sir.

[Bob Aronson:]

Thank you, Helena, good morning, and welcome to Whitestone REIT’s 2016 third 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, November 1, 2016. Whitestone’s third 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 includes 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:]

Thanks, Bob. Thank you all for joining us on our call. Today Dave and I will review our fourth quarter results and we’ll provide with an update on our recent progress and initiatives and we’ll welcome your questions at the end of our presentation. We continue there on Whitestone’s portfolio the exceptional retail properties, located in prime locations with high household incomes, within some of the fastest growing markets in the country. Our tenant base is crafted with strong tenants who are primarily service providers that are selling very well as they continued to gain sales in direct contrast to many of the traditional retailers that continue lose sales to ecommerce. Our properties in overall enterprise value continues to increase. We make acquisitions of retail properties with potential upside gain through increasing rental rates, re-tenanting, increasing occupancies and having leasable square footage at competitively lower costs. This call I’d like to highlight industry leading compound annual growth rates in key financial measures since our IPO in August of 2010, our third quarter financial and operating results. Our recent acquisitions utilizing our operating partnership, units priced at $19 a share which is a significant premium through our current traded stock price. Our current development activities and our efforts to attract additional investors. We have implemented a forward thinking business model that is service tenant based and profitable because we have produced compounded annual growth rate since our IPO in August 2010, a 26.5% in revenues, 37.5% [ph] in company net operating income, 33.8% in funds from operation core and 8.5% in funds from operations core pro share. On a year-over-year basis this quarter marks 24 consecutive quarter of revenue and NOI growth and our 25% consecutive quarter of FFO core growth. Our third quarter compared to last year’s third quarter is equally impressive. Our results have highlighted by 220 basis points improvement in retail occupancies of 89.6%. Our highly differentiated business is innovative and continues to drive our performance and gain recognition with – unit institutional investors. At it’s the core the high quality ecommerce resistant neighborhood community and a lifestyle retail centers. Our portfolio currently consists of 71 properties located in the largest and the fastest growing cities in United States including, Austin, Dallas, Fort Worth, Houston, San Antonia, Phoenix, Mesa and Scottsdale. In these cities are properties are anchored by some of the best communities with high household incomes, higher educated workforces and strong job growth. Our internal growth is strategically driven by our team who continue to craft a tenant mix that capitalize on the changing retail landscape, shifting consumer behaviors and purchasing patterns. We utilize a full range of research understand the needs of busy families who are living in the nearby driving neighborhoods and match well with the tenants that our go-to destination for daily necessities, services and entertainment. This approach is in contrast through traditional retail REITs that lease their properties to retailers, who are continually being threatened either rising rates of online sales. To ensure our tenants success we create a physical environment at our properties increased consumer traffic and gathering in social areas and promote social scoring and holiday events. This process begin with our acquisition and property strategy team who redevelop and then they reposition. They rebrand and re-tenant and then turn it over to our operating team to lease and manage. To meet our growth needs, we continue to train and develop our people. In January, we begin our 2017 annual executive - real-estate executive development program. This 12 month program provides training and development to potential leaders, to lease it up to ensure that the execution and management of our business policies and practices and processes and then give us the ability to scale our business. In additional we align entire Whitestone team with our shareholders through our performance based stock ownership program. During the quarter, we added to our management team with the addition of Travis Rodgers, who joined us as Director of Operations and Travis who has a law degree and brings 18 years of experience and his being with Wal-Mart. In addition, to Travis, we’ve brought on Dennis Younes, a 26 year commercial real estate veteran, who joined our team as Director of Leasing in our Houston operations. During the quarter as previously announced we expanded our portfolio with acquisitions of two upscale retail centers, located in Scottsdale. Those are value-add properties and are complementary to our ecommerce resistant business model. These assets bring our total holdings in the greater Phoenix metropolitan areas to 27 community center properties, totaling 2.3 million leasable square feet and are supported by our existing infrastructure. This place is also in the top two to three, five owners of retail properties in the Phoenix market. The two new properties contain a total of 237,000 square foot of leasable area, were acquired at a combined aggregated occupancy of approximately 90%, at a 7% in place unlevered, cash-on-cash return, that we expect to grow to over 9%, as we increased the occupancy and re-tenant some of the tenants and implement our business model. That stands out in addition to the cash-on-cash returns as we funded 17% of the $72.5 million purchase price with the issuance of operating partnership units at $19 per operating partnership unit and over 40% premium through yesterday’s closing stock price. This is a second acquisition we have made with OP units priced at $19 a share, a premium to our current market valuation. It’s our intention utilize this advantageous structure in the future. Tenants at these two properties includes two Starbucks, one at each property, Orange Theory Fitness and Ruth’s Chris, and Mastro’s Steakhouse, Walgreens, Kumon, Bank of America, [indiscernible] Bread Company and Jamba Juice. On the disposition front, we made good strides there in quarter and expect to complete the disposition of our remaining non-core assets this year, achieving our previously communicated goal of becoming a pure play owner of retail REIT centers. This year we also initiated key development projects, if we expect to complete in the fourth quarter. Our development projects are at Pinnacle and Scottsdale in Scottsdale and at The Shops at Starwood in Frisco, both located adjacent to existing Whitestone’s. At Pinnacle we increased the leased per square footage by 24% and at Starwood by 61%. The land was included in the original acquisitions at the minimum incremental cost. Preleasing efforts have been strong at both these centers the additional space that’s projected to produce incremental annual NOI in excess of $1.7 million and an unleveraged IRR of 13%. We expect to see the impact of this cash flow to begin sometime in the fourth quarter and into next year. Closing in, end of 2015, we committed to further place based on in the radar screens for investors dedicate to long-term growth. We realized that story wasn’t quite understood and that we had to get out and really tell it one-on-one as it is different to that investors are accustomed in the retail estate space. With one-on-one meetings with the significant number of potential new investors across United States and in major European markets, it makes them aware innovative ecommerce resistant business. Some of these meetings were second meetings from meeting with them the previous year in particularly in Europe and we are now having them rebuild their models. With that, I’d like to now turn the call over to Dave and I’ll provide some closing remarks following the conclusion of Q&A. David?

[Dave Holeman:]

Our distinctive ecommerce resistant business models continues to deliver solid results. For the third quarter, total revenues increased 3.7% over the same period last year to $25.5 million. Same-store revenues, which represent 91% of our total revenues for the quarter grew 1.8% to $23.3 million. Net operating income for the quarter increased to 5.4% over last year, driven by our top line growth and efficiencies gained in our property operating expenses, reflecting our scalable business models. Same-store net operating income grew 3.5% versus the prior year. Funds from operations core for the quarter increased 3.8% or $360,000. The increase in funds from operations core was primarily driven by increased net operating income of $900,000 or 5.4% improved G&A by $300,000 which excludes the amortization of our stock compensation and acquisition expenses, which was partially offset by higher debt cost of $900,000 from higher average borrowings during the quarter and a higher effective interest rates. To that point in late 2015, we fixed the rate on $200 million of variable rate debt for a period of 5 years to 7 years. On average, interest rate for this year’s third quarter was 3.31% compared to 3.05% last year. On a per share basis, funds from operations core was $0.33 this quarter, compared to $0.34 in the prior year quarter. The primary reason for the change in the per share amount with the timing of the issuance of 1.9 million shares in Q2 and Q3 there are aftermarket operating programs. These funds were used to fund the two properties we discussed earlier. We expect the two great acquisitions we made in the quarter to contribute approximately $0.12 per share annually or approximately $0.03 per quarter beginning in the fourth quarter this year. The impact to Q3 ‘16 of the additional shares was $0.02 per share. Funds from operations per share was up $0.03 from the prior year primarily as a result of higher amortization of non-cash stock compensation, partially offset by lower acquisition expenses. We continue to benefit as we gain scale from our larger base of assets on our G&A expenses. G&A expenses excluding the amortization non-cash share-based compensation expense and acquisition transaction costs, from both quarterly periods improved 180 basis points from last year to 10.8% of total revenues. We expect that G&A will continue to become a smaller percentage of our revenue as we grow. We continue to believe that performance based compensation resulting in significant ownership by management is the best way to align our team with our shareholders. At the end of the quarter, we had 101 employees. With regard to leasing we had a great quarter. Our leasing team signed 113 new and renewal leases totaling 270,000 square feet with a total lease value of 16.3 million, representing future rental revenue income. Our leasing spreads for the last 12 months on GAAP basis have been a positive 8.2% on renewal leases and a positive 6.5% on new leases or an aggregate 8% increase. We ended the quarter with total occupancy at 87.3% and our retail properties, which represent approximately 90% of our investment capital occupancy was 89.6%, which was an improvement of 220 basis points year-over-year. Our average retail base rent on a GAAP basis expanded 3% to 17 per square foot. We have a diverse tenant base, minimizing our individual tenant credit risk with our largest tenant representing only 3% of our annualized rental revenues. At quarter end, we had 1,561 tenants. Now let’s spend a few minutes on our balance sheet. We had total real estate assets on a gross book basis of $918 million at the end of the quarter, producing approximately $74 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’s have increased 10%. Our capital structure remains quite simple with [indiscernible] no joint ventures and a combination of property and corporate level of debt. Further, our underlying debt structure is found pretty mix of secured and unsecured debt and well laddered maturities. This composition gives us the financial flexibility and support we need to quickly react to growth opportunities and changing conditions. At the end of the third quarter, approximately 70% of our net debt was fixed with a weighted average interest rate of 3.8% and a weighted average remaining term of 5.5 years. Primarily reflecting borrowings under our credit facility during the quarter of $33.5 million related to the funding of our two Scottsdale acquisitions, our real estate debt at quarter end was net of cash was $540 million. We had $108 million of availability under our credit facility at the end of the quarter with an additional availability of upto $200 million from the exercise of the facilities accordion option. As previously communicated we expect our debt leverage to decrease over time as a result of increased net operating income generated from increases in occupancies and rental rates and capital structuring of future acquisitions. During the quarter we completed 72.5 million in acquisition using 54% equity and 46% debt. The debt to EBITDA ratio on these acquisitions was 6.5 times. As a result, our debt-to-EBITDA ratio decreased from 8.9 times in the second quarter to 8.5 times in this quarter. We continue to maintain largely unsecured debt structure with 52 unencumbered properties out of 71 with an undepreciated cost basis of 687 million. During the third quarter we sold 1,084,000 shares of our common stock under our at the market offering programs at an average share price of $15.08 resulting in net proceeds of approximately $16.1 million. These funds along with net proceeds of $10.6 million generated in the second quarter from the sale of 736,000 shares under our ATM program at an average share price of $14.66 were used to help fund the two accretive Scottsdale acquisitions which are previously said are expected to contribute approximately $0.12 per share on an annual basis, beginning in the fourth quarter of this year. To fund the remaining 72.5 million purchase price for the Scottsdale properties as Jim mentioned we issued 621,000 operating partnership units, valued at $19 per unit or approximately 40% premium to our current stock price. We will continue to evaluate all sources of capital to fund our growth, including recycling of capital generated from non-core asset sales, additional debt and issuance of equity and OP units. Turning to our guidance, we are updating our guidance for the year to reflect the two recent acquisitions, related transaction costs, increased shares and operating partnership and increased and amortization of our noncash stock compensation. We are tightening our guidance range for funds from operations core per share to $1.34 to $1.37. As previously communicated our 2016 guidance does not reflect the effect of any future acquisitions or dispositions. Please refer to our 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.

[Operator:]

[Operator Instructions] And we’ll take our first question from Mitch Germain with JMP Securities.

[Mitch Germain:]

You have a couple of larger tenants with 2017 expirations, I know it’s just one of our various leases Safeway, Wells Fargo, Walgreens. What's the status or should we assume that all those are renewed?

[Jim Mastandrea:]

Let’s start with Safeway, Safeway lease and Anthem, they did just renewed, so that’s one of them. With regard to Walgreens, I think you're referring to the one that’s in Mercado. Dave you want to address it?

[Dave Holeman:]

Sure, I’ll just touch. The quick answer Mitch is we expect those tenants to renew, I think I’ll remind everyone obviously we had a really diverse tenant base with even our largest tenant being Safeway at 3% and the next one is 1.2%. So the quick answer is we expect renewal of those tenants of the takeaway stores that are maturing in the coming months.

[Jim Mastandrea:]

Yeah, let me mention, Mitch, on the Safeway and Anthem, that that was the Safeway stores that when Albertsons bought Safeways and then they sold a number of stores to Haggen [ph]. When we accepted that sale we kept Safeway on the lease and so Haggen [ph] as you know filed bankruptcy and Safeway now came in, making back to us and said they’d like to re-lease that space from us, so we did. So they are in the process to be opened by Thanksgiving.

[Mitch Germain:]

Last one for me, asset sales obviously, Jim you mentioned we should have some sort of validation of the process by year end. I'm just curious is this going to be a several trays, is it one big portfolio and maybe if we can just provide some sort of idea what types of potential buyers you’re talking to?

[Jim Mastandrea:]

Let me start of and Dave will jump in, Dave’s going great, we've been consistent with that, that we think going to take place before year-end. Right now I believe we have three different buyer on the portfolio of the assets and it’s about 14 different properties. Values are coming in the range of between $60 million and $75 million, $80 million –

[Dave Holeman:]

$65 million to $85 million value I think we have all of the non-core assets in the process of disposition. So that's why we remain confident in our ability to close those transaction by year-end

[Operator:]

Your next question comes from RJ Milligan with Robert W. Baird.

[RJ Milligan:]

Just to follow-up on Mitch's question on the disposition side. Can you guys remind us in terms of the dollar volume, what your anticipated proceeds are and any idea in terms of pricing, what you guys are seeing in terms of cap rates?

[Dave Holeman:]

I think we've previously communicated a range of kind of $65 million to $85 million expected proceeds that range still is consistent. Then cap rate wise they’re in the 9% to 10% range, NOI purchase price.

[RJ Milligan:]

It looked like occupancy ticked down a little bit in the office flex properties, any color on what's going on there year-over-year.

[Dave Holeman:]

Yeah, currently our focus is on the retail piece of the business. We had great same-store growth in our retail properties, actually the same-store growth was 230 basis points, so up a little bit better than the overall. We did some decreases in our flex properties, which are all located in Houston, about 3% on year-over-year basis. There were a couple lumpier tenant that moved out, larger spaces, continue to be tough, but we’re confident in our ability to lease those up. But we are seeing some softening in that flex products and its obviously part of our plan to move out of that and to move to 100% retail.

[Jim Mastandrea:]

Yeah, we think there is too many economies of scale being pure [indiscernible] play and that how we’ve been managing our focus is, we’re focused on the retail side, knowing that we'll be selling these assets. It’s marginally different in price, whether they’re down 1 point or 2 point and occupancy when we sell them, and price is all coming in about the same because they’re primarily being based on the locations. We think we can sell them and maintain some upside into them as well. But we think that that focus has been really on the retail side, I mean, you’re going to see build rates growing in the future.

[Dave Holeman:]

And it does a little bit, mask our overall results, so we recognize our overall is total occupancy was up 130 basis points year-over-year and that was taken down by some of the flex of about 3% year-over-year. So really the retail portfolio is really even performing better than kind of of the overall results here and I think that will be more clear to folks when we get the fiscal [indiscernible] done.

[RJ Milligan:]

Okay, so moving over to the retail side. Obviously good same-store, NOI growth, good leasing spreads. Wondering if you could provide commentary on a more market specific basis in terms of what you're seeing in Phoenix and Houston and maybe some of the smaller Texas markets?

[Jim Mastandrea:]

Phoenix is terrific, we have had, we continue to get strong interest in our properties in Phoenix, we now, with its recent acquisition, we control about 650,000 square feet within an area of 4 to 5 miles differentiating the properties, that we have different price points for attendance that want to be in the marketplace and that gives us a very strong controlling position. One of our properties that you’ve seen is at the intersection of Scottsdale road in Pinnacle Peak. It has an ACE Hardware and Safeway, we recently expanded that, we’ll have a Starbucks, we have a Italian restaurant, we have about four, five different restaurants there. The property across the street is small, it’s about 125,000 square feet and it has a parts [ph] store and the only competition in the area. Two great pieces, these and tax they’re at. One is that they were unable to attract any of our attendants and that’s a hats off to our leasing and management team and how we take care of our tenants. Two, is that property just retraded at $600 a square foot. So we’re pretty excited about that. I think we're in about $140 a square foot and I think everything to the west of it is state owned land, so there is nothing right in that proximity. With regard to the Starwood property that we’re preleasing up in North of Dallas, up in the Frisco area. And this is a first for Whitestone, we just hit our $50 square foot rent, plus triple nets. And I think in this industry in that kind of space I think it’s an average about 3,000 square foot of space, so that’s a really strong sign that we’re having great fortune with the preleasing of both the Pinnacle and the Starwood property and we expect those at about $1.8 billion next year in cash flow. We’re actually turning over – we turned over two of them, one space is Starbucks, we turned to another space to [indiscernible] I think gives us now about five Starbucks in the portfolio. So in reality we really have some pretty significant tenants along with the small tenant base with small building up. With regard to Houston, we feel properties continue to go strong, we've got redevelopment activity on fixing the properties and as we redevelop we’re able to find extra land parcels. For example we have a lease with Checkers on one of our properties [indiscernible] and this is a property et cetera, there is not cost to it. We just recounted the parking, we’re able to do, that’s one of our Houston properties. So, Houston continues to grow very well for us, particularly our Alliance Square Property, which is now nearing 100% lease and the rents are about 20% higher than they were two years ago. With regard to Dallas and Fort Worth, Dave, you want to touch on those and Austin and --

[Dave Holeman:]

Sure, I’ll give you just a quick summary and then we’ll hopefully answer your question RJ. So I guess I would tell you the leading markets really for us have been Phoenix and Houston over the last year. Very consistent with our past practices when we acquire properties, it usually takes us 12 or 18 months to really apply our model and fee increases in occupancy and NOI. Our newer acquisitions are in the Austin and Dallas markets, so those markets are performing a little slower right now, but very much expected, takes us a little time. So really the best markets for us, really have been Phoenix and Houston from a growth perspective year-over-year and we expect Dallas and Austin obviously to continue to contribute and grow as well. In our investor presentation, I think we have a slide that shows our acquisitions by year and then what we've done to those acquisitions since we’ve done them, very consistent and it takes 12 months to 18 months from an acquisition to really start to see the significant increases.

[RJ Milligan:]

Thanks for color guys.

[Jim Mastandrea:]

You bet.

[Operator:]

Your next question comes from Carol Kemple with Hilliard Lyons.

[Carol Kemple:]

I know that’s a real estate was down in the quarter, which is always exciting, were you all able to go back and kind of argue the taxes out or why were they lower in the quarter?

[Dave Holeman:]

Yeah, we spend a lot of effort on really REIT on the property taxes in Texas, property taxes are a little higher than they are in some parts of country. So we are very active in contesting our protest. Our taxes, some of those we take the litigation and we were able to lower property taxes primarily in our Texas markets in this quarter. And we continue to see benefits there, we’ll continue to push those, obviously those taxes are pushed through to our tenants. And as we decrease those it actually gives us the ability to have a little higher base rent and a higher debt operating income.

[Carol Kemple:]

Then, can you talk about the acquisition pipeline and if you have anything that you think you might close on before year end?

[Jim Mastandrea:]

We have about four deals that we’re working on right now in the pipeline. One of those we could close before year-end. Our focus is really primarily on becoming a pure play retail company by year-end, so we may or may not close on more deal this year. But we do have a much higher probability of becoming a pure play by year-end.

[Dave Holeman:]

We do have as we’ve obviously have, we have a very large active pipeline of potential acquisitions. So nothing has changed on that front and that we continue to see opportunities in our market for deals that are upmarket, that really meet our business model. So just from a timing perspective and resource perspective as Jim mentioned we are focused very much on becoming a pure play REIT by year-end. But we continue to see opportunities in this type of assets in our markets.

[Jim Mastandrea:]

Yeah just to recap, Carol, this year we had $165 million worth of deals under contract. We took a pass and we were in due diligence because we learned that when one of the large property when it was bifurcated, it had a grocery store, they have covenants that were too restricted the adjancent property and you couldn't tell that we have the covenants because there was a roads splitting the grocery store from the other properties we get a pass on that. So we spent about 3 or 4 months working on that deal, to take a pass, and we have some costs as you know which impacted I think we might have had $75,000 worth of costs associated with that. The two deals we just closed, we have been working on for about 2 years, they have been in our pipeline and so those have been just terrific additions to what we’re doing. So overall our pipeline is much larger like basis about $0.5 billion.

[Carol Kemple:]

Okay. Thank you.

[Operator:]

Your next question comes from Anthony Howell with SunTrust.

[Anthony Howell:]

Hey guys, thanks for taking my question. So when I look at the portfolio today, there are a couple of assets that are well under leased, such Mercado at Scottsdale Ranch. Can you just give us an order in your plans on these pockets of vacancy?

[Jim Mastandrea:]

Yeah, Mercado we have two larger tenants we’re working on, one is 11,000 square foot tenant and alternative to that would be taking the entire space. We've been working with them to see it would like either one of those to come back into the space and then jump in when they’re whenever on queue [ph], so we’re working in number of these spaces. Do you want to comment, Dave?

[Dave Holeman:]

Yeah, I was going to go back and remind everyone of the Mercado acquisition. One of the highlights when we bought that property was there was a grocery store there that was really paying I think $2 rent and we expected to be able to re-tenant that. So while there is a vacancy in Mercado from an economic standpoint, that vacancy is not hurting us and we expect to have significant upside and Jim was giving some comment on the color. But if we bought that property, really knowing there was going to be the opportunity to re-tenant and add value over what we paid and the end place alive when we bought the property.

[Jim Mastandrea:]

We had 30,000 square foot vacancy there with a $2 square foot rent, the two deals we’re looking at one is $9 a square foot for the entire space another $7 a square foot for 11,000 with 31,000 square feet. So we’re really looking in terms of – we’re very particular how we match our tenants in a property. And for us one of the things that we’re going back and forth are now that you know is heating on that this week.

[Anthony Howell:]

What’s the net debt to EBITDA for those non-core assets that you guys are planning to sell?

[Dave Holeman:]

I'm sorry did you say the net debt to EBITDA?

[Anthony Howell:]

Right, because I know that those assets have some mortgage debt to those office flex properties, right?

[Dave Holeman:]

Yeah, so some of those assets have mortgage debt some are included in our credit facility. I can’t give you a net debt to EBITDA but we believe that that transaction will be positive from a debt leverage perspective for Whitestone, those assets are a little higher levered than the retail assets.

[Anthony Howell:]

Okay, thank you.

[Operator:]

Your next question comes from Craig Kucera with Wunderlich.

[Craig Kucera:]

I’d like to focus on the dispositions and kind of what you’re thinking even going into ’17. If you’re selling the office flex call it at the midpoint of what you’re talking about, you’re giving up maybe about $0.24 in NOI. How do you think about, as we think about next year, how do we think about are you guys replacing it with acquisitions, is it going to be match funded or do we think we might see some levering up to maybe replace that NOI that might be lost.

[Dave Holeman:]

I think absolutely, we think of this as recycling, so as we mentioned there is great opportunities with our core product type. So we would expect to sell these noncore assets and then recycle those proceeds into the retail assets that fit our business model.

[Jim Mastandrea:]

Yeah, let me also say that, what we’ve learned from you all, the group of analysts and also from our investors is that we’re being penalized with the 10 multiple [ph] today on FFO. We had been consistent in our dividends, we have our own coverage is strong. The only thing that’s not reflecting the strength of the company is our share price. We’ve made two deals now of $19 in OP units, significant amount of capital we raised at – about $15 million worth of capital. And they in fact what we expect to happen is that our multiple will go up anywhere between 10 and 18, we will be in a range that we can raise capital with a much lower cost of capital and then just pick the deals out of our pipeline. Because the deals we have, but it takes a lot of time to be creative, new operating partnership units to make them accretive and we’ve done that since we’ve grown this portfolio from $125 billion [ph] upwards to about $1.2 billion today. So we think that the benefits though there might be a slight $0.02 or $0.03 decline in the sales of these assets, we think we’ll more than make it up in the multiple number. $0.05 a share gives us an extra $6 million in that or actually more than that, it’s about $15 million in value. So we think that that’s going to be a significant change for us.

[Craig Kucera:]

Got it, you did mention achieving some better economy to scale I think this quarter was, maybe a new high for G&A, almost pushing towards 25% of revenues. Do you think when you get out of the office in flex is there any opportunity to improve scale there or do you think it comes from other areas?

[Dave Holeman:]

Sure, we believe very strongly that we will continue to increase scale, so one of the things in our G&A, there is the non-cash amortization of stock comp that varies quarter-by-quarter based on the number of periods we are amortizing that cost over. So that when you quote the 20 plus percent that’s including really an amortization. Our core G&A cost for the was 10.8% of revenues, which you hold up the stock comp and hold the acquisition transaction expenses. We have seen that decline as a percent of revenue and continue to do that. We’ve got the infrastructure that we can support and grow and example of that is the acquisitions we make for the quarter in Phoenix. We brought on about a little over $5 million in net operating income in those two properties and really added no G&A cost to support those. So I think you will continue to see us scale our G&A. You will see the percent with the stock comp and it bounced a little bit just because that’s GAAP accounting and doesn’t really reflect kind of the true earnings of that stock.

[Jim Mastandrea:]

We have to think along those lines that we’ve brought in some new folks that we’ve replaced, I think we have Director of Operations and so that change in terms of the addition to overhead for more work. But the individual brings a wealth of experience and accompany lots of, being with Wal-Mart for all these years and he brings added systems and processes to us. So that’s an area that we wanted to really make sure we continue around that our team properly. We have third individual we’ve brought onboard, he is the Director of Leasing in Houston. As you all know, the leasing efforts in Houston particularly with our core assets have lagged behind, everything else we’ve built in the rest of company and so I think you’re going to see it goes to approach part of those team now. It’s going to make an incredible difference.

[Craig Kucera:]

Thanks.

[Jim Mastandrea:]

You’re welcome.

[Operator:]

And we’ll take our final question from Dan Donlan with Ladenburg.

[Dan Donlan:]

Thank you and good morning. Jim just wanted to clarify the contribution from the developments that are coming online in the fourth quarter maybe into 2017. It is the $1.8 million you cited, is that a run rate once they're fully stabilized or is that how much you think that are actually going to contribute to 2017.

[Dave Holeman:]

Well, that an annualized run rate, once they’re stabilized, maybe I’ll give you a little more cover on the preleasing efforts that will help you understand where we are in the stable registered process. So we have two properties about 70,000 square feet between the two, I mean – sorry the two in total. In Dallas we have leasing discussion, some under lease, some under LOI, some close for a little over 65% of the square footage today. In Scottsdale, the other property, they’re both similar sizes, same is being said of exercises with leases, leases under discussions, LOIs. We’re at close to 90% leased in that property. Leased is the wrong word, 90% under discussions. So the $1.8 million is an annualized, stabilized, 95% occupancy and today we’re not too far from that.

[Jim Mastandrea:]

Let me just go back and I appreciate the question because it gives me an opportunities to share with you part of our culture and philosophy and strategic of Whitestone. We’ve got the shopping center at the corner of Scottsdale road in Pinnacle Peak and at the same time we bought up a parcel of land just north of that on Scottsdale road from two different owners. The land we bought we paid $900,000, it is a bank who had $4.5 million loan on it. We went into the city, we received the entitlements to build approximately 40,000 square feet plus an 20,000 square towards the back of our property. The back of the property including it was a separate parcel and the buyer of that separate parcel purchased from us that 20,000 square foot, closely stand for $1.3 million. So we completely cashed out of our $900,000 investment in the land. And paying one-third of the development cost and putting the new road [ph] going back to their property. So none all those, net of the cost, really were to be in a 16% to 17% range return on investment. And shown worth because that’s the way how we approach deals. We see things in skyward, we back our property, we have the residual piece of land. We’re careful to bring on a percentage of land each year that I would say in virtually 90% of the properties we’ve acquired, there is some element of development that we have, we can either attain the entitlements, or we have a piece of land that’s not really entitled that we can have that property.

[Dave Holeman:]

Hey Dan, just give you one more piece on that, just to help us as well. And really the build cost on that is about $18 million for the two properties, we funded 75%, 80% of that today. So that’s kind of reflected also in our debt level and you're not seeing that in the EBITDA. So that’s a transaction that will be accretive from the leverage perspective next year as well.

[Dan Donlan:]

Okay. .Perfect I really appreciate the color. Just last thing just for [indiscernible] purposes, it seems that you’re been the Company at a net to debt to adjusted EBITDA somewhere between 8, 9 times. Is that kind of the range that we should be thinking a bit, you guys going forward, just kind of curious there.

[Dave Holeman:]

We’ve communicated our goal to decrease that that EBITDA 12 to 24 months down to the kind of 7 turns range. So similar to the acquisition we did in Q3, which was at a 6.5 debt-to-EBITDA ratio, you’re going to see us bring that ratio down really from increased cash flow and then the structuring on acquisitions and dispositions as we go forward.

[Dan Donlan:]

Okay, thanks I really appreciate the commentary.

[Operator:]

And that concludes today's question-and-answer session, Mr. Mastandrea, I would like to turn the call over to you for any closing remarks.

[Jim Mastandrea:]

Yeah, thanks, operators, thanks all. We do appreciate your interest in Whitestone and for joining us on our call today. And we also appreciate your continued confidence in what we're doing with the company. I think we’re building a great company. Looking at the big picture, I am confident in our ability to maintain our momentum in the fourth quarter. Longer term I believe is that our innovative ecommerce resistant business model is well positioned and ideally located portfolio of properties and optimum mix of tenants providing services, really not readily available online and that continues to drive our profitable growth. So it’s very important to us that we are committed to educating our institutional and retail investors because its new business model and its unlike the retail real estate ownership that’s traditionally it's been known. So as we continue to educate and tell our story, we do this on a one-on-one basis. We also always consistently trying to educate our existing analysts and also the new analysts that we’re bringing onboard who seem to love what we’re doing. And the reasons are the financial strength of the model, the earning power we have and growth potential, that’s pretty much inherent. When we did this recent deal of $19 a share and operating partnership that was a discount to a net asset value of the company. And that discount we feel with, really is have been wanting a lot of attention. With that, the last thing I’d like to say is that, in May we’re holding annual conference in REIT world, the week of November 15 through to 16, we’re mentioning on each of our call, that we want to again mention that we’re hosting an even that’s like one of our properties. Within – in area of that property we have I want to say five other properties, so it’s at Market Street, at DC Ranch, so those of you who would be attending REIT world, they’d love to have you come by on November 14 and join us. We would be running a shuttle bus back and forth to the Marriot Desert Ridge, which is maybe 15 minutes west of our Market Street property. There is also fun and entertainment. We have seven restaurants at the property. We have a new [indiscernible] we think will be open and we’ll have some entertain for you and we think it will be fun. We’ve had our RSVP list and they’ve got to 50, so we’d love welcome anyone else who would come on by. With that, I’m going to close our call and thank you once again. We look forward to the final call we’ll be making at the end of the year. Thank you, operator.

[Operator:]

And this concludes today conference. Thank you for your participation. You may now disconnect.