Good morning, and thank you for joining Whitestone REIT First Quarter 2020 Earnings Conference Call. Joining me on today's call are Jim Mastandrea, our Chairman and Executive Officer; and Dave Holeman, our Chief Financial Officer.

I will now hand over the call to Kevin Reed. Please go ahead.

Kevin Reed - Investor Relations

Thank you, Eduardo. Good morning, and thank you for joining Whitestone REIT's First Quarter 2020 Earnings Conference Call. Joining me on today's call are Jim Mastandrea, our Chairman and Chief Executive Officer; and Dave Holeman, our Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors.

Please refer to the company's earnings press release and filings with the SEC, including Whitestone's most recent Form 10-Q and Form 10-K for a detailed discussion of these factors. Acknowledging the fact that this call may be webcast for a period of time, it is also important to note that this call includes time-sensitive information that may be accurate only as of today's date, May 8, 2020. The company undertakes no obligation to update any information.

Whitestone's first quarter earnings press release and supplemental operating and financial data package have been filed with the SEC and are available on our website, www.whitestonereit.com, in the Investor Relations section. During this presentation, we may reference certain non-GAAP financial measures, which we believe allow investors to better understand the financial position and performance of the company. Included in the earnings press release and supplemental data package are the reconciliations of non-GAAP measures to GAAP financial measures.

With that, let me pass the call to Jim Mastandrea.

James C. Mastandrea - Chairman and Chief Executive Officer

Kevin, thank you. Thank you all for joining us on our first quarter 2020 investor call. I will provide an overview on Whitestone, on our business as it relates to COVID-19 in the first quarter. Dave Holeman will provide a detailed financial update on how we did during the first quarter 2020, the month of April and a preliminary look at May 2020, and then we will open it for questions. No one could have predicted the illness created by the coronavirus pandemic or the health concerns that have impacted so many nor could anyone have predicted the economic [slumping] that stretched across the United States impacting the fiber of our business [involving] U.S. e-commerce.

Well, Whitestone was built during the recession in 2008 to 2010, and many of the lessons we learned during that time, we were able to incorporate into the fiber of the company. While these are extraordinary times that continue to evolve, our focus has been primarily on the health and the wellness of our employees, our tenants and communities. Our employee base is safe and focused and our tenants are anxious to get back to operating their businesses full time. Our portfolio by design has well-located community centers in Texas and Arizona. These centers comprise quality real estate adjacent to high-income communities with tenants that provide necessities and essentials.

Since March, all of our centers have remained open. To date, many tenants, to a limited degree, have remained active during this pandemic. Our community centers are yet to be operating at normal capacity. Our executive team and employees have continued to work at full strength. Recently, both Texas and Arizona have begun a phased opening for business. Dave will provide more color on these openings. Through May 5, we collected approximately 64% of our rents for the month of April, and 40% for May thus far.

All of our centers are anchored by neighborhoods of high-quality incomes, and many of our centers have grocery stores and pharmacies that continue to stimulate traffic. Most of our centers have restaurants, and some have provided takeout and curbside service during the pandemic. During my career of over 40 years in the real estate industry, I have experienced multiple down cycles. And what I learned from the past, we had incorporated into Whitestone over the last 14 years as we have grown. We built a culture of policies and processes that enabled us to grow with safeguards to react quickly and decisively.

Within the structure of Whitestone, the policies and processes we created became a de facto firewall that would prove to be somewhat beneficial and resilient to our operations when we faced the pandemic. Whitestone was built by acquiring properties that were located in business-friendly states, fast-growing and heavily populated cities; by creating an Internet-resistant business model that focuses on services and needs of the consumer; by structuring leases with tenant, owner recourse and minimal cotenancy and tenant approval rights; by creating a diverse tenant and tenant mix; by providing annual rent increases of 2% to 3% while passing through triple nets and are making a commitment to train and develop our people.

In the first 2.5 months of 2020, Whitestone was off to a solid start, highlighted by an increase in ABR per leased square foot of 1.1% and continued strong with leasing spreads of 7.2% and 10.4% on new and renewal leases signed in 2020. However, in March, it became clear to us that our business is going to be disrupted. And on March 24, we announced an immediate plan to suspend all acquisitions, postpone all redevelopment and development projects, draw down $30 million under our revolving line of credit, reduce our dividend, freeze all current employee salaries and Board fee increases, reduce our overhead by 10% and minimize all unnecessary expenses and costs, including travel.

These swift actions strengthened our balance sheet, our liquidity and our financial flexibility. These are unpredictable times with regard to how long portions of the country will be closed off and/or business muted. Our concentration of high-quality properties in high-growth markets are showing strong signs of early recovery. However, what we don't know is how long the recovery will take. What we do know is that we are navigating an unfamiliar path towards recovery through uncertain times. We also know that we have a strong balance sheet and liquidity, and we are focused on revenue collections. We know our tenants. We know our markets. We know the consumer. We know our properties. We know our business model. And we know our people.

And with that, let me turn it over to Dave Holeman. Dave?

David K. Holeman - Chief Financial Officer

Thanks, Jim. Let me first speak to our current markets and operations, and then I will discuss our financial results and position. In our Texas markets, which make up about 60% of our revenue, the state has begun steps to open up the economy. Stay-at-home orders are no longer in place. Retailers and movie theaters are allowed to be open up to 25% of capacity so long as they follow social distancing guidelines. Restaurants can open dine-in service up to 25% of the listed occupancy of the restaurant. As early as May 18, we expect retail and restaurants to be allowed to expand their occupancy to 50%.

It is not clear when this capacity may exceed 50% capacity or when spacing requirements will be further eased. Hair salons, barber shops, nail salons are open on May eight with social distancing guidelines. Fitness centers, gyms can reopen on May 18, but customers will be required to wear gloves and maintain six feet of distance in the facility. Office buildings are open but must maintain social differences. In our Arizona markets, which make up about 40% of our revenue, the state has also begun steps to open up the economy. State-wide stay-at-home orders are in effect until May 15. However, some restrictions have been lifted.

On May 8, retail businesses may resume in-person operations as long as sanitation measures and safety guidelines are followed. Cosmetologists and barber shops can resume appointment-based services also. Starting May 11 in Arizona, restaurants and coffee shops can resume dine-in services with physical distancing measures. There is no time line yet in Arizona regarding gyms and movie theaters or when spacing requirements will be further eased for retail and the restaurants.

Today and throughout this crisis, all of our centers have remained open and operating, and we expect them to come to greater life in May. In each of our centers, we have implemented protective measures, which include enhanced cleaning procedures. Our grocery tenants are experiencing record sales volumes, and we are encouraged by the efforts of many of our restaurant tenants in providing needed food to the surrounding neighborhood through creative takeout and curbside solutions, which could become future additional revenue sources for them.

Our monthly operating expenses, including property operating expenses, taxes, general and administrative expenses, debt service and CapEx run about 69% of our revenue. So our April shortfall of collections to operating expenses is about $800,000. I will touch further on our liquidity later in my remarks. Approximately 40% of our tenants have requested help, and we have been actively working to understand their individual financial and operating situations and assist them in accessing financial resources, including the governmental assistance programs that are available.

We believe that a large amount of our tenants have applied for these programs and will ultimately receive funds which will help them to pay salaries, rent and other obligations. We are working with those tenants who have requested help on a case-by-case basis. We expect that these discussions will lead to agreed upon payment deferral plans largely completed in the second quarter as we have a better understanding of the tenants' financial resources and the amount of financial aid they are receiving and their ability to get back up and running quickly. We expect that these payment deferral agreements will generally results in short-term payment plans for unpaid rent, not payment forgiveness.

While most of our tenants that have not paid us, have been significantly impacted by the COVID-19 crisis, we do have less impacted tenants with significant financial resources that we believe are acting in an opportunistic manner, and we intend to aggressively pursue the amounts due us under contractual agreements in these situations. Generally speaking, the process of working with tenants on rent deferrals is very fluid and difficult to fully predict at this point. We do not yet know what May and June could bring in terms of collected rents and associated additional rent deferrals.

Additionally, we do expect that some businesses will not reopen, and this could impact our near-term results and cash flows. As Jim said, we remain confident in our long-term prospects due to great properties, great markets and a strong team. Now let me turn to our operating results for the quarter. Our results for the quarter were largely in line with our expectations through mid-March prior to COVID-19. As a result of the COVID-19 impact on our tenant base, we stress test the collectibility of our impacted tenants.

As a result of this review, we have recorded a $900,000 credit loss and straight-line rent reserve, primarily associated with the COVID-19 pandemic. Collectibility will be a fluid process over the next several quarters and will be adjusted as facts and circumstances change. Our COVID-19 revenue reduction in the first quarter impacted net income, funds from operations and funds from operations core by approximately $0.02 per share and impacted our same-store net operating income growth by approximately 180 basis points.

A short summary of the key highlights for the quarter included occupancy of 89.3%, an increase in our annualized base rent per leased square foot of 1.1% from $19.58 to $19.77. Leasing volume of 56 renewals of 168,000 square feet with a total lease value of $15.9 million and 24 new leases of 53,000 square feet with a value of $6 million a total lease value of $6 million. Our leasing spreads for the trailing 12 months ended with Q1 2020 increased 7.2% for new tenants and 10.4% for renewal leases.

Our same-store net operating income decreased 0.9% for the first quarter, primarily as a result of the credit loss reserve of approximately 180 basis points associated with the COVID-19 pandemic. General and administrative expenses improved as a percentage of revenue to 15.6% in the first quarter, an improvement from 18.3% a year ago and an improvement from 15.9% in the fourth quarter of 2019. Now turning to liquidity. Over the past 60 days, since the pandemic hit, we have been carefully analyzing the company's potential liquidity needs in terms of this year as well as 2021, taking into account numerous factors, including debt maturities and potential revenues versus expenses.

In terms of debt maturities, we have one $9 million mortgage loan that matures in 2020 and no maturities in 2021. In terms of potential revenues versus expenses, we need to collect approximately 69% of our rents to cover our operating expenses, debt service, G&A and CapEx. In April, we have collected 64% so far. And in May, we have collected 40%, which is about the same amount we had collected in April at this point in time. So at this point, our May collections are running largely in line with the percentage we saw in April.

Taking all of these factors into consideration, we took the decisive steps that Jim discussed, including drawing $30 million on our credit facility and reducing our annual dividend by approximately $31 million. Lastly, in light of the current circumstances, we have withdrawn previously stated guidance for 2020. We hope to have greater clarity on the COVID-19 impact on a short-term and long-term basis as we move throughout the year.

With that, we will now take your questions.

Question & Answers

Operator

[Operator Instructions] We'll now take our first question from Craig Kucera at B. Riley FBR. Please go ahead.

Craig Kucera - B. Riley FBR - Analyst

Hey, good morning guys. Appreciate the color on how you're managing the cash rent collections, but I had a few follow-up questions. I guess, as you're working with tenants that are having challenges or at least have requested deferrals, are you asking for any better terms in the leases as you think about them, whether that's a longer-term or maybe increased escalators? Or just any color there would be helpful.

David K. Holeman - Chief Financial Officer

Sure. Thanks, Craig. Yes. These are all very fluid discussions. And one of the things we will look for is if there are lease terms that we feel like need to be improved, those will also be part of the discussions. As Jim mentioned, we really have very few cotenancy and restrictions in our leases. But if we do have some of those that we can improve, we would look to do this throughout the process. We intend to work with these tenants. Many of them have been significantly impacted. And so we're looking for a win-win for both the tenant and for Whitestone.

James C. Mastandrea - Chairman and Chief Executive Officer

Craig, we have a great tenant base. And we very specifically will go out. And as we buy a property, we look at the sociographics surrounding that property from three to five miles, so we understand how to slice and dice our tenants in terms of what the needs are. And so when we pick tenants, we also mix them very well into the centers. And as I said in my remarks, all of our leases have a 2% to 3% escalator in it on an annual basis, and that has been proven very sound for us.

The other thing we do is we ask for personal guarantees on every lease that we sign, i.e., either they sign the lease first and then we get a guarantee on it. And the reason for that is that we feel that if they don't believe in their business, we're not going to believe in their business. And so on the smaller tenants, which is probably we have over 1,000 at this time, I think they've been very good to work with.

Craig Kucera - B. Riley FBR - Analyst

Got it. And as you're going through this process, are you trying to structure things such that you get paid back the rent that's potentially deferred by year-end 2020? Or kind of are you extending in 2021? Or sort of how those discussions moving along?

David K. Holeman - Chief Financial Officer

Yes. Good question. As I said, it is a fluid process, Craig. And we're an important part of the process is truly understanding the tenants' position, their ability to get back and open and operate. We are generally looking at short-term payment deferral plans, but those will evolve as we have further discussions. But in general, we are looking at payment plans, repayment plans that are short-term in nature.

James C. Mastandrea - Chairman and Chief Executive Officer

Our tenants, Craig, are entrepreneurs. And their very nature is to get back to business and get their business going. And so that's really important to emphasize in our business model. When you have those kinds of tenants, they are working just as hard as we are to get them back in service. So there will be some that may not make it through the crisis. We estimate right now that's fewer than 10 that may not. And these are maybe a restaurant here, a restaurant there. But other than that, we think the tenant space look pretty sound.

Craig Kucera - B. Riley FBR - Analyst

Got it. So based on that comment, should I sort of assume that the credit loss and straight-line rent was probably more tied to restaurants? Or are there certain categories that, that was more focused on?

David K. Holeman - Chief Financial Officer

Sure. As I said, we did stress test the collectibility of our tenants given this impact, and we identified about 40 tenants that we took an additional credit loss reserve as well as wrote off to straight-line rent. The nature of those tenants was a large amount were restaurants, some were entertainment, but it was a group of roughly 40 tenants that will continue to change as we go through this. I think just to clarify one thing, Jim indicated that we had 10 tenants that we know of today that are probably not going to reopen. That number obviously may change as we go through the coming quarters.

But the additional reserve was taking through really taking a really hard look at all of our tenants, understanding what we know and then looking at the probability of them being able to meet their long-term lease obligation. And with that, we were we did reserve we did book about an additional $400,000 in bad debt reserve and about a $500,000 straight-line rent write-off. And many of those tenants may ultimately pay. We just at this point in time, we determined that the probability wasn't what it needed to be, but they will be obviously, as they pay, that will be recorded as revenue.

Operator

[Operator Instructions] There seems to be no further questions, I'll turn it back to the speakers for any additional or closing remarks.

James C. Mastandrea - Chairman and Chief Executive Officer

Okay. Well, thank you for joining us today. In closing, I'd just like to emphasize that we have a positive outlook on a long-term basis, and we're encouraged by what we're seeing in the short term. Although we're encouraged in a cautious manner. We do look at our cash position every day. We do have ongoing discussions with the tenants every day. And so we are working very closely with our operating side of the business. We're recognizing that these are extraordinary times and are just going to continue to evolve rapidly. But while in the near term future, it's really difficult to predict, but we do believe that it will come to pass and better times are ahead.

I've been through a number of these down cycles. The company was built during a down cycle, and it has the ability to withstand this. And I think that our quickly adjusting in March, I think, made that more evident to us at least. At Whitestone, during this time, we are really focused on the near term, and we know that this is going to carry us towards beating all of those long-term goals. Our platform is strong. Our business model is proven, and we remain resolute on our focus on capital preservation.

Our team is really passionate and committed. I work with them every day. And throughout this entire period, we've had at least a senior team in here every day to successfully navigate the crisis and being positioned to execute on future opportunities. That's what we're really looking for. We think we're positioned to really be one of the companies that can capture these future opportunities when this market starts [roping] some of these up.

We look forward to moving ahead, and we intend to stay true to our values and our character, our strategic plan and our work, and we do this with unwavering standards through this pandemic. And just as we close it, just like you all to know that God's hands is on our shoulders, that we are focused, and we remain on serving our shareholders and serving Him and meeting our long-term goals. Thank you all.

Operator

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Q1 2020

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