Quarterly Report (10-q)

Date : 11/04/2019 @ 9:53PM
Source : Edgar (US Regulatory)
Stock : Whitestone REIT (WSR)
Quote : 13.75  0.06 (0.44%) @ 12:59AM
After Hours
Last Trade
Last $ 13.75 ◊ 0.00 (0.00%)

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-34855
WHITESTONE REIT
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
76-0594970
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

2600 South Gessner, Suite 500
Houston, Texas
 
77063
(Address of Principal Executive Offices)
 
(Zip Code)

(713) 827-9595
(Registrant’s Telephone Number, Including Area Code)
 
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per share
WSR
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ýYes     ¨No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ýYes    ¨No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨                                                                                      Accelerated filer ý
Non-accelerated filer ¨                            Smaller reporting company ¨

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes   ý No

As of November 1, 2019, there were 40,633,725 common shares of beneficial interest, $0.001 par value per share, outstanding.







PART I - FINANCIAL INFORMATION

Item 1.
 
 
1
 
 
 
1
 
 
 
3
 
 
 
6
 
 
 
7
 
 
 
9
Item 2.
 
 
35
Item 3.
 
 
60
Item 4.
 
 
60

PART II - OTHER INFORMATION

Item 1.
 
 
62
Item 1A.
 
 
62
Item 2.
 
 
62
Item 3.
 
 
63
Item 4.
 
 
63
Item 5.
 
 
63
Item 6.
 
 
64
 
 
 
65
 
 
 
66




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 
 
September 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
ASSETS
Real estate assets, at cost
 
 
 
 
Property
 
$
1,062,283

 
$
1,052,238

Accumulated depreciation
 
(131,508
)
 
(113,300
)
Total real estate assets
 
930,775

 
938,938

Investment in real estate partnership
 
26,423

 
26,236

Cash and cash equivalents
 
5,539

 
13,658

Restricted cash
 
106

 
128

Escrows and acquisition deposits
 
8,163

 
8,211

Accrued rents and accounts receivable, net of allowance for doubtful accounts
 
22,232

 
21,642

Receivable due from related party
 
379

 
394

Financed receivable due from related party
 
5,661

 
5,661

Unamortized lease commissions, legal fees and loan costs
 
9,011

 
6,698

Prepaid expenses and other assets(1)
 
3,471

 
7,306

Total assets
 
$
1,011,760

 
$
1,028,872

 
 
 
 
 
LIABILITIES AND EQUITY
Liabilities:
 
 
 
 
Notes payable
 
$
621,737

 
$
618,205

Accounts payable and accrued expenses(2)
 
38,933

 
33,729

Payable due to related party
 
73

 
58

Tenants' security deposits
 
6,440

 
6,130

Dividends and distributions payable
 
11,820

 
11,600

Total liabilities
 
679,003

 
669,722

Commitments and contingencies:
 

 

Equity:
 
 
 
 
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2019 and December 31, 2018
 

 

Common shares, $0.001 par value per share; 400,000,000 shares authorized; 40,517,569 and 39,778,029 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
 
40

 
39

Additional paid-in capital
 
540,116

 
527,662

Accumulated deficit
 
(207,824
)
 
(181,361
)
Accumulated other comprehensive gain (loss)
 
(7,356
)
 
4,116

Total Whitestone REIT shareholders' equity
 
324,976

 
350,456

Noncontrolling interest in subsidiary
 
7,781

 
8,694

Total equity
 
332,757

 
359,150

Total liabilities and equity
 
$
1,011,760

 
$
1,028,872


See accompanying notes to Consolidated Financial Statements.

1


Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)


 
 
September 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
(1) Operating lease right of use assets (net) (related to adoption of Topic 842)
 
$
697

 
N/A

(2) Operating lease liabilities (related to adoption of Topic 842)
 
$
701

 
N/A



See accompanying notes to Consolidated Financial Statements.



2


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)

 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
 
Rental(1)
 
$
29,368

 
$
30,085

 
$
87,527

 
$
88,211

Management, transaction, and other fees
 
511

 
619

 
1,624

 
1,751

Total revenues
 
29,879

 
30,704


89,151

 
89,962

 
 
 
 
 
 
 
 
 
Property expenses
 
 
 
 
 
 
 
 
Depreciation and amortization
 
6,789

 
6,477

 
19,865

 
19,044

Operating and maintenance
 
5,118

 
5,452

 
14,760

 
15,325

Real estate taxes
 
4,410

 
4,379

 
12,474

 
12,260

General and administrative(2)
 
5,597

 
4,982

 
16,514

 
17,987

Total operating expenses
 
21,914

 
21,290

 
63,613

 
64,616

 
 
 
 
 
 
 
 
 
Other expenses (income)
 
 
 
 
 
 
 
 
Interest expense
 
6,679

 
6,419

 
19,738

 
18,705

Gain on sale of properties
 
(37
)
 
(4,380
)
 
(37
)
 
(4,629
)
Loss on sale or disposal of assets
 
37

 
3

 
152

 
256

Interest, dividend and other investment income
 
(141
)
 
(251
)
 
(550
)
 
(792
)
Total other expense
 
6,538

 
1,791

 
19,303

 
13,540

 
 
 
 
 
 
 
 
 
Income before equity investments in real estate partnerships and income tax
 
1,427

 
7,623

 
6,235

 
11,806

 
 
 
 
 
 
 
 
 
Equity in earnings of real estate partnership
 
524

 
502

 
1,480

 
1,762

Provision for income tax
 
(102
)
 
(92
)
 
(324
)
 
(261
)
Income from continuing operations
 
1,849

 
8,033

 
7,391

 
13,307

 
 
 
 
 
 
 
 
 
Gain on sale of property from discontinued operations
 

 

 
701

 

Income from discontinued operations
 

 

 
701

 

 
 
 
 
 
 
 
 
 
Net income
 
1,849

 
8,033

 
8,092

 
13,307

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
42

 
198

 
184

 
342

 
 
 
 
 
 
 
 
 
Net income attributable to Whitestone REIT
 
$
1,807

 
$
7,835

 
$
7,908

 
$
12,965







See accompanying notes to Consolidated Financial Statements.

3


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Basic Earnings Per Share:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
0.20

 
$
0.18

 
$
0.33

Income from discontinued operations attributable to Whitestone REIT
 
0.00

 
0.00

 
0.02

 
0.00

Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
0.20

 
$
0.20

 
$
0.33

Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
0.19

 
$
0.17

 
$
0.31

Income from discontinued operations attributable to Whitestone REIT
 
0.00

 
0.00

 
0.02

 
0.00

Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
0.19

 
$
0.19

 
$
0.31

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
40,187

 
39,327

 
39,942

 
39,200

Diluted
 
41,446

 
40,635

 
41,084

 
40,541

 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,849

 
$
8,033

 
$
8,092

 
$
13,307

 
 
 
 
 
 
 
 
 
Other comprehensive gain (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedging activities
 
(2,235
)
 
605

 
(11,740
)
 
4,163

Unrealized gain on available-for-sale marketable securities
 

 

 

 
18

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
(386
)
 
8,638

 
(3,648
)
 
17,488

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
42

 
198

 
184

 
342

Less: Comprehensive gain (loss) attributable to noncontrolling interests
 
(51
)
 
15

 
(266
)
 
107

 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Whitestone REIT
 
$
(377
)
 
$
8,425

 
$
(3,566
)
 
$
17,039





See accompanying notes to Consolidated Financial Statements.

4


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
    (1) Rental
 
 
 
 
 
 
 
 
Rental revenues
 
$
21,623

 
$
21,964

 
$
64,752

 
$
65,018

Recoveries
 
8,240

 
8,121

 
23,701

 
23,193

Bad debt
 
(495
)
 
N/A

 
(926
)
 
N/A

Total rental
 
$
29,368

 
$
30,085

 
$
87,527

 
$
88,211


(2) Bad debt included in general and administrative expenses prior to adoption of Topic 842
 
N/A
 
$
308

 
N/A
 
$
970




See accompanying notes to Consolidated Financial Statements.





5


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, 2018
 
39,778

 
$
39

 
$
527,662

 
$
(181,361
)
 
$
4,116

 
$
350,456

 
929

 
$
8,694

 
$
359,150

Exchange of noncontrolling interest OP units for common shares
 
1

 

 
5

 

 

 
5

 
(1
)
 
(5
)
 

Stock issuance costs
 

 

 
(6
)
 

 

 
(6
)
 

 

 
(6
)
Issuance of shares under dividend reinvestment plan
 
3

 

 
34

 

 

 
34

 

 

 
34

Repurchase of common shares (1)
 
(64
)
 

 
(762
)
 

 

 
(762
)
 

 

 
(762
)
Share-based compensation
 
111

 
1

 
1,882

 

 

 
1,883

 

 

 
1,883

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,351
)
 

 
(11,351
)
 

 
(264
)
 
(11,615
)
Unrealized loss on change in value of cash flow hedge
 

 

 

 

 
(3,390
)
 
(3,390
)
 

 
(80
)
 
(3,470
)
Net income
 

 

 

 
2,774

 

 
2,774

 

 
65

 
2,839

Balance, March 31, 2019
 
39,829

 
$
40

 
$
528,815

 
$
(189,938
)
 
$
726

 
$
339,643

 
928

 
$
8,410

 
$
348,053

Exchange of noncontrolling interest OP units for common shares
 

 

 
5

 

 

 
5

 

 
(5
)
 

Issuance of common shares under ATM program, net of costs
 
305

 

 
3,716

 

 

 
3,716

 

 

 
3,716

Stock issuance costs
 

 

 
1

 

 

 
1

 

 

 
1

Issuance of shares under dividend reinvestment plan
 
2

 

 
35

 

 

 
35

 

 

 
35

Repurchase of common shares (1)
 

 

 
(14
)
 

 

 
(14
)
 

 

 
(14
)
Share-based compensation
 

 

 
1,025

 

 

 
1,025

 

 

 
1,025

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,445
)
 

 
(11,445
)
 

 
(265
)
 
(11,710
)
Unrealized loss on change in value of cash flow hedge
 

 

 

 

 
(5,898
)
 
(5,898
)
 

 
(137
)
 
(6,035
)
Net income
 

 

 

 
3,327

 

 
3,327

 

 
77

 
3,404

Balance, June 30, 2019
 
40,136

 
$
40

 
$
533,583

 
$
(198,056
)
 
$
(5,172
)
 
$
330,395

 
928

 
$
8,080

 
$
338,475

Exchange of noncontrolling interest OP units for common shares
 
3

 

 
27

 

 

 
27

 
(3
)
 
(27
)
 

Issuance of common shares under ATM program, net of costs
 
374

 

 
4,830

 

 

 
4,830

 

 

 
4,830

Issuance of shares under dividend reinvestment plan
 
3

 

 
35

 

 

 
35

 

 

 
35

Share-based compensation
 
1

 

 
1,641

 

 

 
1,641

 

 

 
1,641

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,575
)
 

 
(11,575
)
 

 
(263
)
 
(11,838
)
Unrealized loss on change in value of cash flow hedge
 

 

 

 

 
(2,184
)
 
(2,184
)
 

 
(51
)
 
(2,235
)
Net income
 

 

 

 
1,807

 

 
1,807

 

 
42

 
1,849

Balance, September 30, 2019
 
40,517

 
$
40

 
$
540,116

 
$
(207,824
)
 
$
(7,356
)
 
$
324,976

 
925

 
$
7,781

 
$
332,757






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
 
Equity
 
Units
 
Dollars
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
39,222

 
$
38

 
$
521,314

 
$
(176,684
)
 
$
2,936

 
$
347,604

 
1,084

 
$
10,800

 
$
358,404

Impact of change in accounting principal:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASU 2014-09(2)
 

 

 

 
19,119

 

 
19,119

 

 

 
19,119

Balance January 1, 2018
 
39,222

 
38

 
521,314

 
(157,565
)
 
2,936

 
366,723

 
1,084

 
10,800

 
377,523

Exchange of noncontrolling interest OP units for common shares
 
1

 

 
4

 

 

 
4

 
(1
)
 
(4
)
 

Issuance of shares under dividend reinvestment plan
 
2

 

 
33

 

 

 
33

 

 

 
33

Repurchase of common shares (1)
 
(45
)
 

 
(466
)
 

 

 
(466
)
 

 

 
(466
)
Share-based compensation
 

 

 
1,845

 

 

 
1,845

 

 

 
1,845

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,197
)
 

 
(11,197
)
 

 
(309
)
 
(11,506
)
Unrealized gain on change in value of cash flow hedge
 

 

 

 

 
2,574

 
2,574

 

 
71

 
2,645

Unrealized gain on change in fair value of available-for-sale marketable securities
 

 

 

 

 
18

 
18

 

 

 
18

Net income
 

 

 

 
3,181

 

 
3,181

 

 
88

 
3,269

Balance, March 31, 2018
 
39,180

 
$
38

 
$
522,730

 
$
(165,581
)
 
$
5,528

 
$
362,715

 
1,083

 
$
10,646

 
$
373,361

Exchange of noncontrolling interest OP units for common shares
 
74

 

 
748

 

 

 
748

 
(74
)
 
(748
)
 

Issuance of shares under dividend reinvestment plan
 
4

 

 
33

 

 

 
33

 

 

 
33

Exchange offer costs
 

 

 
(128
)
 

 

 
(128
)
 

 

 
(128
)
Repurchase of common shares (1)
 
(47
)
 

 
(593
)
 

 

 
(593
)
 

 

 
(593
)
Share-based compensation
 
533

 

 
1,401

 

 

 
1,401

 

 

 
1,401

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,378
)
 

 
(11,378
)
 

 
(287
)
 
(11,665
)
Unrealized gain on change in value of cash flow hedge
 

 

 

 

 
890

 
890

 

 
23

 
913

Unrealized gain on change in fair value of available-for-sale marketable securities
 

 

 

 

 

 

 

 

 

Reallocation of ownership between parent and subsidiary
 

 

 

 

 
12

 
12

 

 
(12
)
 

Net income
 

 

 

 
1,954

 

 
1,954

 

 
51

 
2,005

Balance, June 30, 2018
 
39,744

 
$
38

 
$
524,191

 
$
(175,005
)
 
$
6,430

 
$
355,654

 
1,009

 
$
9,673

 
$
365,327

Exchange of noncontrolling interest OP units for common shares
 
80

 

 
793

 

 

 
793

 
(80
)
 
(793
)
 

Issuance of shares under dividend reinvestment plan
 
2

 

 
35

 

 

 
35

 

 

 
35

Exchange offer costs
 

 

 

 
(5
)
 

 
(5
)
 

 
5

 

Repurchase of common shares (1)
 
(47
)
 

 
(640
)
 

 

 
(640
)
 

 

 
(640
)
Share-based compensation
 
(7
)
 

 
1,401

 

 

 
1,401

 

 

 
1,401

Distributions - $0.285 per common share / OP unit
 

 

 

 
(11,318
)
 

 
(11,318
)
 

 
(265
)
 
(11,583
)
Unrealized gain on change in value of cash flow hedge
 

 

 

 

 
592

 
592

 

 
13

 
605

Unrealized gain on change in fair value of available-for-sale marketable securities
 

 

 

 

 

 

 

 

 

Reallocation of ownership between parent and subsidiary
 

 

 

 

 
12

 
12

 

 
(12
)
 

Net income
 

 

 

 
7,835

 

 
7,835

 

 
198

 
8,033

Balance, September 30, 2018
 
39,772

 
$
38

 
$
525,780

 
$
(178,493
)
 
$
7,034

 
$
354,359

 
929

 
$
8,819

 
$
363,178


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands)


(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.

(2) 
Represents the impact of change in accounting principal for our modified retrospective adoption of ASU 2014-09.


See accompanying notes to Consolidated Financial Statements.


6


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income from continuing operations
 
$
7,391

 
$
13,307

Net income from discontinued operations
 
701

 

Net income
 
8,092

 
13,307

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
19,865

 
19,044

Amortization of deferred loan costs
 
814

 
902

Loss on sale of marketable securities
 

 
20

Loss (gain) on sale or disposal of assets and properties
 
115

 
(4,373
)
Bad debt
 
926

 
970

Share-based compensation
 
4,548

 
4,894

Equity in earnings of real estate partnership
 
(1,480
)
 
(1,762
)
Changes in operating assets and liabilities:
 
 
 
 
Escrows and acquisition deposits
 
48

 
214

Accrued rents and accounts receivable
 
(1,762
)
 
(1,724
)
Receivable due from related party
 
15

 
696

Distributions from real estate partnership
 
1,005

 
505

Unamortized lease commissions, legal fees and loan costs
 
(202
)
 
(1,396
)
Prepaid expenses and other assets
 
(6,838
)
 
619

Accounts payable and accrued expenses
 
5,206

 
(2,979
)
Payable due to related party
 
15

 
(403
)
Tenants' security deposits
 
310

 
226

Net cash provided by operating activities
 
29,976

 
28,760

Cash flows from investing activities:
 
 
 
 
Additions to real estate
 
(9,953
)
 
(8,733
)
Proceeds from sales of properties
 

 
12,574

Proceeds from financed receivable due from related party
 

 
1,000

Proceeds from sales of marketable securities
 

 
30

Net cash provided by (used in) investing activities
 
(9,953
)
 
4,871

Net cash provided by investing activities of discontinued operations
 
701

 

Cash flows from financing activities:
 
 
 
 
Distributions paid to common shareholders
 
(34,047
)
 
(33,642
)
Distributions paid to OP unit holders
 
(793
)
 
(890
)
Proceeds from issuance of common shares, net of offering costs
 
8,546

 

Payments of exchange offer costs
 
(5
)
 
(128
)
Proceeds from bonds payable
 
100,000

 

Net proceeds from (payments to) credit facility
 
(90,200
)
 
9,000

Repayments of notes payable
 
(7,502
)
 
(1,972
)
Payments of loan origination costs
 
(4,088
)
 
(30
)
Repurchase of common shares
 
(776
)
 
(1,699
)
Net cash used in financing activities
 
(28,865
)
 
(29,361
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(8,141
)
 
4,270

Cash, cash equivalents and restricted cash at beginning of period
 
13,786

 
5,210

Cash, cash equivalents and restricted cash at end of period
 
$
5,645

 
$
9,480

See accompanying notes to Consolidated Financial Statements.

7


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
19,176

 
$
18,181

Cash paid for taxes
 
$
396

 
$
304

Non cash investing and financing activities:
 
 
 
 
Disposal of fully depreciated real estate
 
$
203

 
$
904

Financed insurance premiums
 
$
1,238

 
$
1,273

Value of shares issued under dividend reinvestment plan
 
$
104

 
$
101

Value of common shares exchanged for OP units
 
$
37

 
$
1,545

Change in fair value of available-for-sale securities
 
$

 
$
18

Change in fair value of cash flow hedge
 
$
(11,740
)
 
$
4,163

Reallocation of ownership percentage between parent and subsidiary
 
$

 
$
24



See accompanying notes to Consolidated Financial Statements.


8

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(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, 2018 are derived from our audited consolidated financial statements as of that date.  The unaudited consolidated financial statements as of and for the period ended September 30, 2019 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 September 30, 2019 and December 31, 2018, and the results of operations for the three and nine month periods ended September 30, 2019 and 2018, the consolidated statements of changes in equity for the three months periods ended March 31, June 30, and September 30, 2019 and 2018 and cash flows for the nine month periods ended September 30, 2019 and 2018.  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, 2018.
 
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 September 30, 2019 and December 31, 2018, Whitestone wholly-owned 57 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.

These properties consist of:

Consolidated Operating Portfolio

52 wholly-owned properties that meet our Community Centered Properties® strategy; and

Redevelopment, New Acquisitions Portfolio

five parcels of land held for future development that meet our Community Centered Properties® strategy.

As of September 30, 2019, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in 11 properties that do not meet our Community Centered Property® strategy containing approximately 1.3 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.


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 September 30, 2019 and December 31, 2018, 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.


9

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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 7 (Investment in Real Estate Partnership) for additional disclosure on Pillarstone OP.
  
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 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.
 
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 8 (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 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. 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 September 30, 2019, we consider our cash flow hedges to be highly effective.
        

10

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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 September 30, 2019, approximately $127,000 and $77,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2019, approximately $365,000 and $251,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended September 30, 2018, approximately $149,000 and $145,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2018, approximately $440,000 and $274,000 in interest expense and real estate taxes, respectively, were capitalized.

Real Estate Held for Sale and Discontinued Operations. We consider a commercial property to be held for sale when it meets all of the criteria established under ASC 205, “Presentation of Financial Statements.” For commercial properties classified as held for sale, assets and liabilities are presented separately for all periods presented.

In accordance with ASC 205, a discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of components of an entity is reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component of an entity or group of components of an entity is classified as held for sale, disposed of by sale or disposed of other than by sale. In addition, ASC 205 requires us to provide additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not meet the criteria for a discontinued operation.

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”).  The vast majority of the granted 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 $1,719,000 and $1,497,000 in share-based compensation for the three months ended September 30, 2019 and 2018, respectively, and we recognized $4,770,000 and $4,894,000 in share-based compensation for the nine months ended September 30, 2019 and 2018, 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. With the adoption of ASC No. 842, Leases (“Topic 842”), as of January 1, 2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. 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 September 30, 2019 and December 31, 2018, we had an allowance for uncollectible accounts of $10.7 million and $9.7 million, respectively. During the three and nine months ending September 30, 2019, we recorded an adjustment to rental revenue in the amount of $0.5 million and $0.9 million, respectively. During the three and nine months ending September 30, 2018, we recorded bad debt expense in the amount of $0.3 million and $1.0 million, 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.

11

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

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 7 (Investment in Real Estate Partnership)). Refer to Note 7 (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, 2018 for further discussion on significant accounting policies.
 
Recent Accounting Pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates, establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance. The standard also required an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also required certain additional disclosures. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million.

In February 2016, FASB issued ASU No. 2016-2 which provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance and targeted improvements to Topic 842 were made through the issuance of supplementary ASUs in July 2018, December 2018 and March 2019.

Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $1.1 million, which represents the present value of the remaining lease payments of approximately $1.2 million discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately $1.1 million. The adoption of Topic 842 did not have a material impact to our net income and related per share amounts.

Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:

Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements as well as leases that commenced after that date. Under this method, prior comparative periods presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented, a cumulative-effect adjustment is recognized at that date.


12

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would not be adjusted under this method.

We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles.

Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards.

We elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). For the three months ended September 30, 2019, we had rent revenues of $21.6 million and rental recoveries of $8.2 million compared to $22.0 million and $8.1 million for the three months ended September 30, 2018, respectively. For the nine months ended September 30, 2019, we had rent revenues of $64.8 million and rental recoveries of $23.7 million compared to $65.0 million and $23.2 million for the nine months ended September 30, 2018, respectively.

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. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.

In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance effective January 1, 2018, and we have reconciled cash and cash equivalents and restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported restricted cash and restricted cash equivalents under cash flows from financing activities.

In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on a prospective basis beginning January 1, 2018 and believe the majority of our future acquisitions will qualify as asset acquisitions and the associated transaction costs will be capitalized as opposed to expensed under previous guidance.


13

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adding guidance for partial sales of nonfinancial assets and clarifying recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million.

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 September 30, 2019 is as follows (in thousands)):

Years Ended December 31,
 
Minimum Future Rents(1)
2019
 
$
20,984

2020
 
78,204

2021
 
66,964

2022
 
55,423

2023
 
43,924

Thereafter
 
135,616

Total
 
$
401,115


(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 four years.

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,
 
September 30, 2019
2019
 
$
122

2020
 
362

2021
 
243

2022
 
6

Total undiscounted rental payments
 
733

Less imputed interest
 
32

Total lease liabilities
 
$
701


14

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)


For the three months ended September 30, 2019, the total lease costs were $245,000, and for the nine months ended September 30, 2019, the total lease costs were $740,000. The weighted average remaining lease term for our operating leases was 1.9 years at September 30, 2019. 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 September 30, 2019