Creating Communities
in Our PropertiesTM
2009
ANNUAL REPORT
Creating Communities
in Our PropertiesTM
Visibly located properties whose tenants serve residents
and businesses within a five mile radius in established or
developing, culturally diverse neighborhoods.
Dear Fellow Shareholders:
The past two years have been extraordinarily challenging for Whitestone,
our tenants, the commercial real estate industry, and the global economy.
Against the backdrop of the collapse of the national housing and credit
markets, a sustained economic crisis, and record unemployment levels,
Whitestone’s management remained focused on executing the strategic
plan approved by its Board of Trustees in late 2006. Having done so,
this discipline has now positioned Whitestone to become a leading
Community Center Property REIT, capitalize on value-added acquisition
opportunities, access the public capital markets, and list our shares on a
national exchange.
During the past three years, our property revenues have increased by
15% and our property net operating income (NOI)(1) has increased by
16%. Our team has attracted new tenants, leased difficult space, and
improved our properties.
We made tough decisions that transformed, restructured and rebuilt the
Company to put us on the right track for financial soundness. In 2007,
the groundwork was laid to geographically diversify our platform outside
of Texas and focus on the growth markets that include Latino and Asian
neighborhoods. In 2008, we judiciously allocated our capital resources and
renegotiated our debt to lower our cost of borrowing while lengthening
our maturities. Throughout this defining period, we established a culture
of responsibility to think and act like an owner, develop and train our
associates, and support our tenants—who are important to our success.
Our mission is to be the
dominant REIT that acquires,
owns, leases and manages
Community Centered PropertiesTM.
Average Rent per Occupied
Square Foot
(rent rate)
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
2005
2006
2007
New Management Team
2008
2009*
W hitestone REIT will be a
leading, readily recognized Community Centered
PropertyTM REIT with $1 billion in assets, known for
creating shareholder value by Creating Communities
in our PropertiesTM.
In 2009, we developed our business model related
to Community Centered Properties. Our proactive
management and commitment to our Community
Centered Property strategy creates an environment of
mutual benefit. Providing excellent customer service to
our tenants assures their success, which is our success.
I am pleased with our 2009 results, which showed a continued
upward trend in our key financial performance metrics:
Our funds from operations (“FFO”)(1), a widely recognized
profitability measure for REIT’s, increased 103% to
$8.6 million, or $0.56 per diluted common share and
Operating Partnership (“OP”) unit for the year ended
December 31, 2009, up $4.4 million from $4.2 million,
or $0.28 per diluted common share and OP unit, for the
same period in 2008. This is the first increase in annual
FFO since 2004.
Property net operating income (“NOI”)(1) increased 8%
to $19.7 million in 2009, as compared to $18.4 million
for 2008.
Annualized rent per occupied square foot increased by
9% to $13.18 for the year ended December 31, 2009 as
compared to the same period in 2008. This increase is a
result of our business strategy, which focuses on smaller-
space tenants and produces a premium rental rate per
square foot.
2009 Highlights:
Our positive 2009 financial performance was a product of
our disciplined business management philosophy, focused
on specific strategic goals over a defined timeline.
Conserved cash and paid off all of our short term debt.
Realigned our corporate management, increasing our
efficiencies by reducing the number of our associates,
continuing the pay freeze implemented in March 2008,
and reducing salaries by up to 12.5%.
Geographically diversified and grew our portfolio by
acquiring a property in Illinois through the exchange of
OP units and cash.
Positioned Whitestone as a Community Centered
Property REIT, focused on tenants whose products and
services appeal to their local community—within five
miles of our properties, in culturally diverse markets.
Expanded Our Board of Trustees to include two
new members with extensive real estate and finance
experience, Dan DeVos and Daryl Carter, both of
whom are nationally recognized for their respective
accomplishments.
Restructured Debt
• Lowered cost
• Extended maturities
(millions)
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
(millions)
$70
$60
$50
$40
$30
$20
$10
$0
Debt Maturities
Before Refinancing
(December 2007)
2008
2010
2012
2014
Debt Maturities
After Refinancing
(September 2009)
2009 2010 2011 2012 2013 2014
T o place the interests
of our shareholders first.
T o make decisions &
behave in an honest, ethical,
moral and legal manner.
T o pursue excellence
in everything we do.
T o stretch beyond our
perceived abilities to
attain success.
Initiated our Public Offering (“IPO”) by filing our Form S-11 statement
with the Securities and Exchange Commission (“SEC”).
Received approval from NYSE AMEX to use the symbol, “WRS”, when
we list Whitestone’s shares.
Most importantly, we graduated our second class of Whitestone
associates from our Real Estate Executive Development Program
(REED), an extensive educational initiative which is a key building block
for our future of the Company.
A difficult economic climate made fiscal 2009 a challenging year for
Whitestone and our entire industry, and is likely to continue through
2010. Yet these challenges yield opportunities for companies with strong
roots. Whitestone is positioned to expand our portfolio and grow our
Company. We will continue to build unity and synergy between our
tenants, which is the glue that forms the Community atmosphere in
our properties. In doing so, we create value in our properties and, more
importantly for our shareholders.
Sincerely,
James C. Mastandrea
Chairman and Chief Executive Officer
(1) See our discussion of non-GAAP financial measures, which includes a
reconciliation to the most directly comparable financial measure or measures
calculated and presented in accordance with GAAP, at the end of the
Form 10-K on page R-1.
Financial Highlights
Operations (in thousands)
Revenues
Funds From Operations
Net Income (Loss)
Attributable to Whitestone REIT
Per Share and OP Unit
$
$
$
Diluted FFO Per Common Share and OP Unit(1) $
Dividends Paid Per Common Share and OP Unit $
$
Dividends Paid as % of FFO
$
Diluted Earnings Per Share
2007
29,374
6,001
(77)
0.38
0.60
158%
(0.01)
Financial Position (in thousands)
Shareholders’ Equity
Real Estate Assets, Gross
$
$
52,843
181,809
2008
31,201
4,236
1,134
0.28
0.57
204%
0.12
45,891
180,397
2009
32,685
8,618
1,342
0.56
0.44
79%
0.13
43,590
192,832
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Revenues
(in thousands)
Funds From Operations
(FFO)(1)
(in thousands)
Property NOI
(in thousands)
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$1.00
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009
Dividends Per Share
Diluted FFO Per Share(1)
$1.00
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009
Net Income (Loss)
(in thousands)
$20,000
$15,000
$10,000
$5,000
$0
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
($500)
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009
Corporate Information
BOARD OF TRUSTEES
James C. Mastandrea,
Chairman and CEO, Whitestone REIT; Chairman and
CEO, Paragon; Chairman, CEO and founder, MDC Realty
Corporation; former Chairman and CEO of First Union Real
Estate Investments, a NYSE listed REIT; Director, Cleveland
State University Foundation Board; Director, University
Circle Board; Director, Calvin Business Alliance Board.
Daryl J. Carter,
Founder, Chairman and CEO, Avanath Capital Partners;
former Executive Managing Director, Centerline Capital
Group; former President, American Mortgage Acceptance
Corporation; Co-founder, Capri Capital Finance.
Daniel G. DeVos,
Chairman and Chief Executive Officer, DP Fox Ventures;
Inc. (parent company of Amway
Director, Alticor,
Corporation); Amway Audit Committee member; former
Vice President, Pacific and Vice President of Corporate
Affairs, Amway Corporation.
Donald F. Keating,
Former Chief Financial Officer, Shell Mining Company.
Former board member of Billiton Metal Company, R&F
Coal Company and Marrowbone Coal Company.
Jack L. Mahaffey,
Former President and Chief Executive Officer, Shell
Mining Company. Former board member of the National
Coal Association and the National Coal Counsel.
Chris A. Minton,
Former Vice President, Lockheed Martin. Licensed
CPA (retired status) in the state of Texas. Awarded the
Gold Knight of Management award by the National
Management Association.
OFFICERS
James C. Mastandrea,
Chairman and Chief Executive Officer
John J. Dee,
Chief Operating Officer
David K. Holeman,
Chief Financial Officer
Daniel E. Nixon, Jr.,
Senior Vice President, Leasing and Redevelopment
Valarie L. King,
Senior Vice President, Property Management
Gregory J. Belsheim,
Vice President, Human Resources
Samuel Demissie,
Vice President, Acquisitions and Asset Management
Anne I. Gregory,
Vice President, Marketing and Investor Relations
Corporate Office:
Whitestone REIT
2600 South Gessner, Suite 500
Houston, TX 77063
Toll Free: (866) 789-7348 x3021
Direct: (713) 435.2213
E-Mail: IR@whitestonereit.com
Website: www.whitestonereit.com
Corporate Counsel:
Bass, Berry & Sims, PLC
100 Peabody Place, Suite 900
Memphis, TN 38103
(901) 543-5900
Independent Registered
Public Accounting Firm:
Pannell, Kerr & Forster of Texas, PC
Houston, TX 77057
(713)860-1400
Annual Meeting:
June 3, 2010 10:00 am
Houston Engineering and Scientific Society
Club, San Jacinto Room
5430 Westheimer Road, Houston, Texas 77056
Investor Relations:
Shareholders are encouraged to contact the
Company with questions or requests for
information. Copies of the Company’s Annual
Report on Form 10-K as filed with the Securities
and Exchange Commission are available upon
written request and are available online at the
SEC website: www.sec.gov.
Registrar & Transfer Agent:
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, New York 10038
Account maintenance inquires
should be directed to:
AST Shareholder Services Department
(800) 937-5449 or
(718) 921-8200
Table of Contents
Form 10-K, December 31, 2009
P A R T I
Item 1.
Business.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Risk Factors.
Unresolved Staff Comments
Properties.
Legal Proceedings.
Reserved.
P A R T I I
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Item 9A(T).
Controls and Procedures.
Item 9B.
Other Information.
P A R T I I I
Item 10.
Item 11.
Item 12.
Item 13.
Trust Managers, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters.
Certain Relationships and Related Transactions,
and Director Independence.
Item 14.
Principal Accountant Fees and Services.
P A R T I V
Item 15.
Exhibits and Financial Statement Schedules.
SIGNATURES.
Index to Consolidated Financial Statements
Regulation G Reconciliation of non-GAAP Financial Measures
2
4
4
8
22
22
26
26
27
27
28
30
46
46
46
46
47
48
48
48
48
48
48
49
49
50
F-1
R-1
Whitestone REIT 2009 Annual Report | 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 000-50256
Whitestone REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland
76-0594970
2600 South Gessner, Suite 500,
Houston, Texas
77063
(713) 827-9595
(State or Other Jurisdiction of Incorporation
or Organization)
(I.R.S. Employer Identification No.)
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code
Common Shares of Beneficial Interest,
par value $0.001 per share
None
Securities registered pursuant to section 12(g) of the Act
(Title of Class)
Securities registered pursuant to section 12(b) of the Act
Indicate by check mark if the Registrant is a well-
known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes No
Indicate by check mark if the Registrant is not required
to file reports pursuant to Section 13 or 15(d) of the
Act. Yes No
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. Yes No
Indicate by check mark whether the Registrant has
submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months
(or for such shorter period that the Registrant
was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best or Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K.
2 | Whitestone REIT 2009 Annual Report
Indicate by check mark whether the Registrant is a
large accelerated filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one)
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if smaller reporting company)
Indicate by check mark whether the Registrant is shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the voting stock held
by nonaffiliates of the Registrant as of June 30, 2009
(the last business day of the Registrant’s most recently
completed second fiscal quarter) was $53,237,131
assuming a market value of $5.15 per share.
As of March 11, 2010, the Registrant had 10,337,307
common shares of beneficial interest outstanding.
Documents Incorporated by reference: We incorporate
by reference in Part III of this Annual Report on Form
10-K portions of our definitive proxy statement
for our 2010 Annual Meeting of Shareholders to be
filed subsequently with the Securities and Exchange
Commission.
Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Whitestone REIT and its subsidiaries.
F O R W A R D - L O O K I N G S TAT E M E N T S
This Form 10-K contains forward-looking statements, including discussion and analysis of our financial
condition, 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. 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 to not place undue reliance on forward-looking statements, which reflect our
management’s view only as of the date of this Form 10-K. 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 Form 10-K include:
The imposition of federal taxes if we fail to qualify as a REIT in any taxable year or
forego an opportunity to ensure REIT status;
Uncertainties related to the national economy, the real estate industry in general and in our
specific markets;
Legislative or regulatory changes, including changes to laws governing REITs;
Adverse economic or real estate developments in Texas, Arizona or Illinois;
Increases in interest rates and operating costs;
Inability to obtain necessary outside financing;
Litigation risks;
Lease-up risks;
Inability to obtain new tenants upon the expiration of existing leases;
Inability to generate sufficient cash flows due to market conditions, competition,
uninsured losses, changes in tax or other applicable laws; and
The potential need to fund tenant improvements or other capital expenditures out of
operating cash flow.
The forward-looking statements should be read in light of these factors and the factors identified in the
“Risk Factors” sections of this Form 10-K.
Whitestone REIT 2009 Annual Report | 3
P A R T I
Item 1. Business.
General
We are a Maryland real estate investment trust (“REIT”) engaged in owning and operating commercial
properties in culturally diverse markets in major metropolitan areas. Founded in 1998, we changed our state
of organization from Texas to Maryland in December 2003. We have elected to be taxed as a REIT under
the Internal Revenue Code of 1986, as amended (the “Code”).
We are internally managed and own a real estate portfolio of 36 properties containing approximately 3.0
million square feet of leasable space, located in Texas, Arizona and Illinois. The portfolio has a gross book
value of approximately $193 million and book equity, including noncontrolling interests, of approximately
$67 million as of December 31, 2009.
Our common shares of beneficial interest are currently not traded on a stock exchange. Our offices are
located at 2600 South Gessner, Suite 500, Houston, Texas 77063. Our telephone number is (713) 827-9595
and we maintain an internet site at www.whitestonereit.com.
Our Strategy
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 business center or 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.
Our primary business objective is to increase shareholder value by acquiring, owning and operating
Community Centered Properties. The key elements of our strategy include:
Strategically Acquiring Properties.
Seeking High Growth Markets. We seek to strategically acquire commercial properties in high-
growth markets. Our acquisition targets are located in densely populated, culturally diverse
neighborhoods, primarily in and around Phoenix, Chicago, Dallas, San Antonio and Houston, five of
the top 15 markets in the United States in terms of population growth.
Diversifying Geographically. Our current portfolio is concentrated in Houston. We believe that continued
geographic diversification into markets where we have substantial knowledge and experience will
help offset the economic risk from a single market concentration. We intend to focus our expansion
efforts on the Phoenix, Chicago, Dallas and San Antonio markets. We believe our management
infrastructure and capacity can accommodate substantial growth in those markets.
Capitalizing on Availability of Distressed Assets. We believe that during the next several years there will be
excellent opportunities in our target markets to acquire quality properties at historically attractive
prices. We intend to acquire distressed assets directly from owners or financial institutions holding
foreclosed real estate and debt instruments that are either in default or on bank watch lists. Many
of these assets may benefit from our corporate strategy and our management team’s experience
in turning around distressed properties, portfolios and companies. We have extensive relationships
with community banks, attorneys, title companies, and others in the real estate industry with
whom we regularly work to identify properties for potential acquisition.
4 | Whitestone REIT 2009 Annual Report
Redeveloping and Re-tenanting Existing Properties.
We “turn around” properties and seek to add value through renovating and re-tenanting our
properties to create Whitestone-branded Community Centered Properties. We seek to accomplish
this by (1) stabilizing occupancy, with per property occupancy goals of 90% or higher; (2) adding
leasable square footage to existing structures; (3) developing and building on excess land; (4)
upgrading and renovating existing structures; and (5) investing significant effort in recruiting tenants
whose goods and services meet the needs of the surrounding neighborhood.
Recycling Capital for Greater Returns.
We seek to continually upgrade our portfolio by opportunistically selling properties that do not
have the potential to meet our Community Centered Property strategy and redeploying the sale
proceeds into properties that better fit our strategy. Some of our properties which were acquired
prior to the tenure of our current management team may not fit our Community Centered
Property strategy, and we may look for opportunities to dispose of these properties as we continue
to execute our strategy.
Prudent Management of Capital Structure.
We currently have 15 properties that are not mortgaged. We may seek to add mortgage
indebtedness to existing and newly acquired unencumbered properties to provide additional
capital for acquisitions. As a general policy, we intend to maintain a ratio of total indebtedness to
undepreciated book value of real estate assets that is less than 60%. As of December 31, 2009, our
ratio of total mortgage indebtedness to undepreciated book value of real estate assets was 53%.
Investing in People.
We believe that our people are the heart of our culture, philosophy and strategy. We continually
focus on developing associates who are self-disciplined and motivated and display at all times a
high degree of character and competence. We provide them with equity incentives to align their
interests with those of our shareholders.
Our Structure
Substantially all of our business is conducted through Whitestone REIT Operating Partnership, L.P., a Delaware
limited partnership organized in 1998 (the “Operating Partnership”). We are the sole general partner of the
Operating Partnership. As of December 31, 2009, we owned a 64.7% interest in the Operating Partnership.
As of December 31, 2009, we owned a real estate portfolio consisting of 36 properties located in three
states. As of December 31, 2009, the occupancy rate at our operating properties was 82% based on leasable
square footage compared to 84% as of December 31, 2008.
We take a very hands-on approach to ownership, and directly manage the operations and leasing of our
properties. Substantially all of our revenues consist of base rents received under long-term leases. For the
year ended December 31, 2009, our total revenues were approximately $32.7 million. Approximately 77%
of our existing leases contain “step up” rental clauses that provide for increases in the base rental payments.
As of December 31, 2009, 2008 and 2007, we had one property that accounted for more than 10% of
total gross revenue and real estate assets. Uptown Tower is an office building located in Dallas, Texas and
accounts for 11.9%, 12.8% and 12.0% of our total revenue during 2009, 2008 and 2007, respectively. Uptown
Tower also accounts for 10.9%, 11.5% and 10.8% of our real estate assets, net of accumulated depreciation,
for the years ended December 31, 2009, 2008 and 2007, respectively. Of our 36 properties, 31 are located
in the Houston, Texas metropolitan area.
Whitestone REIT 2009 Annual Report | 5
Economic Factors
The national economy has suffered a severe recession during the past two years. The credit crisis spread
to the commercial credit markets during 2008, negatively impacting the commercial real estate industry.
Obtaining financing for new projects and refinancing existing debt became increasingly difficult with the
tightening of credit.
These factors continue to negatively impact the volume of real estate transactions, occupancy levels, tenants’
ability to pay rent and cap rates, all of which could negatively impact the value of public real estate companies,
including ours. The vast majority of our retail properties are located in densely populated metropolitan
areas and are occupied by tenants which generally provide basic necessity-type items and tend to be less
affected by economic changes. Furthermore, our portfolio is primarily positioned in metropolitan areas in
Texas which have been impacted less by the economic slow down compared to other metropolitan areas.
Competition
All of our properties are located in areas that include competing properties. The amount of competition
in a particular area could impact our ability to acquire additional real estate, sell current real estate, lease
space and the amount of rent we are able to charge. We may be competing with owners, including but
not limited to, other REITs, insurance companies and pension funds, with access to greater resources than
those available to us.
Compliance with Governmental Regulations
Under various federal and state environmental laws and regulations, as an owner or operator of real estate,
we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing
materials, or petroleum product releases at our properties. We may also be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup costs incurred by those
parties in connection with the contamination. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate contaminations at any of our
properties may adversely affect our ability to sell or lease the properties or to borrow using the properties
as collateral. We could also be liable under common law to third parties for damages and injuries resulting
from environmental contamination coming from our properties.
We will not purchase any property unless we are generally satisfied with the environmental status of the
property. We may obtain a Phase I environmental site assessment, which includes a visual survey of the
building and the property in an attempt to identify areas of potential environmental concerns, visually
observing neighboring properties to assess surface conditions or activities that may have an adverse
environmental impact on the property, and contacting local governmental agency personnel and performing
a regulatory agency file search in an attempt to determine any known environmental concerns in the
immediate vicinity of the property. A Phase I environmental site assessment does not generally include any
sampling or testing of soil, groundwater or building materials from the property.
We believe that our properties are in compliance in all material respects with all federal, state and local
ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances.
During the re-financing of twenty-one of our properties in late 2008 and early 2009, Phase I environmental
site assessments were completed at those properties. These assessments revealed that five of the twenty-
one properties currently or previously had a dry cleaning facility as a tenant. Since release of chlorinated
solvents can occur as a result of dry cleaning operations, a Phase II subsurface investigation was conducted
at the five identified properties, and all such investigations revealed the presence of chlorinated solvents.
Based on the findings of the Phase II subsurface investigations, we promptly applied for entry into the
Texas Commission on Environmental Quality Dry Cleaner Remediation Program, or DCRP for four of
the identified properties and were accepted. Upon entry, and continued good standing with the DCRP, the
6 | Whitestone REIT 2009 Annual Report
DCRP administers the Dry Cleaning Remediation fund to assist with remediation of contamination caused
by dry cleaning solvents. The remaining identified property is still under investigation and upon conclusion
of the investigation, we intend to enter the property into the DCRP. The response actions associated with
the ongoing investigation and subsequent remediation, if necessary, have not been determined at this time.
However, we believe that the costs of such response actions will be immaterial and therefore no liability
has been recorded to our financial statements. We have not been notified by any governmental authority,
and are not otherwise aware, other than the five identified properties described above, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our
present or former properties. We have not recorded in our financial statements any material liability in
connection with environmental matters. Nevertheless, it is possible that the environmental assessments
conducted thus far and currently available to us do not reveal all potential environmental liabilities. It is also
possible that subsequent investigations will identify material contamination or other adverse conditions,
that adverse environmental conditions have arisen subsequent to the performance of the environmental
assessments, or that there are material environmental liabilities of which management is unaware.
Under the Americans with Disabilities Act, or ADA, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. Our properties must comply
with the ADA to the extent that they are considered “public accommodations” as defined by the ADA. The
ADA may require removal of structural barriers to access by persons with disabilities in public areas of
our properties where such removal is readily achievable. We believe that our properties are in substantial
compliance with the ADA and that we will not be required to make substantial capital expenditures to
address the requirements of the ADA. In addition, we will continue to assess our compliance with the ADA
and to make alterations to our properties as required.
Employees
As of December 31, 2009, we had 49 employees.
Materials Available on Our Website
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to those reports, as well as Reports on Forms 3, 4 and 5 regarding our officers,
trust managers or 10% beneficial owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of
the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our website
(www.whitestonereit.com) as soon as reasonably practicable after we electronically file the material with,
or furnish it to, the Securities and Exchange Commission (“SEC”). We have also made available on our
website copies of our Audit Committee Charter, Compensation Committee Charter, Nominating and
Governance Committee Charter, Insider Trading Compliance Policy, and Code of Business Conduct and
Ethics Policy. In the event of any changes to these charters or the code or guidelines, changed copies will
also be made available on our website. You may also read and copy any materials we file with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Materials on our website
are not part of our Annual Report on Form 10-K.
Financial Information
Additional financial information related to Whitestone REIT is included in Item 8 “Consolidated Financial
Statements and Supplementary Data.”
Whitestone REIT 2009 Annual Report | 7
Item 1A. Risk Factors.
In addition to the other information contained in this Form 10-K the following risk factors should be
considered carefully in evaluating our business. Our business, financial condition, or results of operations
could be materially adversely affected by any of these risks. Please note additional risks not presently known
to us or which we currently consider immaterial may also impair our business and operations.
Risks Associated with Real Estate
The recent market disruptions may significantly and adversely affect our financial condition and results
of operations.
The recent recession in the United States has resulted in increased unemployment, weakening of tenant
financial condition, large-scale business failures and tight credit markets. Our results of operations may be
sensitive to changes in overall economic conditions that impact tenant leasing practices. A continuation
of ongoing adverse economic conditions affecting tenant income, such as employment levels, business
conditions, interest rates, tax rates, fuel and energy costs and other matters, could reduce overall tenant
leasing or cause tenants to shift their leasing practices. In addition, periods of economic slowdown or
recession, rising interest rates or declining demand for real estate, or the public perception that any of
these events may occur, could result in a general decline in rents or an increased incidence of defaults
under existing leases. At this time, it is difficult to determine the breadth and duration of the economic
and financial market problems and the many ways in which they may affect our tenants and our business in
general. A general reduction in the level of tenant leasing could adversely affect our ability to maintain our
current tenants and gain new tenants, affecting our growth and profitability. Accordingly, continuation or
further worsening of these difficult financial and macroeconomic conditions could have a significant adverse
effect on our cash flows, profitability and results of operations.
Real estate property investments are illiquid, and therefore we may not be able to dispose of
properties when appropriate or on favorable terms.
Our strategy includes opportunistically selling properties that do not have the potential to meet our
Community Centered Property strategy. However, real estate property investments generally cannot be
disposed of quickly. In addition, the Code imposes restrictions on the ability of a REIT to dispose of properties
that are not applicable to other types of real estate companies. Therefore, we may not be able to vary our
portfolio in response to economic or other conditions promptly or on favorable terms, which could cause
us to incur extended losses, reduce our cash flows and adversely affect distributions to shareholders.
We cannot predict whether we will be able to sell any property for the price or on the terms set by us or
whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also
cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. To
the extent we are unable to sell any properties for our book value, we may be required to take a non-cash
impairment charge or loss on the sale, either of which would reduce our net income.
We may be required to expend funds to correct defects or to make improvements before a property can
be sold. We cannot assure you that we will have funds available to correct those defects or to make those
improvements. We may agree to transfer restrictions that materially restrict us from selling that property
for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be
placed or repaid on that property. These transfer restrictions would impede our ability to sell a property
even if we deem it necessary or appropriate. These facts and any others that would impede our ability to
respond to adverse changes in the performance of our properties may have a material adverse effect on
our business, financial condition, results of operations, our ability to make distributions to our shareholders
8 | Whitestone REIT 2009 Annual Report
Our business is dependent upon our tenants successfully operating their businesses and their failure
to do so could have a material adverse effect on our ability to successfully and profitably operate
our business.
We depend on our tenants to operate the properties we own in a manner which generates revenues
sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain
certain insurance coverage, pay real estate taxes and maintain the properties in a manner so as not to
jeopardize their operating licenses or regulatory status. The ability of our tenants to fulfill their obligations
under our leases may depend, in part, upon the overall profitability of their operations. Cash flow generated
by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. Our financial
position could be weakened and our ability to fulfill our obligations under our indebtedness could be limited
if a number of our tenants were unable to meet their obligations to us or failed to renew or extend their
relationship with us as their lease terms expire, or if we were unable to lease or re-lease our properties on
economically favorable terms. These adverse developments could arise due to a number of factors, including
those described in the risk factors discussed in this annual report.
Turmoil in capital markets could adversely impact acquisition activities and pricing of real estate assets.
Volatility in capital markets could adversely affect acquisition activities by impacting certain factors, including
the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory
of unsold collateralized mortgage backed securities in the market. These factors directly affect a lender’s
ability to provide debt financing as well as increase the cost of available debt financing. As a result, we may
not be able to obtain favorable debt financing in the future or at all. This may impair our ability to acquire
properties or result in future acquisitions generating lower overall economic returns, which may adversely
affect our results of operations and distributions to shareholders. Furthermore, any turmoil in the capital
markets could adversely impact the overall amount of capital available to invest in real estate, which may
result in price or value decreases of real estate assets.
The value of investments in our common shares will be directly affected by general economic and
regulatory factors we cannot control or predict.
Investments in real estate typically involve a high level of risk as the result of factors we cannot control or
predict. One of the risks of investing in real estate is the possibility that our properties will not generate
income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at
rates lower than those anticipated or available through investments in comparable real estate or other
investments. The following factors may affect income from properties and yields from investments in
properties and are generally outside of our control:
Conditions in financial markets;
Over-building in our markets;
A reduction in rental income as the result of the inability to maintain occupancy levels;
Adverse changes in applicable tax, real estate, environmental or zoning laws;
Changes in general economic conditions;
A taking of any of our properties by eminent domain;
Adverse local conditions (such as changes in real estate zoning laws that may reduce the
desirability of real estate in the area);
Acts of God, such as earthquakes or floods and other uninsured losses;
Whitestone REIT 2009 Annual Report | 9
Changes in supply of or demand for similar or competing properties in an area;
Changes in interest rates and availability of permanent mortgage funds, which may render the sale
of a property difficult or unattractive; and
Periods of high interest rates and tight money supply.
Some or all of these factors may affect our properties, which could adversely affect our operations and
ability to pay dividends to shareholders.
All of our properties are subject to property taxes that may increase in the future, which could
adversely affect our cash flow.
Our properties are subject to property taxes that may increase as property tax rates change and as the
properties are assessed by taxing authorities. We anticipate that most of our leases will generally provide
that the property taxes, or increases therein, are charged to the lessees as an expense related to the
properties that they occupy. As the owner of the properties, however, we are ultimately responsible for
payment of the taxes to the government. If property taxes increase, our tenants may be unable to make the
required tax payments, ultimately requiring us to pay the taxes. In addition, we will generally be responsible
for property taxes related to any vacant space in our properties.
Compliance or failure to comply with laws requiring access to our properties by disabled persons
could result in substantial cost.
The Americans with Disabilities Act, or ADA, and other federal, state and local laws generally require public
accommodations be made accessible to disabled persons. Noncompliance could result in the imposition of
fines by the government or the award of damages to private litigants. These laws may require us to modify our
existing properties. These laws may also restrict renovations by requiring improved access to such buildings
by disabled persons or may require us to add other structural features which increase our construction
costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on us
with respect to improved access by disabled persons. We may incur unanticipated expenses that may be
material to our financial condition or results of operations to comply with ADA and other federal, state and
local laws, or in connection with lawsuits brought by private litigants.
We face intense competition, which may decrease, or prevent increases of, the occupancy and
rental rates of our properties.
We compete with a number of developers, owners and operators of commercial real estate, many of which
own properties similar to ours in the same markets in which our properties are located. If our competitors
offer space at rental rates below current market rates, or below the rental rates we currently charge our
tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates
below those we currently charge or to offer more substantial rent abatements, tenant improvements,
early termination rights or below-market renewal options in order to retain tenants when our tenants’
leases expire. This competitive environment could have a material adverse effect on our ability to lease our
properties or any newly developed or acquired property, as well as on the rents charged.
Risks Associated with Our Operations
Because of the current lack of geographic diversification of our portfolio, an economic downturn in
the Houston metropolitan area could adversely impact our operations and ability to pay dividends
to our shareholders.
10 | Whitestone REIT 2009 Annual Report
The majority of our assets and revenues are currently derived from properties located in the Houston
metropolitan area. As of December 31, 2009, we had 80% of our gross leasable square feet in Houston. Our
results of operations are directly contingent on our ability to attract financially sound commercial tenants.
A significant economic downturn may adversely impact our ability to locate and retain financially sound
tenants and could have an adverse impact on our tenants’ revenues, costs and results of operations and
may adversely affect their ability to meet their obligations to us. Likewise, we may be required to lower
our rental rates to attract desirable tenants in such an environment. Consequently, because of the lack of
geographic diversity among our current assets, if the Houston metropolitan area experiences an economic
downturn, our operations and ability to pay distributions to our shareholders could be adversely impacted.
We lease our properties to approximately 700 tenants, with 10% to 20% of our leases expiring
annually. Each year we face the risk of non-renewal of a material percentage of our leases and
the cost of re-leasing a significant amount of our available space, and our failure to meet leasing
targets and control the cost of re-leasing our properties could adversely affect our rental revenue,
operating expenses and results of operations.
While the nature of our business model warrants shorter term leases to smaller, non-national tenants, as
of December 31, 2009, approximately 32% of the aggregate gross leasable area of our properties is subject
to leases that expire prior to December 31, 2011. We are subject to the risk that:
Tenants may choose not to, or may not have the financial resources to, renew these leases;
We may experience significant costs associated with re-leasing a significant amount of our available space;
We may not be able to easily re-lease the space subject to these leases, which may cause us to
fail to meet our leasing targets or control the costs of re-leasing; and
The terms of any renewal or re-lease may be less favorable than the terms of the current leases.
If any of these risks materialize, our rental revenue, operating expenses and results of operations could be
adversely affected.
Many of our tenants are small businesses, which may have a higher risk of bankruptcy or insolvency.
Many of our tenants are small, local businesses with little capital that depend on cash flows from their
businesses to pay their rent and are therefore at a higher risk of bankruptcy or insolvency than larger,
national tenants. The bankruptcy or insolvency of a number of smaller tenants may have an adverse impact
on our income and our ability to pay dividends.
We receive substantially all of our income as rent payments under leases of our properties. We have no
control over the success or failure of our tenants’ businesses and, at any time, any of our tenants may
experience a downturn in its business that may weaken its financial condition. As a result, our tenants may
fail to make rent payments when due or declare bankruptcy. For example, on November 10, 2008, one of
our tenants, Circuit City, which leased space at one of our properties and represented approximately 1.1%
of our total rent for the year ended December 31, 2008, filed for reorganization under Chapter 11 of the
Bankruptcy Code. The tenant elected to reject our lease.
If tenants are unable to comply with the terms of the leases, we may be forced to modify the leases in ways
that are unfavorable to us. Alternatively, the failure of a tenant to perform under a lease could require us to
declare a default, repossess the space and find a suitable replacement tenant. There is no assurance that we
would be able to lease the space on substantially equivalent or better terms than the prior lease, or at all,
or successfully reposition the space for other uses.
Whitestone REIT 2009 Annual Report | 11
If any lease expires or is terminated, we could be responsible for all of the operating expenses for that
portion of the property until it is re-leased. If we experience a significant number of un-leased spaces, our
operating expenses could increase significantly. Any significant increase in our operating expenses may have
a material adverse effect on our business, financial condition and results of operations, our ability to make
distributions to our shareholders and the trading price of our common shares.
Any bankruptcy filing by or relating to one of our tenants could bar all efforts by us to collect pre-
bankruptcy debts from that tenant or seize its property. A tenant bankruptcy could also delay our efforts
to collect past due balances under the leases and could ultimately preclude collection of all or a portion of
these sums. It is possible that we may recover substantially less than the full value of any unsecured claims
we hold, if any, which may have a material adverse effect on our business, financial condition and results
of operations, our ability to make distributions to our shareholders. Furthermore, dealing with a tenant’s
bankruptcy or other default may divert management’s attention and cause us to incur substantial legal and
other costs.
If one or more of our tenants files for bankruptcy relief, the Bankruptcy Code provides that a debtor has
the option to assume or reject the unexpired lease within a certain period of time. The Bankruptcy Code
generally requires that a debtor must assume or reject a contract in its entirety. Thus, a debtor cannot
choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract
must be assumed or rejected as a whole. However, where under applicable law a contract (even though it
is contained in a single document) is determined to be divisible or severable into different agreements, or
similarly, where a collection of documents is determined to constitute separate agreements instead of a
single, integrated contract, then in those circumstances a debtor/trustee may be allowed to assume some
of the divisible or separate agreements while rejecting the others.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage
may adversely affect our returns.
We attempt to adequately insure all of our properties to cover casualty losses. However, there are types
of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods,
hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or
may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated
with potential terrorism acts could sharply increase the premiums we pay for coverage against property
and casualty claims. In some instances, we may be required to provide other financial support, either
through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will
have adequate coverage for these losses. Also, to the extent we must pay unexpectedly large insurance
premiums, we could suffer reduced earnings that would result in less cash to be distributed to shareholders
as dividends.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our
operating results.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the cost of removal or remediation of hazardous or
toxic substances on, under or in its property. The costs of removal or remediation could be substantial.
These laws often impose liability whether or not the owner or operator knew of, or was responsible for,
the presence of any hazardous or toxic substances. Environmental laws also may impose restrictions on the
manner in which property may be used or businesses may be operated, and these restrictions may require
substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may
be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental
laws and common law principles could be used to impose liability for release of and exposure to hazardous
12 | Whitestone REIT 2009 Annual Report
substances, including asbestos containing materials into the air. In addition, third parties may seek recovery
from owners or operators of real properties for personal injury or property damage associated with
exposure to released hazardous substances. The cost of defending against claims of liability, of compliance
with environmental regulatory requirements, of remediating any contaminated property, or of paying
personal injury claims could materially adversely affect our business, assets or results of operations and,
consequently, amounts available for payments of dividends to our shareholders.
We may not be successful in identifying and consummating suitable acquisitions or investment
opportunities, which may impede our growth and negatively affect our results of operations.
Our ability to expand through acquisitions is integral to our business strategy and requires us to identify
suitable acquisition or investment opportunities that meet our criteria and are compatible with our growth
strategy. We may not be successful in identifying suitable properties or other assets that meet our acquisition
criteria or in consummating acquisitions or investments on satisfactory terms or at all. Failure to identify or
consummate acquisitions or investment opportunities, or to integrate successfully any acquired properties
without substantial expense, delay or other operational or financial problems, would slow our growth.
Our ability to acquire properties on favorable terms may be constrained by the following significant risks:
Competition from other real estate investors with significant capital, including other publicly-
traded REITs and institutional investment funds;
Competition from other potential acquirers which may significantly increase the purchase price
for a property we acquire, which could reduce our growth prospects;
Unsatisfactory results of our due diligence investigations or failure to meet other customary closing
conditions; and
Failure to finance an acquisition on favorable terms or at all.
If any of these risks are realized, our business, financial condition and results of operations, our ability to
make distributions to our shareholders.
We may face significant competition in our efforts to acquire financially distressed properties and debt.
Our acquisition strategy is focused on distressed commercial real estate, and we could face significant
competition from other investors, such as publicly-traded REITs, hedge funds, private equity funds and other
private real estate investors with greater financial resources and access to capital than us. Therefore, we
may not be able to compete successfully for investments. In addition, the number of entities and the amount
of purchasers competing for suitable investments may increase, all of which could result in competition for
accretive acquisition opportunities and adversely affect our business plan and our ability to maintain our
current dividend rate.
Our success depends in part on our ability to execute our Community Centered Property strategy.
Our Community Centered Property strategy requires intensive management of a large number of small
spaces and small tenant relationships. Our success will depend in part upon our management’s ability
to identify potential Community Centered Properties and find and maintain the appropriate tenants to
create such a property. Lack of market acceptance of our Community Centered Property strategy or our
inability to successfully attract and manage a large number of tenant relationships could adversely affect our
occupancy rates, operating results and dividend rate.
Whitestone REIT 2009 Annual Report | 13
Loss of our key personnel, particularly our eight senior managers, could threaten our ability to
execute our strategy and operate our business successfully.
We are dependent on the experience and knowledge of our key executive personnel, particularly our eight
senior managers who have been instrumental in setting our strategic direction, operating our business,
identifying, recruiting and training key personnel and arranging necessary financing. Losing the services of
any of these individuals could adversely affect our business until qualified replacements could be found. We
also believe that they could not quickly be replaced with managers of equal experience and capabilities and
their successors may not be as effective.
Our systems may not be adequate to support our growth, and our failure to successfully oversee our
portfolio of properties could adversely affect our results of operations.
We cannot assure you that we will be able to adapt our portfolio management, administrative, accounting
and operational systems, or hire and retain sufficient operational staff, to support any growth we may
experience. Our failure to successfully oversee our current portfolio of properties or any future acquisitions
or developments could have a material adverse effect on our results of operations and financial condition
and our ability to make distributions.
There can be no assurance that we will be able to pay or maintain cash dividends or that dividends will
increase over time.
There are many factors that can affect the availability and timing of cash dividends to shareholders. Dividends
will be based principally on cash available from our properties, real estate securities, mortgage loans and
other investments. The amount of cash available for dividends will be affected by many factors, such as our
ability to buy properties, the yields on securities of other real estate programs that we invest in, and our
operating expense levels, as well as many other variables. We can give no assurance that we will be able to
pay or maintain dividends or that dividends will increase over time. In addition, we can give no assurance
that rents from the properties will increase, that the securities we buy will increase in value or provide
constant or increased dividends over time, or that future acquisitions of real properties, mortgage loans
or our investments in securities will increase our cash available for dividends to shareholders. Our actual
results may differ significantly from the assumptions used by our board of trustees in establishing the
dividend rate to shareholders.
If we experience decreased cash flows, we may need to use other sources of cash to fund dividends
or we may be unable to pay dividends.
Actual cash available for dividends may vary substantially from estimates. If our cash dividends exceed the
amount of cash available for dividends, we may need to fund the shortage out of working capital or by
obtaining additional debt, which would reduce the amount of proceeds available for real estate investments.
Our assets may be subject to impairment charges.
We periodically evaluate our real estate investments and other assets for impairment indicators. The
judgment regarding the existence of impairment indicators is based on factors such as market conditions,
tenant performance and legal structure. If we determine that a significant impairment has occurred, we would
be required to make an adjustment to the net carrying value of the asset, which could have a material adverse
effect on our results of operations and funds from operations in the period in which the write-off occurs.
14 | Whitestone REIT 2009 Annual Report
Risks Associated with Our Indebtedness and Financing
Current market conditions could adversely affect our ability to refinance existing indebtedness or
obtain additional financing for growth on acceptable terms or at all, which could adversely affect
our ability to grow, our interest cost and our results of operations.
The United States credit markets have recently experienced significant dislocations and liquidity disruptions,
including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances
have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive,
and in certain cases have resulted in the unavailability of various types of debt financing. Reductions in
our available borrowing capacity, or inability to establish a credit facility when required or when business
conditions warrant, could have a material adverse effect on our business, financial condition and results
of operations. In addition, we mortgage most of our properties to secure payment of indebtedness. If we
are not successful in refinancing our mortgage debt upon maturity, then the property could be foreclosed
upon or transferred to the mortgagee, or we might be forced to dispose of some of our properties upon
disadvantageous terms, with a consequent loss of income and asset value. A foreclosure or disadvantageous
disposal on one or more of our properties could adversely affect our ability to grow, financial condition,
interest cost, results of operations, cash flow and ability to pay dividends to our shareholders.
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest
rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase.
Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase,
our interest costs and overall costs of capital will increase, which could adversely affect our transaction
and development activity, financial condition, results of operation, cash flow, our ability to pay principal and
interest on our debt and our ability to pay dividends to our shareholders.
If we invest in mortgage loans, such investments may be affected by unfavorable real estate market
conditions, including interest rate fluctuations, which could decrease the value of those loans and
our results of operations.
If we invest in mortgage loans, we will be at risk of defaults by the borrowers on those mortgage loans as
well as interest rate risks. To the extent we incur delays in liquidating such defaulted mortgage loans, we may
not be able to obtain sufficient proceeds to repay all amounts due to us under the mortgage loans. Further,
we will not know whether the values of the properties securing the mortgage loans will remain at the levels
existing on the dates of origination of those mortgage loans. If the values of the underlying properties fall,
our risk will increase because of the lower value of the security associated with such loans.
We may incur losses on interest rate hedging arrangements.
Periodically, we have entered into agreements to reduce the risks associated with increases in interest rates,
and may continue to do so. Although these agreements may partially protect against rising interest rates,
they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to
the same rate as the indebtedness which is hedged, we may be exposed to losses to the extent which the
rate governing the indebtedness and the rate governing the hedging arrangement change independently
of each other. Finally, nonperformance by the other party to the hedging arrangement may subject us to
increased credit risks.
Our failure to hedge effectively against interest rate changes may adversely affect results
of operations.
We currently have mortgages that bear interest at a variable rate and we may incur additional variable
rate debt in the future. Accordingly, increases in interest rates on variable rate debt would increase our
interest expense, which could reduce net earnings and cash available for payment of our debt obligations
and distributions to our shareholders.
Whitestone REIT 2009 Annual Report | 15
We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements,
such as interest cap agreements and interest rate swap agreements. These agreements involve risks, such
as the risk that counterparties may fail to honor their obligations under these arrangements, that these
arrangements may not be effective in reducing our exposure to interest rate changes and that a court
could rule that such an agreement is not legally enforceable. In the past, we have used derivative financial
instruments to hedge interest rate risks related to our variable rate borrowings. We will not use derivatives
for speculative or trading purposes and intend only to enter into contracts with major financial institutions
based on their credit rating and other factors, but we may choose to change this practice in the future.
We may enter into interest rate swap agreements for our variable rate debt, which totals $26.1 million
as of December 31, 2009. Hedging may reduce the overall returns on our investments. Failure to hedge
effectively against interest rate changes may materially adversely affect our results of operations.
We currently have and may incur additional mortgage indebtedness and other borrowings, which
may increase our business risks and our ability to make distributions to our shareholders.
If it is determined to be in our best interests, we may, in some instances, acquire real properties by using
either existing financing or borrowing new funds. In addition, we may incur or increase our current mortgage
debt to obtain funds to acquire additional properties. We may also borrow funds if necessary to satisfy the
REIT distribution requirement, or otherwise as may be necessary or advisable to assure that we maintain
our qualification as a REIT for federal income tax purposes.
We may incur mortgage debt on a particular property if we believe the property’s projected cash flow is
sufficient to service the mortgage debt. As of December 31, 2009, we had approximately $101.8 million
of mortgage debt secured by 21 of our properties. If there is a shortfall in cash flow, however, the amount
available for dividends to shareholders may be affected. In addition, incurring mortgage debt increases the
risk of loss because defaults on such indebtedness may result in loss of property in foreclosure actions
initiated by lenders. For tax purposes, a foreclosure of any of our properties would be treated as a sale of
the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage.
If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we
would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may give
lenders full or partial guarantees for mortgage debt incurred by the entities that own our properties.
When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible
to the lender for satisfaction of the debt if it is not paid by that entity. If any mortgages contain cross-
collateralization or cross-default provisions, there is a risk that more than one property may be affected
by a default. If any of our properties are foreclosed upon due to a default, our ability to pay cash dividends
to our shareholders will be adversely affected. For more discussion, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
If we set aside insufficient working capital or are unable to secure funds for future tenant
improvements, we may be required to defer necessary property improvements, which could
adversely impact our ability to pay cash distributions to our shareholders.
When tenants do not renew their leases or otherwise vacate their space, it is possible that, in order to
attract replacement tenants, we may be required to expend substantial funds for tenant improvements and
tenant refurbishments to the vacated space. If we have insufficient working capital reserves, we will have
to obtain financing from other sources. Because most of our leases will provide for tenant reimbursement
of operating expenses, we do not anticipate that we will establish a permanent reserve for maintenance
and repairs for our properties. However, to the extent that we have insufficient funds for such purposes,
we may establish reserves for maintenance and repairs of our properties out of cash flow generated by
operating properties or out of non-liquidating net sale proceeds. If these reserves or any reserves otherwise
established are insufficient to meet our cash needs, we may have to obtain financing from either affiliated
16 | Whitestone REIT 2009 Annual Report
or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will
be available or, if available, will be available on economically feasible terms or on terms acceptable to us.
Additional borrowing for working capital purposes will increase our interest expense, and therefore our
financial condition and our ability to pay cash distributions to our shareholders may be adversely affected.
In addition, we may be required to defer necessary improvements to our properties that may cause our
properties to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased
cash flow as a result of fewer potential tenants being attracted to our properties. If this happens, we may
not be able to maintain projected rental rates for effected properties, and our results of operations may be
negatively impacted.
We may structure acquisitions of property in exchange for limited partnership units in our Operating
Partnership on terms that could limit our liquidity or our flexibility.
We may acquire properties by issuing limited partnership units in our Operating Partnership in exchange for
a property owner contributing property to the Operating Partnership. If we enter into such transactions,
in order to induce the contributors of such properties to accept units in our Operating Partnership, rather
than cash, in exchange for their properties, it may be necessary for us to provide them with additional
incentives. For instance, our Operating Partnership’s limited partnership agreement provides that any holder
of units may exchange limited partnership units for cash, or, at our option, common shares on a one-for-
one exchange basis. We may, however, enter into additional contractual arrangements with contributors of
property under which we would agree to redeem a contributor’s units for our common shares or cash, at
the option of the contributor, at set times. If the contributor required us to redeem units for cash pursuant
to such a provision, it would limit our liquidity and thus our ability to use cash to make other investments,
satisfy other obligations or pay distributions. Moreover, if we were required to redeem units for cash at
a time when we did not have sufficient cash to fund the redemption, we might be required to sell one or
more properties to raise funds to satisfy this obligation. Furthermore, we might agree that if distributions
the contributor received as a limited partner in our Operating Partnership did not provide the contributor
with a defined return, then upon redemption of the contributor’s units we would pay the contributor
an additional amount necessary to achieve that return. Such a provision could further negatively impact
our liquidity and flexibility. Finally, in order to allow a contributor of a property to defer taxable gain on
the contribution of property to our Operating Partnership, we might agree not to sell a contributed
property for a defined period of time or until the contributor exchanged the contributor’s units for cash
or our common shares. Such an agreement would prevent us from selling those properties, even if market
conditions made such a sale favorable to us.
Our ability to issue preferred shares may include a preference in distributions superior to our common
shares and also may deter or prevent a sale of our common shares in which you could profit.
Our declaration of trust authorizes our Board to issue up to 50,000,000 shares of preferred shares. Our
Board has the discretion to establish the preferences and rights, including a preference in distributions
superior to our common shareholders, of any issued preferred shares. If we authorize and issue preferred
shares with a distribution preference over our common shares, payment of any distribution preferences of
outstanding preferred shares would reduce the amount of funds available for the payment of distributions
on our common shares. Further, holders of preferred shares are normally entitled to receive a preference
payment in the event we liquidate, dissolve or wind up before any payment is made to our common
shareholders, likely reducing the amount our common shareholders would otherwise receive upon such an
occurrence. In addition, under certain circumstances, the issuance of preferred shares or a separate class or
series of common shares may render more difficult or tend to discourage:
A merger, tender offer or proxy contest;
Assumption of control by a holder of a large block of our shares; or
Removal of incumbent management.
Whitestone REIT 2009 Annual Report | 17
Risks Associated with Income Tax Laws
If we fail to qualify as a REIT, our operations and dividends to shareholders would be adversely impacted.
We intend to continue to be organized and to operate so as to qualify as a REIT under the Code. A
REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders.
Qualification as a REIT involves the application of highly technical and complex rules for which there are
only limited judicial or administrative interpretations. The determination of various factual matters and
circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In
addition, new legislation, new regulations, administrative interpretations or court decisions could significantly
change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or the federal
income tax consequences of such qualification.
If we were to fail to qualify as a REIT in any taxable year:
We would not be allowed to deduct our distributions to shareholders when computing our
taxable income;
We would be subject to federal income tax (including any applicable alternative minimum tax) on
our taxable income at regular corporate rates;
We would be disqualified from being taxed as a REIT for the four taxable years following the year
during which qualification was lost, unless entitled to relief under certain statutory provisions;
Our cash available for dividends to shareholders would be reduced; and
We may be required to borrow additional funds or sell some of our assets in order to pay
corporate tax obligations that we may incur as a result of our disqualification.
We may need to incur additional borrowings to meet the REIT minimum distribution requirement
and to avoid excise tax.
In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least
90% of our annual real estate investment trust taxable income (excluding any net capital gain and before
application of the dividends paid deduction). In addition, we are subject to a 4% nondeductible excise tax
on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less
than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our net capital gain for that year
and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay dividends
to our shareholders in a manner that allows us to meet the 90% distribution requirement and avoid this 4%
excise tax, we cannot assure you that we will always be able to do so.
Our income consists almost solely of our share of our Operating Partnership’s income, and the cash
available for distribution by us to our shareholders consists of our share of cash distributions made by our
Operating Partnership. Because we are the sole general partner of our Operating Partnership, our Board
determines the amount of any distributions made by it. Our Board may consider a number of factors in
making distributions, including:
The amount of the cash available for distribution;
Our Operating Partnership’s financial condition;
Our Operating Partnership’s capital expenditure requirements; and
Our annual distribution requirements necessary to maintain our qualification as a REIT.
18 | Whitestone REIT 2009 Annual Report
Differences in timing between the actual receipt of income and actual payment of deductible expenses and
the inclusion of income and deduction of expenses when determining our taxable income, as well as the effect
of nondeductible capital expenditures and the creation of reserves or required debt amortization payments
could require us to borrow funds on a short-term or long-term basis or make taxable distributions to our
shareholders of our shares or debt securities to meet the REIT distribution requirement and to avoid the
4% excise tax described above. In these circumstances, we may need to borrow funds to avoid adverse tax
consequences even if our management believes that the then prevailing market conditions generally are not
favorable for borrowings or that borrowings would not be advisable in the absence of the tax consideration.
If our Operating Partnership were classified as a “publicly traded partnership” taxable as a
corporation for federal income tax purposes under the Code, we would cease to qualify as a REIT
and would suffer other adverse tax consequences.
We structured our Operating Partnership so that it would be classified as a partnership for federal income
tax purposes. In this regard, the Code generally classifies “publicly traded partnerships” (as defined in Section
7704 of the Code) as associations taxable as corporations (rather than as partnerships), unless substantially
all of their taxable income consists of specified types of passive income. In order to minimize the risk that the
Code would classify our Operating Partnership as a “publicly traded partnership” for tax purposes, we placed
certain restrictions on the transfer and/or redemption of partnership units in our Operating Partnership. If
the Internal Revenue Service, or IRS, were to assert successfully that our Operating Partnership is a “publicly
traded partnership,” and substantially all of its gross income did not consist of the specified types of passive
income, the Code would treat our Operating Partnership as an association taxable as a corporation.
In such event, the character of our assets and items of gross income would change and would prevent us from
continuing to qualify as a REIT. In addition, the imposition of a corporate tax on our Operating Partnership
would reduce our amount of cash available for payment of distributions by us to our shareholders.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or
liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among
other things, the sources of our income, the nature and diversification of our assets, the amounts we
distribute to our shareholders and the ownership of our shares. In order to meet these tests, we may be
required to forego investments we might otherwise make. Thus, compliance with the REIT requirements
may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our
assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of
our investment in securities (other than government securities and qualified real estate assets) generally
cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of
the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of
the value of our assets (other than government securities and qualified real estate assets) can consist of the
securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the
securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end
of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or
qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions
could have the effect of reducing our income and amounts available for distribution to our shareholders.
Whitestone REIT 2009 Annual Report | 19
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of
our common shares.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those
laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or
administrative interpretation, or any amendment to any existing federal income tax law, regulation or
administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation,
or interpretation may take effect retroactively. We and our shareholders could be adversely affected by any
such change in, or any new, federal income tax law, regulation or administrative interpretation.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from “qualified dividends” payable to U.S. shareholders that are
individuals, trusts and estates has been reduced by legislation to 15% (through the end of 2010). Dividends
payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does
not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable
to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to
perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our
common shares.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to
incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a
hedging transaction that we enter into to manage risk of interest rate changes, price changes or currency
fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does
not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we
enter into other types of hedging transactions, the income from those transactions is likely to be treated
as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may
need to limit our use of advantageous hedging techniques or implement those hedges through taxable REIT
subsidiaries. This could increase the cost of our hedging activities because any taxable REIT subsidiary that
we may form would be subject to tax on gains or expose us to greater risks associated with changes in
interest rates than we would otherwise want to bear. In addition, losses in taxable REIT subsidiaries will
generally not provide any tax benefit, except for being carried forward against future taxable income in the
taxable REIT subsidiaries.
Risks Related to Ownership of our Common Shares
Maryland takeover statutes may deter others from seeking to acquire us and prevent you from
making a profit in such transactions.
The Maryland General Corporation Law, or the MGCL, contains many provisions, such as the business
combination statute and the control share acquisition statute, that are designed to prevent, or have the effect
of preventing, someone from acquiring control of us. Our Board can amend our bylaws, without shareholder
approval, to exempt us from the control share acquisition statute (which eliminates voting rights for certain
levels of shares that could exercise control over us), and our Board has adopted a resolution opting out
of the business combination statute (which, among other things, prohibits a merger or consolidation with
a 10.0% shareholder for a period of time) with respect to our affiliates. However, if these provisions of
Maryland law were to apply, they could delay or prevent offers to acquire us and increase the difficulty of
consummating any such offers, even if such a transaction would be in our shareholders’ best interest.
20 | Whitestone REIT 2009 Annual Report
The MGCL, Maryland REIT Law and our organizational documents limit your right to bring claims
against our officers and trustees.
The MGCL and the Maryland REIT Law provide that a trustee will not have any liability as a trustee so long
as he performs his duties in good faith, in a manner he reasonably believes to be in our best interest, and
with the care that an ordinarily prudent person in a like position would use under similar circumstances. In
addition, our declaration of trust provides that we may indemnify our trustees and officers to the maximum
extent allowed by Maryland law. Under the MGCL and the Maryland REIT law, no trustee or officer will be
liable to us or to any shareholder for money damages except to the extent that (a) the trustee or officer
actually received an improper benefit or profit in money, property or services, for the amount of the benefit
or profit in money, property, or services actually received; or (b) a judgment or the final adjudication adverse
to the trustee or officer is entered in a proceeding based on a finding in the proceeding the trustee’s or
officer’s action or failure to act was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding.
Whitestone REIT 2009 Annual Report | 21
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties.
General
As of December 31, 2009, we owned 36 commercial properties, including 31 properties in Houston, two
properties in Dallas, one property in Windcrest, Texas, a suburb of San Antonio, one property in Carefree,
Arizona, which is adjacent to North Scottsdale in the Phoenix metropolitan statistical area, and one property
in Buffalo Grove, Illinois, a suburb of Chicago.
Our tenants consist of national, regional and local businesses. Our properties generally attract a mix of
tenants who provide basic staples, convenience items and services tailored to the specific cultures, needs
and preferences of the surrounding community. These types of tenants are the core of our strategy of
creating Whitestone-brand Community Centered Properties. We also believe daily sales of these basic
items are less sensitive to fluctuations in the business cycle than higher priced retail items. Our largest
tenant represented only 2.7% of total revenues for the twelve months ended December 31, 2009.
We directly manage the operations and leasing of our properties. Substantially all of our revenues consist
of base rents received under leases that generally have terms that range from month-to-month to 15
years. Approximately 77% of our existing leases as of December 31, 2009 contain “step up” rental clauses
that provide for increases in the base rental payments. The following table summarizes certain information
relating to our properties as of December 31, 2009:
Commercial
Properties
Retail
Office/Flex
Office
Total
Leasable
Square Feet
1,205,531
1,201,672
631,841
3,039,044
Average
Occupancy
as of 12/31/09
80%
85%
80%
82%
Annualized Base
Rental Revenue
(in thousands) (1)
$ 9,854
8,228
8,168
$ 26,250
Average Annualized
Base Rental Revenue
Per Sq. Ft. (2)
$ 10.27
8.07
16.16
$ 10.56
(1) Calculated as the tenant’s actual December 31, 2009 base rent multiplied by 12. Excludes vacant space as of
December 31, 2009. Because annualized base rental revenue is not derived from historical results that were
accounted for in accordance with generally accepted accounting principles, historical results differ from the
annualized amounts.
(2) Calculated as annualized base rent divided by net rentable square feet leased at December 31, 2009. Excludes
vacant space at December 31, 2009.
As of December 31, 2009, we had one property that accounted for more than 10% of total gross revenue.
Uptown Tower is an office building located in Dallas, Texas and accounts for 11.9%, 12.8% and 12.0% of our
total revenue during 2009, 2008 and 2007, respectively. Uptown Tower also accounts for 10.9%, 11.5% and
10.8% of our real estate assets, net of accumulated depreciation, for the years ended December 31, 2009,
2008 and 2007, respectively.
22 | Whitestone REIT 2009 Annual Report
Location of Properties
Of our 36 properties, 34 are located in Texas, with 31 being located in the greater Houston metropolitan
statistical area. These 31 represent 74% of our revenue for the year ended December 31, 2009.
We believe the Houston market has been impacted less drastically than many areas of the country by the
global economic and credit crisis. The Houston workforce is concentrated in energy, chemicals, information
technology, aerospace sciences and medical sciences. According to the United States Census Bureau,
Houston ranked 4th in the largest United States cities as of July 1, 2008. In the Census Bureau’s Estimates
of Population Change for Metropolitan Statistical Areas and Rankings: July 1, 2007 to July 1, 2008, Houston
ranked second in population growth out of 362 metropolitan statistical areas. According to the Bureau of
Labor of Statistics, the unemployment rate in Houston was less than the national average in each of the last
six months of 2009.
August
September
October
November
December
9.7%
8.4%
9.8%
8.5%
10.1%
8.4%
10.0%
8.2%
10.0%
8.3%
National (1)
Houston (2)
July
9.4%
8.4%
(1) Seasonally adjusted.
(2) Not seasonally adjusted.
Whitestone REIT 2009 Annual Report | 23
General Physical and Economic Attributes
The following table sets forth certain information relating to each of our properties owned as of
December 31, 2009.
Property Name
Location
Year Built/
Renovated
Leasable
Sq. Ft.
Percent
Occupied
at
12/31/09
Annualized
Base Rental
Revenue
(in thousands)(1)
Average
Base Rental
Revenue
Per Sq. Ft. (2)
Retail Properties:
Bellnott Square
Bissonnet Beltway
Centre South
Greens Road
Holly Knight
Kempwood Plaza
Lion Square
Providence
Shaver
South Richey
Spoerlein Commons
SugarPark Plaza
Sunridge
Torrey Square
Town Park
Webster Point
Westchase
Windsor Park
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Chicago
Houston
Houston
Houston
Houston
Houston
Houston
San Antonio
Office/Flex Properties:
Brookhill
Houston
Corporate Park Northwest
Houston
Corporate Park West
Houston
Corporate Park Woodland
Houston
Dairy Ashford
Holly Hall
Interstate 10
Main Park
Plaza Park
Westbelt Plaza
Westgate
Houston
Houston
Houston
Houston
Houston
Houston
Houston
1982
1978
1974
1979
1984
1974
1980
1980
1978
1980
1987
1974
1979
1983
1978
1984
1978
1992
1979
1981
1999
2000
1981
1980
1980
1982
1982
1978
1984
73,930
29,205
44,543
20,507
20,015
112,359
119,621
90,327
21,926
69,928
41,396
95,032
49,359
105,766
43,526
26,060
49,573
192,458
1,205,531
74,757
185,627
175,665
99,937
42,902
90,000
151,000
113,410
105,530
65,619
97,225
1,201,672
33%
100%
72%
100%
100%
74%
73%
91%
100%
100%
90%
100%
91%
86%
100%
88%
57%
66%
80%
94%
75%
88%
86%
90%
100%
92%
79%
88%
81%
69%
85%
$ 281
320
282
199
300
838
853
733
248
560
713
939
454
756
736
247
326
1,069
$ 9,854
$ 266
1,449
1,417
793
191
670
646
560
1,085
741
410
$ 8,228
$ 11.62
10.96
8.76
9.70
14.99
10.12
9.74
8.94
11.31
8.01
19.07
9.88
10.09
8.32
16.91
10.83
11.50
8.42
$ 10.27
$ 3.77
10.45
9.20
9.23
4.93
7.44
4.66
6.26
11.67
13.98
6.13
$ 8.07
24 | Whitestone REIT 2009 Annual Report
Property Name
Location
Year Built/
Renovated
Leasable
Sq. Ft.
Percent
Occupied
at
12/31/09
Annualized
Base Rental
Revenue
(in thousands)(1)
Average
Base Rental
Revenue
Per Sq. Ft. (2)
Office Properties:
9101 LBJ Freeway
Featherwood
Pima Norte
Royal Crest
Uptown Tower
Woodlake Plaza
Zeta Building
Grand Totals
Dallas
Houston
Phoenix
Houston
Dallas
Houston
Houston
1985
1983
2007
1984
1982
1974
1982
125,874
49,760
33,417
24,900
253,981
106,169
37,740
631,841
3,039,044
80%
82%
9%
80%
84%
88%
92%
80%
82%
$ 1,631
743
$ 16.18
18.17
72
24.21
263
3,584
1,302
573
$ 8,168
$ 26,250
13.15
16.82
13.98
16.50
$ 16.16
$ 10.56
(1) Calculated as the tenant’s actual December 31, 2009 base rent multiplied by 12. Excludes vacant space as of
December 31, 2009. Because annualized base rental revenue is not derived from historical results that were
accounted for in accordance with generally accepted accounting principles, historical results differ from the
annualized amounts.
(2) Calculated as annualized base rent divided by net rentable square feet leased at December 31, 2009. Excludes
vacant space at December 31, 2009.
Significant Tenants
The following table sets forth information about our fifteen largest tenants as of December 31, 2009, based
upon annualized rental revenues at December 31, 2009.
Tenant Name
US Census
Annualized
Rental Revenue
(in thousands)
$ 708
Percentage of Total
Annualized Base
Rental Revenues
2.7%
Location
Houston
Sports Authority
San Antonio
450
Brockett Davis Drake Inc.
Compass Insurance
Air Liquide America, L.P.
Kroger
Petsmart, Inc
Dallas
Dallas
Dallas
Houston
365
363
352
265
San Antonio
255
X-Ray X-Press Corporation
Houston
Marshall’s
Merrill Corporation
Rock Solid Images
River Oaks L-M, Inc.
New Lifestyles, Inc.
Region IV Education
Landworks, Inc.
Houston
Dallas
Houston
Houston
Dallas
Houston
Houston
252
248
234
206
195
187
172
168
$ 4,420
1.7%
1.4%
1.4%
1.3%
1.0%
1.0%
1.0%
1.0%
0.9%
0.8%
0.7%
0.7%
0.6%
0.6%
16.8%
Initial
Lease Date
10/21/2008
01/01/2004
03/14/1994
09/01/2005
08/01/2001
09/01/1999
01/01/2004
07/01/1998
05/12/1983
12/10/2001
04/01/2004
10/15/1993
05/05/1998
09/01/2001
06/01/2004
Year
Expiring
2010
2015
2011
2011
2013
2011
2013
2019
2013
2014
2012
2010
2013
2011
2013
Whitestone REIT 2009 Annual Report | 25
Lease Expirations
The following table lists, on an aggregate basis, all of our scheduled lease expirations over the next 10 years.
Gross Leasable Area
Number of
Leases
218
Approximate
Sq. Ft.
443,653
Annualized Base Rent as of
December 31, 2009
Percent
of Total
15%
Amount
(in thousands)
$ 4,825
Percent of Total
18.4%
150
155
96
80
39
10
5
7
5
765
515,815
474,759
379,377
297,525
198,762
44,045
35,439
32,531
46,994
2,468,900
17%
16%
12%
10%
7%
1%
1%
1%
2%
82%
5,676
4,869
4,287
3,044
1,744
470
300
312
489
$ 26,016
21.6%
18.5%
16.3%
11.6%
6.6%
1.8%
1.1%
1.2%
1.9%
99.0%
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Insurance
We believe that we have property and liability insurance with reputable, commercially rated companies. We
also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to
cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage
with respect to any additional properties we acquire in the near future. Further, we have title insurance
relating to our properties in an aggregate amount that we believe to be adequate.
Regulations
Our properties, as well as any other properties that we may acquire in the future, are subject to various
federal, state and local laws, ordinances and regulations. They include, among other things, zoning regulations,
land use controls, environmental controls relating to air and water quality, noise pollution and indirect
environmental impacts such as increased motor vehicle activity. We believe that we have all permits and
approvals necessary under current law to operate our properties.
Item 3. Legal Proceedings.
We are a participant in various legal proceedings and claims that arise in the ordinary course of our
business. These matters are generally covered by insurance. While the resolution of these matters cannot
be predicted with certainty, we believe that the final outcome of these matters will not have a material
effect on our financial position, results of operations or cash flows.
Item 4. Reserved.
26 | Whitestone REIT 2009 Annual Report
P A R T I I
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities.
Market Information
There is no established trading market for our common shares of beneficial interest. As of
March 11, 2010, we had 10,337,307 common shares of beneficial interest outstanding held by a total
of approximately 1,400 shareholders.
Dividend Reinvestment Plan
Our dividend reinvestment plan allowed our shareholders to elect to have dividends from our common
shares reinvested in additional common shares. The purchase price per share under our dividend
reinvestment plan was $9.50. On March 27, 2007, we gave the required ten day notice to participants
informing them that we intend to terminate our dividend reinvestment plan. As a result, our dividend
reinvestment plan terminated on April 6, 2007. Shares issued under our dividend reinvestment plan were
registered on our Registration Statement on Form S-11 originally filed with the SEC on December 31, 2003
(File No. 333-111674), as amended. We did not amend or supplement our Registration Statement following
our change in management on October 2, 2006, and the events that occurred thereafter. As a result,
shareholders that received approximately 64,000 shares issued under our dividend reinvestment plan on
or after that date could be entitled to recission rights. These rights would entitle these shareholders to
recovery of their purchase price less any income received on their shares.
Issuer Repurchases
We did not repurchase any of our equity securities during 2009 under a share redemption program. Our
Board has approved (but delayed the implementation of) a share redemption program that would enable
shareholders to sell shares to us after holding them for at least one year under limited circumstances.
Our Board could choose to amend the provisions of the share redemption program without shareholder
approval. Our Board has chosen not to implement the share redemption program at this time.
Dividends
In order to remain qualified as a REIT, we are required to distribute at least 90% of our annual taxable
income to our shareholders. We currently accrue dividends quarterly and pay dividends in three monthly
installments following the end of the 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.”
Whitestone REIT 2009 Annual Report | 27
The following table reflects the total dividends we have paid (including the total amount paid and the
amount paid per share) in each indicated quarter.
Quarter Paid
1st Quarter 2008
2nd Quarter 2008
3rd Quarter 2008
4th Quarter 2008
1st Quarter 2009
2nd Quarter 2009
3rd Quarter 2009
4th Quarter 2009
1st Quarter 2010
Average Per Quarter
Total Amount of Dividends Paid
(in thousands)
1,500
1,529
1,456
1,093
1,156
1,163
1,163
1,163
1,163
Dividends per Share
$ 0.1500
0.1500
0.1500
0.1125
0.1125
0.1125
0.1125
0.1125
0.1125
$ 0.1250
Equity Compensation Plan Information
Please refer to Item 12 of this report for information concerning securities authorized under our incentive
share plan.
Item 6. Selected Financial Data.
The following table sets forth our selected consolidated financial information and should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our audited consolidated financial statements and the notes thereto, both of which appear elsewhere
in this report.
Operating Data:
Revenues
Property expenses
General and administrative (1)
Year Ended December 31,
(in thousands, except per share data)
2009
2008
2007
2006
2005
$ 32,685
$ 31,201
$ 29,374
$ 28,378
$ 23,490
12,991
12,835
12,236
11,438
8,624
6,072
6,708
6,721
2,299
567
Property and other asset management fees to an affiliate
-
-
-
1,482
1,319
Depreciation and amortization
6,958
6,859
6,048
6,181
5,733
Involuntary conversion
Interest expense, net
(1,542)
358
-
-
-
5,713
5,675
4,825
4,910
3,469
Other expense (income), net
-
-
30
(30)
-
Income (loss) from continuing operations
before loss on disposal of assets and income taxes
Provision for income taxes
Loss on disposal of assets
2,493
(1,234)
(486)
2,098
3,778
(222)
(219)
(217)
-
-
(196)
(223)
(9)
197
-
Income (loss) from continuing operations
2,075
(1,676)
(712)
2,295
3,778
Income (loss) from discontinued operations
-
(188)
589
554
561
Gain on sale of properties from discontinued operations
-
3,619
-
-
-
Net income (loss)
2,075
1,755
(123)
2,849
4,339
Less: net income (loss) attributable to noncontrolling interests
733
621 (46)
1,068
1,891
Net income (loss) attributable to Whitestone REIT
$ 1,342
$ 1,134
$ (77) $ 1,781 $ 2,448
28 | Whitestone REIT 2009 Annual Report
Earnings per share - basic
Income (loss) from continuing operations attributable
to Whitestone REIT excluding amounts attributable
to unvested restricted shares
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable
to unvested restricted shares
Earnings per share - diluted
Income (loss) from continuing operations
attributable to Whitestone REIT excluding amounts
attributable to unvested restricted shares
Income from discontinued operations
attributable to Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable
to unvested restricted shares
Balance Sheet Data:
Real estate (net)
Year Ended December 31,
(in thousands, except per share data)
2009 2008 2007 2006 2005
$ 0.14 $ (0.11) $ (0.04) $ 0.15 $ 0.27
-
0.23
0.03 0.03 0.04
$ 0.14 $ 0.12 $ (0.01) $ 0.18 $ 0.31
$ 0.13 $ (0.11) $ (0.04) $ 0.15 $ 0.27
-
0.23
0.03 0.03 0.04
$ 0.13 $ 0.12 $ (.01) $ 0.18 $ 0.31
$ 158,398 $ 15,0847
$ 146,460 $ 141,236 $ 145,581
Real estate (net), discontinued operations
-
-
7,932 8,252 8,384
Other assets
Total assets
Liabilities
23,602
27,098
20,752 17,599 17,497
$ 182,000 $ 177,945
$ 175,144 167,087 $ 171,462
$ 115,141 $ 110,773
94,262 76,464 $ 83,462
Whitestone REIT shareholders’ equity
43,590
45,891
52,843 58,914 53,728
Noncontrolling interest in subsidiary
23,269
21,281
28,039 31,709 34,272
Total Liabilities and Equity
$ 182,000 $ 177,945
$ 175,144 $ 167,087 $ 171,462
Other Data:
Proceeds from issuance of common shares
$ - $ -
$ 261 $ 9,453 $ 17,035
Additions to real estate
9,230
5,153
10,205 1,833 31,712
Dividends and distributions per share (2)
Funds from operations (3)
0.45
0.53
0.60 0.63 0.70
8,618
4,236
6,001 8,993 9,851
Occupancy at year end
82% 84% 86% 83% 82%
Average aggregate gross leasable area
3,039,044 3,008,085
3,093,063 3,121,039 2,962,616
Average rent per square foot
$ 10.76 $ 10.37
$ 9.50 $ 9.09 $ 7.93
(1) General and administrative expenses for the years ended December 31, 2008, 2007 and 2006 include
approximately $1.5 million, $2.2 million and $0.9 million, respectively, of legal costs resulting from litigation
with our former CEO and our former external advisor.
(2) The dividends per share represent total cash payments divided by weighted average common shares.
(3) We believe that Funds From Operations (“FFO”) is an appropriate supplemental measure of operating
performance because it helps our investors compare our operating performance relative to other REITs.
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss)
available to common shareholders computed in accordance with GAAP, excluding gains or losses from sales of
operating properties and extraordinary items, plus depreciation and amortization of real estate assets, including
our share of unconsolidated partnerships and joint ventures. We calculate FFO in a manner consistent with the
NAREIT definition.
Whitestone REIT 2009 Annual Report | 29
Net income (loss) attributable to Whitestone REIT
Depreciation and amortization of real estate assets (1)
(Gain) loss on sale or disposal of assets (1)
Year Ended December 31,
(in thousands)
2005
2007
2009
$ 1,342 $ 1,134 $ (77) $ 1,781 $ 2,448
2008
2006
6,347
5,877
6,108
6,341
5,512
196
(3,396)
16
(197)
-
Net income (loss) attributable to noncontrolling interests 733
621 (46)
1,068
1,891
FFO
$ 8,618 $ 4,236 $ 6,001 $ 8,993 $ 9,851
(1) Including amounts for discontinued operations
Item 7. 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 audited consolidated financial statements and the notes thereto included in this annual report.
For more detailed information regarding the basis of presentation for the following information, you should
read the notes to our audited consolidated financial statements included in this annual report.
Overview of Our Company
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 business center or 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.
As of December 31, 2009, we had 773 total tenants. We have a diversified tenant base with our largest
tenant comprising only 2.7% of our total revenues for the twelve months ended December 31, 2009. Lease
terms for our properties range from less than one year for smaller tenants to over 15 years for larger
tenants. Our leases generally include minimum monthly lease payments and tenant reimbursements for
payment of taxes, insurance and maintenance. We completed 252 new and renewal leases during 2009
totaling 0.6 million square feet and $22.7 million in total lease value.
We employed 49 full-time employees as of December 31, 2009. 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.
How We Derive Our Revenue
Substantially all of our revenue is derived from rents received from leases at our properties. We
had rental income and tenant reimbursements of approximately $32.7 million for the year ended
December 31, 2009 as compared to $31.2 million for the year ended December 31, 2008, an increase
of $1.5 million, or 5%. The increase is primarily attributable to the addition of our Spoerlein Commons
property during January 2009. Our occupancy rate as of December 31, 2009 was 82%, as compared to 84%
as of December 31, 2008. The majority of the decrease in occupancy resulted from the loss of a grocery
store as a tenant in an approximately 42,000 square foot space. The loss of the grocery store as a tenant
occurred near the end of the fiscal year in 2009 and did not have a material impact on revenue in 2009.
30 | Whitestone REIT 2009 Annual Report
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. We
also expect modest continued improvement in the overall economy in Houston to provide slight increases in
occupancy at certain of our properties, which should result in some growth in rental income.
Scheduled Lease Expirations. While we tend to lease space to smaller businesses that desire shorter term
leases, as of December 31, 2009, approximately 32% of our gross leasable square footage is subject to leases
that expire prior to December 31, 2011. We routinely seek to renew leases with our existing tenants
prior to their expiration and typically begin discussions with tenants as many as 12 months prior to the
expiration date of the existing lease. While our early renewal program and other leasing and marketing
efforts target these expiring leases, and while we hope to re-lease most of that space prior to expiration
of the leases at rates comparable to or slightly in excess of the current rates, market conditions, including
new supply of properties, and macroeconomic conditions in Houston and nationally could adversely impact
our renewal rate and/or the rental rates we are able to negotiate. If any of these risks materialize, our cash
flow and ability to pay dividends could be adversely affected.
Acquisitions. We expect to actively seek acquisitions in the foreseeable future. As of December 31, 2009, we
owned and operated 36 commercial properties consisting of:
Eighteen retail properties containing approximately 1.2 million square feet of leasable space and
having a total carrying amount (net of accumulated depreciation) of $70.1 million;
Seven office properties containing approximately 0.6 million square feet of leasable space and
having a total carrying amount (net of accumulated depreciation) of $45.8 million; and
Eleven office/flex properties containing approximately 1.2 million square feet of leasable space and
having a total carrying amount (net of accumulated depreciation) of $42.5 million.
Property Acquisitions
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties
that fit our Community Centered Properties strategy. We define Community Centered Properties as
visibly located properties in established or developing, culturally diverse neighborhoods in our target
markets, primarily in and around Phoenix, Chicago, Dallas, San Antonio and Houston. 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 and medical, educational and financial services. Our goal is
for each property to become a Whitestone-branded business center or retail community that serves a
neighboring five-mile radius around our property.
In January 2009, we acquired a property that meets our Community Centered Property strategy, containing
41,396 leasable square feet located in Buffalo Grove, Illinois for approximately $9.4 million, including cash
of $5.5 million, issuance of 703,912 units of limited partnership interest in our Operating Partnership (“OP
Units”) valued at approximately $3.6 million and credit for net prorations of $0.3 million. The property,
Spoerlein Commons, is a two-story complex of retail, medical and professional office tenants. We acquired
the property from Midwest Development Venture IV (“MDV IV”), an Illinois limited partnership controlled
by James C. Mastandrea, our Chairman, President and Chief Executive Officer. Because of Mr. Mastandrea’s
relationship with the seller, a special committee consisting solely of the independent trustees, negotiated
the terms of the transaction, which included the use of an independent appraiser to value the property.
In October 2007, we acquired a property that meets our Community Centered Property strategy, containing
33,400 leasable square feet in the Phoenix, Arizona metropolitan area, for approximately $8.3 million. The
property, Pima Norte, is a one-story and two-story class “A” professional, executive and medical office
building. We began leasing Pima Norte during 2008. Since we acquired the property in 2007, we have
Whitestone REIT 2009 Annual Report | 31
invested approximately $0.8 million to complete the build-out of one of the buildings and have capitalized
approximately $0.5 million in interest cost, resulting in the total investment through December 31, 2009 of
approximately $9.6 million.
Summary of Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements. We prepared these financial statements in conformity with U.S. generally accepted
accounting principles. The preparation of these financial statements required us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. We based our estimates on historical experience and on various other assumptions we
believe to be reasonable under the circumstances. Our results may differ from these estimates. Currently,
we believe that our accounting policies do not require us to make estimates using assumptions about
matters that are highly uncertain. You should read Note 2, “Summary of Significant Accounting Policies,”
to our consolidated financial statements in conjunction with this Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
We have described below the critical accounting policies that we believe could impact our consolidated
financial statements most significantly.
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 rent 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 have established an allowance for doubtful accounts against the portion of tenant accounts receivable
which is estimated to be uncollectible.
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, primarily interest, real estate taxes and loan acquisition costs, 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. Prior to that time, we expense these costs as acquisition expense. No interest was
capitalized for the year ended December 31, 2009. Approximately $0.4 million and $0.1 million in interest
was capitalized for the years ended December 31, 2008 and 2007, respectively.
Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties
to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on
their respective fair values. Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any. We determine fair value based
on estimated cash flow projections that utilize appropriate discount and capitalization rates and available
market information. Estimates of future cash flows are based on a number of factors including the historical
operating results, known trends and specific market and economic conditions that may affect the property.
Factors considered by management in our analysis of determining the as-if-vacant property value include an
estimate of carrying costs during the expected lease-up periods considering market conditions, and costs
to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance
and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and
other economic conditions. Management also estimates costs to execute similar leases including leasing
commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market
32 | Whitestone REIT 2009 Annual Report
leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment
to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying
leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the
remaining term of such debt.
Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of five
to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-
line method over the life of the lease.
Impairment. We review our properties for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of the assets, including accrued rental income, may not
be recoverable through operations. We determine whether an impairment in value has occurred by
comparing the estimated future cash flows (undiscounted and without interest charges), including the
estimated residual value of the property, with the carrying cost of the property. If impairment is indicated,
a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.
Management has determined that there has been no impairment in the carrying value of our real estate
assets as of December 31, 2009.
Accrued Rent and Accounts Receivable. Included in accrued rent and accounts receivable are base rents,
tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance
for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer
credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy),
historical bad debt levels, and current economic trends. As of December 31, 2009 and 2008, we had
an allowance for uncollectible accounts of $0.9 million and $1.5 million, respectively. During 2009, 2008
and 2007, we recorded bad debt expense in the amount of $0.9 million, $0.7 million and $0.4 million,
respectively, related to tenant receivables that we specifically identified as potentially uncollectible based
on our assessment of each tenant’s credit-worthiness. Bad debt expenses and any related recoveries are
included in property operation and maintenance expense.
Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line
method over the terms of the related lease agreements. Loan costs are amortized on the straight-line
method over the terms of the loans, which approximates the interest method. Costs allocated to in-
place leases whose terms differ from market terms related to acquired properties are amortized over the
remaining life of the respective leases.
Federal Income 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 such a manner as to qualify to be taxed as a REIT, and we intend to operate so as to remain
qualified as a REIT for federal income tax purposes.
Derivative Instruments. We have initiated a program designed to manage exposure to interest rate fluctuations
by entering into financial derivative instruments. The primary objective of this program is to comply with
debt covenants on a credit facility. We sometimes enter into interest rate swap agreements with respect to
amounts borrowed under certain of our credit facilities, which effectively exchanges existing obligations to
pay interest based on floating rates for obligations to pay interest based on fixed LIBOR rates.
We have adopted provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements
and Disclosures” (“ASC 820”) which requires for items appropriately classified as cash flow hedges, that
changes in the market value of the instrument and in the market value of the hedged item be recorded
Whitestone REIT 2009 Annual Report | 33
as other comprehensive income or loss with the exception of the portion of the hedged items that are
considered ineffective. The derivative instruments are reported at fair value as other assets or other
liabilities as applicable. As of December 31, 2009 and 2008, we did not have any interest rate swaps. As of
December 31, 2007, we had a $70 million dollar interest rate swap which was designated as a cash flow
hedge. The fair value of this interest rate swap as of December 31, 2007 was approximately ($0.4) million,
which is included in accounts payable and accrued expenses in the consolidated balance sheets. Additionally
for a previous interest rate swap which was not designated as a cash flow hedge, approximately ($0.03)
million is included in other expense and other income on the consolidated statements of operations for
the year ended December 31, 2007.
Recent Accounting Pronouncements. In June 2009, the Financial Accounting Standards Board (“FASB”) issued
ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“the Codification”). Effective July 1, 2009, the Codification is the single source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation
of financial statements in conformity with GAAP. We adopted the Codification during the third quarter
of 2009 and the adoption did not materially impact our financial statements; however, our references
to accounting literature within our notes to the consolidated financial statements have been revised to
conform to the Codification classification.
In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic
810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which
codified the previously issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments
to FASB Interpretation No. 46R.” ASU 2009-17 changes the consolidation analysis for variable interest
entities (“VIEs”) and requires a qualitative analysis to determine the primary beneficiary of the VIE. The
determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct
matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or
the right to receive benefits, of the VIE which could potentially be significant to the VIE. The ASU requires an
ongoing reconsideration of the primary beneficiary and also amends the events triggering a reassessment
of whether an entity is a VIE. ASU 2009-17 requires additional disclosures for VIEs, including disclosures
about a reporting entity’s involvement with VIEs, how a reporting entity’s involvement with a VIE affects the
reporting entity’s financial statements, and significant judgments and assumptions made by the reporting
entity to determine whether it must consolidate the VIE. ASU 2009-17 is effective for us beginning January
1, 2010. Our adoption of ASU 2009-17 will not have a material effect on our financial statements.
In January 2010, the FASB issued ASU 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders
with Components of Stock and Cash.” The ASU clarifies when the stock portion of a distribution allows
shareholders to elect to receive cash or stock, with a potential limitation on the total amount of cash
which all shareholders could elect to receive in the aggregate, the distribution would be considered a share
issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share
prospectively. We adopted ASU 2010-01 effective October 1, 2009, and the adoption did not have an impact
on our financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” which is codified in FASB ASC 855,
“Subsequent Events” (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are available
to be issued. We adopted ASC 855 in the second quarter of 2009 and evaluated all events or transactions
through the date of this filing. During this period, we did not have any material subsequent events that
impacted our consolidated financial statements.
34 | Whitestone REIT 2009 Annual Report
Liquidity and Capital Resources
Our primary liquidity demands are distributions to the holders of our common shares and holders of our
OP Units, capital improvements and repairs and maintenance for our properties, acquisition of additional
properties, tenant improvements and debt repayments.
Primary sources of capital for funding our acquisitions and redevelopment programs are cash flows
generated from operating activities, issuance of notes payable, sales of common shares, sales of OP Units
and sales of underperforming properties.
Our capital structure includes non-recourse secured debt that we assumed or originated on certain
properties. We may hedge the future cash flows of certain debt transactions principally through interest
rate swaps with major financial institutions.
During the year ended December 31, 2009, our cash provided from operating activities was $8.9 million
and our total distributions were $6.9 million. Therefore we had cash flow from operations in excess of
distributions of approximately $2.0 million.
We anticipate that cash flows from operating activities and our borrowing capacity will provide adequate
capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments
during the next 12 months. 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.
Cash and Cash Equivalents
We had cash and cash equivalents of approximately $6.3 million at December 31, 2009, as compared to
$13.0 million on December 31, 2008. The decrease of $6.7 million was primarily the result of the following:
Sources of Cash
Cash flow from operations of $8.9 million for the year ended December 31, 2009.
Net proceeds of $9.2 million from issuance of notes payable net of origination costs.
Uses of Cash
Payment of dividends and distributions to common shareholders and OP Unit holders of $6.9 million.
Payments of loans of $8.7 million.
Additions to real estate of $9.2 million.
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety
of principal.
Whitestone REIT 2009 Annual Report | 35
Debt
Mortgages and other notes payable consist of the following (in thousands):
Description
Fixed rate notes
$10.0 million 6.04% Note, due 2014
$11.2 million 6.52% Note, due 2015
$21.4 million 6.53% Notes, due 2013
$24.5 million 6.56% Note, due 2013
$9.9 million 6.63% Notes, due 2014
$0.5 million 5.05% Notes, due 2010 and 2009
Floating rate notes
$6.4 million LIBOR + 2.00% Note, due 2009
$26.9 million LIBOR + 2.60% Note, due 2013
Year Ended December 31,
2009
2008
$ 9,646
11,043
20,721
24,435
9,757
52
-
26,128
$ 101,782
$ 9,782
11,159
21,263
24,500
-
40
6,400
26,859
$ 100,003
Our debt was collateralized by 21 operating properties as of December 31, 2009 with a combined
net book value of $108.7 million and 18 operating properties at December 31, 2008 with a combined
net book value of $108.3 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 the assignment of certain rents and leases associated with those properties.
On February 3, 2009, Whitestone, operating through its subsidiary, Whitestone Centers LLC, executed
four promissory notes (the “Sun Life Promissory Notes II”), totaling $9.9 million payable to Sun Life
Assurance Company of Canada with an applicable interest rate of 6.63% per annum and a maturity date of
March 1, 2014. The Sun Life Promissory Notes II are non-recourse loans secured by Whitestone Centers
LLC’s properties and a limited guarantee by Whitestone.
Our loans are subject to customary financial covenants. As of December 31, 2009, we were in compliance
with all loan covenants.
Annual maturities of notes payable as of December 31, 2009 are due during the following years:
Year
2010
2011
2012
2013
2014
2015 and thereafter
Total
Amount Due
(in thousands)
$ 2,350
2,423
2,555
66,386
17,799
10,269
$ 101,782
For further discussion regarding specific terms of our debt, see Note 8 of the Consolidated Financial Statements.
36 | Whitestone REIT 2009 Annual Report
Capital Expenditures
We continually evaluate our properties’ performance and value. We may determine it is in our shareholders’
best interest to invest capital in properties we believe have potential for increasing value. We also may have
unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to invest
in similar properties outside of Texas 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.
Contractual Obligations
As of December 31, 2009, we had the following contractual debt obligations (see Note 8 of the Consolidated
Financial Statements for further discussion regarding the specific terms of our debt):
Contractual Obligations
Total
Payment due by period (in thousands)
Less than
1 Year
(2010)
1-3 Years
(2011-2012)
3-5 Years
(2013-2014)
More than
5 Years
(after 2014)
Long-Term Debt - Principal
$ 101,782
$ 2,350
$ 4,978
$ 84,185
$ 10,269
Long-Term Debt - Fixed Interest
17,221
4,222
8,184
4,316
499
Long-Term Debt - Variable Interest (1)
2,728
730
1,392
606
-
Operating Lease Obligations
53
44
8
1
-
Purchase Obligations
-
-
-
-
-
Other Long-Term Liabilities
Reflected on the Registrant’s
Balance Sheet under GAAP
Total
-
-
-
-
-
$ 121,784
$ 7,346
$ 14,562
$ 89,108
$ 10,768
(1) As of December 31, 2009, we had one loan totaling $26.1 million which bore interest at a floating rate. The
variable interest rate payments are based on LIBOR plus 2.6%. The information in the table above reflects
our projected interest rate obligations for the floating rate payments based on one-month LIBOR as of
December 31, 2009, which was 0.23%.
Distributions
During 2009, we paid dividends to our common shareholders and distributions to our OP Unit holders
of $6.9 million, compared to $8.7 million in 2008. Common shareholders and OP Unit holders receive
monthly dividends and distributions, respectively. Payments of dividends and distributions are declared
quarterly and paid monthly. The dividends paid to common shareholders and distributions paid to OP Unit
holders follow (in thousands):
Common Shareholders
Noncontrolling OP Unit Holders
2009
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$ 1,163
1,163
1,163
1,156
$ 1,093
1,456
1,529
1,500
$ 610
610
530
531
$ 533
712
978
871
Whitestone REIT 2009 Annual Report | 37
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
The following table provides a general comparison of our results of operations for the years ended
December 31, 2009 and December 31, 2008:
Year Ended December 31,
(in thousands, excpet per share data)
Number of properties owned and operated
Aggregate gross leasable area (sq. ft.)
Ending occupancy rate
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Loss on disposal of assets
Income (loss) from continuing operations
Loss from discontinued operations
Gain on sale of properties from
discontinued operations
Net income
Less: Net income attributable to
noncontrolling interests
Net income attributable to Whitestone REIT
Funds from operations (1)
Dividends and distributions paid on common
shares and OP Units
Per common share and OP Unit
Dividends paid as a % of funds from operations
2009
36
3,039,044
82%
$ 32,685
12,991
17,201
222
196
2,075
-
-
2,075
733
$ 1,342
$ 8,618
6,926
$ 0.45
80%
2008
35
2,990,892
84%
$ 31,201
12,835
19,600
219
223
(1,676)
(188)
3,619
1,755
621
$ 1,134
$ 4,236
8,672
$ 0.58
205%
(1) For a reconciliation of funds from operations to net income, see “Funds From Operations” below.
Property Revenues. We had rental income and tenant reimbursements of approximately $32.7 million for
the year ended December 31, 2009 as compared to $31.2 million for the year ended December 31, 2008,
an increase of $1.5 million, or 5%. The increase is primarily attributable to the addition of our Spoerlein
Commons property during January 2009.
38 | Whitestone REIT 2009 Annual Report
Property Expenses. Our property expenses were $13.0 million for the year ended December 31, 2009, as
compared to $12.8 million for the year ended December 31, 2008, an increase of $0.2 million, or 2%. The
primary components of total property expenses are detailed in the table below (in thousands):
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total property expenses
Year Ended December 31,
2009
$ 4,472
2,387
2,108
1,408
877
1,739
$ 12,991
2008
$ 3,973
2,679
2,138
1,633
731
1,681
$ 12,835
Real Estate Taxes. Increases during 2009 in real estate taxes of $499,000, or 13%, are the result of increased
assessed values on our properties and the addition of the Spoerlein Commons property during January 2009.
Utilities. Utilties decreased $292,000, or 11%, during 2009. The majority of our utility expense is the
electricity usage of our seven office buildings which were charged at a lower rate per kilowatt hour during
the second half of 2009 due to our new contracts with our electricity provider for lower fixed rates in the
Texas market.
Contract Services. Contract services decreased $30,000, or 1%, during 2009.
Repairs and Maintenance. Repairs and maintenance decreases of $225,000, or 14%, during 2009 are primarily
attributable to decreases in hard surface and parking lot repair costs and the internalization of many
maintenance functions.
Bad Debt. Bad debt for the year ended December, 31 2009 was $146,000, or 20%, more than in 2008. The
increase in bad debt is driven by slower paying tenants and abandonments. We vigorously pursue past due
accounts, but expect for collection of rents to continue to be challenging for the foreseeable future.
Labor and Other. Increases of $58,000, or 4%, in labor and other during 2009 are the result of increased
travel and marketing costs.
Other Expenses. Our other expenses were $17.2 million for the year ended December 31, 2009, as
compared to $19.6 million for the year ended December 31, 2008, a decrease of $2.4 million, or 12%. The
primary components of other expenses, net are detailed in the table below (in thousands):
General and administrative
Depreciation and amortization
Involuntary conversion
Interest expense
Interest income
Total other expenses
Year Ended December 31,
2009
$ 6,072
6,958
(1,542)
5,749
(36)
$ 17,201
2008
$ 6,708
6,859
358
5,857
(182)
$ 19,600
Whitestone REIT 2009 Annual Report | 39
General and Administrative. The decrease of $636,000, or 10%, in general and administrative expense is
primarily due to decreased legal fees related to litigation with our former CEO and our former external
advisor, offset by share-based compensation that was incurred in 2009 but not in 2008. Legal fees were
$323,000 for the year ended December 31, 2009, as compared to $1,717,000 for the same period in 2008.
Share-based compensation was $1,013,000 and $0 for the years ended December 31, 2009 and 2008,
respectively.
Depreciation and Amortization. Depreciation and amortization increased $99,000, or 1%, for the year ended
December 31, 2009, as compared to the year ended December 31, 2008. During 2009 depreciation
increased $797,000, or 16%, while amortization decreased $698,000, or 35%. The increase in depreciation
expense is the result of tenant improvements placed in service and depreciation on our Pima Norte and
Spoerlein Commons properties which were placed in service in late 2008 and early 2009, respectively. The
decrease in amortization expense is primarily attributable to the loan fees which were $440,000 during
2009 compared to $1,072,000 during 2008.
Involuntary Conversion. Involuntary conversion was a gain of $1,542,000 for the year ended
December 31, 2009, as compared to a loss of $358,000 during the same period in 2008. During the year
ended December 31, 2009, we completed a settlement of our insurance claims related to our 31 properties
damaged by Hurricane Ike. The settlement was $7,000,000 in its entirety, with $6,529,000 allocated to
casualty claims and approximately $471,000 allocated to loss of rents claims. The $6,529,000 in insurance
proceeds allocated to casualty losses were offset by accrued repair costs of $5,107,000, resulting in a gain of
$1,422,000. The remaining $120,000 in involuntary conversion gain for the year ended December 31, 2009
was realized on an insurance settlement we completed during 2009 on a chiller unit at our Uptown Tower
property in Dallas, Texas. Repair costs of $364,000 expensed during the twelve months ended December
31, 2008 related to Hurricane Ike are included in the 2008 involuntary conversion loss.
Interest Expense, Net. Interest expense for the year ended December 31, 2009 was $5,749,000, a decrease
of $108,000 over the same period in 2008. An increase in the average outstanding note payable balance
of $14,906,000 accounted for approximately $972,000 in increased interest expense during 2009, while a
lower effective interest rate of 1.0% per annum (excluding amortized loan fees) accounted for approximately
$1,080,000 in decreased interest expense during 2009. The decrease in interest income of approximately
$146,000 is primarily due to lower interest rates of return on our deposits.
40 | Whitestone REIT 2009 Annual Report
Discontinued Operations. Discontinued operations are comprised of the two properties known as Garden
Oaks and Northeast Square. The two properties were transferred to our former CEO and our former
external advisor as part of a legal settlement on May 30, 2008. Below is a summary of income from
discontinued operations (in thousands):
Year Ended December 31,
Property Revenues
Rental revenues
Other revenues
Total property revenues
Property Expenses
Properties operation and maintenance
Real estate taxes
Total property expenses
Other expense
General and administrative
Depreciation and amortization
Total other expense
Loss before gain on sale of assets
and income taxes
Gain on sale of properties
Provision for income taxes
Income from discontinued operations
2009
$ -
-
-
-
-
-
-
-
-
-
-
-
$ -
2008
$ 333
225
558
391
133
524
-
218
218
(184)
3,619
(4)
$ 3,431
Whitestone REIT 2009 Annual Report | 41
Result of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following table provides a general comparison of our results of operations for the years ended
December 31, 2008 and December 31, 2007 (dollars in thousands):
Year Ended December 31,
Number of properties owned and operated (1)
Aggregate gross leasable area (sq. ft.)(1)
Ending occupancy rate(1)
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Change in fair value of derivative instrument
Loss on disposal of assets
Loss from continuing operations
Income (loss) from discontinued operations
Gain on sale of properties from discontinued operations
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Whitestone REIT
Funds from operations(2)
Dividends and distributions paid on common
shares and OP Units
Per common share and OP Unit
Dividends paid as a % of funds from operations
2008
35
2,990,892
84%
$ 31,201
12,835
19,600
219
-
223
(1,676)
(188)
3,619
1,755
621
$ 1,134
$ 4,236
8,672
$ 0.58
205%
2007
37
3,093,063
86%
$ 29,374
12,236
17,594
217
30
9
(712)
589
-
(123)
(46)
$ (77)
$ 6,001
9,507
$ 0.60
158%
(1) Two properties disposed in May of 2008 with a total area of 135,571 sq. ft. are included in the (i) number of
properties owned and operated; (ii) aggregate gross leasable area (sq. ft.), and (iii) ending occupancy rate for
the year ended December 31, 2007, but are excluded from continuing operations revenues and expenses.
(2) For a reconciliation of funds from operations to net income, see “Funds From Operations” below.
Property Revenues. We had rental income and tenant reimbursements of approximately $31.2 million for
the year ended December 31, 2008 compared to $29.4 million for the year ended December 31, 2008, an
increase of $1.8 million, or 6%. Our year-end occupancy rate for 2008 was 84%, as compared to 86% at
year-end 2007. The majority of the decrease in occupancy occurred near the end of the year in 2008 and
did not have a material affect on revenue in 2008. We lost several large tenants towards the end of the year
in 2008 either to bankruptcy or expiring leases that were not renewed.
42 | Whitestone REIT 2009 Annual Report
Property Expenses. Our property expenses were $12.8 million for the year ended December 31, 2008,
compared to $12.2 million for the year ended December 31, 2007, an increase of $0.6 million, or 5%. The
primary components of total property expenses are detailed in the table below (in thousands):
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total property expenses
Year Ended December 31,
2008
$ 3,973
2,679
2,138
1,633
731
1,681
$ 12,835
2007
$ 3,629
2,481
1,945
1,947
440
1,794
$ 12,236
Real Estate Taxes. Real estate taxes increased $344,000, or 10%, during 2008. Assessed values on many of
our properties increased in 2008. We actively work with various appraisal districts to keep our assessed
values low and litigate if necessary.
Utilities. Utilities increased $198,000 or 8% during 2008.
Contract Services and Repairs and Maintenance. Contract services and repairs and maintenance combined
decreased $121,000, or 3%, during 2008.
Bad Debt. Bad debt increased $291,000, or 66%, during 2008. The tightening credit markets and slowing
economy impacted many of our tenants negatively in 2008. During 2008, we added a full time collector to
constantly improve our collection efforts.
Labor and Other. During the twelve months ended December 31, 2008, labor and other decreased
$113,000, or 6%.
Other Expenses. Our other expenses were $19.6 million for the year ended December 31, 2008 compared
to $17.6 million for the year ended December 31, 2007, a decrease of $2.0 million, or 11%. The primary
components of other expenses, net are detailed in the table below (in thousands):
General and administrative
Depreciation and amortization
Involuntary conversion
Interest expense
Interest income
Total other expenses
Year Ended December 31,
2008
$ 6,708
6,859
358
5,857
(182)
$ 19,600
2007
$ 6,721
6,048
-
5,402
(577)
$ 17,594
General and Administrative. Legal expenses are included in general and administrative for the years ending
December 31, 2008 and 2007 and were $1,717,000 and $2,365,000, respectively. The majority of legal fees
were surrounding the termination of our former CEO and our former external advisor.
Whitestone REIT 2009 Annual Report | 43
Depreciation and Amortization. Depreciation and amortization increased $811,000, or 13%, during 2008.
Amortization of loan fees are included in amortization, and the extension of a revolving credit facility included
an approximately $900,000 fee that was amortized during 2008. During 2008, we incurred approximately
$1,700,000 in additional fees related to new debt, which will be amortized over five to seven years.
Involuntary Conversion. Repair costs of $364,000 expensed during the twelve months ended December 31,
2008 related to Hurricane Ike are included in the 2008 involuntary conversion loss.
Interest Expense, Net. Interest expense for the year ended December 31, 2008 was $5,857,000, an increase
of $455,000 over the same period in 2007. An increase in the average outstanding note payable balance
of $12,902,000 accounted for approximately $906,000 in increased interest expense during 2008, while a
lower effective interest rate of 0.5% per annum (excluding amortized loan fees) accounted for approximately
$451,000 in decreased interest expense during 2008. The decrease in interest income of approximately
$395,000 is primarily due to lower interest rates of return on our deposits.
Discontinued Operations. Discontinued operations are comprised of the two properties known as Garden
Oaks and Northeast Square. The two properties were transferred to our former CEO and our formal
external advisor as part of a legal settlement on May 30, 2008. Below is a summary of income from
discontinued operations (in thousands):
Year Ended December 31,
Property Revenues
Rental revenues
Other revenues
Total property revenues
Property Expenses
Properties operation and maintenance
Real estate taxes
Total property expenses
Other expense
General and administrative
Depreciation and amortization
Total other expense
Income (loss) before gain (loss) on disposal
of assets and income taxes
Gain on sale of properties
Provision for income taxes
Income from discontinued operations
2008
$ 333
225
558
391
133
524
-
218
218
(184)
3,619
(4)
$ 3,431
2007
$ 1,181
427
1,608
558
159
717
-
295
295
596
(7)
-
$ 589
Funds From Operations
The National Association of Real Estate Investment Trusts, or NAREIT, defines funds from operations, or
FFO, as net income (loss) available to common shareholders computed in accordance with U.S. generally
accepted accounting principles, or GAAP, excluding gains or losses from sales of operating real estate assets
and extraordinary items, plus depreciation and amortization of operating properties, including our share of
unconsolidated real estate joint ventures and partnerships. We calculate FFO in a manner consistent with
the NAREIT definition.
44 | Whitestone REIT 2009 Annual Report
Management uses FFO as a supplemental measure to conduct and evaluate our business because there are
certain limitations associated with using GAAP net income 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. There can be no assurance that FFO presented by us is comparable
to similarly titled measures of other 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.
Below is the calculation of FFO and the reconciliation to net income, which we believe is the most
comparable GAAP financial measure:
Net income (loss) attributable to Whitestone REIT
Depreciation and amortization of real estate assets (1)
Loss (gain) on sale or disposal of assets (1)
Income (loss) attributable to noncontrolling interests (1)
FFO
(1) Including amounts for discontinued operations
Year Ended December 31,
(in thousands)
2009
$ 1,342
6,347
196
733
$ 8,618
2008
$ 1,134
5,877
(3,396)
621
$ 4,236
2007
$ (77)
6,108
16
(46)
$ 6,001
Taxes
We elected to be taxed as a REIT under the Internal Revenue 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.
Inflation
We anticipate that the majority of our leases will continue to be triple-net leases or otherwise provide
that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate
the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows
us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire.
Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a
significant adverse effect upon our operating results.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements as of December 31, 2009.
Subsequent Events
The Company evaluated subsequent events through March 11, 2010, which is the date the December 31, 2009
consolidated financial statements were issued and has no items to disclose.
Whitestone REIT 2009 Annual Report | 45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market
risk to which we are exposed is the risk related to interest rate fluctuations. Based upon the nature of our
operations, we are not subject to foreign exchange or commodity risk. We are exposed to changes in interest
rates as a result of our debt facilities that have floating interest rates. As of December 31, 2009, we had $26.1
million of loans with floating interest rates. All of our financial instruments were entered into for other than
trading purposes. As of December 31, 2009, we did not have a fixed rate hedge in place, leaving $26.1 million
subject to interest rate fluctuations. The impact of a 1% increase or decrease in interest rates on our debt
would result in a decrease or increase of annual net income of approximately $0.3 million, respectively.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is incorporated by reference to our Financial Statements beginning
on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Form 10-K, as of December 31, 2009, an evaluation was
performed under the supervision and with the participation of the Company’s management, including the
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design
and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange
Act. In performing this evaluation, management reviewed the selection, application and monitoring of our
historical accounting policies. Based on that evaluation, the CEO and CFO concluded that as of December
31, 2009, these disclosure controls and procedures were effective and designed to ensure that the
information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized
and reported on a timely basis. In designing and evaluating disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. Management is required to apply
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under
the framework in Internal Control—Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation
by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
46 | Whitestone REIT 2009 Annual Report
Changes in Internal Control Over Financial Reporting
There have been no changes during the Company’s quarter ended December 31, 2009, in the Company’s
internal controls over financial reporting that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financing reporting.
Item 9B. Other Information.
None.
Whitestone REIT 2009 Annual Report | 47
P A R T I I I
Item 10. Trust Managers, Executive Officers and Corporate Governance.
The information required by Item 10 of Form 10-K is incorporated herein by reference to such information
as set forth in the definitive proxy statement for our 2010 annual meeting of shareholders.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated herein by reference to such information
as set forth in the definitive proxy statement for our 2010 annual meeting of shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
The following table provides information regarding our equity compensation plans as of December 31, 2009:
Plan Category
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
Equity compensation plans
approved by security holders
- (1)
Equity compensation plans
not approved by security
holders
Total
-
-
$ -
-
$ -
2,164,444 (2)
- (3)
2,164,444
(1) Excludes 1,802,187 common shares subject to outstanding restricted common share units granted pursuant
to our 2008 Long-Term Equity Incentive Plan.
(2) Pursuant to our 2008 Long-Term Equity Incentive Ownership Plan (the “Plan”), the maximum aggregate
number of common shares that may be issued under the Plan will be increased upon each issuance of common
shares by the Company (including issuances pursuant to the Plan) so that at any time the maximum number
of shares that may be issued under the Plan shall equal 12.5% of the aggregate number of common shares of
the Company and units of the Operating Partnership issued and outstanding (other than treasury shares and/
or units issued to or held by the Company).
(3) Excludes 25,000 restricted common shares issued to directors outside the Plan.
The remaining information required by Item 12 of Form 10-K is incorporated by reference to such
information as set forth in the definitive proxy statement for our 2010 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K is incorporated herein by reference to such information
as set forth in the definitive proxy statement for our 2010 annual meeting of shareholders.
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 of Form 10-K is incorporated herein by reference to such information
as set forth in the definitive proxy statement for our 2010 annual meeting of shareholders.
48 | Whitestone REIT 2009 Annual Report
P A R T I V
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements. The list of our financial statements filed as part of this Annual Report on Form
10-K is set forth on page F-1 herein.
2. Financial Statement Schedules.
a. Schedule II – Valuation and Qualifying Amounts
b. Schedule III – Real Estate and Accumulated Depreciation
All other financial statement schedules have been omitted because the required information of such
schedules is not present, is not present in amounts sufficient to require a schedule or is included in the
consolidated financial statements.
3. Exhibits. The list of exhibits filed as part of this Annual Report on Form 10-K in response to Item 601 of
Regulation S-K is submitted on the Exhibit Index attached hereto and incorporated herein by reference.
Whitestone REIT 2009 Annual Report | 49
S I G N AT U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WHITESTONE REIT
Dated: March 11, 2010
POWER OF ATTORNEY
By:
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and CEO
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes
and appoints James C. Mastandrea and David K. Holeman, and each of them, acting individually, as his attorney-
in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and
to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection
therewith and about the premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or
his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and CEO
(Principal Executive Officer)
/s/ David K. Holeman
David K. Holeman, Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
/s/ Daryl J. Carter
Daryl J. Carter, Trustee
/s/ Daniel G. DeVos
Daniel G. DeVos, Trustee
/s/ Donald F. Keating
Donald F. Keating, Trustee
/s/ Jack L. Mahaffey
Jack L. Mahaffey, Trustee
Chris A. Minton, Trustee
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
50 | Whitestone REIT 2009 Annual Report
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009,
2008 and 2007
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
Schedule III – Real Estate and Accumulated Depreciation
F-2
F-3
F-4
F-6
F-7
F-8
F-24
F-25
All other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions or are inapplicable, and therefore have
been omitted.
Whitestone REIT 2009 Annual Report | F-1
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M
To the Board of Trustees and Shareholders of Whitestone REIT
We have audited the accompanying consolidated balance sheets of Whitestone REIT and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations and
comprehensive income (loss), shareholders’ equity and cash flows, for each of the three years in the period
ended December 31, 2009. In connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Whitestone REIT and subsidiaries as of December 31, 2009 and 2008, and
the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ PANNELL KERR FORSTER OF TEXAS, P.C.
Houston, Texas
March 11, 2010
F-2 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Real estate assets, at cost:
Property
Accumulated depreciation
Total real estate assets
Cash and cash equivalents
Escrows and acquisition deposits
Accrued rent and accounts receivable,
net of allowance for doubtful accounts
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses
Tenants’ security deposits
Dividends and distributions payable
Total liabilities
Commitments and Contingencies:
Equity:
Preferred shares, $0.001 par value per share;
50,000,000 shares authorized; none issued and
outstanding at December 31, 2009 and 2008
Common shares, $0.001 par value per share;
400,000,000 shares authorized; 10,337,307 and
9,707,307 issued and outstanding at December 31,
2009 and 2008, respectively
Additional paid-in capital
Accumulated deficit
Total Whitestone REIT shareholders’ equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
December 31,
2009
2008
$ 192,832
(34,434)
158,398
6,275
8,155
4,514
3,973
685
$ 182,000
$ 101,782
9,954
1,630
1,775
115,141
$ 180,397
(29,550)
150,847
12,989
4,076
4,880
4,338
815
$ 177,945
$ 100,003
7,422
1,629
1,719
110,773
-
-
10
69,952
(26,372)
43,590
23,269
66,859
$ 182,000
10
69,188
(23,307)
45,891
21,281
67,172
$ 177,945
See notes to consolidated financial statements.
Whitestone REIT 2009 Annual Report | F-3
WHITESTONE REIT and SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share data)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
Other expenses (income)
General and administrative
Depreciation & amortization
Involuntary conversion
Interest expense
Interest income
Total other expense
Year Ended December 31,
2009
2008
$ 26,449
6,236
32,685
8,519
4,472
12,991
6,072
6,958
(1,542)
5,749
(Revised)
$ 24,999
6,202
31,201
8,862
3,973
12,835
6,708
6,859
358
5,857
(36)
(182)
17,201
19,600
2007
(Revised)
$ 23,769
5,605
29,374
8,607
3,629
12,236
6,721
6,048
-
5,402
(577)
17,594
Income (loss) from continuing operations before
loss on disposal of assets, change in fair value of
derivative instrument and income taxes
2,493
(1,234)
(456)
Provision for income taxes
Loss on sale or disposal of assets
(222)
(219)
(196)
(223)
Change in fair value of derivative instrument
Income (loss) from continuing operations
Income (loss) from discontinued operations
-
2,075
-
Gain on sale of properties from discontinued operations
-
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net income (loss) attributable to
Whitestone REIT
(217)
(9)
(30)
(712)
589
-
(123)
-
(1,676)
(188)
3,619
1,755
2,075
733
621
(46)
$ 1,342
$ 1,134
$ (77)
See notes to consolidated financial statements.
F-4 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share data)
Earnings per share - basic
Income (loss) from continuing operations attributable
to Whitestone REIT excluding amounts attributable to
unvested restricted shares
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable to
unvested restricted shares
Earnings per share - diluted
Income (loss) from continuing operations attributable
to Whitestone REIT excluding amounts attributable to
unvested restricted shares
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable to
unvested restricted shares
Weighted average number of common
shares outstanding:
Basic
Diluted
Dividends declared per common share
Condensed Consolidated Statements of
Comprehensive Income (Loss)
Net income (loss)
Other comprehensive gain (loss)
Year Ended December 31,
2009
2008
2007
(Revised)
(Revised)
$ 0.14
$ (0.11)
$ (0.04)
-
0.23
0.03
$ 0.14
$ 0.12
$ (0.01)
$ 0.13
$ (0.11)
$ (0.04)
-
0.23
0.03
$ 0.13
$ 0.12
$ (0.01)
9,707
9,904
$ 0.45
9,830
9,830
$ 0.53
9,999
9,999
$ 0.60
$ 2,075
$ 1,755
$ (123)
Unrealized gain (loss) on cash flow hedging activities
Comprehensive income (loss)
-
2,075
368
2,123
(368)
(491)
Less: Comprehensive income (loss) attributable to
noncontrolling interests
Comprehensive income (loss) attributable to
Whitestone REIT
733
759
(184)
$ 1,342
$ 1,364
$ (307)
See notes to consolidated financial statements.
Whitestone REIT 2009 Annual Report | F-5
WHITESTONE REIT and SUBSIDIARIES
Condensed Consolidated Statements of Changes in Equity
(in thousands, except share and unit data)
Additional
Common Shares
Shares Amount Capital
Paid-in Accumulated Comprehensive Shareholders’
Deficit
Loss
Total
Equity
Noncontrolling
Interests
Total
Units Amount Equity
Accumulated
Other
9,974
$ 10
$ 72,012
$ (13,108)
$ -
$ 58,914
5,808 $ 31,709 $ 90,623
Balance,
December 31, 2006
Issuance of shares
under dividend
reinvestment plan
at $9.50 per share
Dividends and
distributions
Unrealized loss on
change in fair value of
cash flow hedges
Net income
27
-
-
-
-
-
-
-
261
-
(6,025)
-
-
-
-
-
-
(77)
(230)
-
261
(6,025)
(230)
(77)
-
-
-
-
-
261
(3,486)
(9,511)
(138)
(368)
(46)
(123)
Balance,
December 31, 2007 10,001
$ 10
$ 72,273
$ (19,210)
$ (230)
$ 52,843
5,808 $ 28,039 $ 80,882
Repurchase of
common stock
and units
(294)
-
(2,479)
Reclassification of
dividend reinvestment
plan shares with
rescission rights to
liabilities at $9.50
per share
Dividends and
distributions
Unrealized loss on
change in fair value of
cash flow hedges
Net income
Balance,
December 31, 2008
OP units issued at
$5.15 per unit in
connection with
property acquisition
Share-based
compensation
Dividends and
distributions
Net income
-
-
(5,231)
-
1,134
-
-
-
230
-
(2,479) (1,068)
(4,762)
(7,241)
(606)
(5,231)
230
1,134
-
-
-
-
-
(606)
(2,755)
(7,986)
138
621
368
1,755
-
-
-
-
-
-
-
-
(606)
-
-
-
9,707
$ 10
$ 69,188
$ (23,307)
$ -
$ 45,891
4,740 $ 21,281 $ 67,172
-
630
-
-
-
-
-
-
-
764
-
-
-
-
(4,407)
1,342
-
-
-
-
-
704
3,625
3,625
764
(4,407)
1,342
-
-
-
-
764
(2,370)
(6,777)
733
2,075
Balance,
December 31, 2009 10,337
$ 10
$ 69,952
$ (26,372)
$ -
$ 43,590
5,444 $ 23,269 $ 66,859
See notes to consolidated financial statements.
F-6 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income (loss) from continuing operations
attributable to Whitestone REIT
Net income from discontinued operations
attributable to Whitestone REIT
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization
Noncontrolling interests
Loss on sale or disposal of assets
Bad debt expense
Share-based compensation
Change in fair value of derivative instrument
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rent and accounts receivable
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
Accounts payable and accrued expenses
Tenants’ security deposits
Net cash provided by operating activities
Net cash provided by operating activities
of discontinued operations
Cash flows from investing activities:
Acquisitions of real estate
Additions to real estate
Proceeds from sale of real estate
Repayment of note receivable
Net cash used in investing activities
Net cash used in investing activities of discontinued operations
Cash flows from financing activities:
Dividends paid
Distributions paid to OP unit holders
Proceeds from issuance of common shares
Proceeds from notes payable
Repayments of notes payable
Payments of loan origination costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes
Noncash investing and financing activities:
Disposal of fully depreciated real estate
Financed insurance premiums
Disposal of real estate in settlement of lawsuit
$
$
$
2009
Year Ended December 31,
2008
(Revised)
2007
(Revised)
$ 1,342
$
(1,049)
$
(444)
-
1,342
6,958
733
196
877
1,013
-
(3,700)
(511)
(634)
527
2,096
1
8,898
-
(5,619)
(3,611)
-
-
(9,230)
-
(4,645)
(2,281)
-
9,557
(8,725)
(288)
(6,382)
(6,714)
12,989
6,275
5,535
223
564
568
-
2,183
1,134
6,859
(627)
223
731
-
-
(3,590)
(225)
(831)
417
655
31
2,612
8
-
(5,153)
-
-
(5,153)
(8)
367
(77)
6,048
(268)
9
440
-
30
(104)
(1,292)
(1,210)
205
115
201
3,730
901
(8,248)
(1,957)
265
604
(9,336)
(29)
(5,578)
(3,094)
-
95,053
(78,990)
(2,672)
4,719
2,178
10,811
$ 12,989
$
$
5,189
224
698
476
7,844
(6,022)
(3,485)
261
22,392
(5,752)
(147)
7,247
2,513
8,298
$ 10,811
$
$
5,344
-
1,844
458
-
See notes to consolidated financial statements.
Whitestone REIT 2009 Annual Report | F-7
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
1. Description of Business and Nature of Operations
Whitestone REIT (“Whitestone”) was formed as a real estate investment trust, pursuant to the Texas Real
Estate Investment Trust Act on August 20, 1998. In July 2004, Whitestone changed its state of organization
from Texas to Maryland pursuant to a merger of Whitestone directly with and into a Maryland real estate
investment trust formed for the sole purpose of the reorganization and the conversion of each outstanding
common share of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of
the Maryland entity. Whitestone serves as the general partner of Whitestone REIT Operating Partnership,
L.P. (the “Operating Partnership” or “WROP” or “OP”), which was formed on December 31, 1998 as a
Delaware limited partnership. Whitestone currently conducts substantially all of its operations and activities
through the Operating Partnership. As the general partner of the Operating Partnership, Whitestone has
the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain
customary exceptions. As of December 31, 2009, 2008 and 2007 we owned and operated 36, 35, and 37
retail, warehouse and office properties in and around Houston, Dallas, San Antonio, Chicago and Phoenix.
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 December 31, 2009, 2008
and 2007, 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.
All significant inter-company balances have been eliminated. 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
year. Issuance of additional common shares of beneficial interest in Whitestone (“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 (“OP Units”) changes the ownership interests of both the
noncontrolling interests and Whitestone.
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. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at 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 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 fiscal year amounts in the accompanying consolidated
financial statements in order to be consistent with the current fiscal year presentation, including changes
resulting from the adoption of revised provisions regarding classification of noncontrolling interests within
the Consolidation Topic of the Accounting Standards Codification (the “Codification”), as discussed later in
this Note 2. These reclassifications had no effect on net income or equity other than the changes resulting
F-8 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
from the implementation of revised provisions regarding classification of noncontrolling interests.
Share-Based Compensation. From time to time we award nonvested restricted common share awards or
restricted common share unit awards which may be converted into common shares, to trustees, executive
officers and employees under our 2008 Long-Term Equity Incentive Ownership Plan (the “2008 Plan”).
The vast majority of the 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. For the year
ended December 31, 2009, we recognized $1.0 million in share-based compensation expense. No share-
based compensation expense was recognized prior to 2009 as no awards had been granted.
Noncontrolling Interests. In December 2007, the FASB issued SFAS No. 160, which is codified in ASC 810, which
is effective for fiscal years beginning on or after December 15, 2008. We adopted SFAS No. 160 effective
January 2009. Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent.
The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, we
have reported noncontrolling interests in equity on the condensed consolidated balance sheets but separate
from Whitestone’s equity as prescribed by SFAS No. 160. On the consolidated statements of operations
and comprehensive income (loss), the subsidiaries are reported at the consolidated amount, including both
the amount attributable to Whitestone and noncontrolling interests. Consolidated statements of changes
in equity are included for both quarterly and annual financial statements, including beginning balances,
activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
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 rent 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 have established an allowance for doubtful accounts against the portion of tenant accounts receivable
which is estimated to be uncollectible.
Cash and Cash Equivalents. We consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents as of December 31, 2009 and 2008
consist of demand deposits at commercial banks.
Real Estate
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, acquisition
costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition
costs, 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. We capitalize acquisition costs once the acquisition
of the property becomes probable. Prior to that time, we expense these costs as acquisition expense. No
interest was capitalized during the year ended December 31, 2009. Interest in the amounts of $0.4 million
and $0.1 million was capitalized on properties under development during the years ended December 31, 2008
and 2007, respectively.
Whitestone REIT 2009 Annual Report | F-9
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties
to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on
their respective fair values. Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationship value, if any. We determine fair value based
on estimated cash flow projections that utilize appropriate discount and capitalization rates and available
market information. Estimates of future cash flows are based on a number of factors including the historical
operating results, known trends and specific market and economic conditions that may affect the property.
Factors considered by management in our analysis of determining the as-if-vacant property value include an
estimate of carrying costs during the expected lease-up periods considering market conditions, and costs
to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance
and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and
other economic conditions. Management also estimates costs to execute similar leases including leasing
commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market
leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment
to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying
leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the
remaining term of such debt.
Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5
to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-
line method over the life of the improvement or remaining term of the lease, whichever is shorter.
Impairment. We review our properties for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of the assets, including accrued rental income, may not
be recoverable through operations. We determine whether an impairment in value has occurred by
comparing the estimated future cash flows (undiscounted and without interest charges), including the
estimated residual value of the property, with the carrying cost of the property. If impairment is indicated,
a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.
Management has determined that there has been no impairment in the carrying value of our real estate
assets as of December 31, 2009.
Accrued Rent and Accounts Receivable. Included in accrued rent and accounts receivable are base rents,
tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance
for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer
credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy),
historical bad debt levels, and current economic trends. As of December 31, 2009 and 2008, we had
an allowance for uncollectible accounts of $0.9 million and $1.5 million respectively. During 2009, 2008
and 2007, we recorded bad debt expense in the amount of $0.9 million, $0.7 million and $0.4 million
respectively, related to tenant receivables that we specifically identified as potentially uncollectible based
on our assessment of the tenant’s credit-worthiness. Bad debt expenses and any related recoveries are
included in property operation and maintenance expense in the consolidated statements of operations.
Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized using the straight-line
method over the terms of the related lease agreements. Loan costs are amortized on the straight-line
method over the terms of the loans, which approximates the interest method. Costs allocated to in-
place leases whose terms differ from market terms related to acquired properties are amortized over the
remaining life of the respective leases.
F-10 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Prepaids and Other Assets. Prepaids and other assets include escrows established pursuant to certain
mortgage financing arrangements for real estate taxes and insurance and acquisition deposits which include
earnest money deposits on future acquisitions.
Income Taxes. Federal - We elected to be taxed as a REIT under the Internal Revenue 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.
State Taxes. In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax
structure, replacing the previous tax based on capital or earned surplus with one based on margin (often
referred to as the “Texas Margin Tax”) effective with franchise tax reports filed on or after January 1, 2008.
The Texas Margin Tax is computed by applying the applicable tax rate (1% for us) to the profit margin, which,
generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3
states that the Texas Margin Tax is not an income tax, Financial Accounting Standards Board (“FASB”) ASC 740,
“Income Taxes” (“ASC 740”) applies to the Texas Margin Tax. We have recorded a margin tax provision of $0.2
million for the Texas Margin Tax for each of the years ended December 31, 2009, 2008 and 2007.
Derivative Instruments. We have initiated a program designed to manage exposure to interest rate fluctuations
by entering into financial derivative instruments. The primary objective of this program is to comply with
debt covenants on a credit facility. We sometimes enter into interest rate swap agreements with respect to
amounts borrowed under certain of our credit facilities, which effectively exchanges existing obligations to
pay interest based on floating rates for obligations to pay interest based on fixed LIBOR rates.
We have adopted provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) which
require for items appropriately classified as cash flow hedges that changes in the market value of the instrument
and in the market value of the hedged item be recorded as other comprehensive income or loss with the
exception of the portion of the hedged items that are considered ineffective. The derivative instruments are
reported at fair value as other assets or other liabilities as applicable. As of December 31, 2009 and 2008 we
did not have any interest rate swaps. As of December 31, 2007, we had a $70 million dollar interest rate swap
which was designated as a cash flow hedge. The fair value of this interest rate swap as of December 31, 2007
was approximately ($0.4) million. Additionally for a previous interest rate swap which was not designated
as a cash flow hedge, approximately ($0.03) million is included in other expense and other income on the
consolidated statements of operations for the year ended December 31, 2007.
Fair Value of Financial Instruments. Our financial instruments consist primarily of cash, cash equivalents,
accounts receivable, derivative instruments, accounts and notes payable. The carrying value of cash, cash
equivalents, accounts receivable and accounts payable are representative of their respective fair values due
to the short-term nature of these instruments. The fair value of our debt obligations is representative of its
carrying value based upon current rates offered for similar types of borrowing arrangements. The fair value
of interest rate swaps (used for hedging purposes) is the estimated amount that the financial institution
would receive or pay to terminate the swap agreements at the reporting date, taking into account current
interest rates and the current credit worthiness of the swap counterparties.
Whitestone REIT 2009 Annual Report | F-11
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Concentration of Risk. Substantially all of our revenues are obtained from office, warehouse and retail
locations in the Houston, Dallas and San Antonio, Texas metropolitan areas. We maintain cash accounts in
major U.S. financial institutions. The terms of these deposits are on demand to minimize risk. The balances
of these accounts occasionally exceed the federally insured limits, although no losses have been incurred
in connection with these deposits.
Comprehensive Loss. In October 2007, we entered into an interest rate swap which was designated as a
cash flow hedge. Amounts recorded to other comprehensive income are $0.0 million, $0.4 million and
($0.4) million for the years ended December 31, 2009, 2008 and 2007, respectively. This swap matured in
October 2008.
Recent Accounting Pronouncements. In June 2009, FASB issued the Codification. Effective July 1, 2009, the
Codification is the single source of authoritative accounting principles recognized by the FASB to be applied
by non-governmental entities in the preparation of financial statements in conformity with GAAP. We
adopted the Codification during the third quarter of 2009 and the adoption did not materially impact our
financial statements, however our references to accounting literature within our notes to the consolidated
financial statements have been revised to conform to the Codification classification.
In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) — Improvements to Financial
Reportingby Enterprises Involved with Variable Interest Entities,” which codified the previously issued SFAS 167,
“Amendments to FASB Interpretation No. 46R.” ASU 2009-17 changes the consolidation analysis for Variable
Interest Entities (“VIEs”) and requires a qualitative analysis to determine the primary beneficiary of the VIE.
The determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct
matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or
the right to receive benefits, of the VIE which could potentially be significant to the VIE. The ASU requires an
ongoing reconsideration of the primary beneficiary and also amends the events triggering a reassessment of
whether an entity is a VIE. ASU 2009-17 requires additional disclosures for VIEs, including disclosures about a
reporting entity’s involvement with VIEs, how a reporting entity’s involvement with a VIE affects the reporting
entity’s financial statements, and significant judgments and assumptions made by the reporting entity to
determine whether it must consolidate the VIE. ASU 2009-17 is effective for us beginning January 1, 2010.
Our adoption of ASU 2009-17 will not have a material effect on our financial statements.
In January 2010, the FASB issued ASU 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders
with Components of Stock and Cash.” The ASU clarifies when the stock portion of a distribution allows
shareholders to elect to receive cash or stock, with a potential limitation on the total amount of cash
which all shareholders could elect to receive in the aggregate, the distribution would be considered a share
issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share
prospectively. We adopted ASU 2010-01 effective October 1, 2009, and the adoption did not have an impact
on our financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” which is codified in FASB ASC 855,
“Subsequent Events” (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are available
to be issued. We adopted ASC 855 in the second quarter of 2009 and evaluated all events or transactions
through the date of this filing. During this period, we did not have any material subsequent events that
impacted our consolidated financial statements.
F-12 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
3. Derivatives and Hedging
On September 28, 2007, we entered into an interest rate swap transaction which was designated as a cash
flow hedge. The effective date of the swap transaction was October 1, 2007, which had a total notional
amount of $70 million, and fixed the swap rate at 4.77% plus the LIBOR margin through October 1, 2008.
The purpose of this swap was to mitigate the risk of future fluctuations in interest rates on our variable
rate debt. We determined that this swap was highly effective in offsetting future variable interest cash flows
on variable rate debt. During 2008, the balance in other comprehensive loss as of December 31, 2007 was
amortized to interest expense.
On September 28, 2007, in conjunction with the execution of the $70 million interest rate swap transaction,
we terminated an interest rate swap transaction that was initiated on March 16, 2006. This swap transac-
tion had a total notional amount of $30 million, was at a fixed rate of 5.09% plus the LIBOR margin and was
set to mature on March 11, 2008. As a result of this termination ($0.03) million is included in other income
in our consolidated statements of operations for the year ended December 31, 2007
4. Real Estate
As of December 31, 2009, we owned 36 commercial properties in the Houston, Dallas, San Antonio, Phoenix
and Chicago areas comprising approximately 3.0 million square feet of total area.
In January 2009, we acquired a property containing 41,396 leasable square feet located in Buffalo Grove,
Illinois for approximately $9.4 million, including cash of $5.6 million, issuance of 703,912 OP Units valued at
approximately $3.6 million and credit for net prorations of $0.2 million. The property, Spoerlein Commons,
is a two-story complex of retail, medical and professional office tenants. We acquired the property from
Midwest Development Venture IV (“Midwest”), an Illinois limited partnership controlled by James C.
Mastandrea, our Chairman, President and Chief Executive Officer. Because of Mr. Mastandrea’s relationship
with the seller, a special committee consisting solely of the independent trustees, negotiated the terms of
the transaction, which included the use of an independent appraiser to value the property.
5. Accrued Rent and Accounts Receivable, Net
Accrued rent and accounts receivable, net, consists of amounts accrued, billed and due from tenants,
allowance for doubtful accounts and other receivables as follows (in thousands):
Tenant receivables
Accrued rent
Allowance for doubtful accounts
Other receivables
Totals
2009
$ 1,770
3,636
(894)
2
$ 4,514
December 31,
2008
$ 2,733
3,644
(1,497)
-
$ 4,880
Whitestone REIT 2009 Annual Report | F-13
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
6. Unamortized Leasing Commisions and Loan Costs
Costs which have been deferred consist of the following (in thousands):
Leasing commissions
Deferred financing costs
Total cost
December 31,
2009
$ 4,601
2,208
6,809
Less: leasing commissions accumulated amortization
(2,246)
Less: deferred financing cost accumulated amortization
(590)
Total cost, net of accumulated amortization
$ 3,973
2008
$ 4,412
1,921
6,333
(1,842)
(153)
$ 4,338
A summary of expected future amortization of deferred costs is as follows (in thousands):
Years Ended
December 31,
Leasing
Commissions
Deferred
Financing Costs
2010
2011
2012
2013
2014
Thereafter
Total
$ 711
570
423
269
162
220
$ 2,355
7. Future Minimum Lease Income
$ 412
412
412
337
32
13
$ 1,618
Total
$ 1,123
982
835
606
194
233
$ 3,973
We lease the majority of our properties under noncancelable operating leases which provide for minimum
base rentals plus, in some instances, contingent rentals based upon a percentage of the tenants’ gross receipts.
A summary of minimum future rentals to be received (exclusive of renewals, tenant reimbursements, and
contingent rentals) under noncancelable operating leases in existence at December 31, 2009 is as follows
(in thousands):
Years Ended December 31,
2010
2011
2012
2013
2014
Thereafter
Total
F-14 | Whitestone REIT 2009 Annual Report
$ 24,391
19,755
15,394
9,947
6,340
8,248
$ 84,075
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
8. Debt
Notes payable
Below is a detailed explanation of notes payable including key terms and maturities (in thousands):
Year Ended December 31,
2009
2008
Description
Fixed rate notes
$10.0 million 6.04% Note, due 2014
$11.2 million 6.52% Note, due 2015
$21.4 million 6.53% Notes, due 2013
$24.5 million 6.56% Note, due 2013
$9.9 million 6.63% Notes, due 2014
$0.5 million 5.05% Notes, due 2010 and 2009
Floating rate notes
$ 9,646
11,043
20,721
24,435
9,757
52
$6.4 million LIBOR + 2.00% Note, due 2009
$26.9 million LIBOR + 2.60% Note, due 2013
-
26,128
Total cost, net of accumulated amortization
$ 101,782
$ 9,782
11,159
21,263
24,500
-
40
6,400
26,859
$ 100,003
Our debt was collateralized by 21 operating properties as of December 31, 2009 with a combined net book
value of $108.7 million and 18 operating properties at December 31, 2008 with a combined net book value
of $108.3 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
the assignment of certain rents and leases associated with those properties.
On February 3, 2009, Whitestone, operating through its subsidiary, Whitestone Centers LLC, executed four
promissory notes (the “Sun Life Promissory Notes II”), totaling $9.9 million payable to Sun Life Assurance
Company of Canada with an applicable interest rate of 6.63% per annum and a maturity date of March 1,
2014. The Sun Life Promissory Notes II are non-recourse loans secured by the Whitestone Centers LLC’s
properties and a limited guarantee by Whitestone.
Our loans are subject to customary financial covenants. As of December 31, 2009, we were in compliance
with all loan covenants.
Annual maturities of notes payable as of December 31, 2009 are due during the following years (in thousands):
Year
2010
2011
2012
2013
2014
2015 and Thereafter
Total
Amount Due
$ 2,350
2,423
2,555
66,386
17,799
10,269
$ 101,782
Whitestone REIT 2009 Annual Report | F-15
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
9. Earnings Per Share
Basic earnings per share for Whitestone’s common shareholders is calculated by dividing income (loss)
from continuing operations excluding amounts attributable to unvested restricted shares, income from
discontinued operations, and the net income (loss) attributable to non-controlling interests by Whitestone’s
weighted-average common shares outstanding during the period. Diluted earnings per share is computed
by dividing the net income (loss) attributable to common shareholders excluding amounts attributable to
unvested restricted shares, income from discontinued operations, and the net income (loss) attributable
to non-controlling interests by the weighted-average number of common shares including any dilutive
unvested restricted shares.
Certain of Whitestone’s performance restricted common shares are considered participating securities
which require the use of the two-class method for the computation of basic and diluted earnings per share.
During the years ended December 31, 2009, 2008 and 2007, 5,443,798, 4,739,886 and 5,808,337 OP Units,
respectively, were excluded from the calculation of diluted earnings per share because their effect would
be anti-dilutive.
For the year ended December 31, 2009, distributions of $277,000 were made to the holders of certain
restricted common shares, $250,000 of which were charged against earnings. No distributions were made
on the performance restricted common shares prior to 2009. See Note 13 for information related to
restricted common shares under the 2008 Plan.
F-16 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Numerator:
Income (loss) from continuing operations
Less: Net loss (income) attributable to
noncontrolling interests
Dividends paid on unvested restricted shares
Undistributed earnings attributable to unvested
restricted shares
Income (loss) from continuing operations
attributable to Whitestone REIT excluding
amounts attributable to unvested restricted shares
Income from discontinued operations attributable
to Whitestone REIT
Less: Net income attributable to noncontrolling interests
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable
to unvested restricted shares
Denominator
Weighted average number of common shares - basic
Effect of dilutive securities:
Unvested restricted shares
Weighted average number of common
shares - dilutive
Basic earnings per common share:
Income (loss) from continuing operations attributable
to Whitestone REIT excluding amounts attributable to
unvested restricted shares
Income from discontinued operations attributable to
Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable to
unvested restricted shares
Diluted earnings per common share:
Income (loss) from continuing operations attributable
to Whitestone REIT excluding amounts attributable to
unvested restricted shares
Income from discontinued operations attributable to
Whitestone REIT
Net income (loss) attributable to common
shareholders excluding amounts attributable
to unvested restricted shares
Year Ended December 31,
(in thousands, except per share data)
2009
2008
2007
$ 2,075
$ (1,676)
(733)
627
(27)
-
-
-
$ (712)
268
-
-
1,315
(1,049)
(444)
-
-
-
3,431
(1,248)
2,183
589
(222)
367
$ 1,315
$ 1,134
$ (77)
9,707
9,830
9,999
197
-
9,904
9,830
-
9,999
$ 0.14
$ (0.11)
$ (0.04)
-
0.23
0.03
$ 0.14
$ 0.12
$ (0.01)
$ 0.13
$ (0.11)
$ (0.04)
-
0.23
0.03
$ 0.13
$ 0.12
$ (0.01)
Whitestone REIT 2009 Annual Report | F-17
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
10. Federal Income Taxes
Federal income taxes are not provided because we intend to and believe we qualify as a REIT under the
provisions of the Internal Revenue Code and because we have distributed and intend to continue to
distribute all of our taxable income to our shareholders. Our shareholders include their proportionate
taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate
investment trust 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.
Taxable income differs from net income for financial reporting purposes principally due to differences in the
timing of recognition of interest, real estate taxes, depreciation and rental revenue.
For federal income tax purposes, the cash dividends distributed to shareholders are characterized as follows
for the years ended December 31:
Ordinary income (unaudited)
Return of capital (unaudited)
Capital gain distributions (unaudited)
2009
40.5%
59.5%
0.0%
2008
3.8%
67.6%
28.6%
2007
15.0%
84.1%
0.9%
Total
100.0%
100.0%
100.0%
11. Related Party Transactions
Spoerlein Commons Acquisition
Spoerlein Commons Acquisition. On January 16, 2009, we, through our Operating Partnership, acquired
Spoerlein Commons, a property located in Buffalo Grove, Illinois. Our Operating Partnership acquired
Spoerlein Commons pursuant to the terms and conditions of the purchase, sale and contribution agreement
dated December 18, 2008, between our Operating Partnership and Bank One Chicago, NA as trustee
under a trust agreement dated January 29, 1986 (“Seller”). Midwest is the sole beneficiary of the Seller
under the Trust Agreement.
In exchange for Spoerlein Commons, our Operating Partnership paid the Seller $5.5 million, received credit
for net prorations of $0.3 million and issued 703,912 OP Units, valued at $5.15 per unit, or an aggregate of
$3.6 million, for a total purchase price of $9.4 million.
Midwest, the sole beneficiary of the Seller, was entitled to all earnings and proceeds from the sale of
Spoerlein Commons. James C. Mastandrea, our Chairman, President and Chief Executive Officer, is the
controlling limited partner in Midwest. Because of Mr. Mastandrea’s relationship with the Seller, a special
committee of the independent trustees determined the terms of the transaction, which included the use of
an independent appraiser to value Spoerlein Commons.
Our OP Units were issued in reliance on the exemption from registration provided by Section 4(2) under
the Securities Act of 1933, as amended. The issuance was not effected using any form of general advertising
or general solicitation, and the issuance was made to a qualified investor.
F-18 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
The OP Units received by Midwest are convertible on a one-for-one basis into cash or, at our option, our
common shares at any time after July 1, 2009 in accordance with the terms of the partnership agreement. The
Seller was not entitled to any distributions with respect to the OP Units prior to June 30, 2009. The results
of Spoerlein Commons are included in our consolidated financial statements as of the date of the acquisition.
12. Equity
Under our declaration of trust, we have authority to issue 400 million common shares of beneficial interest,
$0.001 par value per share, and 50 million preferred shares of beneficial interest, $0.001 par value per share.
On September 15, 2004, our Registration Statement on Form S-11, originally filed with the SEC on December
31, 2003 (file No. 333-111674), as amended, with respect to our public offering of up to 10 million common
shares of beneficial interest offered at a price of $10 per share was declared effective under the Securities
Act of 1933. The Registration Statement also covered up to 1 million shares available pursuant to our
dividend reinvestment plan offered at a price of $9.50 per share. The shares were offered to investors on
a best efforts basis. Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were declared
effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006, respectively.
On October 2, 2006, our Board terminated the public offering. On March 27, 2007, we gave the required
ten day notice to participants informing them that we intend to terminate our dividend reinvestment plan.
As a result, our dividend reinvestment plan terminated on April 6, 2007.
As of December 31, 2007, 2.8 million shares had been issued pursuant to our public offering with net offering
proceeds received of $24.6 million. An additional 165,000 shares had been issued pursuant to the dividend
reinvestment plan in lieu of dividends totaling $1.6 million. Shareholders that received approximately
64,000 shares pursuant to our dividend reinvestment plan on or after October 2, 2006 could be entitled
to rescission rights.
All net proceeds of our public offering were contributed to the Operating Partnership in exchange for
OP Units. The Operating Partnership used the proceeds to acquire additional properties and for general
working capital. In accordance with the Operating Partnership’s Agreement of Limited Partnership, in
exchange for the contribution of net proceeds from sales of stock, we received an equivalent number of
OP Units as shares of stock that are sold.
Operating Partnership Units
Substantially all of our business is conducted through the Operating Partnership. We are the sole general
partner of the Operating Partnership. As of December 31, 2009, we owned a 64.7% interest in the
Operating Partnership.
Limited partners in the Operating Partnership holding OP Units have the right to convert their OP
Units into 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 dividends per share of Whitestone.
Subject to certain restrictions, OP Units are not convertible into common shares until the later of one
year after acquisition or an initial public offering of the common shares. As of December 31, 2009 and
December 31, 2008, there were 15,418,622 and 14,085,705 OP Units outstanding, respectively. We owned
9,974,824 and 9,345,820 OP Units as of December 31, 2009 and December 31, 2008, respectively. The
balance of the OP Units is owned by third parties, including certain trustees. Our weighted-average share
ownership in the Operating Partnership was approximately 64.67%, 64.62% and 62.40% for the years ended
December 31, 2009, 2008 and 2007, respectively.
Whitestone REIT 2009 Annual Report | F-19
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Dividends and Distributions
The following tables summarize the cash dividends paid to holders of common shares and distributions
paid to holders of OP Units during the years ended December 31, 2009 and 2008 and the quarter ended
March 31, 2010.
Dividend
per Common Share
$ 0.1500
0.1500
0.1500
0.1125
0.1125
0.1125
0.1125
0.1125
0.1125
Distribution
per OP Unit
$ 0.1500
0.1500
0.1500
0.1125
0.1125
0.1125
0.1125
0.1125
0.1125
Whitestone Shareholders
Quarter Dividend
Paid
Qtr ended 03/31/08
Qtr ended 06/30/08
Qtr ended 09/30/08
Qtr ended 12/31/08
Qtr ended 03/31/09
Qtr ended 06/30/09
Qtr ended 09/30/09
Qtr ended 12/31/09
Qtr ended 03/31/10
Total Amount
Paid (in thousands)
$ 1,500
1,529
1,456
1,093
1,156
1,163
1,163
1,163
1,163
OP Unit Holders Including Noncontrolling Interests
Date Distribution
Paid
Qtr ended 03/31/08
Qtr ended 06/30/08
Qtr ended 09/30/08
Qtr ended 12/31/08
Qtr ended 03/31/09
Qtr ended 06/30/09
Qtr ended 09/30/09
Qtr ended 12/31/09
Qtr ended 03/31/10
Total Amount
Paid (in thousands)
$ 2,317
2,423
2,113
1,585
1,648
1,655
1,735
1,735
1,735
F-20 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
13. Incentive Share Plan
On July 29, 2008, our shareholders approved the 2008 Long-Term Equity Incentive Ownership Plan (the
“Plan”). The Plan provides that awards may be made with respect to common shares of Whitestone or
units in the Operating Partnership, which may be converted into common shares of Whitestone. The Plan
authorizes awards in respect of an aggregate of 2,164,444 common shares. The maximum aggregate number
of common shares that may be issued under the Plan will be increased upon each issuance of common
shares by Whitestone (including issuances pursuant to the Plan) so that at any time the maximum number
of shares that may be issued under the Plan shall equal 12.5% of the aggregate number of common shares
of Whitestone and units of the Operating Partnership issued and outstanding (other than treasury shares
and/or units issued to or held by Whitestone).
The Compensation Committee of Whitestone’s Board of Trustees administers the Plan, except with respect
to awards to non-employee trustees, for which the Plan is administered by Whitestone’s Board of Trustees.
The Compensation Committee is authorized to grant stock options, including both incentive stock options
and non-qualified stock options, as well as stock 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. No single participant may receive options
or stock appreciation rights in any calendar year that, taken together, relate to more than 500,000 common
shares, subject to adjustment in certain circumstances.
On January 6, 2009, the Compensation Committee, pursuant to the Plan, granted to certain of its officers
restricted common share awards and restricted common share unit awards subject to certain restrictions.
The restricted common shares and restricted common share units will vest based on certain performance
goals (as specified in the award agreement). The grantee is the record owner of the restricted common
shares and has all rights of a shareholder with respect to the restricted common shares, including the
right to vote the restricted common shares and to receive dividends and distributions with respect to
the restricted common shares. The grantee has no rights of a shareholder with respect to the restricted
common share units, including no right to vote the restricted common share units and no right to receive
current dividends and distributions with respect to the restricted common share units until the units are
fully vested and convertible into common shares of Whitestone.
A summary of the share-based incentive plan activity as of and for the year ended December 31, 2009 is
as follows:
Non-vested at January 1, 2009
Granted
Vested
Forfeited
Non-vested at December 31, 2009
Shares
-
1,802,187
-
(36,500)
1,765,687
Weight-Average Grant
Date Fair Value
$ -
4.12
-
3.71
$ 4.13
Whitestone REIT 2009 Annual Report | F-21
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
Total compensation recognized in earnings for share-based payments for the year ended December 31, 2009
was $1.0 million, which represents achievement of the first performance-based target. With our current asset
base, management does not expect to achieve the next performance-based target. Should we increase our
asset base, we may achieve the next performance-based target. As a result, as of December 31, 2009, there
was no unrecognized compensation cost related to outstanding nonvested shares based on management’s
current estimates. There was no share-based compensation expense prior to 2009. The fair value of the
shares granted during the year ended December 31, 2009 was determined based on observable market
transactions occurring near the date of the grants.
14. Commitments and Contingencies
We are a participant in various legal proceedings and claims that arise in the ordinary course of our
business. These matters are generally covered by insurance. While the resolution of these matters cannot
be predicted with certainty, we believe that the final outcome of these matters will not have a material
effect on our financial position, results of operations, or cash flows.
Hurricane Ike. In September 2008, Hurricane Ike caused minor to moderate harm to our 31 properties in
Houston, ranging from broken signage to uprooted landscaping; other properties had more significant issues,
such as damaged roofing and exterior siding. We have incurred $1.5 million in hurricane-related repairs for
the year ended December 31, 2009 and have accrued $3.6 million in additional expenses representing the
cost to complete the remaining repairs. A portion of the $3.6 million accrual is estimated and is sensitive
to the scope requirements of our lenders and labor and material cost of our vendors. We completed a
settlement of our insurance claims during the third quarter of 2009 for $7.0 million. The $7.0 million in
insurance proceeds were allocated between loss of rents and casualty losses for $0.5 million and $6.5
million, respectively. The $0.5 million in loss of rents proceeds are included in the rental revenues of the
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended
December 31, 2009.
15. Segment Information
Our management historically has not differentiated by property types and therefore does not present
segment information.
16. Select Quarterly Financial Data (unaudited)
The following is a summary of our unaudited quarterly financial information for the years ended December
31, 2009 and 2008 (in thousands, except per share data):
F-22 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009
(in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2009
Revenues from continuing operations
Income (loss) from continuing operations attributable
to Whitestone REIT
Income from discontinued operations attributable to
Whitestone REIT
Net income (loss) attributable to Whitestone REIT
$ 8,044
$ 8,203
$ 8,484
$ 7,954
(21)
47
601
715
-
(21)
-
47
-
-
601
715
Basic earnings per share:
Income (loss) from continuing operations attributable
to Whitestone REIT
Income from discontinued operations attributable to
Whitestone REIT
$ -
$ -
$ 0.06
$ 0.08
-
-
-
-
Net income (loss) attributable to Whitestone REIT
$ -
$ -
$ 0.06
$ 0.08
Diluted earnings per share:
Income (loss) from continuing operations attributable
to Whitestone REIT
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to Whitestone REIT
$ -
$ -
$ 0.06
$ 0.07
-
$ -
-
$ -
-
$ 0.06
-
$ 0.07
2008
Revenues from continuing operations
Loss from continuing operations attributable to
Whitestone REIT
Income from discontinued operations attributable
to Whitestone REIT
Net income (loss) attributable to Whitestone REIT
Basic and diluted earnings per share:
Loss from continuing operations attributable to
Whitestone REIT
Income from discontinued operations attributable to
Whitestone REIT
$ 7,756
$ 7,750
$ 7,643
$ 8,052
(191)
(529)
(173)
(156)
122
69
2,061
-
-
1,532
(173)
(156)
$ (0.02)
$ (0.05)
$ (0.02)
$ (0.02)
0.02
0.21
-
-
Net income (loss) attributable to Whitestone REIT
$ -
$ 0.16
$ (0.02)
$ (0.02)
17. Subsequent Events
The Company evaluated subsequent events through March 11, 2010, which is the date the December 31, 2009
consolidated financial statements were issued and has no items to disclose.
Whitestone REIT 2009 Annual Report | F-23
WHITESTONE REIT and SUBSIDIARY
Schedule II - Valuation and Qualifying Accounts
Description
Allowance for doubtful accounts:
Year ended December 31, 2009
Year ended December 31, 2008
Year ended December 31, 2007
(in thousands)
Balance at
Beginning of
Period
Charged to
Costs and
Expense
Deductions
from
Reserves
Balance
at End of
Period
$ 1,497
865
586
$ 877
731
440
(1,480)
(99)
(161)
$ 894
1,497
865
F-24 | Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARY
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2009
Initial Cost
(in thousands)
Property Name
Land
Building and
Improvements
Costs Capitalized
Subsequent to Acquisition
(in thousands)
Improvements Carrying
Gross Amount at which Carried
at End of Period
(in thousands) (1)(2)
Building and
(net)
Costs
Land
Improvements Total
Retail Properties:
Bellnott Square
Bissonnet/Beltway
Centre South
Greens Road
Holly Knight
Kempwood Plaza
Lion Square
Providence
Shaver
South Richey
Spoerlein Commons
SugarPark Plaza
Sunridge
Torrey Square
Town Park
Webster Point
Westchase
Windsor Park
Office/Flex Properties:
Brookhill
Corporate Prk NW
Corp. Park West
Corp. Prk Woodland
Dairy Ashford
Holly Hall
Interstate 10
Main Park
Plaza Park
Westbelt Plaza
Westgate
Office Properties:
9101 LBJ Frwy
Featherwood
Pima Norte
Royal Crest
Uptown Tower
Woodlake Plaza
Zeta Building
Grand Total
$ 1,154
415
481
354
320
733
1,546
918
184
778
2,340
1,781
276
1,981
850
720
423
2,621
$ 17,875
$ 4,638
1,947
1,596
1,284
1,293
1,798
4,289
3,675
633
2,584
7,296
7,125
1,186
2,971
2,911
1,150
1,751
10,482
$ 58,609
$ 186 $ 788
6,306
10,267
5,330
1,211
2,516
3,700
2,721
3,294
2,165
2,776
$ 41,074
1,534
2,555
652
226
608
208
1,328
902
568
672
$ 9,439
$ 1,597 $ 6,078
2,591
7,162
1,355
15,551
4,426
1,819
$ 38,982
$ 138,665
368
1,086
509
1,621
1,107
636
$ 6,924
$ 34,238
$ 302
411
389
137
166
1,009
852
791
26
342
113
267
232
779
266
218
2,099
370
$ 8,769
$ 144
830
796
392
116
155
457
419
897
631
276
$ 5,113
$ 1,053
358
795
161
2,123
767
273
$ 5,530
$ 19,412
$ - $ 1,154
415
481
354
320
733
1,546
918
184
778
2,340
1,781
276
1,981
850
720
423
2,621
$ - $ 17,875
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ - $ 186
1,534
2,555
652
226
608
208
1,328
902
568
672
$ - $ 9,439
-
-
-
-
-
-
-
-
-
-
-
517
-
-
-
-
$ - $ 1,597
368
1,086
509
1,621
1,107
6,36
$ 517 $ 6,924
$ 517 $ 34,238
$ 4,940 $ 6,094
2,273
2,466
1,775
1,779
3,540
6,687
5,384
843
3,704
9,749
9,173
1,694
5,731
4,027
2,088
4,273
13,473
$ 67,378 $ 85,253
2,358
1,985
1,421
1,459
2,807
5,141
4,466
659
2,926
7,409
7,392
1,418
3,750
3,177
1,368
3,850
10,852
$ 932 $ 1,118
8,670
13,618
6,374
1,553
3,279
4,365
4,468
5,093
3,364
3,724
$ 46,187 $ 55,626
7,136
11,063
5,722
1,327
2,671
4,157
3,140
4,191
2,796
3,052
2,949
8,474
1,516
17,674
5,193
2,092
$ 7,131 $ 8,728
3,317
9,560
2,025
19,295
6,300
2,728
$ 45,029 $ 51,953
$ 158,594 $ 192,832
Whitestone REIT 2009 Annual Report | F-25
WHITESTONE REIT and SUBSIDIARY
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2009
(Continued)
Property Name
Encumbrances
Accumulated
Depreciation
(in thousands)
Date of
Date
Construction Acquired
Depreciation
Life
Retail Properties:
Bellnott Square
Bissonnet/Beltway
Centre South
Greens Road
Holly Knight
Kempwood Plaza
Lion Square
Providence
Shaver
South Richey
Spoerlein Commons
SugarPark Plaza
Sunridge
Torrey Square
Town Park
Webster Point
Westchase
Windsor Park
Office/Flex Properties:
Brookhill
Corporate Park Northwest
Corporate Park West
Corporate Park Woodland
Dairy Ashford
Holly Hall
Interstate 10
Main Park
Plaza Park
Westbelt Plaza
Westgate
Office Properties:
9101 LBJ Freeway
Featherwood
Pima Norte
Royal Crest
Uptown Tower
Woodlake Plaza
Zeta Building
Grand Total
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(4)
(5)
(6)
(6)
(6)
(6)
(6)
(6)
(6)
(7)
(7)
(7)
$ 1,011
927
701
560
583
1,213
1,424
1,077
214
800
176
998
349
1,234
1,188
442
594
1,628
$ 15,119
$ 299
1,713
2,651
1,809
446
600
1,722
955
1,189
1,058
698
$ 13,140
$ 993
904
308
425
2,081
833
631
$ 6,175
$ 34,434
F-26 | Whitestone REIT 2009 Annual Report
01/01/2002
01/01/1999
01/01/2000
01/01/1999
08/01/2000
02/02/1999
01/01/2000
03/30/2001
12/17/1999
08/25/1999
01/16/2009
09/08/2004
01/01/2002
01/01/2000
01/01/1999
01/01/2000
01/01/2002
12/16/2003
01/01/2002
01/01/2002
01/01/2002
01/01/1999
01/01/2002
01/01/1999
01/01/1999
01/01/2000
01/01/1999
01/01/2002
08/10/2005
01/01/2000
10/04/2007
01/01/2000
11/22/2005
03/14/2005
01/01/2000
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
11/01/2000
WHITESTONE REIT and SUBSIDIARY
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2009
(Continued)
(1) Reconciliations of total real estate carrying value for the three years ended December 31, follows (in thousands):
Balance at beginning of period
Additions during the period:
Acquisitions
Improvements
2009
2008
2007
$ 180,397
$ 172,315
$ 164,132
9,636
-
8,248
3,770
9,402
1,957
13,406
9,402
10,205
Deductions - cost of real estate sold or retired
(971)
(1,320)
(2,022)
Balance at close of period
$ 192,832
$ 180,397
$ 172,315
(2) The aggreage cost of real estate (in thousands) for federal income tax purposes is $162,742.
(3) These properties secure a $21.4 million and a $9.9 million mortgage notes.
(4) This property secures a $10.0 million mortgage note.
(5) This property secures an $11.2 million mortgage note.
(6) These properties secure a $26.9 million mortgage note.
(7) These properties secure a $24.5 million mortgage note.
Whitestone REIT 2009 Annual Report | F-27
WHITESTONE REIT and SUBSIDIARY
Index to Exhibits
Exhibit No.
Description
3.1
3.3
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Declaration of Trust of Whitestone REIT (previously filed as and
incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
filed on July 31, 2008)
Articles Supplementary (previously filed as and incorporated by reference to Exhibit 3(i).1
to the Registrant’s Current Report on Form 8-K, filed December 6, 2006)
Amended and Restated Bylaws of Whitestone REIT (previously filed as and incorporated
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed
October 9, 2008)
Specimen certificate for common shares of beneficial interest, par value $.001 (previously
filed as and incorporated by reference to Exhibit 4.2 to the Registrant’s Registration
Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)
Agreement of Limited Partnership of Whitestone REIT Operating Partnership, L.P.
(previously filed as and incorporated by reference to Exhibit 10.1 to the Registrant’s
General Form for Registration of Securities on Form 10, filed on April 30, 2003)
Certificate of Formation of Whitestone REIT Operating Partnership II GP, LLC (previously
filed as and incorporated by reference to Exhibit 10.3 to the Registrant’s General Form
for Registration of Securities on Form 10, filed on April 30, 2003)
Limited Liability Company Agreement of Whitestone REIT Operating Partnership II GP,
LLC (previously filed as and incorporated by reference to Exhibit 10.4 to the Registrant’s
General Form for Registration of Securities on Form 10, filed on April 30, 2003)
Agreement of Limited Partnership of Whitestone REIT Operating Partnership II, L.P.
(previously filed as and incorporated by reference to Exhibit 10.6 to the Registrant’s
General Form for Registration of Securities on Form 10, filed on April 30, 2003)
Form of Amendment to the Agreement of Limited Partnership of Whitestone REIT
Operating Partnership, L.P. (previously filed in and incorporated by reference to Exhibit
10.1 to the Registrant’s Registration Statement on Form S-11, Commission File No. 333-
111674, filed on December 31, 2003)
Revolving Credit Agreement among Hartman REIT Operating Partnership, L.P., Hartman
REIT Operating Partnership III LP, and KeyBank National Association (together with other
participating lenders), dated March 11, 2005 (previously filed as and incorporated by
reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to the Registrant’s Registration
Statement on Form S-11, Commission File No. 333-111674, filed on June 17, 2005)
Form of Revolving Credit Note under Revolving Credit Agreement among Hartman REIT
Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank
National Association (together with other participating lenders) (previously filed as and
incorporated by reference to Exhibit 10.14 to Post-Effective Amendment No. 1 to the
Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed
on June 17, 2005)
Guaranty under Revolving Credit Agreement among Hartman REIT Operating Partnership,
L.P., Hartman REIT Operating Partnership III LP, and KeyBank National Association
(together with other participating lenders), dated March 11, 2005 (previously filed as and
incorporated by reference to Exhibit 10.15 to Post-Effective Amendment No. 1 to the
Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed
on June 17, 2005)
Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARY
Index to Exhibits
Exhibit No. Description
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Form of Negative Pledge Agreement under Revolving Credit Agreement among Hartman
REIT Operating Partnership, L.P., Hartman REIT Operating Partnership III LP, and KeyBank
National Association (together with other participating lenders) (previously filed as and
incorporated by reference to Exhibit 10.16 to Post-Effective Amendment No. 1 to the
Registrant’s Registration Statement on Form S-11, Commission File No. 333-111674, filed
on June 17, 2005)
Form of Collateral Assignment of Partnership Interests under Revolving Credit Agreement
among Hartman REIT Operating Partnership, L.P., Hartman REIT Operating Partnership
III LP, and KeyBank National Association (together with other participating lenders)
(previously filed as and incorporated by reference to Exhibit 10.17 to Post-Effective
Amendment No. 1 to the Registrant’s Registration Statement on Form S-11, Commission
File No. 333-111674, filed on June 17, 2005)
Waiver and Amendment No. 1 between Hartman REIT Operating Partnership, L.P.,
Hartman REIT Operating Partnership III, L.P., and KeyBank National Association, as agent
for the consortium of lenders, dated May 8, 2006 (previously filed and incorporated by
reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form 10-Q, filed on
May 12, 2006)
Amendment No. 2 between Hartman REIT Operating Partnership, L.P., Hartman REIT
Operating Partnership III, L.P., and KeyBank National Association, as agent for the
consortium of lenders, dated May 19, 2006 (previously filed and incorporated by reference
to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2006, filed on March 30, 2007)
Promissory Note between HCP REIT Operating Company IV LLC and MidFirst Bank,
dated March 1, 2007 (previously filed and incorporated by reference to Exhibit 10.25 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed
on March 30, 2007)
Amendment No. 3 between Hartman REIT Operating Partnership, L.P., Hartman REIT
Operating Partnership III, L.P., and KeyBank National Association, as agent for the
consortium of lenders, dated March 26, 2007 (previously filed and incorporated by
reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2006, filed on March 30, 2007)
Amendment No. 5 between Hartman REIT Operating Partnership, L.P., Hartman REIT
Operating Partnership III, L.P., and KeyBank National Association, as agent for the
consortium of lenders, dated October 31, 2007 (previously filed and incorporated by
reference to Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q, filed on
November 14, 2007)
Amendment No.6 between Whitestone REIT Operating Partnership, L.P., Whitestone
REIT Operating Partnership III, L.P., and KeyBank National Association, as agent for the
consortium of lenders, dated March 11, 2008 (previously filed as and incorporated by
reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2007, filed on March 31, 2008)
Term Loan Agreement among Whitestone REIT Operating Partnership, L.P., Whitestone
Pima Norte LLC, Whitestone REIT Operating Partnership III LP, Hartman REIT Operating
Partnership III LP LTD, Whitestone REIT Operating Partnership III GP LLC and KeyBank
National Association, dated January 25, 2008 (previously filed as and incorporated by
reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2007, filed on March 31, 2008)
Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARY
Index to Exhibits
Exhibit No. Description
10.18
10.19
10.20+
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30+
10.31+
Settlement Agreement between Whitestone and Hartman dated May 30, 2008 (previously
filed and incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on
Form 8-K, filed May 30, 2008)
Mutual Release between Whitestone and Hartman dated May 30, 2008 (previously filed
and incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
8-K, filed May 30, 2008)
Whitestone REIT 2008 Long-Term Equity Incentive Ownership Plan (previously filed and
incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K, filed July 31, 2008)
Promissory Note among Whitestone Corporate Park West, LLC and MidFirst Bank dated
August 5, 2008 (previously filed and incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K, filed August 8, 2008)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated October 1, 2008 (previously filed and incorporated by reference to Exhibit
99.1 to the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated October 1, 2008 (previously filed and incorporated by reference to Exhibit
99.2 to the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated October 1, 2008 (previously filed and incorporated by reference to Exhibit
99.3 to the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated October 1, 2008 (previously filed and incorporated by reference to Exhibit
99.4 to the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated October 1, 2008 (previously filed and incorporated by reference to Exhibit
99.5 to the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Promissory Note among Whitestone Offices LLC and Nationwide Life Insurance Company
dated October 1, 2008 (previously filed and incorporated by reference to Exhibit 99.6 to
the Registrant’s Current Report on Form 8-K, filed October 7, 2008)
Extension of Revolving Credit Agreement among Whitestone REIT Operating Partnership,
L.P., Whitestone REIT Operating Partnership III, L.P., and KeyBank National Association
(together with other participating lenders), dated October 1, 2008 (previously filed and
incorporated by reference to Exhibit 99.7 to the Registrant’s Current Report on Form
8-K, filed October 7, 2008)
Promissory Note among Whitestone Industrial-Office LLC and Jackson Life Insurance
Company dated October 3, 2008 (previously filed and incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed October 9, 2008)
Form of Restricted Common Share Award Agreement (Performance Vested) (previously
filed and incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K, filed January 7, 2009)
Form of Restricted Common Share Award Agreement (Time Vested) (previously filed and
incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K, filed January 7, 2009)
Whitestone REIT 2009 Annual Report
WHITESTONE REIT and SUBSIDIARY
Index to Exhibits
Exhibit No. Description
10.32+
10.33
10.34
10.35
10.36
10.37
10.38+
10.39+
10.40+
10.41+
10.42+
21.1*
23.1*
24.1
31.1*
31.2*
32.1*
32.2*
Form of Restricted Unit Award Agreement (previously filed and incorporated by reference
to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed January 7, 2009)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated February 3, 2009 (previously filed and incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K, filed February 10, 2009)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated February 3, 2009 (previously filed and incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K, filed February 10, 2009)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated February 3, 2009 (previously filed and incorporated by reference to Exhibit
10.3 to the Registrant’s Current Report on Form 8-K, filed February 10, 2009)
Promissory Note among Whitestone Centers LLC and Sun Life Assurance Company of
Canada dated February 3, 2009 (previously filed and incorporated by reference to Exhibit
10.4 to the Registrant’s Current Report on Form 8-K, filed February 10, 2009)
Purchase, Sale and Contribution Agreement between Whitestone REIT Operating
Partnership, L.P. and Bank One, Chicago, NA, as trustee for Midwest Development Venture
IV dated December 18, 2008 (previously filed and incorporated by reference to Exhibit
10.8 to Registrant’s Quarterly Report on Form 10-Q, filed on May 15, 2009)
Grant Agreement for Restricted Shares between Whitestone REIT and Daryl J. Carter
(previously filed and incorporated by reference to Exhibit 10.9 to Registrant’s Quarterly
Report on Form 10-Q, filed on May 15, 2009)
Grant Agreement for Restricted Shares between Whitestone REIT and Daniel G. DeVos
(previously filed and incorporated by reference to Exhibit 10.10 to Registrant’s Quarterly
Report on Form 10-Q, filed on May 15, 2009)
Grant Agreement for Restricted Shares between Whitestone REIT and Donald F. Keating
(previously filed and incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly
Report on Form 10-Q, filed on May 15, 2009)
Grant Agreement for Restricted Shares between Whitestone REIT and Jack L. Mahaffey
(previously filed and incorporated by reference to Exhibit 10.12 to Registrant’s Quarterly
Report on Form 10-Q, filed on May 15, 2009)
Grant Agreement for Restricted Shares between Whitestone REIT and Chris A. Minton
(previously filed and incorporated by reference to Exhibit 10.13 to Registrant’s Quarterly
Report on Form 10-Q, filed on May 15, 2009)
List of subsidiaries of Whitestone REIT
Consent of Pannell Kerr Forster of Texas, P.C.
Power of Attorney (included on the Signatures page hereto)
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
+ Denotes management contract or compensatory plan or arrangement.
Whitestone REIT 2009 Annual Report
Regulation G Reconciliation of non-GAAP Financial Measures
This 2009 Annual Report contains references to non-GAAP financial measures of Funds from Operation
(“FFO”), FFO per share and Net Operating Income (“NOI”).
The National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) defines FFO (April 2002 White
Paper) as net income (computed in accordance with generally accepted accounting principles (“GAAP”))
excluding gains (or losses) from sales of property plus real estate depreciation and amortization. FFO is a
non-GAAP measure and does not replace net income as a measure of performance or net cash provided by
operating activities as a measure of liquidity. We consider FFO to be a standard supplemental measure for
equity real estate investment trusts (“REITs”) because it (1) is the most common metric used by securities
analysts, investors and other interested parties in comparing the relative performances of equity REITs,
and (2) facilitates an understanding of the operating performance of our properties without giving effect
to real estate depreciation and amortization, which historically assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have instead historically risen or fallen with market
conditions, we believe that FFO more accurately provides investors an indication of our ability to incur and
service debt, make capital expenditures and fund other needs.
Reconciliation of Non-GAAP Financial Measures
Year Ended December 31,
(in thousands, except per share data)
2005 2006 2007 2008 2009
FUNDS FROM OPERATIONS (“FFO”)
Net income (loss) attributable to Whitestone REIT
$ 2,448
$ 1,781
$ (77) $ 1,134
$ 1,342
Depreciation and amortization of
real estate assets (1)
Loss (gain) on sale or disposal of assets (1)
Net income (loss) attributable to
noncontrolling interests
FFO
Numerator:
FFO
Dividends paid on unvested restricted shares
Undistributed earnings attributable to
unvested restricted shares
FFO excluding amounts attributable to
unvested restricted shares
5,512
6,341
6,108 5,877
6,347
-
(197) 16 (3,396)
$ 1,891
1,068 (46) 621
196
733
$ 9,851
$ 8,993
$ 6,001 $ 4,236
$ 8,618
$ 9,851
$ 8,993 $ 6,001 $ 4,236 $ 8,618
-
-
-
- (27)
-
-
-
-
-
9,851
8,993
6,001
4,236
8,591
Denominator
Weighted average number of common shares - basic 7,888
Weighted average number of OP Units - basic
5,808
9,652
5,808
9,999
9,830
5,808 5,185
9,707
5,444
Effect of dilutive securities:
Unvested restricted shares
Weighted average number of common shares
and OP Units - dilutive
Basic FFO per common share and OP unit:
FFO excluding amounts attributable to
unvested restricted shares
Diluted FFO per common share and OP unit:
FFO excluding amounts attributable to
unvested restricted shares
(1) Including amounts for discontinued operations
R-1 | Whitestone REIT 2009 Annual Report
-
-
-
-
197
13,696
15,460
15,807
15,015
15,348
$ 0.72 $ 0.58 $ 0.38 $ 0.28 $ 0.57
$ 0.72 $ 0.58
$ 0.38 $ 0.28 $ 0.56
Regulation G Reconciliation of non-GAAP Financial Measures (Continued)
Net Operating Income (“NOI”), defined as real estate rental revenue less real estate expenses, is a non-
GAAP measure. We provide NOI as a supplement to net income calculated in accordance with GAAP, and
it should not be considered an alternative to net income as an indication of our operating performance. It
is the primary performance measure we use to assess the results of our operations at the property level.
NOI is calculated as net income, less non-real estate revenue and the results of discontinued operations
(including gains on sale, if any), plus interest expense, depreciation and amortization, and general and
administrative expenses.
Reconciliation of Non-GAAP Financial Measures
Year Ended December 31,
(in thousands)
2005 2006 2007 2008 2009
PROPERTY NET OPERATING INCOME (“NOI”)
Net income (loss) attributable to Whitestone REIT
$ 2,448
$ 1,781
$ (77) $ 1,134
$ 1,342
General and administrative expense
1,225
3,035 6,721 6,708
Depreciation and amortization
6,099 6,476 6,048 6,859
6,072
6,958
Involuntary conversion
-
-
- 358 (1,542)
Interest expense
Interest income
3,770
5,296 5,402 5,857 5,749
(301) (386) (577) (182) (36)
Provision for income taxes
-
- 217 219
222
Loss on disposal of assets
-
(197) 9 223 196
Loss from discontinued operations
-
-
- 188 -
Change in value of derivative instrument
-
(30) 30 -
-
Gain on sale of properties from
discontinued operations
Net income (loss) attributable to
noncontrolling interests
-
-
- (3,619) -
1,891 1,068 (46) 621 733
NOI
$ 15,132 $ 17,043 $ 17,727 $ 18,366 $ 19,694
Whitestone REIT 2009 Annual Report | R-2
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