Item 1. Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
Real estate assets, at cost
|
|
|
|
|
|
Property
|
|
$
|
1,107,895
|
|
|
$
|
1,106,426
|
|
|
Accumulated depreciation
|
|
(170,286)
|
|
|
(163,712)
|
|
|
Total real estate assets
|
|
937,609
|
|
|
942,714
|
|
|
Investment in real estate partnership
|
|
34,068
|
|
|
33,979
|
|
|
Cash and cash equivalents
|
|
22,820
|
|
|
25,777
|
|
|
Restricted cash
|
|
106
|
|
|
179
|
|
|
Escrows and acquisition deposits
|
|
6,923
|
|
|
9,274
|
|
|
Accrued rents and accounts receivable, net of allowance for doubtful accounts
|
|
23,309
|
|
|
23,009
|
|
|
Receivable due from related party
|
|
731
|
|
|
335
|
|
|
Unamortized lease commissions, legal fees and loan costs
|
|
7,951
|
|
|
7,686
|
|
|
Prepaid expenses and other assets(1)
|
|
3,127
|
|
|
2,049
|
|
|
Total assets
|
|
$
|
1,036,644
|
|
|
$
|
1,045,002
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
Liabilities:
|
|
|
|
|
|
Notes payable
|
|
$
|
645,230
|
|
|
$
|
644,185
|
|
|
Accounts payable and accrued expenses(2)
|
|
41,163
|
|
|
50,918
|
|
|
Payable due to related party
|
|
160
|
|
|
125
|
|
|
Tenants' security deposits
|
|
7,059
|
|
|
6,916
|
|
|
Dividends and distributions payable
|
|
4,660
|
|
|
4,532
|
|
|
Total liabilities
|
|
698,272
|
|
|
706,676
|
|
|
Commitments and contingencies:
|
|
—
|
|
|
—
|
|
|
Equity:
|
|
|
|
|
|
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of March 31, 2021 and December 31, 2020
|
|
—
|
|
|
—
|
|
|
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 42,579,059 and 42,391,316 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
|
|
43
|
|
|
42
|
|
|
Additional paid-in capital
|
|
563,338
|
|
|
562,250
|
|
|
Accumulated deficit
|
|
(219,016)
|
|
|
(215,809)
|
|
|
Accumulated other comprehensive loss
|
|
(12,220)
|
|
|
(14,400)
|
|
|
Total Whitestone REIT shareholders' equity
|
|
332,145
|
|
|
332,083
|
|
|
Noncontrolling interest in subsidiary
|
|
6,227
|
|
|
6,243
|
|
|
Total equity
|
|
338,372
|
|
|
338,326
|
|
|
Total liabilities and equity
|
|
$
|
1,036,644
|
|
|
$
|
1,045,002
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Operating lease right of use assets (net)
|
|
$
|
548
|
|
|
$
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Operating lease liabilities
|
|
$
|
558
|
|
|
$
|
603
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Rental(1)
|
|
$
|
28,695
|
|
|
$
|
30,196
|
|
|
|
|
|
|
Management, transaction, and other fees
|
|
350
|
|
|
388
|
|
|
|
|
|
|
Total revenues
|
|
29,045
|
|
|
30,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
7,013
|
|
|
6,971
|
|
|
|
|
|
|
Operating and maintenance
|
|
4,839
|
|
|
5,597
|
|
|
|
|
|
|
Real estate taxes
|
|
4,038
|
|
|
4,536
|
|
|
|
|
|
|
General and administrative
|
|
5,634
|
|
|
5,100
|
|
|
|
|
|
|
Total operating expenses
|
|
21,524
|
|
|
22,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
6,132
|
|
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale or disposal of assets, net
|
|
(1)
|
|
|
207
|
|
|
|
|
|
|
Interest, dividend and other investment income
|
|
(49)
|
|
|
(62)
|
|
|
|
|
|
|
Total other expense
|
|
6,082
|
|
|
6,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity investment in real estate partnership and income tax
|
|
1,439
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of real estate partnership
|
|
89
|
|
|
192
|
|
|
|
|
|
|
Provision for income tax
|
|
(87)
|
|
|
(87)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
1,441
|
|
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Whitestone REIT
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
42,495
|
|
|
42,048
|
|
|
|
|
|
|
Diluted
|
|
43,331
|
|
|
43,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,441
|
|
|
$
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedging activities
|
|
2,221
|
|
|
(10,952)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
3,662
|
|
|
(9,305)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
|
|
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interests
|
|
41
|
|
|
(231)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Whitestone REIT
|
|
$
|
3,595
|
|
|
$
|
(9,109)
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Rental
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
21,626
|
|
|
$
|
22,077
|
|
|
|
|
|
|
Recoveries
|
|
7,598
|
|
|
8,963
|
|
|
|
|
|
|
Bad debt
|
|
(529)
|
|
|
(844)
|
|
|
|
|
|
|
Total rental
|
|
$
|
28,695
|
|
|
$
|
30,196
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
Noncontrolling
|
|
|
|
|
|
Common Shares
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
Shareholders’
|
|
Interests
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Gain (Loss)
|
|
Equity
|
|
Units
|
|
Dollars
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
42,391
|
|
|
$
|
42
|
|
|
$
|
562,250
|
|
|
$
|
(215,809)
|
|
|
$
|
(14,400)
|
|
|
$
|
332,083
|
|
|
773
|
|
|
$
|
6,243
|
|
|
$
|
338,326
|
|
|
Exchange of noncontrolling interest OP units for common shares
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common shares - ATM Program, net of offering costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exchange offer costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of shares under dividend reinvestment plan
|
|
2
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
Repurchase of common shares (1)
|
|
(37)
|
|
|
—
|
|
|
(324)
|
|
|
—
|
|
|
—
|
|
|
(324)
|
|
|
—
|
|
|
—
|
|
|
(324)
|
|
|
Share-based compensation
|
|
223
|
|
|
1
|
|
|
1,397
|
|
|
—
|
|
|
—
|
|
|
1,398
|
|
|
—
|
|
|
—
|
|
|
1,398
|
|
|
Distributions - $0.1075 per common share / OP unit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,622)
|
|
|
—
|
|
|
(4,622)
|
|
|
—
|
|
|
(83)
|
|
|
(4,705)
|
|
|
Unrealized loss on change in value of cash flow hedge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,180
|
|
|
2,180
|
|
|
—
|
|
|
41
|
|
|
2,221
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,415
|
|
|
—
|
|
|
1,415
|
|
|
—
|
|
|
26
|
|
|
1,441
|
|
|
Balance, March 31, 2021
|
|
42,579
|
|
|
$
|
43
|
|
|
$
|
563,338
|
|
|
$
|
(219,016)
|
|
|
$
|
(12,220)
|
|
|
$
|
332,145
|
|
|
773
|
|
|
$
|
6,227
|
|
|
$
|
338,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
Noncontrolling
|
|
|
|
|
|
Common Shares
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
Shareholders’
|
|
Interests
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Gain (Loss)
|
|
Equity
|
|
Units
|
|
Dollars
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
41,492
|
|
|
$
|
41
|
|
|
$
|
554,816
|
|
|
$
|
(204,049)
|
|
|
$
|
(5,491)
|
|
|
$
|
345,317
|
|
|
909
|
|
|
$
|
7,781
|
|
|
$
|
353,098
|
|
|
Exchange of noncontrolling interest OP units for common shares
|
|
5
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
(5)
|
|
|
(44)
|
|
|
—
|
|
|
Issuance of common shares - ATM Program, net of offering costs
|
|
171
|
|
|
—
|
|
|
2,241
|
|
|
—
|
|
|
—
|
|
|
2,241
|
|
|
—
|
|
|
—
|
|
|
2,241
|
|
|
Exchange offer costs
|
|
—
|
|
|
—
|
|
|
(32)
|
|
|
—
|
|
|
—
|
|
|
(32)
|
|
|
—
|
|
|
—
|
|
|
(32)
|
|
|
Issuance of shares under dividend reinvestment plan
|
|
4
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
Repurchase of common shares (1)
|
|
(153)
|
|
|
—
|
|
|
(1,630)
|
|
|
—
|
|
|
—
|
|
|
(1,630)
|
|
|
—
|
|
|
—
|
|
|
(1,630)
|
|
|
Share-based compensation
|
|
616
|
|
|
—
|
|
|
1,248
|
|
|
—
|
|
|
—
|
|
|
1,248
|
|
|
—
|
|
|
—
|
|
|
1,248
|
|
|
Distributions - $0.285 per common share / OP unit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,449)
|
|
|
—
|
|
|
(4,449)
|
|
|
—
|
|
|
(95)
|
|
|
(4,544)
|
|
|
Unrealized loss on change in value of cash flow hedge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,721)
|
|
|
(10,721)
|
|
|
—
|
|
|
(231)
|
|
|
(10,952)
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,612
|
|
|
—
|
|
|
1,612
|
|
|
—
|
|
|
35
|
|
|
1,647
|
|
|
Balance, March 31, 2020
|
|
42,135
|
|
|
$
|
41
|
|
|
$
|
556,729
|
|
|
$
|
(206,886)
|
|
|
$
|
(16,212)
|
|
|
$
|
333,672
|
|
|
904
|
|
|
$
|
7,446
|
|
|
$
|
341,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Company acquired common shares held by employees who tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares.
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,441
|
|
|
$
|
1,647
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
7,013
|
|
|
6,971
|
|
|
Amortization of deferred loan costs
|
|
274
|
|
|
282
|
|
|
(Gain) loss on sale or disposal of assets and loan forgiveness, net
|
|
(1)
|
|
|
207
|
|
|
Bad debt
|
|
529
|
|
|
844
|
|
|
Share-based compensation
|
|
1,398
|
|
|
1,248
|
|
|
Equity in earnings of real estate partnership
|
|
(89)
|
|
|
(192)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Escrows and acquisition deposits
|
|
2,352
|
|
|
2,068
|
|
|
Accrued rents and accounts receivable
|
|
(829)
|
|
|
(886)
|
|
|
Receivable due from related party
|
|
(396)
|
|
|
(419)
|
|
|
Unamortized lease commissions, legal fees and loan costs
|
|
(844)
|
|
|
(423)
|
|
|
Prepaid expenses and other assets
|
|
611
|
|
|
(10,154)
|
|
|
Accounts payable and accrued expenses
|
|
(7,534)
|
|
|
3,737
|
|
|
Payable due to related party
|
|
35
|
|
|
144
|
|
|
Tenants' security deposits
|
|
143
|
|
|
139
|
|
|
Net cash provided by operating activities
|
|
4,103
|
|
|
5,213
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Additions to real estate
|
|
(1,528)
|
|
|
(1,593)
|
|
|
Net cash used in investing activities
|
|
(1,528)
|
|
|
(1,593)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Distributions paid to common shareholders
|
|
(4,480)
|
|
|
(11,928)
|
|
|
Distributions paid to OP unit holders
|
|
(82)
|
|
|
(258)
|
|
|
Proceeds from issuance of common shares, net of offering costs
|
|
—
|
|
|
2,241
|
|
|
Payments of exchange offer costs
|
|
—
|
|
|
(32)
|
|
|
Net proceeds from credit facility
|
|
—
|
|
|
30,000
|
|
|
Repayments of notes payable
|
|
(719)
|
|
|
(777)
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
(324)
|
|
|
(1,630)
|
|
|
Net cash provided by (used in) financing activities
|
|
(5,605)
|
|
|
17,616
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
(3,030)
|
|
|
21,236
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
25,956
|
|
|
15,643
|
|
|
Cash, cash equivalents and restricted cash at end of period (1)
|
|
$
|
22,926
|
|
|
$
|
36,879
|
|
(1) For a reconciliation of cash, cash equivalents and restricted cash, see supplemental disclosures below.
See accompanying notes to Consolidated Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,936
|
|
|
$
|
6,461
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
Disposal of fully depreciated real estate
|
|
$
|
3
|
|
|
$
|
24
|
|
|
Financed insurance premiums
|
|
$
|
1,712
|
|
|
$
|
1,431
|
|
|
Value of shares issued under dividend reinvestment plan
|
|
$
|
15
|
|
|
$
|
42
|
|
|
Value of common shares exchanged for OP units
|
|
$
|
—
|
|
|
$
|
44
|
|
|
Change in fair value of cash flow hedge
|
|
$
|
2,221
|
|
|
$
|
(10,952)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2021
|
|
2020
|
|
Cash, cash equivalents and restricted cash
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,820
|
|
|
$
|
36,774
|
|
|
Restricted cash
|
|
106
|
|
|
105
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
22,926
|
|
|
$
|
36,879
|
|
See accompanying notes to Consolidated Financial Statements.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The use of the words “we,” “us,” “our,” “Company” or “Whitestone” refers to Whitestone REIT and our consolidated subsidiaries, except where the context otherwise requires.
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2020 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of and for the period ended March 31, 2021 have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information on a basis consistent with the annual audited consolidated financial statements and with the instructions to Form 10-Q.
The consolidated financial statements presented herein reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of Whitestone and our subsidiaries as of March 31, 2021 and December 31, 2020, and the results of operations for the three month periods ended March 31, 2021 and 2020, the consolidated statements of changes in equity for the three months periods ended March 31, 2021 and 2020 and cash flows for the three month periods ended March 31, 2021 and 2020. All of these adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and the notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Business. Whitestone was formed as a real estate investment trust (“REIT”) pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, we changed our state of organization from Texas to Maryland pursuant to a merger where we merged directly with and into a Maryland REIT formed for the sole purpose of the reorganization and the conversion of each of the outstanding common shares of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity. We serve as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), which was formed on December 31, 1998 as a Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions. As of March 31, 2021 and December 31, 2020, Whitestone wholly-owned 58 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.
As of March 31, 2021, these properties consist of:
Consolidated Operating Portfolio
•52 wholly-owned properties that meet our Community Centered Properties® strategy;
Redevelopment, New Acquisitions Portfolio
•one wholly-owned property, Las Colinas Village, that meets our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $34.4 million, and is classified as part of our new acquisition portfolio. Acquired properties are categorized in the new acquisition portfolio until the earlier of attainment of 90% occupancy or 18 months of ownership; and
•five parcels of land held for future development.
As of March 31, 2021, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.
We anticipate that the global health crisis caused by a novel strain of coronavirus (“COVID-19”) and the related responses intended to control its spread will continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. As part of the initial responses to the virus, many governmental authorities
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
implemented measures such as enhanced screenings, quarantine or shelter in place requirements and travel restrictions, including local governments in Texas and Arizona, where all but one of our properties are located. In May 2020, parts of the U.S. began to ease certain restrictions and allow for the reopening of businesses but with required or recommended safety protocols. Due to the increase in the number of COVID-19 cases in the fall of 2020, parts of the U.S. implemented additional stay in place orders and other restrictions. While as of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona, the timing and ultimate impact of any steps to reopen the economy as a whole and on our and our tenants’ businesses and financial condition remains uncertain. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise occupy their space. Though COVID-19 vaccines have become available in the U.S. there remain uncertainties as to the logistics of distribution and the overall efficacy of the vaccine program, and there can be no assurances regarding the timing for when vaccines or other therapies will be widely available and effective and the related impact on the economic recovery. In light of the changing nature of the COVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, the unknown timing or effectiveness of treatments, possible resurgences of COVID-19 cases in future periods and how quickly and to what extent normal economic and operating conditions can resume.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and markets, including how it will impact the businesses of its tenants. The Company has put in place a temporary response team to address tenant concerns in light of the COVID-19 pandemic. The response team is in ongoing communication with the Company’s tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under additional stimulus bills that may be adopted by the U.S. government. To date, the Company has received a number of rent relief requests from tenants, most often in the form of rent deferral requests, as a result of the COVID-19 pandemic. The Company is evaluating each tenant rent relief request on a case-by-case basis, considering a number of factors. Not all tenant requests will ultimately result in lease concessions, nor is the Company forgoing its contractual rights under its lease agreements at this time. As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 94.8% of contractual base rent and common area maintenance reimbursables billed for the first quarter.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. We are the sole general partner of the Operating Partnership and possess full legal control and authority over the operations of the Operating Partnership. As of March 31, 2021 and December 31, 2020, we owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements include the accounts of the Operating Partnership.
Noncontrolling interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income or loss is allocated to noncontrolling interests based on the weighted-average percentage ownership of the Operating Partnership during the period. Issuance of additional common shares of beneficial interest in Whitestone (the “common shares”) and units of limited partnership interest in the Operating Partnership that are convertible into cash or, at our option, common shares on a one-for-one basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.
Equity Method. For the years prior to December 31, 2017, Pillarstone OP was accounted for under the profit-sharing method. In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification (“ASC”) 360-20, “Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets,” we adopted Topic 606 and ASC 610 as of January 1, 2018, resulting in the derecognition of the underlying assets and liabilities associated with the Contribution (defined below) as of January 1, 2018 and the recognition of the Company’s investment in Pillarstone OP under the equity method. See Note 6 (Investment in Real Estate Partnership) for additional disclosure on Pillarstone OP.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
In these financial statements, unless otherwise indicated, we do not include the Pillarstone Properties when we refer to our properties.
Basis of Accounting. Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the grant date fair value of common share units included in share-based compensation expense, the estimated allowance for doubtful accounts, the estimated fair value of interest rate swaps and the estimates supporting our impairment analysis for the carrying values of our real estate assets. Actual results could differ from those estimates. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s operations and the operations of its tenants. The full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements, and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, the impact on our tenants’ businesses and financial condition, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Reclassifications. We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity.
Restricted Cash. We classify all cash pledged as collateral to secure certain obligations and all cash whose use is limited as restricted cash. During 2015, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7 (Debt)), which is collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize such promissory note.
Derivative Instruments and Hedging Activities. We utilize derivative financial instruments, principally interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a cash flow hedges’ change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using Level 2 inputs under ASC 820, “Fair Value Measurements and Disclosures.” Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable. As of March 31, 2021, we consider our cash flow hedges to be highly effective.
Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying charges (interest, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction), are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. For the three months ended March 31, 2021, approximately $102,000 and $79,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended March 31, 2020, approximately $122,000 and $80,000 in interest expense and real estate taxes, respectively, were capitalized.
Share-Based Compensation. From time to time, we grant nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to executive officers and employees under our 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). Awarded shares and units vest when certain performance conditions are met. We recognize compensation expense when achievement of the performance conditions is probable based on management’s most recent estimates using the fair value of the shares as of the grant date. We recognized $1,468,000 and
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
$1,326,000 in share-based compensation for the three months ended March 31, 2021 and 2020, respectively. We recognize forfeitures as they occur.
Noncontrolling Interests. Noncontrolling interests are the portion of equity in a subsidiary not attributable to a parent. Accordingly, we have reported noncontrolling interests in equity on the consolidated balance sheets but separate from Whitestone’s equity. On the consolidated statements of operations and comprehensive income (loss), subsidiaries are reported at the consolidated amount, including both the amount attributable to Whitestone and noncontrolling interests. The consolidated statements of changes in equity is included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of March 31, 2021 and December 31, 2020, we had an allowance for uncollectible accounts of $16.8 million and $16.4 million, respectively. During the three months ending March 31, 2021 and 2020, we recorded an adjustment to rental revenue for bad debt, exclusive of straight-line rent reserve adjustments, in the amount of $0.5 million and $0.8 million, respectively. The three months ended March 31, 2021 included 67 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight-line rent adjustments of $0.5 million and $0.1 million and, respectively, and the three months ended March 31, 2020 included 40 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight-line rent adjustments of $0.4 and $0.5, respectively.
Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). Additionally, we have tenants who pay real estate taxes directly to the taxing authority. We exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense.
Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly. Revenues are governed by the Management Agreements (as defined in Note 6 (Investment in Real Estate Partnership)). Refer to Note 6 (Investment in Real Estate Partnership) for additional information regarding the Management Agreements with Pillarstone OP. Additionally, we recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.
See our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion on significant accounting policies.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Recent Accounting Pronouncements. In April 2020, the FASB issued guidance on the application of Topic 842, relating to concessions being made by lessors in response to the COVID-19 pandemic. The guidance notes that it would be acceptable for entities to make an election to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed, even if such enforceable rights and obligations are not explicitly contained in the lease contract. Thus, for concessions relating to the COVID-19 pandemic, an entity would not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract, and would have the option to apply, or not to apply, the general lease modification guidance in Topic 842 as it stands. We have elected this option to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed. Therefore, such concessions are not accounted for as a lease modification under Topic 842.
3. LEASES
As a Lessor. All leases on our properties are classified as noncancelable operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss).
A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, contingent rents, and collectability adjustments under Topic 842) under noncancelable operating leases in existence as of March 31, 2021 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Minimum Future Rents(1)
|
|
2021 (remaining)
|
|
$
|
62,239
|
|
|
2022
|
|
74,566
|
|
|
2023
|
|
63,407
|
|
|
2024
|
|
50,751
|
|
|
2025
|
|
36,126
|
|
|
Thereafter
|
|
107,470
|
|
|
Total
|
|
$
|
394,559
|
|
(1) These amounts do not reflect future rental revenues from the renewal or replacement of existing leases and exclude reimbursements of operating expenses and rental increases that are not fixed.
As a Lessee. We have office space, automobile, and office machine leases, which qualify as operating leases, with remaining lease terms of one to three years.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by our weighted average incremental borrowing rates to calculate the lease liabilities for our operating leases in which we are the lessee (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
March 31, 2021
|
|
2021 (remaining)
|
|
$
|
342
|
|
|
2022
|
|
106
|
|
|
2023
|
|
61
|
|
|
2024
|
|
39
|
|
|
2025
|
|
29
|
|
|
|
|
|
|
Total undiscounted rental payments
|
|
577
|
|
|
Less imputed interest
|
|
19
|
|
|
Total lease liabilities
|
|
$
|
558
|
|
For the three months ended March 31, 2021 and 2020, the total lease costs were $257,000 and $303,000, respectively. The weighted average remaining lease term for our operating leases was 2.1 years at March 31, 2021. We do not include renewal options in the lease term for calculating the lease liability unless we are reasonably certain we will exercise the option or the lessor has the sole ability to exercise the option. The weighted average incremental borrowing rate was 4.5% at March 31, 2021.
4. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET
Accrued rents and accounts receivable, net consists of amounts accrued, billed and due from tenants, allowance for doubtful accounts and other receivables as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Tenant receivables
|
|
$
|
22,900
|
|
|
$
|
22,956
|
|
|
Accrued rents and other recoveries
|
|
16,944
|
|
|
16,348
|
|
|
Allowance for doubtful accounts
|
|
(16,792)
|
|
|
(16,426)
|
|
|
Other receivables
|
|
257
|
|
|
131
|
|
|
Total
|
|
$
|
23,309
|
|
|
$
|
23,009
|
|
5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS
Costs which have been deferred consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Leasing commissions
|
|
$
|
11,179
|
|
|
$
|
10,380
|
|
|
Deferred legal cost
|
|
373
|
|
|
373
|
|
|
Deferred financing cost
|
|
3,898
|
|
|
3,898
|
|
|
Total cost
|
|
15,450
|
|
|
14,651
|
|
|
Less: leasing commissions accumulated amortization
|
|
(5,330)
|
|
|
(5,029)
|
|
|
Less: deferred legal cost accumulated amortization
|
|
(227)
|
|
|
(216)
|
|
|
Less: deferred financing cost accumulated amortization
|
|
(1,942)
|
|
|
(1,720)
|
|
|
Total cost, net of accumulated amortization
|
|
$
|
7,951
|
|
|
$
|
7,686
|
|
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
6. INVESTMENT IN REAL ESTATE PARTNERSHIP
On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the “Contribution Agreement”) with Pillarstone OP and Pillarstone Capital REIT (“Pillarstone REIT”) pursuant to which we contributed all of the equity interests in four of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower,” and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own 14 non-core properties that do not fit our Community Centered Property® strategy (the “Pillarstone Properties”), to Pillarstone OP for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“Pillarstone OP Units”), issued at a price of $1.331 per Pillarstone OP Unit; and (2) the assumption of approximately $65.9 million of liabilities, consisting of (a) approximately $15.5 million of our liability under the 2018 Facility (as defined in Note 7 (Debt)); (b) an approximately $16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26, 2013, between Uptown Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory Note”) of Industrial-Office issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan Agreement”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Contribution”).
In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. The initial term of each Management Agreement expired on December 31, 2017, after which each Management Agreement became automatically renewable on a month to month basis; provided that each Management Agreement can be terminated by either party thereto upon not less than thirty days’ prior written notice to the other party. None of the Management Agreements had been terminated as of March 31, 2021.
In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection Agreement with Pillarstone REIT and Pillarstone OP pursuant to which Pillarstone OP agreed to indemnify the Operating Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or if Pillarstone OP fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that must be paid to maintain its REIT status for federal income tax purposes.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The table below presents the real estate partnership investment in which the Company holds an ownership interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s Investment as of
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Real estate partnership
|
Ownership Interest
|
|
|
|
|
|
Pillarstone OP(1)
|
81.4%
|
|
$
|
34,068
|
|
|
$
|
33,979
|
|
|
Total real estate partnership(2)
|
|
|
$
|
34,068
|
|
|
$
|
33,979
|
|
(1) The Company manages these real estate partnership investments and, where applicable, earns acquisition fees, leasing commissions, property management fees, and asset management fees.
(2) Representing eight property interests and 926,798 square feet of GLA, as of March 31, 2021 and December 31, 2020.
The table below presents the Company’s share of net income from its investment in the real estate partnership which is included in equity in earnings of real estate partnership, net on the Company’s consolidated statements of operations and comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pillarstone OP
|
|
$
|
89
|
|
|
$
|
192
|
|
|
|
|
|
Summarized financial information for the Company’s investment in real estate partnership is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Real estate, net
|
|
$
|
48,880
|
|
|
$
|
49,113
|
|
|
Other assets
|
|
6,948
|
|
|
7,657
|
|
|
Total assets
|
|
55,828
|
|
|
56,770
|
|
|
Liabilities and equity:
|
|
|
|
|
|
Notes payable
|
|
15,117
|
|
|
15,185
|
|
|
Other liabilities
|
|
2,524
|
|
|
3,533
|
|
|
Equity
|
|
38,187
|
|
|
38,052
|
|
|
Total liabilities and equity
|
|
55,828
|
|
|
56,770
|
|
|
Company’s share of equity
|
|
31,102
|
|
|
30,992
|
|
|
Cost of investment in excess of the Company’s share of underlying net book value
|
|
2,966
|
|
|
2,987
|
|
|
Carrying value of investment in real estate partnership
|
|
$
|
34,068
|
|
|
$
|
33,979
|
|
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,190
|
|
|
$
|
2,585
|
|
|
|
|
|
|
Operating expenses
|
|
(1,707)
|
|
|
(1,900)
|
|
|
|
|
|
|
Other expenses
|
|
(348)
|
|
|
(418)
|
|
|
|
|
|
|
Net income
|
|
$
|
135
|
|
|
$
|
267
|
|
|
|
|
|
The amortization of the basis difference between the cost of investment and the Company's share of underling net book value for both of the three months periods ended March 31, 2021 and 2020 is $27,000. The Company amortized the difference into equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).
The Company has evaluated its guarantee to Pillarstone OP pursuant to ASC 460, “Guarantees,” and has determined the guarantee to be a performance guarantee, for which ASC 460 contains initial recognition and measurement requirements, and related disclosure requirements. The Company is obligated in two respects: (i) a noncontingent liability, which represents the Company’s obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering event(s) occur; and (ii) the contingent liability, which represents the Company’s obligation to make future payments if those triggering events occur. The fair value of our loan guarantee to Pillarstone OP is estimated on a Level 3 basis (as provided by ASC 820), using a probability-weighted discounted cash flow analysis based on a discount rate, discounting the loan balance. The Company recognized a noncontingent liability of $462,000 at the inception of the guarantee at fair value which is recorded on the Company’s consolidated balance sheets, net of accumulated amortization. The Company will amortize the guarantee liability into income over seven years. For the three months ended March 31, 2021 and 2020, the amortization of the guarantee liability was $10,000.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
7. DEBT
Certain subsidiaries of Whitestone are the borrowers under various financing arrangements. These subsidiaries are separate legal entities, and their respective assets and credit are not available to satisfy the debt of Whitestone or any of its other subsidiaries.
Debt consisted of the following as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Fixed rate notes
|
|
|
|
|
|
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (1)
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (2)
|
|
165,000
|
|
|
165,000
|
|
|
$80.0 million, 3.72% Note, due June 1, 2027
|
|
80,000
|
|
|
80,000
|
|
|
$19.0 million 4.15% Note, due December 1, 2024
|
|
18,604
|
|
|
18,687
|
|
|
$20.2 million 4.28% Note, due June 6, 2023
|
|
18,117
|
|
|
18,222
|
|
|
$14.0 million 4.34% Note, due September 11, 2024
|
|
13,171
|
|
|
13,236
|
|
|
$14.3 million 4.34% Note, due September 11, 2024
|
|
13,953
|
|
|
14,014
|
|
|
$15.1 million 4.99% Note, due January 6, 2024
|
|
14,100
|
|
|
14,165
|
|
|
$2.6 million 5.46% Note, due October 1, 2023
|
|
2,326
|
|
|
2,339
|
|
|
$50.0 million, 5.09% Note, due March 22, 2029
|
|
50,000
|
|
|
50,000
|
|
|
$50.0 million, 5.17% Note, due March 22, 2029
|
|
50,000
|
|
|
50,000
|
|
|
$1.7 million 3.25% Note, due December 28, 2021
|
|
1,386
|
|
|
—
|
|
|
Floating rate notes
|
|
|
|
|
|
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023
|
|
119,500
|
|
|
119,500
|
|
|
Total notes payable principal
|
|
646,157
|
|
|
645,163
|
|
|
Less deferred financing costs, net of accumulated amortization
|
|
(927)
|
|
|
(978)
|
|
|
Total notes payable
|
|
$
|
645,230
|
|
|
$
|
644,185
|
|
(1) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of 2.24% for the duration of the term through January 31, 2024.
LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company is monitoring the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
On April 30, 2020, the Company entered into a loan in the principal amount of $1,733,510 from U.S. Bank National Association, one of the Company’s existing lenders, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). The PPP Loan was set to mature on May 6, 2022 (the “Maturity Date”), and accrued interest at 1.00% per annum and could be prepaid in whole or in part without penalty. Principal and interest were payable in 18 monthly installments of $96,864.28, beginning on December 6, 2020, plus a final payment equal to all unpaid principal and accrued interest on the Maturity Date. Pursuant to the CARES Act, the Company applied for and was granted forgiveness for all of the PPP Loan. Forgiveness was determined by the U.S. Small Business Administration based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company intended to and used all proceeds from the PPP Loan to retain employees and maintain payroll and make mortgage payments, lease payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts were eligible for forgiveness, subject to the provisions of the CARES Act. Based on the guidance in FASB ASC 405-20, “Liabilities - Extinguishment of Liabilities,” the PPP loan remains a liability until either (1) it is wholly or partially forgiven and we have been legally released, or (2) it is paid off. Since the loan was partially or wholly forgiven and legal release was received, the liability was reduced by the amount forgiven and a gain on extinguishment was recognized. The Company recognized a $1,734,000 gain for the PPP Loan forgiveness during the year ended December 30, 2020 based on the legal release from the U.S. Small Business Administration.
On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement (the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively, the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50 million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.
The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are substantially similar to those contained in the Operating Partnership’s existing credit facility.
Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated the 2018 Facility (as defined below).
The 2019 Facility is comprised of the following three tranches:
•$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
•$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
•$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term Loan A, the “2019 Term Loans”).
Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of March 31, 2021, the interest rate on the 2019 Revolver was 1.76%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the 2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to such alternate interest rate.
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. On March 20, 2020, as a precautionary measure to preserve our financial flexibility in response to potential credit risks posed by the COVID-19 pandemic, the Company drew down approximately $30.0 million under the 2019 Revolver, which we subsequently paid down in the fourth quarter of 2020. As of March 31, 2021, subject to any potential future paydowns or increases in the borrowing base, we have $15.9 million remaining availability under the 2019 Revolver. As of March 31, 2021, $384.5 million was drawn on the 2019 Facility. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions,
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, customary representations and warranties and affirmative and negative covenants including, without limitation, information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019 Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status.
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the “2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the 2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “2018 Revolver”) to October 30, 2019 from November 7, 2018;
•converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;
•extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October 30, 2020 from February 17, 2017; and
•extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and together with Term Loan 1 and Term Loan 3, the “2018 Term Loans”) to January 29, 2021 from November 7, 2019.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Borrowings under the 2018 Facility accrued interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. The applicable margin for Adjusted LIBOR borrowings ranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities.
Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working capital.
As of March 31, 2021, our $160.3 million in secured debt was collateralized by seven properties with a carrying value of $249.9 million. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of March 31, 2021, we were in compliance with all loan covenants.
Scheduled maturities of our outstanding debt as of March 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Amount Due
|
|
2021 (remaining)
|
|
$
|
2,822
|
|
|
2022
|
|
101,684
|
|
|
2023
|
|
147,363
|
|
|
2024
|
|
228,574
|
|
|
2025
|
|
17,143
|
|
|
|
|
|
|
Thereafter
|
|
148,571
|
|
|
Total
|
|
$
|
646,157
|
|
8. DERIVATIVES AND HEDGING ACTIVITIES
The fair value of our interest rate swaps is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Balance Sheet Location
|
|
Estimated Fair Value
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
$
|
(12,442)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Balance Sheet Location
|
|
Estimated Fair Value
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
$
|
(14,663)
|
|
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $65 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $12.9 million of the swap to U.S. Bank, National Association, $11.6 million of the swap to Regions Bank, $15.7 million of the swap to SunTrust Bank, and $5.9 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on February 7, 2019 and matured on November 9, 2020. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income (loss).
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $115 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $22.7 million of the swap to U.S. Bank, National Association, $20.5 million of the swap to Regions Bank, $27.9 million of the swap to SunTrust Bank, and $10.5 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on November 9, 2020 and matured on February 8, 2021. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income (loss).
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $165 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $32.6 million of the swap to U.S. Bank, National Association, $29.4 million of the swap to Regions Bank, $40.0 million of the swap to SunTrust Bank, and $15.0 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on February 8, 2021 and will mature on January 31, 2024. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.
On September 5, 2018, we, through our Operating Partnership, entered into an interest rate swap with Bank of America that fixed the LIBOR portion of the $9.6 million extension loan on the Whitestone Terravita Marketplace property at 2.85%. The swap began on September 25, 2018 and matured on September 24, 2020. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income (loss).
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan 3 under the 2018 Facility at 1.73%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $35.0 million of the swap to U.S. Bank, National Association, and $15.0 million of the swap to SunTrust Bank. See Note 7 (Debt) for additional information regarding the 2018 Facility. The swap began on November 30, 2015 and will mature on October 28, 2022. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan 1 under the 2018 Facility at 1.75%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See Note 7 (Debt) for additional information regarding the 2018 Facility. The swap began on February 3, 2017 and matured on October 30, 2020. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income (loss).
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan 2 under the 2018 Facility at 1.50%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See Note 7 (Debt) for additional information regarding the 2018 Facility. The swap began on December 7, 2015 and matured on January 29, 2021. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income (loss).
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
A summary of our interest rate swap activity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Recognized as Comprehensive Income (Loss)
|
|
Location of Income (Loss) Recognized in Earnings
|
|
Amount of Income (Loss) Recognized in Earnings (1)
|
|
Three Months Ended March 31, 2021
|
|
$
|
2,221
|
|
|
Interest expense
|
|
$
|
(1,276)
|
|
|
Three Months Ended March 31, 2020
|
|
$
|
(10,952)
|
|
|
Interest expense
|
|
$
|
(151)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) There was no ineffective portion of our interest rate swaps to recognize in earnings for the three months ended March 31, 2021 and 2020.
9. EARNINGS PER SHARE
Basic earnings per share for our common shareholders is calculated by dividing net income excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by our weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income attributable to common shareholders, excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by the weighted average number of common shares including any dilutive unvested restricted common shares.
Certain of our performance-based restricted common shares are considered participating securities that require the use of the two-class method for the computation of basic and diluted earnings per share. During the three months ended March 31, 2021 and 2020, 772,775 and 904,550 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
(in thousands, except per share data)
|
|
2021
|
|
2020
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,441
|
|
|
$
|
1,647
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
(26)
|
|
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
|
42,495
|
|
|
42,048
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Unvested restricted shares
|
|
836
|
|
|
961
|
|
|
|
|
|
|
Weighted average number of common shares - dilutive
|
|
43,331
|
|
|
43,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
10. INCOME TAXES
With the exception of our taxable REIT subsidiaries, federal income taxes are generally not provided because we intend to and believe we continue to qualify as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and because we have distributed and intend to continue to distribute all of our taxable income to our shareholders. As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.
We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (0.75% for us) to the profit margin, which generally will be determined for us as total revenue less a 30% standard deduction. Although the Texas Margin Tax is not an income tax, FASB ASC 740, “Income Taxes” applies to the Texas Margin Tax. For the three months ended March 31, 2021 and 2020, we recognized approximately $88,000 and $87,000 in margin tax provision, respectively.
11. EQUITY
Common Shares
Under our declaration of trust, as amended, we have authority to issue up to 400,000,000 common shares of beneficial interest, $0.001 par value per share, and up to 50,000,000 preferred shares of beneficial interest, $0.001 par value per share.
Equity Offerings
On May 31, 2019, we entered into nine equity distribution agreements for an at-the-market equity distribution program (the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. During the three months ended March 31, 2021, we did not sell shares under the 2019 equity distribution agreements. For the three months ended March 31, 2020, we sold 170,942 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $2.2 million. In connection with such sales, we paid compensation of approximately $34,000 to the sales agents.
Operating Partnership Units
Substantially all of our business is conducted through our Operating Partnership. We are the sole general partner of the Operating Partnership. As of March 31, 2021, we owned a 98.2% interest in the Operating Partnership.
Limited partners in the Operating Partnership holding OP units have the right to redeem their OP units for cash or, at our option, common shares at a ratio of one OP unit for one common share. Distributions to OP unit holders are paid at the same rate per unit as distributions per share to holders of Whitestone common shares. As of March 31, 2021 and December 31, 2020, there were 43,230,994 and 43,043,251 OP units outstanding, respectively. We owned 42,458,219 and 42,270,476 OP units as of March 31, 2021 and December 31, 2020, respectively. The balance of the OP units is owned by third parties, including certain members of our board of trustees. Our weighted average share ownership in the Operating Partnership was approximately 98.2% and 97.9% for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021 and 2020, 0 and 5,228 OP units, respectively, were redeemed for an equal number of common shares.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Distributions
The following table summarizes the cash distributions paid or payable to holders of common shares and to holders of noncontrolling OP units during each quarter of 2020 and the three months ended March 31, 2021 (in thousands, except per share/per OP unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
Noncontrolling OP Unit Holders
|
|
Total
|
|
Quarter Paid
|
|
Distributions Per Common Share
|
|
Amount Paid
|
|
Distributions Per OP Unit
|
|
Amount Paid
|
|
Amount Paid
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.1058
|
|
|
$
|
4,480
|
|
|
$
|
0.1058
|
|
|
$
|
82
|
|
|
$
|
4,562
|
|
|
Total
|
|
$
|
0.1058
|
|
|
$
|
4,480
|
|
|
$
|
0.1058
|
|
|
$
|
82
|
|
|
$
|
4,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
0.1050
|
|
|
$
|
4,432
|
|
|
$
|
0.1050
|
|
|
$
|
81
|
|
|
$
|
4,513
|
|
|
Third Quarter
|
|
0.1050
|
|
|
4,430
|
|
|
0.1050
|
|
|
81
|
|
|
4,511
|
|
|
Second Quarter
|
|
0.1050
|
|
|
4,413
|
|
|
0.1050
|
|
|
91
|
|
|
4,504
|
|
|
First Quarter
|
|
0.2850
|
|
|
11,928
|
|
|
0.2850
|
|
|
258
|
|
|
12,186
|
|
|
Total
|
|
$
|
0.6000
|
|
|
$
|
25,203
|
|
|
$
|
0.6000
|
|
|
$
|
511
|
|
|
$
|
25,714
|
|
The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.
Shareholders' Rights Plan
On May 14, 2020, the Board authorized a dividend of one preferred share purchase right (a “Right”) for each outstanding common share payable on May 26, 2020 (the “Record Date”), to the holders of record of common shares as of 5:00 P.M., New York City time, on the Record Date. In connection with the Rights, the Company and American Stock Transfer & Trust Company, LLC, as rights agent, entered into a Rights Agreement, dated as of May 14, 2020 (the “Rights Agreement”). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series A Preferred Share, par value $0.001 per share (each a “Preferred Share”), of the Company at a purchase price of $30.00 per Unit, subject to adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a one-for-one basis. Pursuant to the Rights Agreement, the Rights were scheduled to expire on the earliest of (i) the close of business on May 13, 2021, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. On April 21, 2021, the Company entered into the First Amendment to Rights Agreement (the “First Amendment to Rights Agreement”) with American Stock Transfer and Trust, LLC, as rights agent, solely to extend the expiration date of the Rights under the Rights Agreement from the close of business on May 13, 2021 to the close of business on May 13, 2022, unless earlier exercised, exchanged, amended, redeemed, or terminated, as described above. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement, as amended by the First Amendment to Rights Agreement.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
12. INCENTIVE SHARE PLAN
The Company’s 2008 Long-Term Equity Incentive Ownership Plan (as amended, the “2008 Plan”) expired in July 2018. At the Company’s annual meeting of shareholders on May 11, 2017, our shareholders voted to approve the 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common shares and OP units pursuant to awards under the 2018 Plan. The 2018 Plan became effective on July 30, 2018, which is the day after the 2008 Plan expired. Pursuant to the 2008 Plan, the maximum aggregate number of common shares that were issuable under the 2008 Plan was increased upon each issuance of common shares by the Company so that at any time the maximum number of shares that were issuable under the 2008 Plan equaled 12.5% of the aggregate number of common shares of the Company and OP units issued and outstanding (other than units issued to or held by the Company).
The Compensation Committee administered the 2008 Plan and administers the 2018 Plan except, in each case, with respect to awards to non-employee trustees, for which the 2008 Plan was and the 2018 Plan is administered by the board of trustees. The Compensation Committee is authorized to grant share options, including both incentive share options and non-qualified share options, as well as share appreciation rights, either with or without a related option. The Compensation Committee is also authorized to grant restricted common shares, restricted common share units, performance awards and other share-based awards. On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 965,000 performance-based restricted common share units under the 2008 Plan which only vest immediately prior to the consummation of a Change in Control (as defined in the 2008 Plan) that occurs on or before September 30, 2024 (the “CIC Units”) to certain of our employees. Continued employment is required through the vesting date. If a Change in Control does not occur on or before September 30, 2024, the CIC Units shall be immediately forfeited. The Company considers a Change in Control on or before September 30, 2024 to be improbable, and no expense has been recognized for the CIC Units. If a Change in Control occurs, any outstanding CIC Units would be expensed immediately on the date of the Change in Control using the grant date fair value. The grant date fair value for each CIC Unit of $13.05 was determined based on the Company’s closing share price on the grant date.
On March 16, 2018, the Compensation Committee approved the grant of an aggregate of 387,499 time-based restricted common share units under the 2008 Plan, which vest annually in three equal installments, and 4,300 performance-based restricted common share units to certain of our employees.
On December 1, 2018, the Compensation Committee approved the grant of an aggregate of 229,684 performance-based restricted common share units with market-based vesting conditions (“TSR Units”) under the 2018 Plan to certain of our employees. Vesting is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $14.89 was determined using the Monte Carlo simulation method and was recognized as share-based compensation expense ratably from the December 1, 2018 grant date to the end of the performance period, December 31, 2020. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. On January 1, 2021, the remaining unvested 208,210 TSR Units that were granted on December 1, 2018 vested at a 50% achievement into 104,105 common shares.
On June 30, 2019, the Compensation Committee approved the grant of an aggregate of 405,417 TSR Units and 317,184 time-based restricted common share units under the 2018 Plan to certain of our employees. On September 30, 2019, the Compensation Committee approved the grant of 17,069 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $8.22 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2019 grant date to the end of the performance period, December 31, 2021. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $10.63 and $11.69 and vest annually in three equal installments for the June 30, 2019 and September 30, 2019 grants, respectively.
On July 31, 2020, the Compensation Committee approved the grant of an aggregate of 545,000 TSR Units and 530,000 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $5.55 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the July 31, 2020 grant date to the end of the performance period, December 31, 2022. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $5.83 and vest annually in three equal installments.
A summary of the share-based incentive plan activity as of and for the three months ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested at January 1, 2021
|
|
2,903,846
|
|
|
$
|
9.45
|
|
|
Granted
|
|
2,490
|
|
|
10.04
|
|
|
Vested
|
|
(326,916)
|
|
|
12.66
|
|
|
Forfeited
|
|
(23,192)
|
|
|
7.29
|
|
|
Non-vested at March 31, 2021
|
|
2,556,228
|
|
|
9.06
|
|
|
Available for grant at March 31, 2021
|
|
754,935
|
|
|
|
A summary of our non-vested and vested shares activity for the three months ended March 31, 2021 and years ended December 31, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Granted
|
|
Shares Vested
|
|
|
|
Non-Vested Shares Issued
|
|
Weighted Average Grant-Date Fair Value
|
|
Vested Shares
|
|
Total Vest-Date Fair Value
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended March 31, 2021
|
|
2,490
|
|
|
$
|
10.04
|
|
|
(326,916)
|
|
|
$
|
4,139
|
|
|
Year Ended December 31, 2020
|
|
1,108,014
|
|
|
$
|
5.76
|
|
|
(511,621)
|
|
|
$
|
5,566
|
|
|
Year Ended December 31, 2019
|
|
762,630
|
|
|
$
|
9.46
|
|
|
(284,964)
|
|
|
$
|
3,352
|
|
Total compensation recognized in earnings for share-based payments was $1,468,000 and $1,326,000 for the three months ended March 31, 2021 and 2020, respectively.
Based on our current financial projections, we expect approximately 100% of the unvested awards, exclusive of 890,000 CIC Units, to vest over the next 28 months. As of March 31, 2021, there was approximately $3.2 million in unrecognized compensation cost related to outstanding non-vested TSR Units, which are expected to vest over a period of 22 months, and approximately $3.7 million in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a period of approximately 28 months beginning on October 1, 2020.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
We expect to record approximately $5.0 million in non-cash share-based compensation expense in 2021 and $3.4 million subsequent to 2021. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 21 months. The dilutive impact of the performance-based shares will be included in the denominator of the earnings per share calculation beginning in the period that the performance conditions are expected to be met. The dilutive impact of the TSR Units is based on the Company’s TSR Peer Group Ranking as of the reporting date and weighted according to the number of days outstanding in the period. The TSR Units issued in 2017 and 2018 vested at 200% and 50% attainment, respectively, based on the TSR Peer Group Ranking, and, as of March 31, 2021, the TSR Peer Group Ranking called for attainment of 0% for the shares issued in 2019 and 2020. The dilutive impact of the CIC Units is based on the probability of a Change in Control. Because the Company considers a Change in Control on or before September 30, 2024 to be improbable, no CIC Units are included in the Company’s dilutive shares.
13. GRANTS TO TRUSTEES
On December 4, 2020, six independent trustees, including one independent trustee who served on the board until the 2020 annual meeting of shareholders and did not stand for re-election, and one trustee emeritus were granted a total of 29,587 common shares, which vested immediately and are prorated based on date appointed. The 29,587 common shares granted to our trustees had a grant fair value of $8.17 per share. On December 4, 2020, one of our independent trustees elected to receive a total of 3,427 common shares with a grant date fair value of $8.17 in lieu of cash for board fees. The fair value of the shares granted during the year ended December 31, 2020 was determined using quoted prices available on the date of grant.
14. SEGMENT INFORMATION
Historically, our management has not differentiated results of operations by property type or location and, therefore, does not present segment information.
15. REAL ESTATE
Not applicable.
16. RELATED PARTY TRANSACTIONS
The Contribution. Mr. James C. Mastandrea, the Chairman and Chief Executive Officer of the Company, also serves as the Chairman and Chief Executive Officer of Pillarstone REIT and beneficially owns approximately 66.7% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act of 1934, as amended (the “Exchange Act”)). Mr. John J. Dee, the Chief Operating Officer and Corporate Secretary of the Company, also serves as the Senior Vice President and Chief Financial Officer of Pillarstone REIT and beneficially owns approximately 20.0% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act). In addition, Mr. Paul T. Lambert, a Trustee of the Company, also serves as a Trustee of Pillarstone REIT. The Contribution is pursuant to the Company’s strategy of recycling capital by disposing of Non-Core Properties that do not fit the Company’s Community Centered Property® strategy and the terms of the Contribution Agreement, the OP Unit Purchase Agreement, the Tax Protection Agreement and the Contribution were determined through arm’s-length negotiations. The Contribution was unanimously approved and recommended by a special committee of independent Trustees of the Company.
Pillarstone OP. The Company accounts for its investment in Pillarstone OP under the equity method.
During the ordinary course of business, we have transactions with Pillarstone OP that include, but are not limited to, rental income, interest expense, general and administrative costs, commissions, management and asset management fees, and property expenses.
WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The following table presents the revenue and expenses with Pillarstone OP included in our consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Location of Revenue (Expense)
|
|
2021
|
|
2020
|
|
|
|
|
|
Rent
|
|
Operating and maintenance
|
|
$
|
(218)
|
|
|
$
|
(264)
|
|
|
|
|
|
|
Property management fee income
|
|
Management, transaction, and other fees
|
|
$
|
140
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. COMMITMENTS AND CONTINGENCIES
On December 12, 2017, a property owner that owns a land parcel adjacent to a Whitestone property filed suit against Whitestone Pinnacle of Scottsdale - Phase II, LLC (“Whitestone Pinnacle”), a wholly-owned subsidiary of the Operating Partnership, alleging breach of contract and resulting in the delay of the construction of their assisted living facility. The claimant seeks approximately $2.3 million in restitution from Whitestone Pinnacle. The Company intends to vigorously defend the matter as it believes that these claims are without merit and that it has substantial legal and factual defenses to the claims and allegations contained in the complaint. Based upon the present status of this matter, the Company does not believe it is probable that a loss will be incurred. Accordingly, the Company has not recorded a charge as a result of this action.
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.
18. SUBSEQUENT EVENTS
On April 21, 2021, the Company entered into the First Amendment to Rights Agreement, solely to extend the expiration date of the Rights under the Rights Agreement from the close of business on May 13, 2021 to the close of business on May 13, 2022, unless earlier exercised, exchanged, amended, redeemed, or terminated. See Note 11 (Equity) for additional information.
Management has evaluated subsequent events through May 7, 2021, the date the consolidated financial statements were available to be issued, and has determined that there are no additional subsequent events to be reported.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”), and the consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2020. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report.
This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, pending acquisitions and the impact of such acquisitions on our financial condition and results of operations, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:
•uncertainties related to the COVID-19 pandemic, including the unknown duration and economic, operational and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by U.S. and local governmental authorities or others in response to the pandemic on our business, employees and tenants, including, among others, (a) changes in tenant demand for our properties, (b) financial challenges confronting major tenants, including as a result of decreased customers’ willingness to frequent, and mandated stay in place orders that have prevented customers from frequenting, some of our tenants’ businesses and the impact of these issues on our ability to collect rent from our tenants; (c) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (d) significant reduction in our liquidity due to the lack of further availability under our 2019 Facility and limited ability to access the capital markets and other sources of financing on attractive terms or at all, and (e) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19;
•adverse economic or real estate developments or conditions in Texas or Arizona, Houston and Phoenix in particular, including as a result of a surge in COVID-19 cases in such areas and the impact on our tenants’ ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments;
•the imposition of federal income taxes if we fail to qualify as a real estate investment trust (“REIT”) in any taxable year or forego an opportunity to ensure REIT status;
•the risk of government investigation of the Paycheck Protection Program loan (the “PPP Loan”);
•uncertainties related to the national economy, the real estate industry in general and in our specific markets, including, but not limited to, the significant volatility and disruption in the global financial markets caused by the COVID-19 pandemic;
•legislative or regulatory changes, including changes to laws governing REITs and the impact of the legislation commonly known as the Tax Cuts and Jobs Act;
•increases in interest rates, operating costs or general and administrative expenses;
•availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures;
•decreases in rental rates or increases in vacancy rates;
•litigation risks;
•lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants;
•our inability to renew tenant leases or obtain new tenant leases upon the expiration of existing leases;
•our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws;
•the need to fund tenant improvements or other capital expenditures out of operating cash flow; and
•the risk that we are unable to raise capital for working capital, acquisitions or other uses on attractive terms or at all.
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, as previously filed with the Securities and Exchange Commission (“SEC”) and of this Report below.
Overview
We are a fully-integrated real estate company that owns and operates commercial properties in culturally diverse markets in major metropolitan areas. Founded in 1998, we are internally managed with a portfolio of commercial properties in Texas, Arizona and Illinois.
In October 2006, our current management team joined the Company and adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties®. We define Community Centered Properties® as visibly located properties in established or developing culturally diverse neighborhoods in our target markets. We market, lease and manage our centers to match tenants with the shared needs of the surrounding neighborhood. Those needs may include specialty retail, grocery, restaurants and medical, educational and financial services. Our goal is for each property to become a Whitestone-branded retail community that serves a neighboring five-mile radius around our property. We employ and develop a diverse group of associates who understand the needs of our multicultural communities and tenants.
We serve as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), which was formed on December 31, 1998 as a Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions.
As of March 31, 2021, we wholly-owned 58 commercial properties consisting of:
Consolidated Operating Portfolio
•52 wholly-owned properties that meet our Community Centered Properties® strategy containing approximately 4.9 million square feet of gross leasable area (“GLA”) and having a total carrying amount (net of accumulated depreciation) of $883.9 million;
Redevelopment, New Acquisitions Portfolio
•one wholly-owned property, Las Colinas Village, that meets our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $34.4 million, and is classified as part of our new acquisition portfolio. Acquired properties are categorized in the new acquisition portfolio until the earlier of attainment of 90% occupancy or 18 months of ownership; and
•five parcels of land held for future development that meet our Community Centered Properties® strategy having a total carrying value of $19.3 million.
As of March 31, 2021, we had an aggregate of 1,403 tenants. We have a diversified tenant base with our largest tenant comprising only 2.8% of our annualized rental revenues for the three months ended March 31, 2021. Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants. Our leases include minimum
monthly lease payments and generally provide for tenant reimbursements for payment of taxes, insurance and maintenance. We completed 94 new and renewal leases during the three months ended March 31, 2021, totaling 225,225 square feet and approximately $30.8 million in total lease value. This compares to 80 new and renewal leases totaling 221,139 square feet and approximately $22.0 million in total lease value during the same period in 2020.
We employed 90 full-time employees as of March 31, 2021. As an internally managed REIT, we bear our own expenses of operations, including the salaries, benefits and other compensation of our employees, office expenses, legal, accounting and investor relations expenses and other overhead costs.
Real Estate Partnership
As of March 31, 2021, we, through our investment in Pillarstone OP, owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 926,798 square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.
Impact of COVID-19
The following discussion is intended to provide our shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our portfolio and tenants are estimates based on information available to us as of May 7, 2021. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition, and that of our tenants, for future periods.
We anticipate that the ongoing global health crisis caused by COVID-19 and the related responses intended to control its spread will continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. Any such impacts may be material in nature. As part of the initial responses to the virus, many governmental authorities implemented measures such as enhanced screenings, quarantine or shelter in place requirements and travel restrictions, including local governments in Texas and Arizona, where all but one of our properties are located. In May 2020, parts of the U.S. began to ease certain restrictions and allow for the reopening of businesses but with required or recommended safety protocols. Due to the increase in the number of COVID-19 cases in the fall of 2020, parts of the U.S. implemented additional stay in place orders and other restrictions. While as of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona, the timing and ultimate impact of any steps to reopen the economy as a whole and on our and our tenants’ businesses and financial condition remains uncertain. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may materially and adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise continue to occupy their space. Though COVID-19 vaccines have become available in the U.S., there remain uncertainties as to the logistics of distribution and the overall efficacy of the vaccine program, and there can be no assurances regarding the timing for when vaccines or other therapies will be widely available and effective and the related impact on the economic recovery. In light of the changing nature of the COVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, the unknown timing or effectiveness of treatments, possible resurgences of COVID-19 cases in future periods and how quickly and to what extent normal economic and operating conditions can resume.
Our portfolio and tenants have been impacted by these and other factors as follows:
•As of the date of this Quarterly Report on Form 10-Q, all of our properties are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates.
•Included in our adjustments to rental revenue for the three months ending March 31, 2021, was a bad debt adjustment of $0.5 million and a straight-line rent reserve adjustment of $0.1 million related to credit loss for the conversion of 67 tenants to cash basis revenue as a result of COVID-19 collectability analysis.
•As of the date of this Quarterly Report on Form 10-Q, we have received payments of approximately 94.8% of contractual base rent and common area maintenance reimbursables billed for the first quarter. As is believed to be
the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.
We have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:
•To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. As of March 31, 2021, subject to any potential future paydowns or increases in the borrowing base, we have $15.9 million of remaining availability under our revolving credit facility. We have cash, cash equivalents and restricted cash of approximately $22.9 million as of March 31, 2021.
•Our board of trustees has reduced our quarterly dividend from $0.2850 per share in the first quarter of 2020 to $0.1075 per common share and OP unit for the second quarter of 2021. The board of trustees will regularly reassess the dividend level.
•We have implemented expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability.
•We adapted our operations to protect employees and minimize travel through use of virtual meeting technology.
We believe these steps have been effective to date and will continue to monitor pandemic-related impacts on our business and implement additional measures as needed.
How We Derive Our Revenue
Substantially all of our revenue is derived from rents received from leases at our properties. We had total revenues of approximately $29.0 million and $30.6 million for the three months ended March 31, 2021 and 2020, respectively.
Known Trends in Our Operations; Outlook for Future Results
Rental Income
We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal leases. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Over the past three years, we have seen modest improvement in the overall economy in our markets, which has allowed us to maintain overall occupancy rates, with slight increases in occupancy at certain of our properties, and to recognize modest increases in rental rates. However, as of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 94.8% of contractual base rent and common area maintenance reimbursables billed for the first quarter. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. In addition, included in our adjustments to rental revenue for the three months ending March 31, 2021, was a bad debt adjustment of $0.5 million and a straight-line rent reserve adjustment of $0.1 million related to credit loss for the conversion of 67 tenants to cash basis revenue as a result of COVID-19 collectability analysis. We are unable to predict the impact that the COVID-19 pandemic will have on our rental income in the long term. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our and our tenants’ financial positions and operating results.
Scheduled Lease Expirations
We tend to lease space to smaller businesses that desire shorter term leases. As of March 31, 2021, approximately 24% of our GLA was subject to leases that expire prior to December 31, 2022. Over the last three calendar years, we have renewed expiring leases with respect to approximately 83% of our GLA. We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 24 months prior to the expiration date of the existing lease. Inasmuch as our early renewal program and other leasing and marketing efforts target these expiring leases, we work to re-lease most of that space prior to expiration of the leases. In the markets in which we operate, we obtain and analyze market rental rates through review of third-party publications, which provide market and submarket rental rate data and through inquiry of property owners and property management companies as to rental rates being quoted at properties that are located in close proximity to our properties and we believe display similar physical attributes as our nearby properties. We use this data to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental rates, we believe that, in the aggregate, our current leases are at market rates. Market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate and/or the rental rates we are able to negotiate. We continue to monitor our tenants’ operating performances as well as overall economic trends to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our cash flow and ability to make distributions to our shareholders.
Acquisitions
We seek to grow our GLA through the acquisition of additional properties, and we are carefully evaluating development and redevelopment activities on a case-by-case basis. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe enables us to take advantage of these market opportunities and maintain an active acquisition pipeline.
Property Acquisitions, Dispositions and Development
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties® strategy. We may acquire properties in other high-growth cities in the future.
Leasing Activity
As of March 31, 2021, we owned 58 properties with 4,953,571 square feet of GLA and our occupancy rate for all properties was approximately 89% and 90% occupied as of March 31, 2021 and 2020, respectively. The following is a summary of the Company’s leasing activity for the three months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Leases Signed
|
|
GLA Signed
|
|
Weighted Average Lease Term (2)
|
|
TI and Incentives per Sq. Ft. (3)
|
|
Contractual Rent Per Sq. Ft. (4)
|
|
Prior Contractual Rent Per Sq. Ft. (5)
|
|
Straight-lined Basis Increase (Decrease) Over Prior Rent
|
|
Comparable (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases
|
|
46
|
|
|
103,931
|
|
|
4.7
|
|
|
$
|
1.92
|
|
|
$
|
21.17
|
|
|
$
|
21.29
|
|
|
9.6
|
%
|
|
New Leases
|
|
26
|
|
|
56,578
|
|
|
6.7
|
|
|
17.72
|
|
|
23.87
|
|
|
26.52
|
|
|
5.3
|
%
|
|
Total
|
|
72
|
|
|
160,509
|
|
|
5.4
|
|
|
$
|
7.49
|
|
|
$
|
22.12
|
|
|
$
|
23.14
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Leases Signed
|
|
GLA Signed
|
|
Weighted Average Lease Term (2)
|
|
TI and Incentives per Sq. Ft. (3)
|
|
Contractual Rent Per Sq. Ft. (4)
|
|
|
|
|
|
Non-Comparable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases
|
|
2
|
|
|
4,301
|
|
|
3.5
|
|
|
$
|
0.63
|
|
|
$
|
23.11
|
|
|
|
|
|
|
New Leases
|
|
20
|
|
|
60,415
|
|
|
6.6
|
|
|
13.73
|
|
|
19.52
|
|
|
|
|
|
|
Total
|
|
22
|
|
|
64,716
|
|
|
6.4
|
|
|
$
|
12.86
|
|
|
$
|
19.76
|
|
|
|
|
|
(1) Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and the new or renewal square footage was within 25% of the expired square footage.
(2) Weighted average lease term is determined on the basis of square footage.
(3) Estimated amount per signed leases. Actual cost of construction may vary. Does not include first generation costs for tenant improvements (“TI”) and leasing commission costs needed for new acquisitions or redevelopment of a property to bring to operating standards for its intended use.
(4) Contractual minimum rent under the new lease for the first month, excluding concessions.
(5) Contractual minimum rent under the prior lease for the final month.
Capital Expenditures
The following is a summary of the Company's capital expenditures for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
Tenant improvements and allowances
|
|
$
|
475
|
|
|
$
|
688
|
|
|
|
|
|
|
Developments / redevelopments
|
|
452
|
|
|
187
|
|
|
|
|
|
|
Leasing commissions and costs
|
|
799
|
|
|
376
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
601
|
|
|
718
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
2,327
|
|
|
$
|
1,969
|
|
|
|
|
|
Critical Accounting Policies
In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2020, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to these policies during the three months ended March 31, 2021. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
The comparability of our results of operations for the three months ended March 31, 2021 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the three months ended March 31, 2021 and 2020 (dollars in thousands, except per share and per OP unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
Number of properties owned and operated
|
|
58
|
|
|
58
|
|
|
Aggregate GLA (sq. ft.)(1)
|
|
4,848,652
|
|
|
4,848,652
|
|
|
Ending occupancy rate - operating portfolio(1)
|
|
89
|
%
|
|
90
|
%
|
|
Ending occupancy rate
|
|
89
|
%
|
|
90
|
%
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
29,045
|
|
|
$
|
30,584
|
|
|
Total operating expenses
|
|
21,524
|
|
|
22,204
|
|
|
Total other expense
|
|
6,082
|
|
|
6,838
|
|
|
Income from operations before equity investments in real estate partnerships and income tax
|
|
1,439
|
|
|
1,542
|
|
|
Equity in earnings of real estate partnership
|
|
89
|
|
|
192
|
|
|
Provision for income taxes
|
|
(87)
|
|
|
(87)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
1,441
|
|
|
1,647
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
Net income attributable to Whitestone REIT
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
|
|
|
|
|
|
Funds from operations(2)
|
|
$
|
8,825
|
|
|
$
|
9,265
|
|
|
Funds from operations core(3)
|
|
10,293
|
|
|
10,591
|
|
|
Property net operating income(4)
|
|
21,139
|
|
|
21,655
|
|
|
Distributions paid on common shares and OP units
|
|
4,562
|
|
|
12,186
|
|
|
Distributions per common share and OP unit
|
|
$
|
0.1058
|
|
|
$
|
0.2850
|
|
|
Distributions paid as a percentage of funds from operations core
|
|
44
|
%
|
|
115
|
%
|
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.
(2) For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below.
(3) For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below.
(4) For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below.
We define “Same Store” as properties that have been owned for the entire period being compared. For purposes of comparing the three months ended March 31, 2021 to the three months ended March 31, 2020, Same Store includes properties owned during the entire period from January 1, 2020 to March 31, 2021. We define “Non-Same Store” as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. As of March 31, 2021, we did not have any Non-Same Store properties.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Revenue
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
Same Store
|
|
|
|
|
|
|
|
|
|
Rental revenues (1)
|
|
$
|
21,626
|
|
|
$
|
22,077
|
|
|
$
|
(451)
|
|
|
(2)
|
%
|
|
Recoveries (2)
|
|
7,598
|
|
|
8,963
|
|
|
(1,365)
|
|
|
(15)
|
%
|
|
Bad debt (3)
|
|
(529)
|
|
|
(844)
|
|
|
315
|
|
|
(37)
|
%
|
|
Total rental
|
|
28,695
|
|
|
30,196
|
|
|
(1,501)
|
|
|
(5)
|
%
|
|
Other revenues
|
|
210
|
|
|
232
|
|
|
(22)
|
|
|
(9)
|
%
|
|
Same Store Total
|
|
28,905
|
|
|
30,428
|
|
|
(1,523)
|
|
|
(5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Same Store and Management Fees
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Recoveries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Bad debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Total rental
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Other revenues
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Management fees
|
|
140
|
|
|
156
|
|
|
(16)
|
|
|
(10)
|
%
|
|
Non-Same Store and Management Fees Total
|
|
140
|
|
|
156
|
|
|
(16)
|
|
|
(10)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
29,045
|
|
|
$
|
30,584
|
|
|
$
|
(1,539)
|
|
|
(5)
|
%
|
(1) The Same Store rental revenues decrease of $451,000 resulted from a decrease of $396,000 from lower average leased square feet from 4,459,381 to 4,380,820, and a decrease of $55,000 from lower average rent per leased square foot from $19.80 to $19.75. Same Store rental revenues include straight-line rent write offs for tenants converted to cash basis accounting of $147,000 and $491,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.
(2) The Same Store recoveries revenue decrease of $1,365,000 is primarily attributable to related decreases in Same Store operating expenses and real estate taxes of $1,212,000. Operating expenses generally decreased as a result of cost saving initiatives during the COVID-19 pandemic, and real estate taxes included $604,000 more in savings from favorable tax settlements than the same period in 2020. Our recovery revenue from tenants decreases as the related operating and real estate tax expenses decrease.
(3) Bad debt decreased Same Store total rental revenue by $529,000, including $459,000 from cash basis accounting, during the three months ended March 31, 2021, as compared to a reduction of $844,000, including $362,000 from cash basis accounting, during the same period a year ago.
As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 94.8% of contractual base rent and common area maintenance reimbursables billed for the first quarter. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis. We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained.
Operating expenses. The primary components of operating expenses for the three months ended March 31, 2021 and 2020 are detailed in the table below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Operating Expenses
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
Same Store
|
|
|
|
|
|
|
|
|
|
Operating and maintenance (1)
|
|
$
|
4,619
|
|
|
$
|
5,333
|
|
|
$
|
(714)
|
|
|
(13)
|
%
|
|
Real estate taxes (2)
|
|
4,038
|
|
|
4,536
|
|
|
(498)
|
|
|
(11)
|
%
|
|
Same Store total
|
|
8,657
|
|
|
9,869
|
|
|
(1,212)
|
|
|
(12)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Same Store and affiliated company rents
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Real estate taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Not meaningful
|
|
Affiliated company rents (3)
|
|
220
|
|
|
264
|
|
|
(44)
|
|
|
(17)
|
%
|
|
Non-Same Store and affiliated company rents total
|
|
220
|
|
|
264
|
|
|
(44)
|
|
|
(17)
|
%
|
|
Depreciation and amortization
|
|
7,013
|
|
|
6,971
|
|
|
42
|
|
|
1
|
%
|
|
General and administrative (4)
|
|
5,634
|
|
|
5,100
|
|
|
534
|
|
|
10
|
%
|
|
Total operating expenses
|
|
$
|
21,524
|
|
|
$
|
22,204
|
|
|
$
|
(680)
|
|
|
(3)
|
%
|
(1) The $714,000 Same Store operating and maintenance cost decrease included $319,000 in decreased contract services costs, $316,000 in decreased repair and maintenance costs and $79,000 in other decreased costs.
(2) Real estate taxes included $604,000 more in savings from favorable tax settlements than the same period in 2020.
(3) Affiliated company rents are spaces that we lease from Pillarstone OP.
(4) The general and administrative expense increase is attributable to a $590,000 increase in payroll costs and a $142,000 increase in share-based compensation expense offset by decreases of $186,000 in legal fees and $12,000 in other general and administrative expenses.
Other expenses (income). The primary components of other expenses (income) for the three months ended March 31, 2021 and 2020 are detailed in the table below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Other Expenses (Income)
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (1)
|
|
$
|
6,132
|
|
|
$
|
6,693
|
|
|
$
|
(561)
|
|
|
(8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale or disposal of assets, net
|
|
(1)
|
|
|
207
|
|
|
(208)
|
|
|
(100)
|
%
|
|
Interest, dividend and other investment income
|
|
(49)
|
|
|
(62)
|
|
|
13
|
|
|
(21)
|
%
|
|
Total other expense
|
|
$
|
6,082
|
|
|
$
|
6,838
|
|
|
$
|
(756)
|
|
|
(11)
|
%
|
(1) The $561,000 decrease in interest expense for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 included $404,000 from a decrease in the effective annual interest rate from 3.89% to 3.63%, $149,000 from a decrease in the average outstanding notes payable from $660 million to $645 million and an $8,000 decrease in the amortization of loan fees.
Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $103,000 from $192,000 for the three months ended March 31, 2020 to $89,000 for the three months ended March 31, 2021. Please refer to Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.
Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Increase
|
|
% Increase
|
|
|
|
2021
|
|
2020
|
|
(Decrease)
|
|
(Decrease)
|
|
Same Store (53 properties, excluding development land)
|
|
|
|
|
|
|
|
|
|
Property revenues
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
28,695
|
|
|
$
|
30,196
|
|
|
$
|
(1,501)
|
|
|
(5)
|
%
|
|
Management, transaction and other fees
|
|
210
|
|
|
232
|
|
|
(22)
|
|
|
(9)
|
%
|
|
Total property revenues
|
|
28,905
|
|
|
30,428
|
|
|
(1,523)
|
|
|
(5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
|
|
|
|
|
|
|
|
|
Property operation and maintenance
|
|
4,619
|
|
|
5,333
|
|
|
(714)
|
|
|
(13)
|
%
|
|
Real estate taxes
|
|
4,038
|
|
|
4,536
|
|
|
(498)
|
|
|
(11)
|
%
|
|
Total property expenses
|
|
8,657
|
|
|
9,869
|
|
|
(1,212)
|
|
|
(12)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total property revenues less total property expenses
|
|
20,248
|
|
|
20,559
|
|
|
(311)
|
|
|
(2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Same Store straight-line rent adjustments
|
|
(210)
|
|
|
334
|
|
|
(544)
|
|
|
(163)
|
%
|
|
Same Store amortization of above/below market rents
|
|
(201)
|
|
|
(209)
|
|
|
8
|
|
|
(4)
|
%
|
|
Same Store lease termination fees
|
|
(76)
|
|
|
(30)
|
|
|
(46)
|
|
|
153
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Same Store NOI(1)
|
|
$
|
19,761
|
|
|
$
|
20,654
|
|
|
$
|
(893)
|
|
|
(4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See below for a reconciliation of property net operating income to net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
PROPERTY NET OPERATING INCOME (“NOI”)
|
|
2021
|
|
2020
|
|
Net income attributable to Whitestone REIT
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
General and administrative expenses
|
|
5,634
|
|
|
5,100
|
|
|
Depreciation and amortization
|
|
7,013
|
|
|
6,971
|
|
|
Equity in earnings of real estate partnership
|
|
(89)
|
|
|
(192)
|
|
|
Interest expense
|
|
6,132
|
|
|
6,693
|
|
|
Interest, dividend and other investment income
|
|
(49)
|
|
|
(62)
|
|
|
Provision for income taxes
|
|
87
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee, net of related expenses
|
|
80
|
|
|
108
|
|
|
(Gain) loss on sale or disposal of assets, net
|
|
(1)
|
|
|
207
|
|
|
NOI of real estate partnership (pro rata)
|
|
891
|
|
|
1,096
|
|
|
Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
NOI
|
|
$
|
21,139
|
|
|
$
|
21,655
|
|
|
Non-Same Store NOI (1)
|
|
—
|
|
|
—
|
|
|
NOI of real estate partnership (pro rata)
|
|
(891)
|
|
|
(1,096)
|
|
|
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
|
|
20,248
|
|
|
20,559
|
|
|
Same Store straight-line rent adjustments
|
|
(210)
|
|
|
334
|
|
|
Same Store amortization of above/below market rents
|
|
(201)
|
|
|
(209)
|
|
|
Same Store lease termination fees
|
|
(76)
|
|
|
(30)
|
|
|
Same Store NOI (2)
|
|
$
|
19,761
|
|
|
$
|
20,654
|
|
(1) We define “Non-Same Store” as properties that have been acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. For purposes of comparing the three months ended March 31, 2021 to the three months ended March 31, 2020, Non-Same Store includes properties acquired between January 1, 2020 and March 31, 2021 and properties sold between January 1, 2020 and March 31, 2021, but not included in discontinued operations.
(2) We define “Same Store” as properties that have been owned during the entire period being compared. For purposes of comparing the three months ended March 31, 2021 to the three months ended March 31, 2020, Same Store includes properties owned before January 1, 2020 and not sold before March 31, 2021. Straight-line rent adjustments, above/below market rents, and lease termination fees are excluded.
Reconciliation of Non-GAAP Financial Measures
Funds From Operations (NAREIT) (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains or losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We calculate FFO in a manner consistent with the NAREIT definition and also include adjustments for our unconsolidated real estate partnership.
Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income (loss) alone as the primary measure of our operating performance.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself. In addition, securities analysts, investors and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs.
FFO should not be considered as an alternative to net income or other measurements under GAAP, as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Although our calculation of FFO is consistent with that of NAREIT, there can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs.
Funds From Operations Core (“FFO Core”)
Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include, but are not limited to, legal settlements, proxy contest fees, debt extension costs, non-cash share-based compensation expense, rent support agreement payments received from sellers on acquired assets, management fees from Pillarstone and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of other REITs.
Below are the calculations of FFO and FFO Core and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
FFO (NAREIT) AND FFO-CORE
|
|
2021
|
|
2020
|
|
|
|
|
|
Net income attributable to Whitestone REIT
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
|
|
|
|
Adjustments to reconcile to FFO:(1)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of real estate
|
|
6,980
|
|
|
6,909
|
|
|
|
|
|
|
Depreciation and amortization of real estate assets of real estate partnership (pro rata)
|
|
405
|
|
|
449
|
|
|
|
|
|
|
(Gain) loss on sale or disposal of assets, net
|
|
(1)
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale or disposal of properties or assets of real estate partnership (pro rata)(2)
|
|
—
|
|
|
53
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
|
|
|
|
FFO (NAREIT)
|
|
8,825
|
|
|
9,265
|
|
|
|
|
|
|
Adjustments to reconcile to FFO Core
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
1,468
|
|
|
1,326
|
|
|
|
|
|
|
FFO Core
|
|
$
|
10,293
|
|
|
$
|
10,591
|
|
|
|
|
|
(1) Includes pro-rata share attributable to real estate partnership.
(2) Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).
Property Net Operating Income (“NOI”)
Management believes that NOI is a useful measure of our property operating performance. We define NOI as operating revenues (rental and other revenues) less property and related expenses (property operation and maintenance and real estate taxes). Other REITs may use different methodologies for calculating NOI and, accordingly, our NOI may not be comparable to other REITs. Because NOI excludes general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes, gain or loss on sale or disposition of assets, and our pro rata share of NOI of equity method investments, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not immediately apparent from net income. We use NOI to evaluate our operating performance since NOI allows us to evaluate the impact that factors such as occupancy levels, lease structure, lease rates and tenant base have on our results, margins and returns. In addition, management believes that NOI provides useful information to the investment community about our property and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of property performance in the real estate industry. However, NOI should not be viewed as a measure of our overall financial performance since it does not reflect general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes and gain or loss on sale or disposition of assets, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties.
Below is the calculation of NOI and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
PROPERTY NET OPERATING INCOME
|
|
2021
|
|
2020
|
|
|
|
|
|
Net income attributable to Whitestone REIT
|
|
$
|
1,415
|
|
|
$
|
1,612
|
|
|
|
|
|
|
General and administrative expenses
|
|
5,634
|
|
|
5,100
|
|
|
|
|
|
|
Depreciation and amortization
|
|
7,013
|
|
|
6,971
|
|
|
|
|
|
|
Equity in earnings of real estate partnership
|
|
(89)
|
|
|
(192)
|
|
|
|
|
|
|
Interest expense
|
|
6,132
|
|
|
6,693
|
|
|
|
|
|
|
Interest, dividend and other investment income
|
|
(49)
|
|
|
(62)
|
|
|
|
|
|
|
Provision for income taxes
|
|
87
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee, net of related expenses
|
|
80
|
|
|
108
|
|
|
|
|
|
|
(Gain) loss on sale or disposal of assets, net
|
|
(1)
|
|
|
207
|
|
|
|
|
|
|
NOI of real estate partnership (pro rata)
|
|
891
|
|
|
1,096
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
26
|
|
|
35
|
|
|
|
|
|
|
NOI
|
|
$
|
21,139
|
|
|
$
|
21,655
|
|
|
|
|
|
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of distributions to holders of our common shares and OP units, including those required to maintain our REIT status and satisfy our current quarterly distribution target of $0.1075 per common share and OP unit, recurring expenditures, such as repairs and maintenance of our properties, non-recurring expenditures, such as capital improvements and tenant improvements, debt service requirements, and, potentially, acquisitions of additional properties.
During the three months ended March 31, 2021, our cash provided from operating activities was $4,103,000 and our total distributions were $4,562,000. Therefore, distributions are in excess of cash flows from operations of approximately $459,000. We anticipate that cash flows from operating activities and our borrowing capacity under our unsecured revolving credit facility will provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT for federal income tax purposes.
Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements, development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness, sales of common shares, issuance of OP units, sales of underperforming properties and non-core properties and other financing opportunities, including debt financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. On February 10, 2021, the Company announced an increase to its quarterly distribution to $0.1075 per common share and OP unit, equal to a monthly distribution of $0.035833, beginning with the March 2021 distribution. The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve. As of March 31, 2021, subject to any potential future paydowns or increases in the borrowing base, we have $15.9 million remaining availability under the revolving credit facility.
On May 14, 2020, the Board authorized a dividend of one preferred share purchase right (a “Right”) for each outstanding common share payable on May 26, 2020 (the “Record Date”), to the holders of record of common shares as of 5:00 P.M., New York City time, on the Record Date. In connection with the Rights, the Company and American Stock Transfer & Trust Company, LLC, as rights agent, entered into a Rights Agreement, dated as of May 14, 2020 (the “Rights Agreement”). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series A Preferred Share, par value $0.001 per share (each a “Preferred Share”), of the Company at a purchase price of $30.00 per Unit, subject to
adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a one-for-one basis. Pursuant to the Rights Agreement, the Rights were scheduled to expire on the earliest of (i) the close of business on May 13, 2021, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. On April 21, 2021, the Company entered into the First Amendment to Rights Agreement (the “First Amendment to Rights Agreement”) with American Stock Transfer and Trust, LLC, as rights agent, solely to extend the expiration date of the Rights under the Rights Agreement from the close of business on May 13, 2021 to the close of business on May 13, 2022, unless earlier exercised, exchanged, amended, redeemed, or terminated, as described above. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement, as amended by the First Amendment to Rights Agreement.
Our ability to access the capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our Company. In light of the dynamics in the capital markets impacted by the COVID-19 pandemic and the economic slowdown, our access to capital may be diminished due to, among other things:
•the potential reduction in the borrowing base under our 2019 Facility due to the potential reduction in real estate values and a reduction in our NOI as a result of our tenants’ inability or unwillingness to pay rent timely or at all and increased vacancy rates due to the risk of tenants closing their businesses and delays in leasing vacant space due to potential lack of demand for retail space;
•the price of our common shares being below our estimates of our net asset value, which would result in any offering of our common shares to be dilutive to our existing shareholders.
Despite these challenges, we believe we have sufficient access to capital for the foreseeable future, but we can provide no assurance that, if the impact of the COVID-19 pandemic continues for an extended period of time significantly worsens, that such capital will be available to us on attractive terms or at all.
We are unable to predict and determine the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in the long term. We have taken a number of proactive measures to maintain the strength of our business and manage the impact of the COVID-19 pandemic on our operations and liquidity, including the following:
•To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of the revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. As of March 31, 2021, subject to any potential future paydowns or increases in the borrowing base, we have $15.9 million remaining availability under the revolving credit facility. As of March 31, 2021, we have cash, cash equivalents and restricted cash of approximately $22.9 million.
•Our board of trustees has reduced our quarterly dividend from $0.2850 per share in the first quarter of 2020 to $0.1075 per common share and OP unit for the second quarter of 2021. The board of trustees will regularly reassess the dividend level.
•We have implemented expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability.
•We adapted our operations to protect employees and minimize travel through use of virtual meeting technology.
We believe these steps have been effective to date and will continue to monitor pandemic-related impacts on our business and implement additional measures as needed. As economic conditions improve and favorable opportunities arise, we intend to continue acquiring additional properties that meet our Community Centered Property® strategy through equity issuances and debt financing.
On April 30, 2020, the Company entered into a loan in the principal amount of $1,733,510 from U.S. Bank National Association, one of the Company’s existing lenders, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). The PPP Loan was set to mature on May 6, 2022 (the “Maturity Date”), and accrued interest at 1.00% per annum and could be prepaid in whole or in part without penalty. Principal and interest were payable in 18 monthly installments of $96,864.28, beginning on December 6, 2020, plus a final payment equal to all unpaid principal and accrued interest on the Maturity Date. Pursuant to the CARES Act, the Company applied for and was granted forgiveness for all of the PPP Loan. Forgiveness was determined by the U.S. Small Business Administration based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company intended to and used all proceeds from the PPP Loan to retain employees and maintain payroll and make mortgage payments, lease payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts were eligible for forgiveness, subject to the provisions of the CARES Act. Based on the guidance in FASB ASC 405-20, “Liabilities - Extinguishment of Liabilities,” the PPP loan remains a liability until either (1) it is wholly or partially forgiven and we have been legally released, or (2) it is paid off. Since the loan was partially or wholly forgiven and legal release was received, the liability was reduced by the amount forgiven and a gain on extinguishment was recognized. The Company recognized a $1,734,000 gain for the PPP Loan forgiveness during the year ended December 31, 2020 based on the legal release from the U.S. Small Business Administration.
On May 15, 2019, our universal shelf registration statement on Form S-3 was declared effective by the SEC, allowing us to offer up to $750 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights.
On May 31, 2019, we entered into nine equity distribution agreements for an at-the-market equity distribution program (the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. During the three months ended March 31, 2021, we did not sell shares under the 2019 equity distribution agreements. For the three months ended March 31, 2020, we sold 170,942 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $2.2 million. In connection with such sales, we paid compensation of approximately $34,000 to the sales agents.
We have used and anticipate using net proceeds from common shares issued pursuant to the 2019 equity distribution agreements for general corporate purposes, which may include acquisitions of additional properties, the repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment and/or re-tenanting of properties in our portfolio, working capital and other general purposes.
Our capital structure includes non-recourse mortgage debt that we have assumed or originated on certain properties. We may hedge the future cash flows of certain variable rate debt transactions principally through interest rate swaps with major financial institutions. See Note 8 (Derivatives and Hedging Activities) to the accompanying consolidated financial statements for a description of our current cash flow hedges.
As discussed in Note 2 (Summary of Significant Accounting Policies) to the accompanying consolidated financial statements, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7 (Debt) to the accompanying consolidated financial statements), which is collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize such promissory note. Amounts in the cash management account are classified as restricted cash.
Cash, Cash Equivalents and Restricted Cash
We had cash, cash equivalents and restricted cash of approximately $22,926,000 as of March 31, 2021, as compared to $25,956,000 on December 31, 2020. The decrease of $3,030,000 was primarily the result of the following:
Sources of Cash
•Cash flow from operations of $4,103,000 for the three months ended March 31, 2021;
Uses of Cash
•Payment of distributions to common shareholders and OP unit holders of $4,562,000;
•Additions to real estate of $1,528,000;
•Repurchase of common shares of $324,000; and
•Payments of notes payable of $719,000.
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Debt
Debt consisted of the following as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Fixed rate notes
|
|
|
|
|
|
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (1)
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (2)
|
|
165,000
|
|
|
165,000
|
|
|
$80.0 million, 3.72% Note, due June 1, 2027
|
|
80,000
|
|
|
80,000
|
|
|
$19.0 million 4.15% Note, due December 1, 2024
|
|
18,604
|
|
|
18,687
|
|
|
$20.2 million 4.28% Note, due June 6, 2023
|
|
18,117
|
|
|
18,222
|
|
|
$14.0 million 4.34% Note, due September 11, 2024
|
|
13,171
|
|
|
13,236
|
|
|
$14.3 million 4.34% Note, due September 11, 2024
|
|
13,953
|
|
|
14,014
|
|
|
$15.1 million 4.99% Note, due January 6, 2024
|
|
14,100
|
|
|
14,165
|
|
|
$2.6 million 5.46% Note, due October 1, 2023
|
|
2,326
|
|
|
2,339
|
|
|
$50.0 million, 5.09% Note, due March 22, 2029
|
|
50,000
|
|
|
50,000
|
|
|
$50.0 million, 5.17% Note, due March 22, 2029
|
|
50,000
|
|
|
50,000
|
|
|
$1.7 million 3.25% Note, due December 28, 2021
|
|
1,386
|
|
|
—
|
|
|
Floating rate notes
|
|
|
|
|
|
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023
|
|
119,500
|
|
|
119,500
|
|
|
Total notes payable principal
|
|
646,157
|
|
|
645,163
|
|
|
Less deferred financing costs, net of accumulated amortization
|
|
(927)
|
|
|
(978)
|
|
|
Total notes payable
|
|
$
|
645,230
|
|
|
$
|
644,185
|
|
(1) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 at 1.73%.
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of 2.24% for the duration of the term through January 31, 2024.
Scheduled maturities of our outstanding debt as of March 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Amount Due
|
|
2021 (remaining)
|
|
$
|
2,822
|
|
|
2022
|
|
101,684
|
|
|
2023
|
|
147,363
|
|
|
2024
|
|
228,574
|
|
|
2025
|
|
17,143
|
|
|
|
|
|
|
Thereafter
|
|
148,571
|
|
|
Total
|
|
$
|
646,157
|
|
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated the 2018 Facility (as defined below).
The 2019 Facility is comprised of the following three tranches:
•$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
•$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
•$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term Loan A, the “2019 Term Loans”).
Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of March 31, 2021, the interest rate on the 2019 Revolver was 1.76%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the 2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to such alternate interest rate. LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. On March 20, 2020, as a precautionary measure to preserve our financial flexibility in response to potential credit risks posed by the COVID-19 pandemic, the Company drew down approximately $30 million under the 2019 Revolver, which we subsequently paid down in the fourth quarter of 2020. As of March 31, 2021, subject to any potential future paydowns or increases in the borrowing base, we have $15.9 million remaining availability under the 2019 Revolver. As of March 31, 2021, $384.5 million was drawn on the 2019 Facility. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions,
debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, customary representations and warranties and affirmative and negative covenants including, without limitation, information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019 Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status.
On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement (the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively, the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50 million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.
The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings (as defined therein).
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are substantially similar to those contained in the Operating Partnership’s existing credit facility.
Net proceeds from the Private Placement will be used to refinance existing indebtedness. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
As of March 31, 2021, our $160.3 million in secured debt was collateralized by seven properties with a carrying value of $249.9 million. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of March 31, 2021, we were in compliance with all loan covenants.
Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding debt.
Capital Expenditures
We continually evaluate our properties’ performance and value. In light of the COVID-19 pandemic, we are continuing to monitor and, if necessary, reduce our capital expenditures to maintain financial flexibility. We may determine it is in our shareholders’ best interest to invest capital in properties that we believe have potential for increasing value. We also may have unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to continue investing in similar properties outside of the markets on which we focus in cities with exceptional demographics to diversify market risk, and we may incur significant capital expenditures or make improvements in connection with any properties we may acquire.
Distributions
U.S. federal income tax law generally requires that a REIT distribute annually to its shareholders at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates on any taxable income that it does not distribute. We currently, and intend to continue to, accrue distributions quarterly and make distributions in three monthly installments following the end of each quarter. For a discussion of our cash flow as compared to dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
The timing and frequency of our distributions are authorized and declared by our board of trustees in exercise of its business judgment based upon a number of factors, including:
•our funds from operations;
• our debt service requirements;
• our capital expenditure requirements for our properties;
• our taxable income, combined with the annual distribution requirements necessary to maintain REIT qualification;
• requirements of Maryland law;
• our overall financial condition; and
• other factors deemed relevant by our board of trustees.
Any distributions we make will be at the discretion of our board of trustees and we cannot provide assurance that our distributions will be made or sustained in the future.
On February 10, 2021, the Company announced an increase to its quarterly distribution to $0.1075 per common share and OP unit, equal to a monthly distribution of $0.035833, beginning with the March 2021 distribution. The Board will regularly reassess the dividend level.
During the three months ended March 31, 2021, we paid distributions to our common shareholders and OP unit holders of $4.6 million, compared to $12.2 million in the three months ended March 31, 2020. Common shareholders and OP unit holders receive monthly distributions. Payments of distributions are declared quarterly and paid monthly. The following table summarizes the cash distributions paid or payable to holders of our common shares and noncontrolling OP units during each quarter of 2020 and the three months ended March 31, 2021 (in thousands, except per share data):
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Common Shares
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Noncontrolling OP Unit Holders
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Total
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Quarter Paid
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Distributions Per Common Share
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Amount Paid
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Distributions Per OP Unit
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Amount Paid
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Amount Paid
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2021
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First Quarter
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$
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0.1058
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$
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4,480
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$
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0.1058
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$
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82
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$
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4,562
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Total
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$
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0.1058
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$
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4,480
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$
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0.1058
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$
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82
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$
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4,562
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2020
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Fourth Quarter
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$
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0.1050
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$
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4,432
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$
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0.1050
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$
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81
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$
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4,513
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Third Quarter
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0.1050
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4,430
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0.1050
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|
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81
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|
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4,511
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Second Quarter
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0.1050
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4,413
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0.1050
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91
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4,504
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First Quarter
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0.2850
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11,928
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0.2850
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258
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12,186
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Total
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$
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0.6000
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$
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25,203
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$
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0.6000
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$
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511
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$
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25,714
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Taxes
We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 1999. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We believe that we are organized and operate in a manner to qualify and be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.
Environmental Matters
Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.
Off-Balance Sheet Arrangements
Guarantees. We may guarantee the debt of a real estate partnership primarily because it allows the real estate partnership to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the real estate partnership on its investment, and a higher return on our investment in the real estate partnership. We may receive a fee from the real estate partnership for providing the guarantee. Additionally, when we issue a guarantee, the terms of the real estate partnership’s partnership agreement typically provide that we may receive indemnification from the real estate partnership or have the ability to increase our ownership interest. See Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for information related to our guarantee of our real estate partnership’s debt.