2018 ANNUAL REPORT
HOUSTON |AUSTIN | DALLAS-FORTH WORTH| SAN ANTONIO | PHOENIX
2018 FINANCIAL HIGHLIGHTS*
Net Income Per Share
$0.52, More than double from 2017
Occupancy
+30 bps, Reaching 90.5% at year end 2018
Annualized Base Rent
Grows 2.8% to $19.35 per SF from year end 2017
Same Store NOI
Increases 3.3% from year end 2017
Funds From Operation
$0.94 per share vs. $0.93 in 2017
Rental Rates (Signed Leases)
New and Renewal leases increased 7.0% and 11.1%
Disposition
Sold 5 properties generating $29.3M in gross proceeds
Net Debt to EBITDA
Improved to 8.4x from 8.5x in 2017
TOTAL SHAREHOLDER RETURN RANK AMONGST U.S. PUBLIC REIT SHOPPING CENTERS*
#2 OF 17
over 1 year
#1 OF 17
over 3 years
#2 OF 16
over 5 years
AUSTIN/SAN ANTONIO
Davenport Village • Quinlan Crossing • Parkside Village North • Parkside Village South • City View Village •
The Strand at Huebner Oaks • Windsor Park Centre
DALLAS/FORT WORTH
Heritage Trace Plaza • Shops at Starwood • Headquarters Village • Keller Place • Eldorado Plaza
HOUSTON
BLVD Place • Williams Trace Plaza • The Shops at Williams Trace • South Richey • Shaver Street Center • Bissonnet Beltway
Plaza • Westchase Plaza • Sunridge Center • Town Park Plaza • Providence Plaza • Sugar Park Plaza • Kempwood Plaza •
Lion Square • Woodlake Plaza
PHOENIX/CHICAGO
Fulton Ranch Towne Center • Promenade at Fulton Ranch • Gilbert Tuscany Village • Ahwatukee Plaza • Pinnacle of Scottsdale •
Sunset at Pinnacle Peak • Village Square at Dana Park • Fountain Square • Shops at Pecos Ranch • Mercado at Scottsdale Ranch •
Pima Norte • The Citadel • Marketplace at Central • Desert Canyon • Terravita Marketplace • Paradise Plaza • Anthem
Marketplace • Fountain Hills Plaza • Market Street at DC Ranch • La Mirada Center • Scottsdale Seville • Spoerlein Commons
*Whitestone REIT Total Shareholder Return as compared to its peers based on SNL data. All periods ending Dec 31, 2018. Total shareholder return is defined as share price change plus re-invested dividends. Peers include Acadia
Realty Trust, Brixmor Property Group Inc., Cedar Realty Trust Inc., Federal Realty Investment Trust, Kimco Realty Corp., Kite Realty Group Trust, RPT Realty, Regency Centers Corp., Retail Opportunity Investments Corp., Retail Properties of
America, Inc., Saul Centers Inc., Site Centers Corp, Urban Edge Properties, Urstadt Biddle Properties Inc., Weingarten Realty Investors, and Wheeler REIT Inc., excluding any such peer which was not a public company for the entirety of
the applicable TSR period.
EXECUTING OUR STRATEGY: INVESTING
IN REAL ESTATE TO ADD VALUE
BLVD PLACE | HOUSTON, TEXAS
Added first ever skyline cinema in Texas
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To my Fellow Shareholders:
As I look back over 2018 and write my Annual Letter, I’m reminded of the underlying financial strength of Whitestone’s balance sheet
and the character of our people. This past year we experienced some great success, only to be muted by some tumultuous times and
the diversion of a proxy contest that was not in the best interests for all shareholders. With the help of many of you, we prevailed.
In 2018, we achieved several significant financial and operational accomplishments that are worthy of mention:
• Strengthening our balance sheet with the successful closing, expansion, and upsizing of our unsecured credit facility to
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$515M,
Locking in fixed rates on 70% of our overall debt,
Increased the overall quality of our portfolio with the disposition of five non-core properties (including three owned
through our equity investment in a real estate partnership),
Increased by 2.8% our Annualized Base Rent per square foot to $19.35, and
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• Attracted a unique tenant, Rooftop Cinema Club, which is the first ever skyline cinema in Texas, to our premier property
BLVD Place in Houston.
As we look ahead in 2019, we plan to declassify our Board and move to annual elections of our Trustees, install a Lead Independent
Director, strengthen our Environmental, Social, and Governance (ESG) Platform, and continue to train and develop our associates to
profitably scale our business.
I am reminded of two important characteristics. A good place to start is our financially strong balance sheet comprised of high quality
real estate properties that produce stable and predictable returns, and a board of trustees and management team whose priorities
are aligned in all areas to deliver what has been promised to our shareholders.
“What we do with what we own” is at the forefront of our work. We lease space to tenants, whose businesses provide services and
meet the needs of the consumers in communities. Our tenants profit from the services they provide to consumers, and our
shareholders profit from the success of our tenants. Our knowledge of consumers is essential to identifying tenants who are likely to
serve these consumers and succeed. The creditworthiness of our tenants and their entrepreneurial businesses, along with their success
operating in local and regional markets, have collectively produced predictable and stable financial results at our properties and
have driven our growing Net Operating Income.
I would like to highlight several of our key initiatives for 2019:
Initiative #1:
Whitestone’s unique research and analytics are used extensively to understand and identify the consumers. We address services
such as health and wellness, groceries and dining, education and entertainment which cannot be conveniently fulfilled through the
Internet. We focus on consumers who live in close proximity to our properties, are time constrained, and range from Millennials to
Boomers to keep an eye on the generational changes that provide new opportunities. After we target specific profiles, we then find
the matching tenants. We assemble tenants as integral pieces to a community puzzle, which forms our community centered picture.
Initiative #2:
We develop and trainour associates. They are carefully selected, hired, and trained to work with our tenants in a pro-active way in
order to achieve our expectations. The depth and breadth of this initiative is to provide them knowledge through our Real Estate
Executive Development (REED) program, and advanced learning through our First Scholar Education Program at well-known
universities, such as The Jones Graduate School of Business at Rice University in Houston, TX. We combine our training programs with
an incentive compensation program that includes performance-based awards of Whitestone shares. Currently, approximately 30% of
our associates have graduated from our REED program and five associates have Rice MBAs. This initiative enables us to scale our
business model in both our existing and future markets to achieve our long-term growth.
Initiative #3:
Whitestone acquires properties in growth marketswith high household incomes and invests in those properties to add-value. Our
broad and unique knowledge of real estate and entrepreneurial businesses enables us to increase consumer traffic to our properties.
The neighborhood consumers visit our properties to meet friends and families as if it were their own kitchens, living rooms, home
offices, exercise rooms, and nightlife entertainment venues. They bring their children for medical and dental services and visit
investment counselors for financial planning. Their children have access to supplemental educational services, while parents have the
opportunity to shop for their groceries and daily needs.
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Initiative #4:
Whitestone adds valueto its properties through attaining entitlements and developing out-parcels and vacant land pads at properties
we have acquired. Our formula driven approach increases our gross leasable space and revenues, resulting in increased value. For
example, when we purchase a property that has parking spaces exceeding the general average requirement of 4 spaces per 1,000
square feet of gross leasable space, we develop additional buildings. This “Intrinsic Value” will ultimately be reflected in the market’s
valuation of Whitestone.
Initiative #5:
Whitestone introduced two key Long Term Goalsin 2018: (1) improvement of our “G & A” expenses as a percentage of revenue and
(2) lowering of our debt leverage.
More specifically, our initiatives continue to produce solid results, and are guiding us towards meeting the objectives of our long-term
goals, as illustrated below:
(1) As of Dec 31, 2018, excludes cost associated with proxy contest
(2) Includes pro-rata share of investment in real estate partnership
Our core initiatives remain at our forefront and continue to produce predictable and stable results. In time we believe the long term
value will be recognized in the marketplace. What differentiates Whitestone is “what we do with what we own.”
In closing, I personally would like to thank our shareholders for their continued confidence and support, and look forward to 2019,
where I remain committed to serve you with God’s hand on my shoulders.
Sincerely,
James C. Mastandrea
Chairman and CEO
Proverbs 19:21 “Many are the plans in the mind of a man, but it is the purpose of the Lord that will stand.”
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EXECUTING OUR STRATEGY:
CORPORATE RESPONSIBILITY AND
SUSTAINABILITY COMMITMENT
Corporate Responsibility:
• Steps taken in 2018 to declassify Board of Trustees
• Initiation of an Environmental, Social, and Governance (ESG) Platform
• Adoption of a Lead Independent Director
• Employee diversity - Whitestone associates include native speakers of approximately 30
different languages/dialects
• Properties serve ethnic and multi-cultural groups in our communities
Lunar New Year Celebration, Lion Square
Sustainability:
• Installation of LED lighting, energy-efficient equipment, and air filtration systems at
redevelopment projects
• Evaluation and installation of recharging stations for electric vehicles at select properties
• Establishment of recycling programs at both the property and tenant levels
• Creation of walking and bicycle paths from adjacent communities to minimize congestion and
pollution from vehicle traffic
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Santa Sundays, Village Square at Dana Park
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
For the transition period from ____________ to ____________
Commission File Number: 001-34855
WHITESTONE REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of Incorporation or Organization)
76-0594970
(I.R.S. Employer Identification No.)
2600 South Gessner, Suite 500, Houston, Texas
(Address of Principal Executive Offices)
77063
(Zip Code)
Registrant’s telephone number, including area code: (713) 827-9595
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 Section 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 every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No □
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company’’ and ‘‘emerging
growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer □
Emerging growth company □
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Smaller reporting company □
Non-accelerated filer □
Accelerated filer ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No ☒
The aggregate market value of the common shares held by nonaffiliates of the registrant as of June 29, 2018 (the last business day of the registrant’s
most recently completed second fiscal quarter) was $490,696,053.
As of March 15, 2019, the registrant had 39,766,240 common shares of beneficial interest, $0.001 par value per share, 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 2019 Annual Meeting of Shareholders, which proxy statement will be filed no later than 120 days after the end of
our fiscal year ended December 31, 2018.
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EXPLANATORY NOTE
On February 26, 2019, the Audit Committee of the Board of Trustees (the “Audit Committee”) of Whitestone REIT (“we,”
“us,” “our” or the “Company”), after consultation with members of senior management of the Company, concluded that the
Company’s unaudited consolidated financial statements as of and for the periods ended March 31, 2018, June 30, 2018 and
September 30, 2018 (collectively, the “2018 Quarterly Financial Statements”) included in the Company’s Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively, should be
restated to correct the accounting error described below under “Background on the Quarterly Restatement” and should no
longer be relied upon.
In this comprehensive Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (this “Annual Report on
Form 10-K”), the Company is presenting its audited consolidated financial statements as of and for the fiscal years ended
December 31, 2018, 2017 and 2016, as well as restated 2018 Quarterly Financial Statements, which are included in Note 19
(Selected Quarterly Financial Data (Unaudited)) to the Company’s consolidated financial statements included in this Annual
Report on Form 10-K. The Company refers to the restatement of the 2018 Quarterly Financial Statements included herein as
the “Quarterly Restatement.”
We do not intend to file separate amended Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2018, June 30, 2018 and September 30, 2018.
Background on the Quarterly Restatement
As previously disclosed in the Company’s Current Form 8-K filed with the Securities and Exchange Commission (“SEC”)
on February 27, 2019 (the “Form 8-K”), on January 1, 2018, the Company adopted Accounting Standard Update (“ASU”)
2014-09 (“Topic 606”), as subsequently amended, using the modified retrospective method and applied Topic 606 to those
contracts that were not completed as of January 1, 2018. We applied Topic 606 to account for contracts (that do not meet the
definition of a business) to customers. We accounted for contracts (that do not meet the definition of a business) to
noncustomers under Accounting Standards Codification 610, “Other Income-Gains and Losses from the Derecognition of
Nonfinancial Assets” (“ASC 610”), which requires the application of certain concepts from Topic 606. In August 2018, the
Company received a comment letter from the Staff of the SEC relating to its Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2018. The Staff requested that the Company provide them with an analysis of the Company’s
determination that the contribution of assets to Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone
OP”) (as described in the Form 8-K) did not meet the requirements for derecognition of the underlying assets under Topic 606
and ASC 610, and an explanation of the Company’s consideration of the immaterial accounting errors related to Pillarstone OP
in its conclusion that the Company’s disclosure controls and procedures and internal controls over financial reporting were
effective as of June 30, 2018 and December 31, 2017. In September 2018, the Company responded to the Staff’s letter with the
requested analysis and explanation. In October 2018, the Company received a comment letter from the Staff with certain
follow up questions. Subsequently, the Company engaged in verbal discussions with the Staff regarding its responses, and in
February 2019, the Staff verbally informed the Company that it objected to the Company’s conclusion regarding the assessment
of the transfer of control criteria in Topic 606 with respect to the contribution and objected to the Company’s continued
recognition of the underlying assets and liabilities associated with the contribution subsequent to the adoption of Topic 606 and
ASC 610 on January 1, 2018. Accordingly, the Company concluded that the 2018 Quarterly Financial Statements should be
restated. Because this change from the profit sharing method is only applicable for periods ending after giving effect to the
implementation of Topic 606 and ASC 610, no periods prior to January 1, 2018 are affected by this error.
As described in more detail in this Annual Report on Form 10-K, as a result of the adoption of Topic 606 and ASC 610 and
as reflected in the Quarterly Restatement, the Company has derecognized the underlying assets and liabilities associated with
the contribution as of January 1, 2018 and has recognized the Company’s investment in Pillarstone OP under the equity method
of accounting. As a part of the Quarterly Restatement, the Company has made the following adjustments to the 2018 Quarterly
Financial Statements, which increased the Company’s retained earnings as of January 1, 2018 by $19.1 million:
For the three months ended March 31, 2018, the change decreased revenue by $3.8 million, decreased total expenses
by $3.3 million, increased equity in earnings of real estate partnership by $0.7 million and increased net income by
$0.2 million.
For the three months ended June 30, 2018, the change decreased revenue by $3.6 million, decreased total expenses by
$3.2 million, increased equity in earnings of real estate partnership by $0.6 million and increased net income by $0.2
million. For the six months ended June 30, 2018, the change decreased revenue by $7.4 million, decreased total
expenses by $6.5 million, increased equity in earnings of real estate partnership by $1.3 million and increased net
income by $0.4 million.
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For the three months ended September 30, 2018, the change decreased revenue by $3.9 million, decreased total
expenses by $3.6 million, increased equity in earnings of real estate partnership by $0.5 million and increased net
income by $0.2 million.
For the nine months ended September 30, 2018, the change decreased revenue by $11.3 million, decreased total
expenses by $10.1 million, increased equity in earnings of real estate partnership by $1.8 million and increased net
income by $0.6 million.
Internal Control Over Financial Reporting and Disclosure Controls and Procedures
The Company identified a material weakness in its internal control over financial reporting as of December 31, 2018. As a
result of the material weakness, management concluded that the Company’s internal control over financial reporting was not
effective as of December 31, 2018 and determined that its disclosure controls and procedures were not effective as of March
31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018. The Company has implemented and continues to
implement measures to remediate the material weakness. See Part II, Item 9A, “Controls and Procedures” of this Annual
Report on Form 10-K for more information about the material weakness and our remediation activities.
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WHITESTONE REIT
FORM 10-K
Year Ended December 31, 2018
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
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.(cid:3)
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.(cid:3)
Controls and Procedures.
Other Information.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Trustees, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.(cid:3)
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules.
Form 10-K Summary
SIGNATURES.
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Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company,” “we,” “us” or
“our” are to Whitestone REIT and its consolidated subsidiaries.
Forward-Looking Statements
The following discussion should be read in conjunction with our audited consolidated financial statements and the notes
thereto in this Annual Report on Form 10-K.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities
laws, 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, although not all forward-looking
statements include these words. These statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are
cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date
of this Annual Report on 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 Annual Report on Form 10-K include:
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•
the imposition of federal taxes if we fail to qualify as a real estate investment trust (“REIT”) in any taxable year or forego
an opportunity to ensure REIT status;
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 or conditions in Texas, Arizona or Illinois;
increases in interest rates, operating costs or general and administrative expenses, including those incurred in connection
with the Quarterly Restatement;
availability and terms of capital and financing to fund our operations, distributions to shareholders and to refinance our
indebtedness as it matures;
decreases in rental rates or increases in vacancy rates;
litigation risks, including potential litigation as a result of the Quarterly Restatement and its effects;
lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants;
our inability to renew tenants or obtain new tenants upon the expiration of existing leases;
our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or
other applicable laws;
the need to fund tenant improvements or other capital expenditures out of operating cash flow;
the risk that we are unable to raise capital for working capital, acquisitions or other uses on attractive terms or at all; and
our inability to improve our internal control over financial reporting and disclosure controls and procedures, including
our inability to remediate the identified material weakness, and the costs and time associated with such efforts.
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors”
section of this Annual Report on Form 10-K.
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PART I
Item 1. Business.
General
We are a Maryland 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, as of December 31, 2018, we wholly-owned a real estate portfolio of 57 properties
that meet our Community Centered Property® strategy containing approximately 4.8 million square feet of gross leasable area
(“GLA”), located in Texas, Arizona and Illinois. Our consolidated property portfolio has a gross book value of approximately
$1.1 billion and book equity, including noncontrolling interests, of approximately $359 million as of December 31, 2018.
Further, as of December 31, 2018, we, through our investment in Pillarstone OP, owned a majority interest in 11
properties that do not meet our Community Centered Property® strategy containing approximately 1.3 million square feet of
GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using
the equity method. We also manage the day-to-day operations of Pillarstone OP. In this Annual Report on Form 10-K, unless
otherwise indicated, we do not include the Pillarstone Properties when we refer to our properties.
Our common shares of beneficial interest, par value $0.001 per share, are traded on the New York Stock Exchange
(the “NYSE”) under the ticker symbol “WSR.” Our offices are located at 2600 South Gessner, Suite 500, Houston, Texas
77063. Our telephone number is (713) 827-9595 and we maintain a website at www.whitestonereit.com. The contents of our
website are not incorporated into this filing.
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 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 Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.
Diversifying Geographically. Our current portfolio is concentrated in Houston and Phoenix. As of
December 31, 2018, we wholly-owned 57 commercial properties, including 15 properties in Houston, seven
properties in Dallas-Fort Worth, three properties in San Antonio, four properties in Austin, 27 properties in
the Scottsdale and Phoenix, Arizona metropolitan areas, and one property in Buffalo Grove, Illinois, a suburb
of Chicago.
We believe that continued geographic diversification in markets where we have substantial knowledge and
experience will help offset the economic risk from a single market concentration. We intend to continue to
focus our expansion efforts on the Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio
markets. We believe our management infrastructure and capacity can accommodate substantial growth in
those markets. We may also pursue opportunities in other regions that are consistent with our Community
Centered Property® strategy. Markets in which we have developed some knowledge and contacts include
Orlando, Florida and Denver, Colorado, both of which have economic, demographic and cultural profiles
similar to our Arizona and Texas markets.
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Capitalizing on Availability of Reasonably Priced Acquisition Opportunities. We believe that currently and
during the next several years there will continue to be excellent opportunities in our target markets to acquire
quality properties at historically attractive prices. We intend to acquire assets in off-market transactions
negotiated directly with 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 Community
Centered Property® 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.
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Redeveloping and Re-tenanting Existing Properties. We have substantial experience in repositioning
underperforming 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 new leasable square footage 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 that we owned at the time our current
management team assumed the management of the Company (the “Legacy Portfolio” or “Non-Core Properties”) 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. For example, on December 31, 2016, we contributed to Pillarstone the 14
Pillarstone Properties located in Dallas and Houston that were part of the Legacy Portfolio.
Prudent Management of Capital Structure. Of our 57 properties, we currently have 48 properties that are
unencumbered. 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 at or less than 60%. As of December 31, 2018, our ratio of total
indebtedness to undepreciated book value of real estate assets was 58%.
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, 2018, we owned a 97.7% interest in the Operating Partnership.
As of December 31, 2018, we wholly-owned a real estate portfolio consisting of 57 properties located in three
states. The aggregate occupancy rate of our portfolio was 90% based on GLA as of December 31, 2018.
We are hands-on owners who directly manage the operations and leasing of our properties. Substantially all of our
revenues consist of base rents received under varying term leases. For the year ended December 31, 2018, our total revenues
were approximately $119.9 million.
Additionally, we, through our investment in Pillarstone, owned a majority interest in 11 properties located in Dallas
and Houston, Texas. The aggregate occupancy rate of the Pillarstone properties was 80% based on GLA as of December 31,
2018.
Our largest property, BLVD Place (“BLVD”), a retail community purchased on May 26, 2017 and located in Houston,
Texas, accounted for 12.7% of our total revenues for the year ended December 31, 2018. BLVD also accounted for 17.4% of
our consolidated real estate assets, net of accumulated depreciation, as of the year ended December 31, 2018. Of our 57
properties, 15 and 27 are located in the Houston, Texas and Phoenix, Arizona metropolitan areas, respectively.
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Economic Environment
Low interest rates and desire for higher yielding investments with moderate risk has resulted in lower capitalization
rates and higher prices for commercial real estate acquisitions. Each of these factors could negatively impact the value of
public real estate companies, including ours. However, the majority of our retail properties are located in densely populated
metropolitan areas and are occupied by tenants that generally provide basic necessity-type items and services which have
tended to be less affected by economic changes. Furthermore, a substantial portion of our portfolio is in metropolitan areas in
Texas that have been impacted less by the economic slowdown 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, developers and operators, including, but not limited to, real estate
investors, other REITs, insurance companies and pension funds.
Should we decide to dispose of a property, we may compete with third-party sellers of similar types of commercial
properties for suitable purchasers, which may result in our receiving lower net proceeds from a sale or in our not being able to
dispose of such property at a time of our choosing due to the lack of an acceptable return. In operating and managing our
properties, we compete for tenants based upon a number of factors including, but not limited to, location, rental rates, security,
flexibility, expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated,
maintained and marketed. We may be required to provide rent concessions, incur charges for tenant improvements and other
inducements, or we may not be able to timely lease vacant space, all of which could adversely impact our results of operations.
Many of our competitors have greater financial and other resources than us and also may have more operating
experience. Generally, there are other neighborhood and community retail centers within relatively close proximity to each of
our properties. There is, however, no dominant competitor in the Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and
San Antonio metropolitan areas. Our retail tenants also face increasing competition from outlet malls, internet retailers, catalog
companies, direct mail and telemarketing.
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 any such contamination. In addition, some
environmental laws create a lien on a contaminated site in favor of the government for damages and costs the government
incurs in connection with contamination on the site. The presence of contamination or the failure to remediate contamination 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
typically obtain a Phase I environmental site assessment for each new acquisition, 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
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 applicable federal, state and local
laws and regulations regarding the handling, discharge and emission of hazardous or toxic substances. Because release of
chlorinated solvents can occur as a result of dry cleaning operations, we participate in the Texas Commission on Environmental
Quality Dry Cleaner Remediation Program (“DCRP”) with respect to four of our properties that currently or previously had a
dry cleaning facility as a tenant. The DCRP administers the Dry Cleaning Remediation fund to assist with remediation of
contamination caused by dry cleaning solvents.
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We have not been notified by any governmental authority, and are not otherwise aware of any material noncompliance,
liability or claim relating to hazardous or toxic substances in connection with any of our present or former properties.
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 (“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, 2018, we had 98 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, proxy statements with respect to meetings of our shareholders, as well as Reports on Forms 3, 4
and 5 regarding our officers, trustees or 10% beneficial owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of
the Securities Exchange Act of 1934, as amended (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
SEC. We have also made available on our website copies of our Audit Committee Charter, Compensation Committee Charter,
Nominating and Governance Committee Charter, Corporate Governance Guidelines, Insider Trading Compliance Policy, and
Code of Business Conduct and Ethics Policy. In the event of any changes to these documents, revised copies will also be made
available on our website. The SEC maintains an internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC as we do. The website address is http://www.sec.gov.
Materials on our website are not part of our Annual Report on Form 10-K. The contents of these websites are not incorporated
into this filing.
Financial Information
Additional financial information related to the Company is included in Item 8 “Financial Statements and
Supplementary Data.”
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Item 1A. Risk Factors.
In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should
be considered carefully in evaluating our business. Our business, financial condition, results of operations or the trading price
of our common shares could be materially adversely affected by any of these risks. Please note that 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
Market disruptions may significantly and adversely affect our financial condition and results of operations.
World financial markets have, from time to time, experienced significant disruption. While many U.S. real estate
markets have generally stabilized since the pervasive and fundamental disruptions associated with the last recession, which
resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit
markets, the financial markets have been volatile recently, and oil prices have declined dramatically over the past year. Our
results of operations may be sensitive to changes in overall economic conditions that impact tenants of our properties or tenant
leasing practices. 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. Although the U.S. economy generally appears to have emerged from the worst
aspects of the last recession, rental rates and valuations for retail space have not fully recovered to pre-recession levels and may
not for a number of years. In addition, financial markets may again experience significant and prolonged disruption, including
as a result of unanticipated events, or as a result of recent uncertainty regarding legislative and regulatory shifts relating to,
among other things, taxation and trade, which could adversely affect our tenants and our business in general. For example, a
general reduction in consumer spending and 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, if financial and macroeconomic conditions
deteriorate, or if financial markets experience significant disruption, it could have a significant adverse effect on our cash
flows, profitability, results of operations and the trading price of our common shares.
Real estate property investments are illiquid due to a variety of factors 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 certain 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 and time 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, which
may impede our ability to sell a property. Further, we may agree to transfer restrictions that materially restrict us from selling a
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 could impede our ability to sell a property even if we deem it necessary or
appropriate. These facts and any others that would further contribute to the illiquid character of real estate properties and
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 and the trading
price of our common shares.
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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 their businesses in a manner that 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 the businesses of certain tenants may not be sufficient for such tenants to meet their obligations to us. Our
financial position could be weakened and our ability to fulfill our obligations under our indebtedness and make distributions to
our shareholders could be limited if a number of our tenants were unable to meet their obligations to us or failed to renew or
extend their relationships with us as their lease terms expire, or if we were unable to lease or re-lease our properties on
economically favorable terms.
Disruption in capital markets could adversely impact acquisition activities and pricing of real estate assets.
Volatility or other disruption in capital markets could adversely affect our access to or the cost of debt and equity
capital, which could adversely affect our acquisition and other investment activities. Disruptions could include price volatility
or decreased demand in equity markets, as seen in recent months, rising interest rates, tightening of underwriting standards by
lenders and credit rating agencies and the significant inventory of unsold collateralized mortgage backed securities in the
market. As a result, we may not be able to obtain favorable equity and debt financing in the future or at all. This may impair
our ability to acquire properties at favorable returns or adversely affect our returns on investments in development and re-
development projects, 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:
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conditions in financial markets;
continuing deterioration of the brick-and-mortar retail industry;
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 or economic conditions in our markets;
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 hurricanes, earthquakes or floods and other uninsured losses;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent debt capital, which may render the sale of a property difficult or
unattractive; and
periods of high interest rates, inflation or tight money supply.
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Some or all of these factors may affect our properties, which could adversely affect our operations and ability to make
distributions 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 or reassessed by taxing authorities. As the owner of the properties 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.
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.
Compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial
cost.
The ADA and other federal, state and local laws generally require public accommodations be made accessible to
disabled persons. Noncompliance with these laws 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, which could require a significant
investment of our cash resources that could otherwise be invested in more productive assets. 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 obligations,
restrictions or increased compliance costs 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 whom 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.
Our acquisition strategy includes acquiring distressed commercial real estate, and we could face significant
competition from other investors, 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.
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Risks Associated with Our Operations
Because a majority of our GLA is in the Houston and Phoenix metropolitan areas, an economic downturn in either area
could adversely impact our operations and ability to make distributions to our shareholders.
The majority of our assets and revenues are currently derived from properties located in the Houston and Phoenix
metropolitan areas. As of December 31, 2018, 26% and 48% of our GLA was located in Houston and Phoenix, respectively.
Our results of operations are directly affected by our ability to attract financially sound commercial tenants. A significant
economic downturn in the Houston or Phoenix metropolitan area may adversely impact our ability to locate and retain
financially sound tenants, could have an adverse impact on our existing 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 geographic concentration among our current
assets, if either the Houston or Phoenix metropolitan area experiences an economic downturn, our operations and ability to
make distributions to our shareholders could be adversely impacted. In addition, a substantial component of the Houston
economy is the oil and gas industry, and the current low prices of oil and natural gas could adversely affect companies in that
industry and their employees, which could adversely affect the businesses of our Houston tenants.
We lease our properties to approximately 1,300 tenants and leases for approximately 10% to 20% of our GLA expire
annually. Each year we face the risk of non-renewal of a significant 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.
Our Community Centered Property® business model produces shorter term leases to smaller, non-national tenants, and
substantially all of our revenues consist of base rents received under these leases. As of December 31, 2018, approximately
29% of the aggregate GLA of our properties is subject to leases that expire prior to December 31, 2020. We are subject to the
risk that:
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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 experience difficulties and significant time lags re-leasing vacated space, which may cause us to fail to meet our
occupancy and average base rent targets and experience increased costs of re-leasing; and
the terms of any renewal or re-lease may be less favorable than the terms of the current leases.
We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions
with tenants as early as 18 months prior to the expiration date of the existing lease. While our early renewal program and other
leasing and marketing efforts provide early focus on expiring leases, and have generally been effective in producing lease
renewals 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 our markets 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 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 businesses that depend primarily on cash flows from their operations to pay their rent
and without other resources could be at a higher risk of bankruptcy or insolvency than larger, national tenants. If tenants are
unable to comply with the terms of our 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. 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.
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Any bankruptcy filing by or relating to one or more 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 lease 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. 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. The bankruptcy or
insolvency of a number of smaller tenants may have an adverse impact 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.
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. Our current geographic concentration in the Houston metropolitan area potentially increases
the risk of damage to our portfolio due to hurricanes. 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.
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 a 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 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 distributions to our shareholders.
Certain of our properties currently include or have in the past included a dry cleaning facility as a tenant. See
“Business - Compliance with Governmental Regulations.”
We may not be successful in consummating suitable acquisitions or investment opportunities, which may impede our growth
and adversely affect the trading price of our common shares.
Our ability to expand through acquisitions is integral to our business strategy and requires us to consummate suitable
acquisition or investment opportunities that meet our criteria and are compatible with our growth strategy. We may not be
successful in consummating acquisitions or investments in properties that meet our acquisition criteria on satisfactory terms or
at all. Failure to consummate acquisitions or investment opportunities, the failure of an acquired property to perform as
expected, or the failure to integrate successfully any acquired properties without substantial expense, delay or other operational
or financial problems, would slow our growth, which could in turn adversely affect the trading price of our common shares.
Our ability to acquire properties on favorable terms may be constrained by the following significant risks:
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competition from other real estate investors with significant capital, including other 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;
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unsatisfactory results of our due diligence investigations or failure to meet other customary closing conditions;
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the failure of an acquired property to perform as expected; 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 and the trading price of our common shares may be materially and adversely affected.
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 depends 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.
Our business is significantly influenced by demand for retail space generally, and a decrease in such demand may have a
greater adverse effect on our business than if we owned a more diversified real estate portfolio.
Because our portfolio of properties consists primarily of community and neighborhood shopping centers, a decrease in
the demand for retail space, due to the economic factors discussed above or otherwise, may have a greater adverse effect on our
business and financial condition than if we owned a more diversified real estate portfolio. The market for retail space has been,
and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial
conditions of some retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a
number of markets and increasing online consumer purchases.
Loss of our key personnel, particularly our 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 certain of our 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 make no assurances that we will be able to adapt our portfolio management, administrative, accounting and
operational systems, or hire and retain sufficient operational staff, to support our growth. 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.
We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.
Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized
access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to
gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a
number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful in
preventing a cyber-attack. Cybersecurity incidents could compromise the confidential information of our tenants, employees
and third party vendors and affect the efficiency of our business operations, which in turn could have a material adverse effect
on our reputation, competitiveness and results of operations.
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There can be no assurance that we will be able to pay or maintain cash distributions or that distributions will increase over
time.
There are many factors that can affect the availability and timing of cash distributions to shareholders. Distributions
are based upon our funds from operations, financial condition, cash flows and liquidity, debt service requirements, capital
expenditure requirements for our properties and other matters our board of trustees may deem relevant from time to time. If we
do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to
provide funds for such distributions, which would reduce the amount of capital available for real estate investments and
increase our future interest costs.
We can give no assurance that we will be able to continue to pay distributions or that distributions will increase over
time. In addition, we can give no assurance that rents from our properties will increase, or that future acquisitions of real
properties, mortgage loans or our investments in securities will increase our cash available for distributions to shareholders.
Our actual results may differ significantly from the assumptions used by our board of trustees in establishing the distribution
rate to shareholders. Our inability to make distributions, or to make distributions at expected levels, could result in a decrease
in the trading price of our common shares.
We have identified a material weakness in our system of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002. If not remediated, this material weakness could result in additional material misstatements in our consolidated
financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on their systems of
internal control over financial reporting. In addition, our independent registered public accounting firm must report on
management’s evaluation of those controls. As disclosed in Part II, Item 9A, “Controls and Procedures” of this Form 10-K, our
management, including our Chief Executive Officer and our Chief Financial Officer, has determined that we had a material
weakness in the Company’s internal control over financial reporting as of December 31, 2018. The material weakness
contributed to the material misstatement in our previously filed interim unaudited consolidated financial statements, which
were restated as part of the Quarterly Restatement. As a result of the material weakness, the Company’s management, under
the supervision of the Audit Committee and with participation of the Company’s Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2018 and
determined that its disclosure controls and procedures were not effective as of March 31, June 30, September 30 and December
31, 2018.
Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting and
disclosure controls and procedures, there can be no assurance as to when the remediation plan will be fully developed and
implemented. Until our remediation plan is fully implemented, our management will continue to devote significant time,
attention and financial resources to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our
remediation plan is inadequate, there will continue to be an increased risk that our future consolidated financial statements
could contain errors that will be undetected. Further and continued determinations that there are one or more material
weaknesses in the effectiveness of the Company’s internal control over financial reporting could also reduce our ability to
obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and
our management’s time to comply with applicable requirements. For more information relating to the Company’s internal
control over financial reporting, the material weakness that existed as of December 31, 2018 and the remediation activities
undertaken by us, see Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K.
We have restated certain of our prior interim unaudited financial statements, which may lead to additional risks and
uncertainties, including loss of investor confidence and negative impacts on our share price.
We have restated our unaudited financial statements for the periods ended March 31, 2018, June 30, 2018 and
September 30, 2018. We have filed this comprehensive Annual Report on Form 10-K to, among other things, reflect the
restatement of our 2018 interim financial statements.
As a result of the Quarterly Restatement, we have become subject to a number of additional costs and risks, including
costs for accounting and legal fees in connection with or related to the Quarterly Restatement and the remediation of our
material weakness in internal control over financial reporting. In addition, the attention of our management team has been
diverted by these efforts. We may be subject to shareholder and other actions in connection with the Quarterly Restatement and
related matters. In addition, the Quarterly Restatement and related matters could impair our reputation or could cause our
counterparties to lose confidence in us. Each of these occurrences could have a material adverse effect on our business,
financial condition, results of operations and share price.
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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 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 refinance our
revolving 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 many 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 make
distributions to our shareholders. In addition, our universal shelf registration statement on Form S-3 expired in April 2018.
Until our new shelf registration statement is declared effective by the SEC, we will not have access to the public capital
markets.
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 make distributions to our shareholders.
Our failure to hedge effectively against interest rate changes may adversely affect results of operations.
We currently have mortgages that bear interest at variable rates 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.
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. As of December 31, 2018, we had
fixed rate hedges on $209.5 million of our variable rate debt, including $200 million of our unsecured credit facility. We may
enter into additional interest rate swap agreements for our variable rate debt not currently subject to hedges, which totaled
$241.2 million as of December 31, 2018. Hedging may reduce the overall returns on our investments. Failure to hedge
effectively against interest rate changes may materially and 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 may adversely affect our ability to make distributions to our shareholders.
If we determine it 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 described above, or
otherwise as may be necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax
purposes.
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On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the
“2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and
Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured
revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the
2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to
the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019
Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson
Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson
Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated
the 2018 Facility (as defined herein).
The 2019 Facility is comprised of the following three tranches:
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$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term
Loan A, the “2019 Term Loans”).
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity by $200.0 million, upon the satisfaction of certain conditions. The Company used $446.2 million of proceeds from the
2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019
Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion,
redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the
Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the
Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without
limitation, customary representations and warranties and affirmative and negative covenants including, without limitation,
information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and
sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants
including the following:
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges
ratio of 1.50 to 1.00;
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million
plus 75% of the net proceeds from additional equity offerings.
The 2019 Facility also contains customary events of default with customary notice and cure, including, without
limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-
default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status. If an event of default occurs and
is continuing under the 2019 Facility, the lenders may, among other things, terminate their commitments under the 2019
Facility and require the immediate payment of all amounts owed thereunder.
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We may also 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, 2018, we had approximately $178.2 million of mortgage debt secured by 9
of our properties. If there is a shortfall in cash flow, however, the amount available for distributions 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 distributions to our shareholders
may 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 the quality of our properties and our
results of operations.
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 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 provide for tenant reimbursement of operating expenses, we have not established 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 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 affected properties, and our results
of operations may be negatively impacted.
We have in the past and may continue to 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 have in the past and may continue to acquire properties by issuing limited partnership units in our Operating
Partnership (“OP units”) 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 OP units, 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 OP units may redeem such units for cash, or, at our
option, common shares on a one-for-one basis. We may, however, enter into additional contractual arrangements with
contributors of property under which we would agree to redeem a contributor’s OP units for our common shares or cash, at the
option of the contributor, at set times. If the contributor required us to redeem OP 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 OP 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 OP 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
redeemed the contributor’s OP 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.
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We may issue preferred shares with a preference in distributions over our common shares, and our ability to issue preferred
shares and additional common shares may deter or prevent a sale of our common shares in which you could profit.
Our declaration of trust authorizes our board of trustees to issue up to 400,000,000 common shares and 50,000,000
preferred shares. Our board of trustees may amend our declaration of trust from time to time to increase or decrease the
aggregate number of shares or the number of any class or series that we have authority to issue. In addition, our board of
trustees may classify or reclassify any unissued common shares or preferred shares and may set the preferences, rights and
other terms of the classified or reclassified shares. The terms of preferred shares could include a preference in distributions
senior to our common shares. If we authorize and issue preferred shares with a distribution preference senior to 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.
Risks Associated with Income Tax Laws
If we fail to qualify as a REIT, our operations and distributions 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 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 distributions 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.
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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 distributions 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.
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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 of trustees determines the amount of any distributions
made by our Operating Partnership. Our board of trustees may consider a number of factors in authorizing distributions,
including:
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•
•
•
the amount of 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.
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 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 20% 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.
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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
For non-corporate taxpayers the maximum tax rate applicable to “qualified dividend income” paid by regular “C”
corporations to U.S. shareholders generally is 20%. Dividends payable by REITs, however, generally are not eligible for the
reduced rates on qualified dividend income. Instead, our ordinary dividends generally are taxed at the higher tax rates
applicable to ordinary income, the current maximum rate of which is 37%. However, for taxable years prior to 2026, individual
stockholders are generally allowed to deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to
certain limitations, which would reduce the maximum marginal effective tax rate for individuals on the receipt of such ordinary
dividends to 29.6%.
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.
Pursuant to the Tax Protection Agreement, the amount that Pillarstone is required to indemnify the Operating Partnership
for certain tax liabilities reduces over the term of the Tax Protection Agreement.
In connection with the Contribution (as defined below), on December 8, 2016, the Operating Partnership entered into a
Tax Protection Agreement (the “Tax Protection Agreement”) with Pillarstone Capital REIT (“Pillarstone REIT”), the general
partner of Pillarstone, and Pillarstone pursuant to which Pillarstone agreed to indemnify the Operating Partnership for certain
tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 (a) if such liabilities result from a
transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or (b) if Pillarstone
fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as specified in the
Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that
must be paid to maintain its REIT status for federal tax purposes. However, the Tax Protection Agreement expires on the
earlier of (x) December 8, 2021 and (y) the date on which the Operating Partnership disposes of 50% or more of the Pillarstone
OP Units (as defined below) issued in connection with the Contribution. Further, the amount that Pillarstone is required to
indemnify the Operating Partnership reduces over the term of the Tax Protection Agreement as follows: on December 8th of
each year, the amount of tax liability recognized by the Operating Partnership during that year that Pillarstone is required to
indemnify is reduced by 20 percentage points. Once the Tax Protection Agreement has expired, the Company could be subject
to additional taxes upon the occurrence of certain events that must be paid to maintain its REIT status for federal tax purposes.
Risks Related to Ownership of our Common Shares
Increases in market interest rates may result in a decrease in the value of our common shares.
One of the factors that may influence the price of our common shares will be the dividend distribution rate on the
common shares (as a percentage of the price of our common shares) relative to market interest rates. If market interest rates
rise, prospective purchasers of shares of our common shares may expect a higher distribution rate. Higher interest rates would
not, however, result in more funds being available for distribution and, in fact, would likely increase our borrowing costs and
might decrease our funds available for distribution. We therefore may not be able, or we may not choose, to provide a higher
distribution rate. As a result, prospective purchasers may decide to purchase other securities rather than our common shares,
which would reduce the demand for, and result in a decline in the market price of, our common shares.
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Broad market fluctuations could negatively impact the market price of our common shares.
The stock market has experienced extreme price and volume fluctuations that have affected the market price of many
companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances.
These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and
prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with
comparable market capitalizations. Either of these factors could lead to a material decline in the market price of our common
shares.
Maryland takeover statutes may deter others from seeking to acquire us and prevent shareholders from making a profit in
such transactions.
The Maryland General Corporation Law (“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. The business combination statute, subject to limitations, prohibits certain business combinations
between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting
power of our outstanding voting shares or an affiliate or associate of our Company who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares) or an
affiliate of an interested shareholder for five years after the most recent date on which the person becomes an interested
shareholder and thereafter imposes super-majority voting requirements on these combinations. The control share acquisition
statute provides that “control shares” of our Company (defined as shares which, when aggregated with other shares controlled
by the shareholder (except solely by virtue of a revocable proxy), entitle the shareholder to exercise one of three increasing
ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect
acquisition of ownership or control of issued and outstanding control shares) have no voting rights except to the extent
approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
We are currently subject to the control share acquisition statute, although our board of trustees may amend our
Amended and Restated Bylaws, or our bylaws, without shareholder approval, to exempt any acquisition of our shares from the
statute. Our board of trustees has adopted a resolution exempting any business combination with any person from the business
combination statute. The business combination statute (if our board of trustees revokes the foregoing exemption) and the
control share acquisition statute 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.
The MGCL, the Maryland REIT Law and our organizational documents limit shareholders’ rights 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 interests, 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 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. Finally, our
declaration of trust authorizes our Company to obligate itself, and our bylaws obligate us, to indemnify and advance expenses
to our trustees and officers to the maximum extent permitted by Maryland law.
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Our board of trustees is currently classified. Although our board of trustees has voted to recommend that our shareholders
approve a proposal to declassify our board of trustees at our 2019 annual meeting of shareholders, there can be no
assurance that such proposal will be approved at that the board of trustees will be declassified. A classified board of trustees
may prevent others from effecting a change in the control of our board of trustees.
Our board of trustees is currently classified into three classes, with each trustee elected for a three-year term. Although
our board of trustees has voted unanimously to submit a proposal to our shareholders to declassify the board of trustees at our
2019 annual meeting of shareholders, the approval of the holders of at least a majority of the outstanding common shares will
be required to approve the proposal and there can be no assurance that the proposal will be approved and that the board will be
declassified on the timeline anticipated, or at all. The full text of the proposal will be included in our proxy statement, which
will be filed in advance of our 2019 annual meeting of shareholders. If our board remains classified, the classified board
provision could have the effect of making the replacement of incumbent trustees more time-consuming and difficult. At least
two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of
trustees. Thus, the classified board provision could increase the likelihood that incumbent trustees will retain their positions.
The staggered terms of trustees may delay, defer or prevent a transaction or a change in control that might involve a premium
price for our common shares or otherwise be in the best interest of the shareholders.
The terms of our employment agreements with our executive officers and severance arrangements with other employees and
the terms of certain equity awards granted to our employees may deter others from seeking to acquire us or reduce the price
of any such acquisition.
We have entered into employment agreements with our executive officers and severance arrangements with other of
our employees, and have granted equity awards to a number of our employees. In certain cases, upon a change of control
acquisition of us, such agreements and awards would entitle the officer or employee to severance payments and vesting of
otherwise unvested awards. The cost of these payments and the impact of the vesting of such awards could deter a third party
from seeking to acquire us or could cause the price payable to shareholders in connection with any such acquisition to be lower
than it otherwise may have been. These effects could delay or prevent offers to acquire us and increase the difficulty in
consummating any such offers, even if such a transaction would be in our shareholders’ best interests.
Future offerings of debt, which would be senior to our common shares upon liquidation, and/or preferred equity securities
that may be senior to our common shares for purposes of distributions or upon liquidation, may adversely affect the market
price of our common shares.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred
equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred shares.
Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive
distributions of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the
holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares
are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a
preference on liquidating distributions or a preference on distribution payments that could limit our ability to pay distributions
to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future
offerings. Thus, our common shareholders bear the risk of our future offerings reducing the market price of our common
shares and diluting their share holdings in us.
Item 1B. Unresolved Staff Comments.
None.
29
3129
Item 2. Properties.
General
As of December 31, 2018, we wholly-owned 57 commercial properties, including 15 properties in Houston, seven properties in
Dallas-Fort Worth, three properties in San Antonio, four properties in Austin, 27 properties in the Scottsdale and Phoenix, Arizona
metropolitan areas, 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-branded 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 3.0% of
our total revenues for the year ended December 31, 2018.
Substantially all of our revenues consist of base rents received under leases that generally have terms that range from less than one
year to 15 years. The following table summarizes certain information relating to our properties as of December 31, 2018:
Commercial Properties
Whitestone
GLA
4,841,660
Average
Occupancy as of
12/31/18
Annualized Base
Rental Revenue
(in thousands) (1)
82,055
90% $
Average
Annualized
Base
Rental Revenue
Per Sq. Ft. (2)
$
18.83
(1) Calculated as the tenant’s actual December 31, 2018 base rent (defined as cash base rents including abatements) multiplied by
12. Excludes vacant space as of December 31, 2018. Because annualized base rental revenue is not derived from historical results that
were accounted for in accordance with GAAP, historical results differ from the annualized amounts. Total abatements for leases in effect
as of December 31, 2018 equaled approximately $152,000 for the month ended December 31, 2018.
(2) Calculated as annualized base rent divided by GLA leased as of December 31, 2018. Excludes vacant space as of December 31, 2018.
Our largest property, BLVD Place, a retail community purchased on May 26, 2017 and located in Houston, Texas, accounted for
12.7% of our total revenues for the year ended December 31, 2018. BLVD also accounted for 17.4% of our real estate assets, net of
accumulated depreciation, for the year ended December 31, 2018.
As of December 31, 2018, approximately $178.2 million of our total debt of $619.4 million was secured by 9 of our properties with
a combined net book value of $279.1 million.
Location of Properties
Of our 57 wholly-owned properties, 15 are located in the greater Houston metropolitan statistical area. These 15 properties
represent 29% of our revenue for the year ended December 31, 2018. An additional 27 of our wholly-owned properties are located in the
greater Phoenix metropolitan statistical area and represent 42% of our revenue for the year ended December 31, 2018.
According to the United States Census Bureau, Houston and Phoenix ranked sixth and twelfth, respectively, in the largest United
States metropolitan statistical areas as of December 31, 2018. The following table sets forth information about the unemployment rate in
Houston, Phoenix and nationally during the last six months of 2018.
National (1)
Houston (2)
Phoenix (2)
(1) Seasonally adjusted.
(2) Not seasonally adjusted.
(3) Represents estimate.
Source: Bureau of Labor Statistics
July
Aug.
Sept.
Oct.
Nov.
Dec.
3.9%
4.4%
4.3%
3.8%
4.3%
4.5%
3.7%
4.1%
4.2%
3.8%
3.8%
3.9%
3.7%
3.8%
3.9%
3.9%
3.9% (3)
4.5% (3)
32
30
30
General Physical and Economic Attributes
The following table sets forth certain information relating to each of our properties owned as of December 31, 2018.
Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2018
Community Name
Location
Year Built/
Renovated
Gross
Leasable
Square
Feet
Percent
Occupied
at
12/31/2018
Annualized Base
Rental Revenue
(in thousands) (1)
Average
Base Rental
Revenue Per
Sq. Ft. (2)
Average Net
Effective Annual
Base Rent Per
Leased Sq. Ft.(3)
Whitestone Properties:
Ahwatukee Plaza
Anthem Marketplace
Bissonnet Beltway
BLVD Place
The Citadel
City View Village
Davenport Village
Desert Canyon
Eldorado Plaza
Fountain Hills
Fountain Square
Fulton Ranch Towne Center
Gilbert Tuscany Village
Gilbert Tuscany Village Hard Corner
Heritage Trace Plaza
Headquarters Village
Keller Place
Kempwood Plaza
La Mirada
Lion Square
The Marketplace at Central
Market Street at DC Ranch
Mercado at Scottsdale Ranch
Paradise Plaza
Parkside Village North
Parkside Village South
Pima Norte
Pinnacle of Scottsdale
Pinnacle Phase II
The Promenade at Fulton Ranch
Providence
Quinlan Crossing
Seville
Shaver
Shops at Pecos Ranch
Shops at Starwood
The Shops at Williams Trace
South Richey
Spoerlein Commons
Starwood Phase II
The Strand at Huebner Oaks
SugarPark Plaza
Phoenix
Phoenix
Houston
Houston
Phoenix
San
Antonio
Austin
Phoenix
Dallas
Phoenix
Phoenix
Phoenix
Phoenix
Phoenix
Dallas
Dallas
Dallas
Houston
Phoenix
Houston
Phoenix
Phoenix
Phoenix
Phoenix
Austin
Austin
Phoenix
Phoenix
Phoenix
Phoenix
Houston
Austin
Phoenix
Houston
Phoenix
Dallas
Houston
Houston
Chicago
Dallas
San
Antonio
Houston
1979
2000
1978
2014
2013
2005
1999
2000
2004
2009
1986
2005
2009
2009
2006
2009
2001
1974
1997
2014
2012
2003
1987
1983
2005
2012
2007
1991
2017
2007
1980
2012
1990
1978
2009
2006
1985
1980
1987
2016
2000
1974
72,650
113,293
29,205
216,944
28,547
17,870
128,934
62,533
221,577
111,289
118,209
120,575
49,415
14,603
70,431
89,134
93,541
91,302
147,209
117,592
111,130
242,459
118,730
125,898
27,045
90,101
35,110
113,108
27,063
98,792
90,327
109,892
90,042
21,926
78,767
55,385
132,991
69,928
41,455
35,351
73,920
95,032
86% $
801
$
12.82
$
96%
80%
99%
89%
100%
100%
87%
98%
85%
88%
87%
100%
100%
91%
84%
95%
89%
81%
98%
99%
92%
87%
87%
100%
100%
68%
100%
100%
87%
99%
98%
72%
94%
80%
92%
96%
97%
79%
72%
98%
100%
1,735
335
8,277
466
488
3,334
799
3,217
1,586
1,851
1,746
954
124
1,407
2,148
889
949
2,515
1,501
1,001
4,417
1,620
1,551
811
2,338
426
2,411
648
1,138
804
2,339
2,202
292
1,678
1,455
1,980
715
639
866
1,464
1,126
15.95
14.34
38.54
18.34
27.31
25.86
14.69
14.81
16.77
17.79
16.64
19.31
8.49
21.95
28.69
10.00
11.68
21.09
13.02
9.10
19.80
15.68
14.16
29.99
25.95
17.84
21.32
23.94
13.24
8.99
21.72
33.97
14.17
26.63
28.56
15.51
10.54
19.51
34.02
20.21
11.85
12.76
15.56
13.78
43.30
16.14
28.60
25.74
14.70
15.27
16.89
17.31
17.96
18.82
8.90
23.22
29.49
10.29
12.31
21.95
12.70
8.69
19.74
16.24
13.96
30.58
26.78
18.56
21.87
23.69
15.01
9.01
23.92
34.17
14.07
26.14
29.69
15.40
10.72
19.51
37.17
22.06
13.80
31
3331
Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2018
Community Name
Location
Year Built/
Renovated
Gross
Leasable
Square
Feet
Percent
Occupied
at
12/31/2018
Annualized Base
Rental Revenue
(in thousands) (1)
Average
Base Rental
Revenue Per
Sq. Ft. (2)
Average Net
Effective Annual
Base Rent Per
Leased Sq. Ft.(3)
Houston
Phoenix
Phoenix
Houston
Phoenix
Houston
Houston
San
Antonio
Houston
Phoenix
Houston
Phoenix
Dallas
Phoenix
Phoenix
Sunridge
Sunset at Pinnacle Peak
Terravita Marketplace
Town Park
Village Square at Dana Park
Westchase
Williams Trace Plaza
Windsor Park
Woodlake Plaza
Total/Weighted Average - Whitestone
Properties
Land Held for Development:
Anthem Marketplace
BLVD Phase II-B
Dana Park Development
Eldorado Plaza Development
Fountain Hills
Market Street at DC Ranch
Total/Weighted Average - Land Held
For Development (4)
Grand Total/Weighted Average -
Whitestone Properties
1979
2000
1997
1978
2009
1978
1983
2012
1974
N/A
N/A
N/A
N/A
N/A
N/A
49,359
41,530
102,733
43,526
323,026
50,332
129,222
196,458
106,169
4,841,660
—
—
—
—
—
—
—
83%
82%
50%
100%
87%
86%
94%
97%
80%
90%
531
611
1,142
946
6,107
633
1,780
1,876
1,386
82,055
12.96
17.94
22.23
21.73
21.73
14.62
14.65
9.84
16.32
18.83
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12.50
18.24
22.35
21.71
21.54
14.30
15.19
9.65
15.99
19.35
—
—
—
—
—
—
—
4,841,660
90% $
82,055
$
18.83
$
19.35
(1) Calculated as the tenant’s actual December 31, 2018 base rent (defined as cash base rents including abatements) multiplied by 12.
Excludes vacant space as of December 31, 2018. 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. Total
abatements for leases in effect as of December 31, 2018 equaled approximately $152,000 for the month ended December 31, 2018.
(2) Calculated as annualized base rent divided by gross leasable area leased as of December 31, 2018. Excludes vacant space as of
December 31, 2018.
(3) Represents (i) the contractual base rent for leases in place as of December 31, 2018, adjusted to a straight-line basis to reflect changes in
rental rates throughout the lease term and amortize free rent periods and abatements, but without regard to tenant improvement
allowances and leasing commissions, divided by (ii) square footage under commenced leases of December 31, 2018.
(4) As of December 31, 2018, these parcels of land were held for development and, therefore, had no gross leasable area.
34
32
32
Significant Tenants
The following table sets forth information about our 15 largest tenants as of December 31, 2018, based upon consolidated annualized
rental revenues at December 31, 2018.
Tenant Name
Location
Annualized
Rental
Revenue
(in
thousands)
Percentage
of Total
Annualized
Base Rental
Revenues (1)
Initial Lease
Date
Year Expiring
Safeway Stores Incorporated (2)
Whole Foods Market
Frost Bank
Newmark Real Estate of Houston LLC
Austin,
Houston and
Phoenix
$
Houston
Houston
Houston
2,447
2,042
1,872
1,188
3.0%
2.5%
2.3%
1.4%
Walgreens & Co. (3)
Houston and
Phoenix
946
1.1%
Verizon Wireless (4)
Bashas' Inc. (5)
Alamo Drafthouse Cinema
Dollar Tree (6)
Wells Fargo & Company (7)
Kroger Co.
Ruth's Chris Steak House Inc.
Regus Corporation
Paul's Ace Hardware
Ross Dress for Less, Inc. (8)
Houston and
Phoenix
Phoenix
Austin
Houston and
Phoenix
Phoenix
Dallas
Phoenix
Houston
Phoenix
Phoenix and
San Antonio
875
823
690
677
553
483
466
434
427
362
$
14,285
1.1%
1.0%
0.8%
0.8%
0.7%
0.6%
0.6%
0.5%
0.5%
0.4%
17.3%
11/14/1982,
5/8/1991,
7/1/2000,
4/1/2014,
4/1/2014 and
10/19/16
9/3/2014
7/1/2014
10/1/2015
11/14/1982,
11/2/1987,
8/24/1996 and
11/3/1996
8/16/1994,
2/1/2004,
5/10/2004,
1/27/2006 and
5/1/2014
10/9/2004 and
4/1/2009
2/1/2012
3/1/1998,
8/10/1999,
6/29/2001,
11/8/2009,
12/17/2009,
and 5/21/2013
10/24/1996 and
4/16/1999
12/15/2000
1/1/1991
5/23/2014
3/1/2008
2/11/2009 and
6/18/2012
2020, 2020,
2021, 2022,
2024 and 2034
2035
2024
2026
2022, 2027,
2049 and 2056
2019, 2019,
2022, 2023 and
2024
2024 and 2029
2027
2020, 2020,
2021, 2022,
2023 and 2027
2022 and 2023
2022
2030
2025
2023
2020, 2023
(1) Annualized Base Rental Revenues represents the monthly base rent as of December 31, 2018 for each applicable tenant multiplied by 12.
33
3533
(2) As of December 31, 2018, we had six leases with the same tenant occupying space at properties located in Phoenix, Houston and Austin.
The annualized rental revenue for the lease that commenced on April 1, 2014, and is scheduled to expire in 2034, was $997,000, which
represents approximately 1.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced
on April 1, 2014, and is scheduled to expire in 2024, was $42,000, which represents less than 0.1% of our annualized base rental revenue.
The annualized rental revenue for the lease that commenced on May 8, 1991, and is scheduled to expire in 2021, was $344,000, which
represents approximately 0.4% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced
on July 1, 2000, and is scheduled to expire in 2020, was $321,000, which represents approximately 0.4% of our total annualized base
rental revenue. The annualized rental revenue for the lease that commenced on November 14, 1982, and is scheduled to expire in 2022,
was $318,000, which represents approximately 0.4% of our total annualized base rental revenue. The annualized rental revenue for the
lease that commenced on October 19, 2016, and is scheduled to expire in 2020, was $425,000, which represents approximately 0.5% of
our total annualized base rental revenue.
(3) As of December 31, 2018, we had four leases with the same tenant occupying space at properties located in Phoenix and Houston. The
annualized rental revenue for the lease that commenced on November 3, 1996, and is scheduled to expire in 2049, was $279,000, which
represents approximately 0.3% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced
on November 2, 1987, and is scheduled to expire in 2027, was $188,000, which represents approximately 0.2% of our total annualized
base rental revenue. The annualized rental revenue for the lease that commenced on November 14, 1982, and is scheduled to expire in
2022, was $181,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for
the lease that commenced on August 24, 1996, and is scheduled to expire in 2056, was $298,000, which represents approximately 0.4% of
our total annualized rental revenue.
(4) As of December 31, 2018, we had five leases with the same tenant occupying space at properties located in Phoenix and Houston. The
annualized rental revenue for the lease that commenced on August 16, 1994, and is scheduled to expire in 2019, was $21,000, which
represents less than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on
January 27, 2006, and is scheduled to expire in 2023, was $130,000, which represents approximately 0.2% of our total annualized base
rental revenue. The annualized rental revenue for the lease that commenced on February 1, 2004, and is scheduled to expire in 2019, was
$37,000, which represents less than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that
commenced on May 1, 2014, and is scheduled to expire in 2024, was $681,000, which represents approximately 0.8% of our total
annualized rental revenue. The annualized rental revenue for the lease that commenced on May 10, 2004, and is scheduled to expire in
2022, was $6,000, which represents less than 0.1% of our total annualized base rental revenue.
(5) As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in Phoenix. The annualized
rental revenue for the lease that commenced on October 9, 2004, and is scheduled to expire in 2024, was $119,000, which represents
approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on April 1,
2009, and is scheduled to expire in 2029, was $704,000, which represents approximately 0.9% of our total annualized base rental revenue.
(6) As of December 31, 2018, we had six leases with the same tenant occupying space at properties in Houston and Phoenix. The annualized
rental revenue for the lease that commenced on March 1, 1998, and is scheduled to expire in 2022, was $73,000, which represents less
than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on August 10, 1999,
and is scheduled to expire in 2020, was $88,000, which represents approximately 0.1% of our total annualized base rental revenue. The
annualized rental revenue for the lease that commenced on December 17, 2009, and is scheduled to expire in 2020, was $110,000, which
represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced
on June 29, 2001, and is scheduled to expire in 2021, was $145,000, which represents approximately 0.2% of our total annualized base
rental revenue. The annualized rental revenue for the lease that commenced on May 21, 2013, and is scheduled to expire in 2023, was
$111,000, which represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease
that commenced on November 8, 2009, and is scheduled to expire in 2027, was $151,000, which represents approximately 0.2% of our
total annualized base rental revenue.
(7) As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in Phoenix. The annualized
rental revenue for the lease that commenced on October 24, 1996, and is scheduled to expire in 2022, was $131,000, which represents
approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on April 16,
1999, and is scheduled to expire in 2023, was $421,000, which represents approximately 0.5% of our total annualized base rental revenue.
(8) As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in San Antonio and Phoenix.
The annualized rental revenue for the lease that commenced on June 18, 2012, and is scheduled to expire in 2023, was $175,000, which
represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced
on February 11, 2009, and is scheduled to expire in 2020, was $187,000, which represents approximately 0.2% of our total annualized
base rental revenue.
36
34
34
Lease Expirations
The following table lists, on an aggregate basis, all of our consolidated scheduled lease expirations over the next 10 years.
GLA
Annualized Base Rent
as of December 31, 2018
Number of
Leases
Approximate
Square Feet
Percent of
Total
Amount
(in thousands)
Percent of
Total
370
219
198
167
154
79
43
26
26
21
1,303
633,907
786,854
512,859
626,485
474,322
477,378
156,796
172,237
173,391
98,415
4,112,644
13.1 % $
16.3 %
10.6 %
12.9 %
9.8 %
9.9 %
3.2 %
3.6 %
3.6 %
2.0 %
85.0% $
12,998
13,032
9,994
11,220
9,437
7,664
3,614
3,309
3,457
2,131
76,856
15.8 %
15.8 %
12.1 %
13.6 %
11.4 %
9.3 %
4.4 %
4.0 %
4.2 %
2.6 %
93.2%
Year
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
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.
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. Mine Safety Disclosures.
Not applicable.
35
3735
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Common Shares
Our common shares are traded on the NYSE under the ticker symbol “WSR.” As of March 15, 2019, we had
39,766,240 common shares of beneficial interest outstanding held by a total of 1,123 shareholders of record.
On March 15, 2019, the closing price of our common shares reported on the NYSE was $11.88 per share.
Distributions
U.S. federal income tax law generally requires that a REIT distribute annually to its shareholders at least 90% of its
REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at
regular corporate rates on any taxable income that it does not distribute. We currently, and intend to continue to, accrue
distributions quarterly and make distributions in three monthly installments following the end of each quarter. For a discussion
of our cash flow as compared to dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.”
The timing and frequency of our distributions are authorized and declared by our board of trustees in exercise of its
business judgment based upon a number of factors, including:
•
•
•
•
•
•
•
our funds from operations;
our debt service requirements;
our capital expenditure requirements for our properties;
our taxable income, combined with the annual distribution requirements necessary to maintain REIT qualification;
requirements of Maryland law;
our overall financial condition; and
other factors deemed relevant by our board of trustees.
Any distributions we make will be at the discretion of our board of trustees and we cannot provide assurance that our
distributions will be made or sustained in the future.
The following table reflects the total distributions we have paid (including the total amount paid and the amount paid
per share/unit) in each indicated quarter (in thousands, except per share/unit data):
38
36
36
Common Shares
Noncontrolling OP Unit Holders
Total
Quarter Paid
Distributions
Per Common
Share
Total Amount
Paid
Distributions
Per OP Unit
Total Amount
Paid
Total Amount
Paid
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
$
$
$
$
0.2850
$
11,302
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
11,294
11,203
11,145
44,944
$
0.2850
0.2850
0.2850
1.1400
$
0.2850
$
11,002
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
10,948
10,093
8,429
40,472
$
0.2850
0.2850
0.2850
1.1400
$
265
286
295
309
1,155
309
309
310
313
1,241
$
$
$
$
11,567
11,580
11,498
11,454
46,099
11,311
11,257
10,403
8,742
41,713
Equity Compensation Plan Information
Please refer to Item 12 of this Annual Report on Form 10-K for information concerning securities authorized under our
equity incentive plan.
Issuer Purchases of Equity Securities
During the three months ended December 31, 2018, certain of our employees tendered owned common shares to
satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under our 2008 Long-Term
Equity Incentive Ownership Plan (the “2008 Plan”). The following table summarizes all of these repurchases during the three
months ended December 31, 2018.
Period
October 1, 2018 through October 31, 2018
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
Total Number
of Shares
Purchased (1)
Average Price
Paid for Shares
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Number of
Shares that
May Yet be
Purchased
Under the Plans
or Programs
— $
—
21,414
21,414
$
—
—
12.26
12.26
N/A
N/A
N/A
N/A
N/A
N/A
(1)
The number of shares purchased represents common shares held by employees who tendered owned common shares
to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under the 2008 Plan. With
respect to these shares, the price paid per share is based on the fair market value at the time of tender.
37
3937
Performance Graph
The following graph compares the total shareholder returns of the Company's common shares to the Standard & Poor's
500 Index (“S&P 500 Index”) and to the Morgan Stanley Capital International US REIT Index (“REIT Index”) from December
31, 2013 to December 31, 2018. The graph assumes that the value of the investment in our common shares and in the S&P 500
Index and REIT Index was $100 at December 31, 2013 and that all dividends were reinvested. The closing price of our
common shares on December 31, 2013 (on which the graph is based) was $13.37. The past shareholder return shown on the
following graph is not necessarily indicative of future performance. The performance graph and related information shall not
be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the
extent the Company specifically incorporates it by reference into such filing.
40
38
38
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 Annual Report on Form 10-K.
Operating Data:
Revenues
Property expenses
General and administrative
Depreciation and amortization
Equity in earnings of real estate partnership
Interest expense
Interest, dividend and other investment income
Income from continuing operations before loss on disposal of assets
and income taxes
Provision for income taxes
Gain on sale of property
Profit sharing expense
Loss on disposal of assets
Income from continuing operations
Income from discontinued operations
Gain on sale of properties from discontinued operations
Net income
Less: net income attributable to noncontrolling interests
Year Ended December 31,
(in thousands, except per share and per square foot data)
2018
2017
2016
2015
2014
$
119,863
$
125,959
$
104,437
$
93,416
$
72,382
37,431
23,281
25,679
(8,431)
25,177
(1,055)
17,781
(347)
4,629
—
(82)
21,981
—
—
21,981
550
42,110
23,949
27,240
—
23,651
(410)
9,419
(386)
16
(278)
(183)
8,588
—
—
8,588
254
34,092
23,922
22,457
—
19,239
(429)
5,156
(289)
3,357
(15)
(96)
8,113
—
—
8,113
182
31,335
20,312
19,761
—
14,910
(313)
7,411
(372)
—
—
(185)
6,854
11
—
6,865
116
25,152
15,274
15,725
—
10,579
(90)
5,742
(282)
—
—
(111)
5,349
510
1,887
7,746
160
Net income attributable to Whitestone REIT
$
21,431
$
8,334
$
7,931
$
6,749
$
7,586
39
4139
Earnings per share - basic
Income from continuing operations attributable to Whitestone REIT
excluding amounts attributable to unvested restricted shares
Income from discontinued operations attributable to Whitestone REIT
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares
Earnings per share - diluted
Income from continuing operations attributable to Whitestone REIT
excluding amounts attributable to unvested restricted shares
Income from discontinued operations attributable to Whitestone REIT
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares
Balance Sheet Data:
Real estate (net)
Other assets
Total assets
Liabilities
Whitestone REIT shareholders’ equity
Noncontrolling interest in subsidiary
Other Data:
Proceeds from issuance of common shares
Acquisitions of and additions to real estate (1)
Distributions per share (2)
Funds from operations (3)
Total occupancy at year end
Average aggregate GLA
Average rent per square foot
(1) Including amounts for discontinued operations.
Year Ended December 31,
(in thousands, except per share data and per square foot and occupancy)
2018
2017
2016
2015
2014
$
$
$
$
$
$
$
0.54
—
0.54
0.52
—
0.52
$
$
$
$
0.22
—
0.22
0.22
—
0.22
938,938
$ 1,018,420
89,934
51,748
1,028,872
$ 1,070,168
669,722
$
711,764
350,456
8,694
347,604
10,800
$
1,028,872
$ 1,070,168
$
$
$
$
$
— $
118,412
11,638
1.14
39,398
90%
4,925
18.81
$
$
$
$
231,120
1.13
35,039
88%
6,403
16.81
$
$
$
$
$
$
$
$
$
$
$
$
$
0.26
—
0.26
0.26
—
0.26
$
$
$
$
0.25
—
0.25
0.24
—
0.24
$
$
$
$
0.23
0.10
0.33
0.22
0.10
0.32
813,052
$
745,958
$
602,068
38,327
851,379
583,751
255,687
11,941
$
$
36,127
782,085
535,094
242,974
4,017
$
$
30,137
632,205
418,882
210,072
3,251
851,379
$
782,085
$
632,205
30,014
91,785
1.13
27,031
87%
5,837
15.45
$
$
$
$
$
49,649
163,050
1.13
26,696
87%
5,734
14.62
$
$
$
$
$
6,458
142,065
1.13
21,920
87%
5,075
13.57
(2) The distributions 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 equity method investments and joint ventures. We calculate FFO in a manner
consistent with the NAREIT definition. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Reconciliation of Non-GAAP Financial Measures.”
42
40
40
The following table sets forth a reconciliation of net income to FFO, the nearest GAAP measure, for the periods
presented:
Net income attributable to Whitestone REIT
Adjustments to reconcile to FFO:(1)
Year Ended December 31,
(in thousands)
2018
2017
2016
2015
2014
$
21,431
$
8,334
$
7,931
$
6,749
$
7,586
Depreciation and amortization of real estate assets (2)
25,401
26,290
22,179
19,646
15,950
Depreciation and amortization of real estate assets of real estate partnership (pro
rata)(3)
Loss (gain) on sale or disposal of assets (2)
Gain on sale or disposal of properties or assets of real estate partnership (pro
rata)(3)
Net income attributable to redeemable operating partnership units (2)
2,903
(4,547)
(6,340)
550
—
167
—
254
—
(3,261)
—
182
—
185
—
116
—
(1,776)
—
160
FFO
$
39,398
$
35,045
$
27,031
$
26,696
$
21,920
(1) Includes pro rata share attributable to real estate partnership in 2018.
(2) Including amounts for discontinued operations.
(3) Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income.
41
4341
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 on Form 10-K. 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 on Form 10-K.
On February 26, 2019, our Audit Committee, after consultation with members of senior management of the Company,
concluded that the Company’s unaudited consolidated financial statements as of and for the periods ended March 31, 2018, June
30, 2018 and September 30, 2018 (collectively, the “2018 Quarterly Financial Statements”) included in the Company’s Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively,
should be restated to correct the accounting error described below.
As previously disclosed in the Company’s Current Form 8-K filed with the SEC on February 27, 2019, on January 1,
2018, the Company adopted Topic 606, as subsequently amended, using the modified retrospective method and applied Topic
606 to those contracts that were not completed as of January 1, 2018. We applied Topic 606 to account for contracts (that do
not meet the definition of a business) to customers. We accounted for contracts (that do not meet the definition of a business) to
noncustomers under ASC 610, which requires the application of certain concepts from Topic 606. In August 2018, the
Company received a comment letter from the Staff relating to its Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2018. The Staff requested that the Company provide them with an analysis of the Company’s determination that the
contribution of assets to Pillarstone OP (as described in the Form 8-K) did not meet the requirements for derecognition of the
underlying assets under Topic 606 and ASC 610, and an explanation of the Company’s consideration of the immaterial
accounting errors related to Pillarstone OP in its conclusion that the Company’s disclosure controls and procedures and internal
controls over financial reporting were effective as of June 30, 2018 and December 31, 2017. In September 2018, the Company
responded to the Staff’s letter with the requested analysis and explanation. In October 2018, the Company received a comment
letter from the Staff with certain follow up questions. Subsequently, the Company engaged in verbal discussions with the Staff
regarding its responses, and in February 2019, the Staff verbally informed the Company that it objected to the Company’s
conclusion regarding the assessment of the transfer of control criteria in Topic 606 with respect to the contribution and objected
to the Company’s continued recognition of the underlying assets and liabilities associated with the contribution subsequent to
the adoption of Topic 606 and ASC 610 on January 1, 2018. Accordingly, the Company concluded that the 2018 Quarterly
Financial Statements should be restated. Because this change from the profit sharing method is only applicable for periods
ending after giving effect to the implementation of Topic 606 and ASC 610, no periods prior to January 1, 2018 are affected by
this error.
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 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, 2018, we wholly-owned 57 commercial properties consisting of:
Consolidated Operating Portfolio
•
51 properties that meet our Community Centered Properties® strategy containing approximately 4.8 million
square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $921.1 million;
and
Redevelopment, New Acquisitions Portfolio
44
42
42
•
six parcels of land held for future development that meet our Community Centered Properties® strategy having
a total carrying amount of $17.8 million.
As of December 31, 2018, we had an aggregate of 1,337 tenants. We have a diversified tenant base with our largest
tenant comprising only 3.0% of our total revenues for the year ended December 31, 2018. Lease terms for our properties range
from less than one year for smaller tenants to more than 15 years for larger tenants. Our leases generally include minimum
monthly lease payments and tenant reimbursements for taxes, insurance and maintenance. We completed 308 new and renewal
leases during 2018, totaling 727,440 square feet and $82.7 million in total lease value.
We employed 98 full-time employees as of December 31, 2018. As an internally managed REIT, we bear our own
expenses of operations, including the salaries, benefits and other compensation of our employees, office expenses, legal,
accounting and investor relations expenses and other overhead costs.
Real Estate Partnership
As of December 31, 2018, we, through our investment in Pillarstone OP, owned a majority interest in 11 properties
that do not meet our Community Centered Property® strategy containing approximately 1.3 million square feet of GLA (the
“Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity
method. We also manage the day-to-day operations of Pillarstone OP.
Recent Developments
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019
Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson
Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson
Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated
the 2018 Facility.
The 2019 Facility is comprised of the following three tranches:
•
•
•
$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term
Loan A, the “ 2019 Term Loans”).
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity by $200.0 million, upon the satisfaction of certain conditions. The Company used $446.2 million of proceeds from the
2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019
Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, expansion,
redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the
Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the
Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without
limitation, customary representations and warranties and affirmative and negative covenants including, without limitation,
information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and
sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants
including the following:
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges
ratio of 1.50 to 1.00;
43
4543
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million
plus 75% of the net proceeds from additional equity offerings (as defined).
The 2019 Facility also contains customary events of default with customary notice and cure, including, without
limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-
default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status. If an event of default occurs and
is continuing under the 2019 Facility, the lenders may, among other things, terminate their commitments under the 2019
Facility and require the immediate payment of all amounts owed thereunder.
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 $119,863,000 for the year ended December 31, 2018 as compared to $125,959,000 for
the year ended December 31, 2017, a decrease of $6,096,000, or 5%. The year ended December 31, 2018 included $6,486,000
in increased revenues from Non-Same Store operations and $15,441,000 in decreased revenues from the Pillarstone Properties
(as defined below) due to the accounting change from the profit sharing method to the equity method. We define “Non-Same
Stores” as properties acquired since the beginning of the period being compared and properties that have been sold, but not
classified as discontinued operations. During the twelve months ended December 31, 2018, Same Store revenues increased
$2,859,000. We define “Same Stores” as properties owned during the entire period being compared. For purposes of
comparing the year ended December 31, 2018 to the year ended December 31, 2017, Same Stores include properties owned
from January 1, 2016 to December 31, 2017. Same Store average occupied square feet increased from 3,959,354 for the year
ended December 31, 2017 to 3,967,881 for the year ended December 31, 2018, increasing Same Store revenue by $201,000.
Same Store average occupancy decreased from 90.2% for the year ended December 31, 2017 to 90.1% for the year ended
December 31, 2018. Same Store revenue rate per average leased square foot increased $0.67 for the year ended December 31,
2018 to $25.10 per average leased square foot as compared to the year ended December 31, 2017 revenue rate per average
leased square foot of $24.43, increasing Same Store revenue by $2,658,000. The revenue rate per average leased square feet is
calculated by dividing the total revenue by the average square feet leased during the period.
Known Trends in Our Operations; Outlook for Future Results
Rental Income
We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal
leases. The amount of net rental income generated by our properties depends principally on our ability to maintain the
occupancy rates of currently leased space and to lease currently available space, newly acquired properties with vacant space,
and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability
to maintain or increase rental rates in our submarkets. Over the past three years, we have seen modest improvement in the
overall economy in our markets, which has allowed us to maintain overall occupancy rates, with slight increases in occupancy
at certain of our properties, and to recognize modest increases in rental rates. We expect this trend to continue in 2019.
Scheduled Lease Expirations
We tend to lease space to smaller businesses that desire shorter term leases. As of December 31, 2018, approximately
29% of our GLA was subject to leases that expire prior to December 31, 2020. Over the last three years, we have renewed
expiring leases with respect to approximately 80% of our GLA. We routinely seek to renew leases with our existing tenants
prior to their expiration and typically begin discussions with tenants as early as 18 months prior to the expiration date of the
existing lease. Inasmuch as our early renewal program and other leasing and marketing efforts target these expiring leases, we
hope to re-lease most of that space prior to expiration of the leases. In the markets in which we operate, we obtain and analyze
market rental rates through review of third-party publications, which provide market and submarket rental rate data and through
inquiry of property owners and property management companies as to rental rates being quoted at properties that are located in
close proximity to our properties and we believe display similar physical attributes as our nearby properties. We use this data
to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the
markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental
rates, we believe that, in the aggregate, our current leases are at market rates. Market conditions, including new supply of
properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels,
business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate
46
44
44
and/or the rental rates we are able to negotiate. We continue to monitor our tenants’ operating performances as well as overall
economic trends to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our
cash flow and ability to make distributions to our shareholders.
Acquisitions
We have continued to successfully grow our GLA through the acquisition of additional properties, and we expect to
actively pursue and consummate additional acquisitions in the foreseeable future. We believe that over the next few years we
will continue to have excellent opportunities to acquire quality properties at historically attractive prices. We have extensive
relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe enables
us to take advantage of these market opportunities and maintain an active acquisition pipeline.
Property Acquisitions and Dispositions
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, Fort Worth, San Antonio and Houston. We may acquire properties in other high growth cities in the future. 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.
Property Dispositions. 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 that we owned at the time our current management team assumed the
management of the Company 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. For example, in December 2014, we sold three suburban
office properties in Clear Lake, Texas that were part of the Legacy Portfolio. In 2016, we sold three properties in the greater
Houston area. In 2018, we sold two properties in the greater Houston area, and Pillarstone OP, through an indirect wholly
owned subsidiary, Whitestone Industrial-Office, LLC, sold a portfolio of three properties in the greater Houston area.
On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the
“Contribution Agreement”) with Pillarstone and Pillarstone REIT pursuant to which we contributed all of the equity interests in
four of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP
Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices,
LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited
liability company (“Uptown Tower”, and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”)
that own 14 non-core properties (the “Pillarstone Properties”) that do not fit our Community Centered Property® strategy, to
Pillarstone for aggregate consideration of approximately $84.0 million, consisting of (1) approximately $18.1 million Class A
units representing limited partnership interests in Pillarstone (“Pillarstone OP Units”), issued at a price of $1.331 per Pillarstone
OP Unit; and (2) the assumption of approximately $65.9 million of liabilities, consisting of (a) approximately $15.5 million of
our liability under the 2018 Facility (see Note 9 to the accompanying consolidated financial statements); (b) an approximately
$16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26, 2013, between Uptown
Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as
lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory Note”) of Industrial-Office
issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan Agreement”), between
Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Contribution”).
In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into an OP Unit
Purchase Agreement (the “OP Unit Purchase Agreement”) with Pillarstone REIT and Pillarstone pursuant to which the
Operating Partnership agreed to purchase up to an aggregate of $3.0 million of Pillarstone OP Units at a price of $1.331 per
Pillarstone OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit
Purchase Agreement contains customary closing conditions and the parties have made certain customary representations,
warranties and indemnifications to each other in the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit
Purchase Agreement, in the event of a Change of Control (as defined therein) of the Company, Pillarstone shall have the right,
but not the obligation, to repurchase the Pillarstone OP Units issued thereunder from the Operating Partnership at their initial
issue price of $1.331 per Pillarstone OP Unit.
45
4745
In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower),
Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the
Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management
Agreement with Pillarstone (collectively, the “Management Agreements”). Pursuant to the Management Agreements with
respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property
management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a
monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset
management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the
respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement,
excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management
Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-
to-day advisory and administrative services to Pillarstone in exchange for (x) a monthly property management fee equal to
3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown
Tower.
In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection
Agreement with Pillarstone REIT and Pillarstone pursuant to which Pillarstone agreed to indemnify the Operating Partnership
for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result
from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or if
Pillarstone fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as
specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company
incurs taxes that must be paid to maintain its REIT status for federal tax purposes.
As of December 31, 2018, we owned approximately 81.4% of the total outstanding Pillarstone OP Units, which we
account for under the equity method. Additionally, certain of our officers and trustees serve as officers and trustees of
Pillarstone REIT. See Note 5 Investment in Real Estate Partnership to the accompanying consolidated financial statements for
more information on our accounting treatment of our investment in Pillarstone OP.
Property Acquisitions. On December 29, 2017, we acquired a 1.83 acre parcel of undeveloped land for $0.9 million in
cash and net prorations. The undeveloped land parcel is the hard corner at our Eldorado Plaza property.
On May 26, 2017, we acquired BLVD Place, a property that meets our Community Centered Property® strategy, for
$158.0 million, including $80.0 million of asset level mortgage financing and $78.0 million in cash and net prorations using
borrowings under our 2014 Facility and a portion of the net proceeds from the April 2017 Offering (as defined below). BLVD
Place, a 216,944 square foot property, was 99% leased at the time of purchase and is located in Houston, Texas. Included in the
purchase of BLVD Place is approximately 1.43 acres of developable land.
On May 3, 2017, we acquired Eldorado Plaza, a property that meets our Community Centered Property® strategy, for
$46.6 million in cash and net prorations using borrowings under our 2014 Facility and a portion of the net proceeds from the
April 2017 Offering. Eldorado Plaza, a 221,577 square foot property, was 96% leased at the time of purchase and is located in
McKinney, Texas, a suburb of Dallas, Texas.
Hurricane Harvey. In August 2017, Hurricane Harvey impacted the South Texas region, including Houston, Texas.
The majority of our Houston properties incurred minor damage and as a result, we recorded approximately $0.5 million in
Harvey related repairs recorded in property operation and maintenance expense for the year ended December 31, 2017.
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Leasing Activity
As of December 31, 2018, we wholly-owned 57 properties with 4,841,660 square feet of GLA, which were
approximately 90% occupied. The following is a summary of the Company’s leasing activity for the year ended December 31,
2018:
Number of
Leases Signed
GLA Signed
Weighted
Average Lease
Term (2)
TI and
Incentives per
Sq. Ft. (3)
Contractual Rent
Per Sq. Ft (4)
Prior
Contractual
Rent Per Sq.
Ft. (5)
Straight-lined
Basis Increase
(Decrease)
Over Prior
Rent
177
48
225
409,217
84,504
493,721
4.5
4.9
4.5
$
$
3.98
9.08
4.85
$
$
20.57
22.94
20.98
$
$
19.97
23.65
20.60
11.1%
7.0%
10.3%
Number of
Leases Signed
GLA Signed
Weighted
Average Lease
Term (2)
TI and
Incentives per
Sq. Ft. (3)
Contractual Rent
Per Sq. Ft (4)
177
131
308
409,217
318,223
727,440
4.5
5.6
5.0
$
$
3.98
12.05
7.51
$
$
20.57
20.00
20.32
Comparable (1)
Renewal Leases
New Leases
Total/Average
Total
Renewal Leases
New Leases
Total/Average
(1) Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and
the new or renewal square footage was within 25% of the expired square footage.
(2) Weighted average lease term (in years) is determined on the basis of square footage.
(3) Estimated amount per signed leases. Actual cost of construction may vary. Does not include first generation costs for
tenant improvements (“TI”) and leasing commission costs needed for new acquisitions, development or redevelopment of
a property to bring to operating standards for its intended use.
(4) Contractual minimum rent under the new lease for the first month, excluding concessions.
(5) Contractual minimum rent under the prior lease for the final month.
Capital Expenditures
The following is a summary of the Company’s capital expenditures for the years ended December 31 (in thousands):
Capital expenditures:
Tenant improvements and allowances
Developments / redevelopments
Leasing commissions and costs
Maintenance capital expenditures
Total capital expenditures
2018
2017
$
$
4,622
$
4,142
2,113
2,874
13,751
$
6,646
6,519
3,118
4,410
20,693
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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 GAAP. 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. For a better
understanding of our accounting policies, you should read Note 2 to our accompanying 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 rents and accounts
receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been
met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the
corresponding costs are incurred. We have established an allowance for doubtful accounts against the portion of tenant
accounts receivable which is estimated to be uncollectible.
Profit-sharing Method. In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance
applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification (“ASC”) 360-20,
“Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and Losses
from the Derecognition of Nonfinancial Assets,” we did not recognize the sale of assets to Pillarstone OP in the Contribution
and accounted for the transaction under the profit-sharing method for the year ended December 31, 2017. We recognized
Pillarstone OP’s real estate assets and notes payables in our consolidated balance sheets. Additionally, the profits and losses of
Pillarstone OP not attributable to the Company are reported as profit sharing expense. As a result of the adoption of Topic 606
and ASC 610, the Company derecognized the underlying assets and liabilities associated with the Contribution as of January 1,
2018 and recognized the Company’s investment in Pillarstone OP under the equity method.
Equity Method. For the year ended December 31, 2017, we accounted for the Contribution under the profit-sharing
method. As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities
associated with the Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the
equity method. See Note 5 and Note 19 to our accompanying consolidated financial statements for additional disclosure on
Pillarstone OP.
Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the
development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying
charges (interest and real estate taxes) are capitalized as part of construction in progress. The capitalization of such costs ceases
when the property, or any completed portion, becomes available for occupancy. For the year ended December 31, 2018,
approximately $574,000 and $365,000 in interest expense and real estate taxes, respectively, were capitalized. For the year
ended December 31, 2017, approximately $439,000 and $277,000 in interest expense and real estate taxes, respectively, were
capitalized. For the year ended December 31, 2016, approximately $324,000 and $71,000 in interest expense and real estate
taxes, respectively, were capitalized.
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 at the time of purchase. 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.
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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 improvements and buildings, respectively. 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 at least 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, 2018.
Accrued Rents 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, 2018 and 2017, we had an allowance for uncollectible accounts of $9.7 million and $8.6 million, respectively.
As of December 31, 2018, 2017 and 2016, we recorded bad debt expense in the amount of $1.4 million, $2.3 million and $1.6
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.
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.
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.
State Taxes. We are subject to the Texas Margin Tax which 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
the Texas Margin Tax is not an income tax, Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) ASC 740, “Income Taxes” (“ASC 740”) applies to the Texas Margin Tax. As of December 31, 2018,
2017 and 2016, we recorded a margin tax provision of $0.4 million, $0.4 million and $0.2 million, respectively.
Fair Value of Financial Instruments. Our financial instruments consist primarily of cash, cash equivalents, accounts
receivable, accounts and notes payable and investments in marketable securities. The carrying value of cash, cash equivalents,
accounts receivable and accounts payable are representative of their respective fair values due to their short-term nature. The
fair value of our long-term debt, consisting of fixed rate secured notes, variable rate secured notes and an unsecured revolving
credit facility aggregate to approximately $618.6 million and $659.6 million as compared to the book value of approximately
$619.4 million and $660.9 million as of December 31, 2018 and 2017, respectively. The fair value of our long-term debt is
estimated on a Level 2 basis (as provided by ASC 820, “Fair Value Measurements and Disclosures”), using a discounted cash
flow analysis based on the borrowing rates currently available to us for loans with similar terms and maturities, discounting the
future contractual interest and principal payments.
49
5149
The fair value of our loan guarantee to Pillarstone OP is estimated on a Level 3 basis (as provided by ASC 820, “Fair
Value Measurements and Disclosures”), using a probability-weighted discounted cash flow analysis based on a discount rate,
discounting the loan balance.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of
December 31, 2018 and 2017. Although management is not aware of any factors that would significantly affect the fair value
amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31,
2018 and current estimates of fair value may differ significantly from the amounts presented herein.
Derivative Instruments and Hedging Activities. We occasionally utilize derivative financial instruments, principally
interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for
risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate
swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income and
subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a
cash flow hedge’s change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using
Level 2 inputs under ASC 820. Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted
prices in markets that are not active; and model-derived valuations whose inputs are observable. As of December 31, 2018, we
consider our cash flow hedges to be highly effective.
Recent Accounting Pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates,
establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most of the existing revenue recognition guidance. The standard also requires an entity to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This guidance
became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal
years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the
underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s
investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the
Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5 and Note 19 to our accompanying
consolidated financial statements for further details.
In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for
all leases. Lessor accounting will remain largely unchanged with the exception of changes related to costs which qualify as
initial direct costs. The guidance will also require new qualitative and quantitative disclosures to help financial statement users
better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance is effective for reporting
periods beginning on or after December 15, 2018, with early adoption permitted. We adopted the guidance and its related
amendments as of January 1, 2019 using the transition practical expedient which allows us to recognize a cumulative-effect
adjustment to the opening balance of retained earnings as of the adoption date as well as other elected practical expedients.
Additionally, we have elected the optional transition practical expedient for lessors that permits lessors to make an accounting
policy election to not separate nonlease components from the associated lease components, if the following two criteria are
met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the lease component
would be classified as an operating lease if accounted for separately. As a result, leases where we are the lessor are accounted
for in a similar manner to existing standards with the underlying leased asset being reported and recognized as a real estate
asset.
We have identified our lease commitments and finalized our evaluation on our consolidated financial statements and
on our internal accounting processes. Substantially all of our real estate lessor commitments continued to be accounted for as
operating leases, and the new leasing standard did not have a material impact on rental revenues. Our lessee operating lease
commitments are subject to the standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Our
adoption of the new leasing standard did not have a material impact on our consolidated financial statements. Upon our
adoption of the guidance as of January 1, 2019, we increased lease liabilities and corresponding right-of-use assets. Such
adoption resulted in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized. We
capitalized $406,000 in legal related costs for the year ended December 31, 2018. These transition adjustments did not have a
material impact on our consolidated balance sheet. Additionally, this guidance did not have a material impact on our
consolidated statement of income upon adoption.
In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the
period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
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equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within
those fiscal years. We adopted this guidance effective January 1, 2018, and we have reconciled cash and cash equivalents and
restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported
restricted cash and restricted cash equivalents under cash flows from financing activities.
In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of
assets or businesses. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and
interim periods within those fiscal years. We adopted this guidance on a prospective basis beginning January 1, 2018 and
believe the majority of our future acquisitions will qualify as asset acquisitions and the associated transaction costs will be
capitalized as opposed to expensed under previous guidance.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adds guidance for
partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in
contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15,
2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning
January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1,
2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company
made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5
and Note 19 to our accompanying consolidated financial statements for further details.
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Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of distributions to holders of our common shares and OP units,
including those required to maintain our REIT status and satisfy our current quarterly distribution target of $0.2850 per share
and OP unit, recurring expenditures, such as repairs and maintenance of our properties, non-recurring expenditures, such as
capital improvements and tenant improvements, debt service requirements, and, potentially, acquisitions of additional
properties.
During the year ended December 31, 2018, our cash provided from operating activities was $39,557,000 and our total
dividends and distributions paid were $46,099,000. Therefore, we had distributions in excess of cash flow from operations of
approximately $6,542,000. The 2019 Facility included a $300 million unsecured borrowing capacity under a revolving credit
facility, two $50 million term loans and one $100 million term loan. The 2019 Facility also included an accordion feature that
allowed the Operating Partnership to increase the borrowing capacity to $700 million, upon the satisfaction of certain
conditions. We anticipate that cash flows from operating activities and our borrowing capacity under the 2019 Facility will
provide adequate capital for our distributions, working capital requirements, anticipated capital expenditures and scheduled
debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will
allow us to make all distributions required for us to continue to qualify to be taxed as a REIT for federal income tax purposes.
Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements,
development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with
net cash from operations, long-term indebtedness, sales of common shares, issuance of OP units, sales of underperforming and
Non-Core Properties and other financing opportunities, including debt financing. We believe we have access to multiple
sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of
additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree
of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to
access the equity markets will be dependent on a number of factors as well, including general market conditions for REITs and
market perceptions about our Company. In addition, our universal shelf registration statement on Form S-3 expired in April
2018. Until our new shelf registration statement is declared effective by the SEC, we will not have access to the public capital
markets.
We expect that our rental income will increase as we continue to acquire additional properties, subsequently increasing
our cash flows generated from operating activities. We intend to finance the continued acquisition of such additional properties
through equity issuances and through debt financing.
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.
As discussed in Note 2 to the accompanying consolidated financial statements, pursuant to the term of our $15.1
million 4.99% Note, due January 6, 2024 (see Note 9 to the accompanying consolidated financial statements), which is
collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management
account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize
such promissory note. Amounts in the cash management account are classified as restricted cash.
Cash and Cash Equivalents
We had cash and cash equivalents of approximately $13,786,000 at December 31, 2018, as compared to $5,210,000 at
December 31, 2017. The increase of $8,576,000 was primarily the result of the following:
Sources of Cash
Cash flow from operations of $39,557,000 for the year ended December 31, 2018;
Net proceeds of $9,000,000 from the 2018 Facility;
Net proceeds from financed receivable due from related party of $9,812,000;
Net proceeds of $12,574,000 from sales of properties;
Net proceeds of $30,000 from sales of marketable securities;
•
•
•
•
•
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Uses of Cash
Payment of dividends and distributions to common shareholders and OP unit holders of $46,099,000;
Additions to real estate of $11,638,000;
Payments of loan origination costs of $30,000;
Payments of notes payable of $2,543,000;
Payments of exchange offer costs of $126,000; and
Repurchase of common shares of $1,961,000.
•
•
•
•
•
•
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Equity Offerings
On April 25, 2017, we completed the sale of 8,018,500 common shares, including 1,018,500 common shares
purchased by the underwriters upon exercise of their option to purchase additional common shares, at a public offering price
per share of $13.00 (the “April 2017 Offering”). Total net proceeds from the April 2017 Offering, after deducting offering
expenses, were approximately $99.9 million, which we contributed to the Operating Partnership in exchange for OP units. The
Operating Partnership used the net proceeds from the April 2017 Offering to repay a portion of the 2018 Facility and for
general corporate purposes, including funding a portion of the purchase price of BLVD Place and Eldorado Plaza.
On June 4, 2015, we entered into nine amended and restated equity distribution agreements (the “2015 equity
distribution agreements”) for an at-the-market distribution program. Pursuant to the terms and conditions of the 2015 equity
distribution agreements, we could issue and sell up to an aggregate of $50 million of our common shares pursuant to our
Registration Statement on Form S-3 (File No. 333-203727), which expired on April 29, 2018. Actual sales depended on a
variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our
common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in
transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We had no
obligation to sell any of our common shares, and could at any time suspend offers under the 2015 equity distribution
agreements or terminate the 2015 equity distribution agreements. For the year ended December 31, 2018, we did not sell any
common shares under the 2015 equity distribution agreements. For the year ended December 31, 2017, we sold 1,324,038
common shares under the 2015 equity distribution agreements, with net proceeds to us of approximately $18.6 million. In
connection with such sales, we paid compensation of approximately $0.3 million to the sales agents. For the year ended
December 31, 2016, we sold 2,063,697 common shares under the 2015 equity distribution agreements, with net proceeds to us
of approximately $30.0 million. In connection with such sales, we paid compensation of approximately $0.5 million to the
sales agents.
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5553
Debt
Mortgages and other notes payable consist of the following (in thousands):
December 31,
2018
2017
Description
Fixed rate notes
$10.5 million, LIBOR plus 2.00% Note, due September 24, 2020 (1)
$50.0 million, 1.75% plus 1.35% to 1.90% Note, due October 30, 2020 (2)
$50.0 million, 1.50% plus 1.35% to 1.90% Note, due January 29, 2021 (3)
$100.0 million, 1.73% plus 1.65% to 2.25% Note, due October 30, 2022 (4)
$80.0 million, 3.72% Note, due June 1, 2027
$37.0 million 3.76% Note, due December 1, 2020 (5)
$6.5 million 3.80% Note, due January 1, 2019
$19.0 million 4.15% Note, due December 1, 2024
$20.2 million 4.28% Note, due June 6, 2023
$14.0 million 4.34% Note, due September 11, 2024
$14.3 million 4.34% Note, due September 11, 2024
$16.5 million 4.97% Note, due September 26, 2023 (5)
$15.1 million 4.99% Note, due January 6, 2024
$2.6 million 5.46% Note, due October 1, 2023
$
9,500
$
50,000
50,000
100,000
80,000
—
5,657
19,000
18,996
13,718
14,300
—
14,643
2,430
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.95%, due October 30,
2019 (6)
Total notes payable principal
Less deferred financing costs, net of accumulated amortization
241,200
619,444
(1,239)
618,205
$
$
9,740
50,000
50,000
100,000
80,000
33,148
5,842
19,000
19,360
13,944
14,300
16,058
14,865
2,472
232,200
660,929
(1,861)
659,068
(1) Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term through
September 24, 2018 and 4.85% beginning September 24, 2018 through September 24, 2020.
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 1 (as defined below) at 0.84%
through February 3, 2017 and 1.75% beginning February 3, 2017 through October 30, 2020.
(3) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 2 (as defined below) at 1.50%.
(4) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.
(5) Promissory notes were assumed by Pillarstone OP in December 2016 and included in our consolidated balance sheet under
the profit-sharing method of accounting through December 31, 2017 as discussed in Note 5.
(6) Unsecured line of credit includes certain Pillarstone Properties (as defined and described in more detail below) in
determining the amount of credit available under the 2018 Facility (as defined and described in more detail below).
On May 26, 2017, we, through our subsidiary, Whitestone BLVD Place LLC, a Delaware limited liability company,
issued a $80.0 million promissory note to American General Life Insurance Company (the “BLVD Note”). The BLVD Note
has a fixed interest rate of 3.72% and a maturity date of June 1, 2027. Proceeds from the BLVD Note were used to fund a
portion of the purchase price of the acquisition of BLVD Place (See Note 4 to our accompanying consolidated financial
statements).
56
54
54
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the
“2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and
Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured
revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the
2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to
the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•
•
•
•
extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “Revolver”)
to October 30, 2019 from November 7, 2018;
converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under
the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;
extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October
30, 2020 from February 17, 2017; and
extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and
together with Term Loan 1 and Term Loan 3, the “Term Loans”) to January 29, 2021 from November 7, 2019.
Borrowings under the 2018 Facility accrued interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of December 31, 2018, the interest rate
was 4.28%. The applicable margin for Adjusted LIBOR borrowings ranged from 1.40% to 1.95% for the Revolver and 1.35%
to 2.25% for the Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the
average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value
of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being
determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by
one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at
which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities.
We served as the guarantor for funds borrowed by the Operating Partnership under the 2018 Facility. The 2018
Facility contained customary terms and conditions, including, without limitation, affirmative and negative covenants such as
information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before
interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth.
The 2018 Facility also contained customary events of default with customary notice and cure, including, without limitation,
nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to
other major indebtedness, change of control, bankruptcy and loss of REIT tax status.
The 2018 Facility includes an accordion feature that will allowed the Operating Partnership to increase the borrowing
capacity to $700 million, upon the satisfaction of certain conditions. As of December 31, 2018, $441.2 million was drawn on
the 2018 Facility and our unused borrowing capacity was $58.8 million, assuming that we used the proceeds of the 2018
Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base.
Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt repayment,
capital expenditures, expansion, redevelopment and re-tenanting of properties in our portfolio and working capital.
On December 8, 2016, in connection with the Contribution, the Operating Partnership entered into the Second
Amendment to the 2018 Facility and Reaffirmation of Guaranties (the “Second Amendment”) with Pillarstone OP, the
Company and the other Guarantors party thereto, the lenders party thereto and the Agent. Pursuant to the Second Amendment,
following the Contribution, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC were permitted to remain
Material Subsidiaries (as defined in the 2018 Facility) and Guarantors under the 2018 Facility and their respective Pillarstone
Properties were each permitted to remain an Eligible Property (as defined in the 2018 Facility) and be included in the
Borrowing Base (as defined in the Facility) under the 2018 Facility. In addition, on December 8, 2016, Pillarstone OP entered
into the Limited Guarantee (the “Limited Guarantee”) with the Agent, pursuant to which Pillarstone OP agreed to be joined as a
party to the Facility to provide a limited guarantee up to the amount of availability generated by the Pillarstone Properties
owned by Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC. As of December 31, 2018, Pillarstone
accounted for approximately $5.7 million of the total amount drawn on the 2018 Facility.
55
5755
As of December 31, 2018, our $178.2 million in secured debt was collateralized by nine properties with a carrying
value of $279.1 million. Our loans contain restrictions that would require the payment of prepayment penalties for the
acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents
and leases associated with those properties. In 2018, we were not in compliance with respect to the tangible Net Worth
covenant (as defined in the 2018 Facility) and had received two waivers as of December 31, 2018. Had we been unable to
obtain a waiver or other suitable relief from the lenders under the 2018 Facility, an Event of Default (as defined in the 2018
Facility) would have occurred, permitting the lenders holding a majority of the commitments under the 2018 Facility to, among
other things, accelerate the outstanding indebtedness, which would make it immediately due and payable. The 2019 Facility
contains a similar tangible Net Worth covenant that resets at a new threshold and changes the definition of Net Worth to add
back accumulated depreciation. However, we can make no assurances that we will be in compliance with this covenant or
other covenants under the 2019 Facility in future periods or, if we are not in compliance, that we will be able to obtain a waiver.
Scheduled maturities of our outstanding debt as of December 31, 2018 were as follows (in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Total
Amount Due
(in thousands)
$
$
248,199
60,801
51,611
101,683
20,720
136,430
619,444
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 continue investing in similar properties outside
of Texas and Arizona 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.
58
56
56
Contractual Obligations
As of December 31, 2018, we had the following contractual obligations (see Note 9 of our accompanying consolidated
financial statements for further discussion regarding the specific terms of our debt):
Consolidated Contractual Obligations
Total
Payment due by period (in thousands)
Less than
1
year (2019)
1 - 3 years
(2020 -
2021)
3 - 5 years
(2022 -
2023)
More than
5 years
(after
2023)
Long-Term Debt - Principal
$ 619,444
$
248,199
$ 112,412
$ 122,403
$ 136,430
Long-Term Debt - Fixed Interest
Long-Term Debt - Variable Interest (1)
Unsecured Credit Facility - Unused commitment fee (2)
Operating Lease Obligations
Related Party Rent Lease Obligations
Total
60,492
6,633
98
185
963
$
$ 687,815
$
$
13,131
6,633
98
85
441
$
22,772
12,689
11,900
—
—
100
522
—
—
—
$
— $
—
—
—
—
268,587
$ 135,806
$ 135,092
$ 148,330
(1) As of December 31, 2018, we had one loan totaling $241.2 million which bore interest at a floating rate. The variable
interest rate payments are based on LIBOR plus 1.40% to LIBOR plus 1.95%, which reflects our new interest rates under
our 2014 Facility. 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, 2018, of 2.35%.
(2) The unused commitment fees on our unsecured credit facility, payable quarterly, are based on the average daily unused
amount of our unsecured credit facility. The fees are 0.20% for facility usage greater than 50% or 0.25% for facility usage
less than 50%. The information in the table above reflects our projected obligations for our unsecured credit facility based
on our December 31, 2018 balance of $441.2 million.
Distributions
During 2018, we paid distributions to our common shareholders and OP unit holders of $46.1 million, compared to
$41.7 million in 2017. Common shareholders and OP unit holders receive monthly distributions. Payments of distributions are
declared quarterly and paid monthly. The distributions paid to common shareholders and OP unit holders were as follows (in
thousands, except per share data) for the years ended December 31, 2018 and 2017:
57
5957
Common Shares
Noncontrolling OP Unit
Holders
Total
Distributions
Per Common
Share
Total Amount
Paid
Distributions
Per OP Unit
Total Amount
Paid
Total Amount
Paid
Quarter Paid
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
$
$
$
$
0.2850
$
11,302
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
11,294
11,203
11,145
44,944
$
0.2850
0.2850
0.2850
1.1400
$
0.2850
$
11,002
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
10,948
10,093
8,429
40,472
$
0.2850
0.2850
0.2850
1.1400
$
265
286
295
309
1,155
309
309
310
313
1,241
$
$
$
$
11,567
11,580
11,498
11,454
46,099
11,311
11,257
10,403
8,742
41,713
60
58
58
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table provides a general comparison of our results of operations for the years ended December 31, 2018
and 2017 (dollars in thousands, except per share data):
Number of properties owned and operated
Aggregate GLA (sq. ft.)(1)
Ending occupancy rate - operating portfolio(1)
Ending occupancy rate
Number of properties managed
Aggregate GLA (sq. ft.)
Ending occupancy rate - managed operating portfolio
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on disposal of assets
Income from continuing operations
Income from discontinued operations
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Whitestone REIT
Funds from operations(2)
Funds from operations core(3)
Property net operating income (4)
Distributions paid on common shares and OP units
Distributions per common share and OP unit
Year Ended December 31,
2018
2017
57
59
4,841,660
5,023,215
90%
90%
11
91%
90%
14
1,307,930
1,531,737
80%
81%
$
119,863
$
125,959
37,431
64,651
347
(4,629)
—
82
21,981
—
21,981
550
21,431
39,398
48,778
89,949
46,099
1.1400
$
$
$
42,110
74,430
386
(16)
278
183
8,588
—
8,588
254
8,334
35,045
47,096
83,849
41,713
1.1400
$
$
$
Distributions paid as a percentage of funds from operations core
95%
89%
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii)
properties that are undergoing significant redevelopment or re-tenanting.
(2) For an explanation and reconciliation of funds from operations and funds from operations core to net income, see “Funds
From Operations” below.
(3) For a reconciliation of funds from operations core to net income, see “FFO Core” below.
(4) For an explanation and reconciliation of property net operating income to net income, see “Property Net Operating
Income” below.
59
6159
Property revenues. We had rental income and tenant reimbursements of approximately $119,863,000 for the year
ended December 31, 2018 as compared to $125,959,000 for the year ended December 31, 2017, a decrease of $6,096,000, or
5%. The year ended December 31, 2018 included $6,486,000 in increased revenues from Non-Same Store operations and
$15,441,000 in decreased revenues from the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and
ASC 610. We define “Non-Same Stores” as properties acquired since the beginning of the period being compared and
properties that have been sold, but not classified as discontinued operations. During the twelve months ended December 31,
2018, Same Store revenues increased $2,859,000. We define “Same Stores” as properties owned during the entire period being
compared. For purposes of comparing the year ended December 31, 2018 to the year ended December 31, 2017, Same Stores
include properties owned from January 1, 2017 to December 31, 2018. Same Store average occupied square feet increased
from 3,959,354 for the year ended December 31, 2017 to 3,967,881 for the year ended December 31, 2018, increasing Same
Store revenue by $201,000. Same Store revenue rate per average leased square foot increased $0.67 for the year ended
December 31, 2018 to $25.10 per average leased square foot as compared to the year ended December 31, 2017 revenue rate
per average leased square foot of $24.43, increasing Same Store revenue by $2,658,480. The revenue rate per average leased
square feet is calculated by dividing the total revenue by the average square feet leased during the period.
Property expenses. Our property expenses were $37,431,000 for the year ended December 31, 2018, as compared to
$42,110,000 for the year ended December 31, 2017, a decrease of $4,679,000, or 11%. Property expenses for the year ended
December 31, 2018 included Same Store and Non-Same Store amounts of $30,794,000 and $6,637,000, respectively. Property
expenses for the year ended December 31, 2017 included Same Store and Non-Same Store amounts of $30,833,000 and
$4,102,000, respectively. The primary components of total property expenses, Same Store property expenses and Non-Same
Store property expenses are detailed in the tables below (in thousands):
Overall Property Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
Same Store Property Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
Non-Same Store Property Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
62
60
Year Ended December 31,
2018
2017
$
16,362
$
17,897
4,470
7,017
3,900
1,391
4,291
5,514
7,186
5,052
2,356
4,105
37,431
$
42,110
$
Increase
(Decrease)
(1,535)
(1,044)
(169)
(1,152)
(965)
186
(4,679)
$
% Increase
(Decrease)
(9)%
(19)%
(2)%
(23)%
(41)%
5 %
(11)%
$
$
$
$
$
Year Ended December 31,
Increase
% Increase
2018
2017
(Decrease)
(Decrease)
13,253
$
13,032
$
3,816
5,602
3,571
1,361
3,191
3,935
5,278
3,830
1,867
2,891
30,794
$
30,833
$
221
(119)
324
(259)
(506)
300
(39)
2 %
(3)%
6 %
(7)%
(27)%
10 %
— %
Year Ended December 31,
2018
2017
Increase
(Decrease)
% Increase
(Decrease)
3,109
654
1,415
329
30
1,100
6,637
$
$
2,273
417
764
309
100
239
4,102
$
$
836
237
651
20
(70)
861
2,535
37 %
57 %
85 %
6 %
(70)%
360 %
62 %
60
Real estate taxes. Real estate taxes decreased $1,535,000, or 9%, during the year ended December 31, 2018 as
compared to 2017. The $1,535,000 decrease was comprised of increases of $836,000 in Non-Same Store expense, $221,000 in
Same Store expense and offset by decrease of $2,592,000 from the derecognition of Pillarstone Properties as a result of the
adoption of Topic 606 and ASC 610. We actively work to keep our valuations and resulting taxes low because a majority of
these taxes are charged to our tenants through triple net leases, and we strive to keep these charges to our tenants as low as
possible.
Utilities. Utilities decreased $1,044,000, or 19%, during the year ended December 31, 2018 as compared to 2017.
The $1,044,000 decrease was comprised of increases of $237,000 in Non-Same Store expense and offset by decreases of
$119,000 in our Same Store properties and $1,162,000 from the derecognition of Pillarstone Properties as a result of the
adoption of Topic 606 and ASC 610.
Contract services. Contract services decreased $169,000, or 2%, during the year ended December 31, 2018 as
compared to 2017. The $169,000 decrease was comprised of increases of $324,000 in Same Store expense and $651,000 in
Non-Same Store expense, offset by a decrease of $1,144,000 from the derecognition of Pillarstone Properties as a result of the
adoption of Topic 606 and ASC 610.
Repairs and maintenance. Repairs and maintenance decreased $1,152,000, or 23%, during the year ended
December 31, 2018 as compared to 2017. The $1,152,000 decrease was comprised of decreases of $259,000 in Same Store
expense and $913,000 from the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610,
partially offset by an increase of $20,000 in our Non-Same Store properties.
Bad debt. Bad debt for the year ended December 31, 2018 decreased $965,000, or 41%, as compared to 2017. The
$965,000 decrease was comprised of decreases of $506,000 in Same Store expense, $70,000 in our Non-Same Store properties,
and $389,000 from the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610.
Labor and other. Labor and other expenses increased $186,000, or 5%, for year ended December 31, 2018 as
compared to 2017. The $186,000 increase was comprised of increases of $861,000 in Non-Same Store expense and $300,000
in Same Store expense, offset by a decrease of $975,000 from the derecognition of Pillarstone Properties as a result of the
adoption of Topic 606 and ASC 610.
61
6361
Same Store and Non-Same Store net operating income. The components of Same Store, Non-Same Store net
operating income, real estate partnership, and net income are detailed in the table below (in thousands):
Year Ended December
31,
2018
2017
Increase % Increase
(Decrease)
(Decrease)
Same Store (49 properties excluding development land)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
$
72,454
$
71,987
$
27,138
99,592
17,541
13,253
30,794
24,746
96,733
17,801
13,032
30,833
467
2,392
2,859
(260)
221
(39)
Total same store net operating income
68,798
65,900
2,898
Non-Same Store (4 properties excluding development
land)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
Total Non-Same Store net operating income
14,190
6,081
20,271
3,528
3,109
6,637
13,634
9,679
4,106
13,785
1,829
2,273
4,102
9,683
4,511
1,975
6,486
1,699
836
2,535
3,951
1 %
10 %
3 %
(1)%
2 %
— %
4 %
47 %
48 %
47 %
93 %
37 %
62 %
41 %
Pillarstone OP properties net operating income
—
8,266
(8,266)
(100)%
Pro rata share of real estate partnership
7,725
—
7,725
Not
meaningful
Total property net operating income
90,157
83,849
6,308
8 %
Less total other expenses, excluding pro rata share of real
estate partnership net operating income, provision for
income taxes, gain on sale of properties and gain (loss)
on disposal of assets
Net income
68,176
75,261
(7,085)
$
21,981
$
8,588
$
13,393
(9)%
156 %
64
62
62
Other expenses. Our other expenses were $64,651,000 for the year ended December 31, 2018, as compared to
$74,430,000 for the year ended December 31, 2017, a decrease of $9,779,000, or 13%. The primary components of other
expenses, net are detailed in the table below (in thousands):
Year Ended December 31,
Increase % Increase
General and administrative
Depreciation and amortization
Equity in earnings of real estate partnership
Interest expense
Interest, dividend and other investment income
Total other expenses
$
2018
2017
$
23,281
$
$
(Decrease)
(668)
(1,561)
(8,431)
1,526
(645)
(9,779)
$
(Decrease)
(3)%
(6)%
Not
Meaningful
6 %
157 %
(13)%
23,949
27,240
—
23,651
(410)
74,430
25,679
(8,431)
25,177
(1,055)
64,651
$
General and administrative. General and administrative expenses decreased approximately $668,000 for the year
ended December 31, 2018 as compared to 2017. The decrease in general and administrative expenses included decreased
share-based compensation expense costs of $3,668,000, decreased acquisition costs of $832,000, and decreased other expenses
of $407,000, offset by increased professional fees primarily resulting from a proxy contest at our 2018 annual meeting of
shareholders of $2,099,000, increased salaries and benefits, net of allocated costs of $2,080,000, and increased marketing costs
of $60,000
Equity in earnings of real estate partnership. Equity in earnings of real estate partnership increased $8,431,000 for the
year ended December 31, 2018 as compared to 2017 from the derecognition of Pillarstone Properties as a result of the adoption
of Topic 606 and ASC 610.
Depreciation and amortization. Depreciation and amortization decreased $1,561,000, or 6%, for the year ended
December 31, 2018 as compared to 2017. Non-Same Store depreciation increased $1,166,000. Same Store depreciation
increased $1,142,000. The increase in Same Store depreciation is attributable to redevelopment and re-tenanting investments.
Depreciation for Pillarstone OP properties decreased by $3,933,000 from the derecognition of Pillarstone Properties as a result
of the adoption of Topic 606 and ASC 610. Depreciation on corporate assets and amortization of commission costs increased
$64,000.
Interest expense. Interest expense increased $1,526,000, or 6%, for the year ended December 31, 2018 as compared to
2017 from the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610. A decrease in our
average outstanding notes payable balance of $262,000 accounted for $9,000 in decreased interest expense, and an increase in
our effective interest rate to 3.89% for the year ended December 31, 2018 as compared to 3.62% for the year ended
December 31, 2017, resulting in a $1,726,000 increase in interest expense. Amortization of loan fees decreased interest
expense by $191,000 for the year ended December 31, 2018 as compared to the year ended December 31, 2017.
Interest, dividend and other investment income. Interest, dividend and other investment income increased $645,000,
or 157%, for the year ended December 31, 2018 as compared to 2017. During the year ended December 31, 2018, our interest
income decreased $69,000, interest from real estate partnership increased $583,000, amortization of guaranty of real estate
partnership income increased $72,000, our gain on sales of investments in available-for-sale securities increased $71,000 and
our dividend income decreased $12,000 as compared to the amounts realized during the year ended December 31, 2017.
63
6563
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table provides a general comparison of our results of operations for the years ended December 31, 2017
and 2016 (dollars in thousands, except per share data):
Number of properties wholly-owned and operated
Aggregate GLA (sq. ft.)(1)
Ending occupancy rate - wholly-owned operating portfolio(1)
Ending occupancy rate - all wholly-owned properties
Number of properties managed
Aggregate GLA (sq. ft.)
Ending occupancy rate - managed operating portfolio
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on disposal of assets
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Whitestone REIT
Funds from operations(2)
Funds from operations core(3)
Property net operating income (4)
Distributions paid on common shares and OP units
Distributions per common share and OP unit
Year Ended December 31,
2017
2016
59
55
5,023,215
4,557,425
91%
90%
14
90%
89%
14
1,531,737
1,531,737
81%
81%
$
125,959
$
104,437
42,110
74,430
386
(16)
278
183
8,588
254
8,334
35,045
47,096
83,849
41,713
1.1400
$
$
$
34,092
65,189
289
(3,357)
15
96
8,113
182
7,931
27,031
39,379
70,345
32,640
1.1400
$
$
$
Distributions paid as a percentage of funds from operations core
89%
83%
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii)
properties that are undergoing significant redevelopment or re-tenanting.
(2) For an explanation and reconciliation of funds from operations and funds from operations core to net income, see “Funds
From Operations” below.
(3) For a reconciliation of funds from operations core to net income, see “FFO Core” below.
(4) For an explanation and reconciliation of property net operating income to net income, see “Property Net Operating
Income” below.
66
64
64
Property revenues. We had rental income and tenant reimbursements of approximately $125,959,000 for the year
ended December 31, 2017 as compared to $104,437,000 for the year ended December 31, 2016, an increase of $21,522,000, or
21%. The year ended December 31, 2017 included $17,057,000 in increased revenues from Non-Same Store operations and
$181,000 in increased revenues from Pillarstone OP. We define “Non-Same Stores” as properties acquired since the beginning
of the period being compared and properties that have been sold, but not classified as discontinued operations. During the
twelve months ended December 31, 2017, Same Store revenues increased $4,284,000. We define “Same Stores” as properties
owned during the entire period being compared. For purposes of comparing the year ended December 31, 2017 to the year
ended December 31, 2016, Same Stores include properties owned from January 1, 2016 to December 31, 2017. Same Store
average occupancy increased from 89.0% for the year ended December 31, 2016 to 89.5% for the year ended December 31,
2017. Same Store revenue rate per average leased square foot increased $0.81 for the year ended December 31, 2017 to $23.49
per average leased square foot as compared to the year ended December 31, 2016 revenue rate per average leased square foot of
$22.68, increasing Same Store revenue by $3,143,000. The revenue rate per average leased square feet is calculated by
dividing the total revenue by the average square feet leased during the period.
Property expenses. Our property expenses were $42,110,000 for the year ended December 31, 2017, as compared to
$34,092,000 for the year ended December 31, 2016, an increase of $8,018,000, or 24%. Property expenses for the year ended
December 31, 2017 included Same Store, Non-Same Store and Pillarstone OP amounts of $29,809,000, $5,126,000 and
$7,175,000, respectively. Property expenses for the year ended December 31, 2016 included Same Store, Non-Same Store and
Pillarstone OP amounts of $27,078,000, $607,000 and $6,407,000, respectively. The primary components of total property
expenses, Same Store property expenses and Non-Same Store property expenses are detailed in the tables below (in thousands):
Overall Property Expenses
2017
2016
Increase
% Increase
Year Ended December 31,
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
Same Store Property Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
Non-Same Store Property Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
65
$
17,897
$
14,383
$
5,514
7,186
5,052
2,356
4,105
4,868
5,941
3,802
1,589
3,509
3,514
646
1,245
1,250
767
596
42,110
$
34,092
$
8,018
24%
13%
21%
33%
48%
17%
24%
$
$
$
$
$
Year Ended December 31,
2017
2016
Increase
% Increase
$
12,883
3,738
$
11,873
3,423
4,988
3,733
1,742
4,865
2,921
1,367
2,725
29,809
$
2,629
27,078
$
1,010
315
123
812
375
96
2,731
9%
9%
3%
28%
27%
4%
10%
Year Ended December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
2,422
614
1,054
406
225
405
5,126
$
$
190
101
84
77
17
138
607
$
$
2,232
513
970
329
208
267
4,519
1,175%
508%
1,155%
427%
1,224%
193%
744%
6765
Real estate taxes. Real estate taxes increased $3,514,000, or 24%, during the year ended December 31, 2017 as
compared to 2016. The $3,514,000 increase was comprised of increases of $2,232,000 in Non-Same Store expense,
$1,010,000 in Same Store expense and $272,000 in Pillarstone OP properties. We actively work to keep our valuations and
resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases, and we strive to keep
these charges to our tenants as low as possible.
Utilities. Utilities increased $646,000, or 13%, during the year ended December 31, 2017 as compared to 2016. The
$646,000 increase was comprised of increases of $513,000 in Non-Same Store expense and $315,000 in Same Store expenses,
offset by a decrease of $182,000 in Pillarstone OP properties.
Contract services. Contract services increased $1,245,000, or 21%, during the year ended December 31, 2017 as
compared to 2016. The $1,245,000 increase was comprised of increases of $970,000 in Non-Same Store expense, $123,000 in
Same Store expense and $152,000 in Pillarstone OP properties.
Repairs and maintenance. Repairs and maintenance increased $1,250,000, or 33%, during the year ended
December 31, 2017 as compared to 2016. The $1,250,000 increase was comprised of increases of $329,000 in Non-Same
Store expense, $812,000 in Same Store expense and $109,000 in Pillarstone OP properties.
Bad debt. Bad debt for the year ended December 31, 2017 increased $767,000, or 48%, as compared to 2016. The
$767,000 increase was comprised of increases of $208,000 in Non-Same Store expense, $375,000 in Same Store expense and
$184,000 in Pillarstone OP properties.
Labor and other. Labor and other expenses increased $596,000, or 17%, for year ended December 31, 2017 as
compared to 2016. The $596,000 increase was comprised of increases of $267,000 in Non-Same Store expense, $96,000 in
Same Store expense and $233,000 in Pillarstone OP properties.
68
66
66
Same Store, Non-Same Store and Pillarstone OP net operating income. The components of Same Store, Non-Same
Store and Pillarstone OP property net operating income and net income are detailed in the table below (in thousands):
Year Ended December 31,
2017
2016
Increase % Increase
(Decrease)
(Decrease)
$
67,706
$
65,340
$
Same Store (49 properties excluding development land)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
Total same store net operating income
Non-Same Store (4 properties excluding development
land)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
Total Non-Same Store net operating income
Pillarstone OP properties (14 properties)
Property revenues
Rental revenues
Other revenues
Total property revenues
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
Total Pillarstone OP properties net operating income
23,456
91,162
16,926
12,883
29,809
61,353
13,960
5,396
19,356
2,704
2,422
5,126
14,230
12,902
2,539
15,441
4,583
2,592
7,175
8,266
21,538
86,878
15,205
11,873
27,078
59,800
1,796
503
2,299
417
190
607
2,366
1,918
4,284
1,721
1,010
2,731
1,553
12,164
4,893
17,057
2,287
2,232
4,519
1,692
12,538
12,932
2,328
15,260
4,087
2,320
6,407
8,853
(30)
211
181
496
272
768
(587)
4 %
9 %
5 %
11 %
9 %
10 %
3 %
677 %
973 %
742 %
548 %
1,175 %
744 %
741 %
0 %
9 %
1 %
12 %
12 %
12 %
(7)%
19 %
21 %
6 %
Total property net operating income
83,849
70,345
13,504
Less total other expenses, provision for income taxes and
loss on disposal of assets
75,261
62,232
13,029
Net income
$
8,588
$
8,113
$
475
67
6967
Other expenses. Our other expenses were $74,430,000 for the year ended December 31, 2017, as compared to
$65,189,000 for the year ended December 31, 2016, an increase of $9,241,000, or 14%. The primary components of other
expenses, net are detailed in the table below (in thousands):
Year Ended December 31,
Increase % Increase
2017
2016
(Decrease)
(Decrease)
General and administrative
Depreciation and amortization
Interest expense
Interest, dividend and other investment income
Total other expenses
$
$
23,949
$
23,922
$
27,240
23,651
(410)
74,430
$
22,457
19,239
(429)
65,189
27
4,783
4,412
19
$
9,241
— %
21 %
23 %
(4)%
14 %
General and administrative. General and administrative expenses increased approximately $27,000 for the year ended
December 31, 2017 as compared to 2016. The increase in general and administrative expenses included increased salaries and
benefits costs of $282,000, increased share-based compensation of $179,000 and increased professional fees of $133,000, offset
by decreased acquisition expenses and other expenses of $541,000 and $26,000, respectively.
Depreciation and amortization. Depreciation and amortization increased $4,783,000, or 21%, for the year ended
December 31, 2017 as compared to 2016. Non-Same Store depreciation increased $2,649,000, Pillarstone OP depreciation
decreased $264,000 and Same Store depreciation increased $1,810,000. The increase in Same Store depreciation is attributable
to redevelopment and re-tenanting investments. Depreciation on corporate assets and amortization of commission costs
increased $60,000.
Interest expense. Interest expense increased $4,412,000, or 23%, for the year ended December 31, 2017 as compared
to 2016. An increase in our average outstanding notes payable balance of $97,534,000 accounted for $3,366,000 in increased
interest expense, and an increase in our effective interest rate to 3.62% for the year ended December 31, 2017 as compared to
3.45% for the year ended December 31, 2016, resulting in a $1,016,000 increase in interest expense. Amortization of loan fees
increased interest expense by $30,000 for the year ended December 31, 2017 as compared to the year ended December 31,
2016.
Interest, dividend and other investment income. Interest, dividend and other investment income decreased $19,000, or
4%, for the year ended December 31, 2017 as compared to 2016. During the year ended December 31, 2017, our interest
income increased $79,000, our gains on sales of investments in available-for-sale securities decreased $91,000 and our
dividend income decreased $7,000 as compared to the amounts realized during the year ended December 31, 2016.
70
68
68
Quarterly Results of Operations
Comparison of the Three Months Ended March 31, 2018 and 2017
The following table provides a general comparison of our results of operations for the three months ended March 31,
2018 and 2017 after giving effect to the Quarterly Restatement - See Note 19 to our accompanying consolidated financial
statements for further details - (dollars in thousands, except per share data):
Three Months Ended March 31,
2018
(as Restated)
2017
Change
Change %
Number of properties owned and operated
Aggregate GLA (sq. ft.)(1)
Ending occupancy rate - operating portfolio(1)
Ending occupancy rate
Number of properties managed
58
55
3
4,949,285
4,584,488
364,797
91%
91%
14
89%
88%
14
2 %
3 %
—
—
(2)%
Aggregate GLA (sq. ft.)
Ending occupancy rate - managed operating portfolio
1,531,737
1,531,737
78%
80%
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on disposal of assets
Net income
Less: Net income attributable to noncontrolling
interests
$
29,785
$
28,267
$
1,518
8,832
17,643
110
(249)
—
180
3,269
88
9,414
17,192
81
—
64
23
(582)
451
29
(249)
(64)
157
1,493
1,776
53
35
Net income attributable to Whitestone REIT
$
3,181
$
1,440
$
1,741
5 %
8 %
2 %
3 %
— %
— %
(3)%
5 %
(6)%
3 %
36 %
Not
meaningful
(100)%
683 %
119 %
66 %
121 %
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii)
properties that are undergoing significant redevelopment or re-tenanting.
Property revenues. We had rental income and tenant reimbursements of approximately $29,785,000 for the three
months ended March 31, 2018 as compared to $28,267,000 for the three months ended March 31, 2017, an increase of
$1,518,000, or 5% as the result of an increase in the average leased square feet.
Property expenses. Our property expenses were $8,832,000 for the three months ended March 31, 2018, as compared
to $9,414,000 for the three months ended March 31, 2017, a decrease of $582,000, or 6%.
Other expenses. Our other expenses were $17,643,000 for the three months ended March 31, 2018, as compared to
$17,192,000 for the three months ended March 31, 2017, an increase of $451,000, or 3%.
69
7169
Comparison of the Three Months Ended June 30, 2018 and 2017
The following table provides a general comparison of our results of operations for the three months ended June 30,
2018 and 2017 after giving effect to the Quarterly Restatement - See Note 19 to our accompanying consolidated financial
statements for further details - (dollars in thousands, except per share data):
Three Months Ended June 30,
2018
(as Restated)
2017
Change
Change %
Number of properties owned and operated
Aggregate GLA (sq. ft.)(1)
Ending occupancy rate - operating portfolio(1)
Ending occupancy rate
Number of properties managed
Aggregate GLA (sq. ft.)
Ending occupancy rate - managed operating
portfolio
58
58
—
4,949,285
5,023,009
(73,724)
91%
91%
14
90%
89%
14
1,529,861
1,531,737
1 %
2 %
—
(1,876)
77%
78%
(1)%
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on disposal of assets
Net income
Less: Net income attributable to noncontrolling
interests
$
29,473
$
30,208
$
8,922
18,414
59
—
—
73
9,862
18,057
89
(16)
101
72
2,005
2,043
51
60
Net income attributable to Whitestone REIT
$
1,954
$
1,983
$
(735)
(940)
357
(30)
16
(101)
1
(38)
(9)
(29)
— %
(1)%
1 %
2 %
— %
— %
(1)%
(2)%
(10)%
2 %
(34)%
(100)%
(100)%
1 %
(2)%
(15)%
(1)%
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii)
properties that are undergoing significant redevelopment or re-tenanting.
Property revenues. We had rental income and tenant reimbursements of approximately $29,473,000 for the three
months ended June 30, 2018 as compared to $30,208,000 for the three months ended June 30, 2017, a decrease of $735,000, or
2% as a result of the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610.
Property expenses. Our property expenses were $8,922,000 for the three months ended June 30, 2018, as compared to
$9,862,000 for the three months ended June 30, 2017, a decrease of $940,000, or 10% as a result of the derecognition of
Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610.
Other expenses. Our other expenses were $18,414,000 for the three months ended June 30, 2018, as compared to
$18,057,000 for the three months ended June 30, 2017, an increase of $357,000, or 2%.
72
70
70
Comparison of the Three Months Ended September 30, 2018 and 2017
The following table provides a general comparison of our results of operations for the three months ended September
30, 2018 and 2017 after giving effect to the Quarterly Restatement - See Note 19 to our accompanying consolidated financial
statements for further details - (dollars in thousands, except per share data):0
Three Months Ended September 30,
2018
(as Restated)
2017
Change
Change %
Number of properties owned and operated
Aggregate GLA (sq. ft.)(1)
Ending occupancy rate - operating portfolio(1)
Ending occupancy rate
Number of properties managed
Aggregate GLA (sq. ft.)
Ending occupancy rate - managed operating
portfolio
57
58
4,843,519
5,023,215
92%
92%
14
90%
90%
14
1,529,861
1,531,737
(1)
(179,696)
2%
2%
—
(1,876)
80%
80%
—%
Total property revenues
Total property expenses
Total other expenses
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on disposal of assets
Net income
Less: Net income attributable to noncontrolling
interests
$
30,704
$
9,831
17,125
92
(4,380)
—
3
8,033
198
$
33,653
11,285
19,062
126
—
63
40
3,077
84
Net income attributable to Whitestone REIT
$
7,835
$
2,993
$
(2,949)
(1,454)
(1,937)
(34)
(4,380)
(63)
(37)
4,956
114
4,842
(2)%
(4)%
2 %
2 %
— %
— %
— %
(9)%
(13)%
(10)%
(27)%
Not
meaningful
(100)%
(93)%
161 %
136 %
162 %
(1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii)
properties that are undergoing significant redevelopment or re-tenanting.
Property revenues. We had rental income and tenant reimbursements of approximately $30,704,000 for the three
months ended September 30, 2018 as compared to $33,653,000 for the three months ended September 30, 2017, a decrease of
$2,949,000, or 9% as a result of the derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC
610.
Property expenses. Our property expenses were $9,831,000 for the three months ended September 30, 2018, as
compared to $11,285,000 for the three months ended September 30, 2017, a decrease of $1,454,000, or 13% as a result of the
derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610.
Other expenses. Our other expenses were $17,125,000 for the three months ended September 30, 2018, as compared
to $19,062,000 for the three months ended September 30, 2017, a decrease of $1,937,000, or 10% as a result of the
derecognition of Pillarstone Properties as a result of the adoption of Topic 606 and ASC 610.
71
7371
Reconciliation of Non-GAAP Financial Measures
Funds From Operations (“FFO”)
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 real estate assets
or assets of equity method investments, impairment charges on properties held for investment and extraordinary items, plus
depreciation and amortization of operating properties, including our share of equity method investments. We calculate FFO in
a manner consistent with the NAREIT definition.
Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain
limitations associated with using GAAP net income (loss) alone as the primary measure of our operating performance.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real
estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market
conditions, management believes that the presentation of operating results for real estate companies that use historical cost
accounting is insufficient by itself. In addition, securities analysts, investors and other interested parties use FFO as the
primary metric for comparing the relative performance of equity REITs.
FFO should not be considered as an alternative to net income or other measurements under GAAP, as an indicator of
our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.
Although our calculation of FFO is consistent with that of NAREIT, there can be no assurance that FFO presented by us is
comparable to similarly titled measures of other REITs.
FFO Core
Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items
that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period
performance. These items include, but are not limited to, legal settlements, proxy contest fees, debt extension costs, non-cash
share-based compensation expense, rent support agreement payments received from sellers on acquired assets, management
fees from Pillarstone and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to
exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not
indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure
for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified
FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of
other REITs.
74
72
72
Below are the calculations of FFO and FFO Core and the reconciliations to net income, which we believe is the most
comparable GAAP financial measure (in thousands):
FFO AND FFO CORE
Net income attributable to Whitestone REIT
Adjustments to reconcile to FFO:(1)
Depreciation and amortization of real estate assets
Depreciation and amortization of real estate assets of real estate partnership
(pro rata)(2)
(Gain) loss on sale or disposal of assets and properties, net
Gain on sale or disposal of properties or assets of real estate partnership (pro
rata)(2)
Net income attributable to noncontrolling interests
FFO
Share-based compensation expense
Proxy contest professional fees
Early debt extinguishment costs of real estate partnership
Acquisition costs
FFO Core
Year Ended December 31,
2017
2016
2018
$
21,431
$
8,334
$
7,931
25,401
26,290
22,179
2,903
(4,547)
(6,340)
550
39,398
6,758
2,534
88
—
48,778
$
$
$
—
167
—
254
35,045
10,426
—
—
1,625
47,096
$
$
$
—
(3,261)
—
182
27,031
10,247
—
—
2,101
39,379
$
$
$
(1)
(2)
Includes pro-rata share attributable to real estate partnership.
Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive
income.
Property Net Operating Income (“NOI”)
Management believes that NOI is a useful measure of our property operating performance. We define NOI as
operating revenues (rental and other revenues) less property and related expenses (property operation and maintenance and real
estate taxes). Other REITs may use different methodologies for calculating NOI and, accordingly, our NOI may not be
comparable to other REITs. Because NOI excludes general and administrative expenses, depreciation and amortization,
involuntary conversion, interest expense, interest income, provision for income taxes, gain or loss on sale or disposition of
assets, and our pro rata share of NOI of equity method investments, it provides a performance measure that, when compared
year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate
properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective
not immediately apparent from net income. We use NOI to evaluate our operating performance since NOI allows us to evaluate
the impact that factors such as occupancy levels, lease structure, lease rates and tenant base have on our results, margins and
returns. In addition, management believes that NOI provides useful information to the investment community about our
property and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of
property performance in the real estate industry. However, NOI should not be viewed as a measure of our overall financial
performance since it does not reflect general and administrative expenses, depreciation and amortization, involuntary
conversion, interest expense, interest income, provision for income taxes and gain or loss on sale or disposition of assets, the
level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties.
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7573
Below is the calculation of NOI and the reconciliation to net income, which we believe is the most comparable GAAP
financial measure (in thousands):
PROPERTY NET OPERATING INCOME (“NOI”)
Net income attributable to Whitestone REIT
General and administrative expenses
Depreciation and amortization
Equity in earnings of real estate partnership
Interest expense
Interest, dividend and other investment income
Provision for income taxes
Gain on sale of properties
Management fee, net of related expenses
Profit sharing expense
Loss on sale or disposal of assets
NOI of real estate partnership (pro rata)
Net income attributable to noncontrolling interests
NOI
Taxes
Year Ended December 31,
2018
2017
2016
$
21,431
$
8,334
$
7,931
23,281
25,679
(8,431)
25,177
(1,055)
347
(4,629)
(208)
—
82
7,725
550
23,949
27,240
—
23,651
(410)
386
(16)
—
278
183
—
254
23,922
22,457
—
19,239
(429)
289
(3,357)
—
15
96
—
182
$
89,949
$
83,849
$
70,345
We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 1999. As a
REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify
as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We
believe that we are organized and operate in a manner to qualify and be taxed as a REIT, and we intend to operate so as to
remain qualified as a REIT for federal income tax purposes.
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
Guarantees We may guarantee the debt of a real estate partnership primarily because it allows the real estate
partnership to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the real estate
partnership on its investment, and a higher return on our investment in the real estate partnership. We may receive a fee from
the real estate partnership for providing the guarantee. Additionally, when we issue a guarantee, the terms of the real estate
partnership’s partnership agreement typically provide that we may receive indemnification from the real estate partnership or
have the ability to increase our ownership interest. See Note 5 and Note 19 to the accompanying consolidated financial
statements for information related to our guarantees of our real estate partnership’s debt as of December 31, 2018 and 2017.
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74
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our future income, cash flows and fair value relevant to our financial instruments depend upon prevailing market
interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the
nature of our operations, we are not subject to foreign exchange rate or commodity price risk. The principal market risk to
which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and other factors that are beyond our control
contribute to interest rate risk. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and
cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in
market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable
rates are obtainable.
All of our financial instruments were entered into for other than trading purposes.
Fixed Interest Rate Debt
As of December 31, 2018, $378.2 million, or approximately 61%, of our outstanding debt was subject to fixed interest
rates, which limit the risk of fluctuating interest rates. Though a change in the market interest rates affects the fair market
value, it does not impact net income to shareholders or cash flows. Our total outstanding fixed interest rate debt has an average
effective interest rate as of December 31, 2018 of approximately 3.92% per annum with expirations ranging from 2019 to 2027
(see Note 9 to our accompanying consolidated financial statements for further detail). Holding other variables constant, a 1%
increase or decrease in interest rates would cause a $13.1 million decline or increase, respectively, in the fair value for our fixed
rate debt.
Variable Interest Rate Debt
As of December 31, 2018, $241.2 million, or approximately 39%, of our outstanding debt was subject to floating
interest rates of LIBOR plus 1.40% to 1.95% and not currently subject to a hedge. The impact of a 1% increase or decrease in
interest rates on our floating rate debt would result in a decrease or increase, respectively, of annual net income of
approximately $2.4 million.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is incorporated by reference to our accompanying consolidated 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. Controls and Procedures.
Overview
As previously announced on February 26, 2019, the Audit Committee of the Board of Trustees (the “Audit
Committee”) of the Company, after consultation with members of senior management of the Company, concluded that the
Company’s unaudited consolidated financial statements as of and for the periods ended March 31, 2018, June 30, 2018 and
September 30, 2018 (collectively, the “2018 Quarterly Financial Statements”) included in the Company’s Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively, should be
restated to correct an accounting error. Please refer to “Part II - Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 19 (Selected Quarterly Financial Data), included in “Part II - Item 8 -
Consolidated Financial Statements and Supplementary Data” for a more detailed description of the Quarterly Restatement.
Notwithstanding the existence of the material weakness described below, we believe that the consolidated financial
statements in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of
operations and cash flows as of the dates, and for the periods presented, in conformity with GAAP.
Evaluation of Disclosure Controls and Procedures
75
7775
We maintain disclosure controls and procedures that are designed to provide a reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, has carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2018. Based upon that evaluation,
and in light of the material weakness in the design and operation of our internal control over financial reporting disclosed
below, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were not effective at the reasonable assurance level referenced above. 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 Report on Internal Control Over Financial Reporting
Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(e) under the
Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP, and
includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
Our management conducted a process to assess the effectiveness of our internal control over financial reporting as of
December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. This framework highlights that the control
environment sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all
other components of internal control over financial reporting.
During the assessment process, we identified the following material weakness as of December 31, 2018 in the
Company’s internal controls over financial reporting and disclosure controls and procedures.
•
Application of New Accounting Pronouncements, including proper assessment of judgment items in
complex accounting transactions - The Company did not have effective controls to ensure the proper application of
new accounting pronouncements in its financial statements. After its review of the error and its internal controls over
financial reporting and disclosure controls and procedures, the Company determined that it did not appropriately
weigh its legal rights in its assessment of the transfer of control criteria under Topic 606 as it pertained to the
Contribution.
The material weakness described above contributed to accounting errors that required the restatement of our
consolidated financial statements for the first three quarterly periods of the year ended December 31, 2018.
As a result of the material weakness described above, management has concluded that, as of December 31, 2018, our
internal control over financial reporting was not effective.
78
76
76
The Company’s independent registered public accounting firm has issued a report on the effectiveness of the
Company’s internal control over financial reporting, which appears on page F-3 of this Annual Report on Form 10-K.
Remediation of Material Weakness in Internal Control over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, and with the
oversight of the Audit Committee, has undertaken a plan to remediate the material weakness identified above. The remediation
efforts summarized below, which are either implemented or in the process of being implemented, are intended to address the
identified material weakness.
•
Enhancements to internal controls regarding the adoption of new accounting pronouncements including:
Enhanced documentation of the details of new accounting pronouncements;
Enhanced documentation of areas in new accounting pronouncements that require the exercise of
management’s judgment; and
Enhanced documentation of the applicability of new accounting pronouncements to the Company’s
business.
•
accounting pronouncements.
Engagement of outside technical experts to assist the Company in the application and adoption of new
•
•
Ensure key accounting personnel have appropriate training.
Additional accounting staff with appropriate experience, certification, education and training.
•
Implementation of a disclosure review committee, including outside technical advisors, the Chief Financial
Officer, accounting staff, and other members of management. The committee will meet quarterly, at a minimum, to
provide guidance and oversight to ensure the proper implementation of the enhanced internal controls regarding the
adoption of new accounting pronouncements.
•
key judgment areas.
Quarterly review with the Audit Committee of new accounting pronouncements, including a discussion of
Changes in Internal Control Over Financial Reporting
Other than those described in “Remediation of Material Weakness in Internal Control over Financial Reporting”
above, there have been no changes during the Company’s quarter ended December 31, 2018, 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 financial reporting.
Item 9B. Other Information.
None.
77
7977
PART III
Item 10. Trustees, 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 2019 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 2019 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, 2018:
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 (excluding
securities reflected in
column (a))
(a)
(b)
(c)
— (1) $
—
— $
—
—
—
3,172,158 (2)
— (3)
3,172,158
Plan Category
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
(1) Excludes 3,119,221 common shares subject to outstanding restricted common share units granted pursuant to our 2008
Long-Term Equity Incentive Ownership Plan, as amended (the “2008 Plan”).
(2) At our annual meeting of shareholders on May 11, 2017, our shareholders voted to approve the 2018 Long-Term Equity
Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common shares
and OP units pursuant to awards under the 2018 Plan. The 2018 Plan became effective on July 30, 2018, which is the day
after the 2008 Plan expired. Pursuant to the 2008 Plan, the maximum aggregate number of common shares that were
issuable under the 2008 Plan was increased upon each issuance of common shares by the Company so that at any time the
maximum number of shares that were issuable under the 2008 Plan equaled 12.5% of the aggregate number of common
shares of the Company and OP units issued and outstanding (other than units issued to or held by the Company).
(3) Excludes 8,333 restricted common shares issued to trustees outside the 2008 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 2019 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 2019 Annual Meeting of Shareholders.
80
78
78
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 2019 Annual Meeting of Shareholders.
PART IV
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 Accounts
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.
Item 16. Form 10-K Summary.
None.
79
8179
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.
SIGNATURES
WHITESTONE REIT
Date:
March 15, 2019
By:
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and CEO
POWER OF ATTORNEY
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.
March 15, 2019
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and CEO
(Principal Executive Officer)
March 15, 2019
/s/ David K. Holeman
David K. Holeman, Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
/s/ Nandita Berry
Nandita Berry, Trustee
/s/ Donald F. Keating
Donald F. Keating, Trustee
/s/ Najeeb A. Khan
Najeeb A. Khan, Trustee
/s/ Paul T. Lambert
Paul T. Lambert, Trustee
/s/ Jack L. Mahaffey
Jack L. Mahaffey, Trustee
/s/ David F. Taylor
David F. Taylor, Trustee
82
80
80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31,
2018, 2017 and 2016
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
Schedule III – Real Estate and Accumulated Depreciation
Page
82
85
86
88
90
92
138
139
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.
81
8381
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Whitestone REIT:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Whitestone REIT and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, changes in equity,
and cash flows for each of the years in the three year period ended December 31, 2018, and the related notes and schedules
(collectively referred to as the “Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the years in the three year period ended December 31, 2018, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated March 15, 2019, expressed an adverse opinion on the Company’s internal control over financial
reporting.
Basis for Opinion
These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s Consolidated Financial Statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial
Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Pannell Kerr Forster of Texas, P.C.
We have served as the Company’s auditors since 2002.
Houston, Texas
March 15, 2019
84
82
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Whitestone REIT:
Adverse Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Whitestone REIT and subsidiaries (the “Company”) as of December
31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described
in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated
Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. A material weakness was identified as a result of ineffective controls
related to the implementation of Accounting Standards Codification 606, Revenue from Contracts with Customers. Specifically,
there were ineffective controls around management's judgments and estimates in the determination of the Company's legal rights
in the assessment of the transfer of control criteria for a sale transaction of certain properties to a non-customer. This material
weakness resulted in accounting errors that required restatement of the Company's interim consolidated financial statements for
the first three quarterly periods of the year ended December 31, 2018. This material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not
affect our report dated March 15, 2019, on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets and the related consolidated statements of operations and comprehensive income,
changes in equity, and cash flows of the Company, and our report dated March 15, 2019, expressed an unqualified opinion on the
Company’s consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
83
8583
/s/ Pannell Kerr Forster of Texas, P.C.
We have served as the Company’s auditors since 2002.
Houston, Texas
March 15, 2019
86
84
84
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
Real estate assets, at cost
Property
Accumulated depreciation
Total real estate assets
Investment in real estate partnership
Cash and cash equivalents
Restricted cash
Marketable securities
Escrows and acquisition deposits
Accrued rents and accounts receivable, net of allowance for doubtful accounts
Receivable due from related party
Financed receivable due from related party
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
LIABILITIES AND EQUITY
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses
Payable due to related party
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 as of December 31, 2018 and December 31,
2017, respectively
Common shares, $0.001 par value per share; 400,000,000 shares authorized;
39,778,029 and 39,221,773 issued and outstanding as of December 31, 2018
and December 31, 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain
Total Whitestone REIT shareholders' equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
$
$
$
$
December 31,
2018
2017
$
1,052,238
(113,300)
938,938
1,149,454
(131,034)
1,018,420
26,236
13,658
128
—
8,211
21,642
394
5,661
6,698
7,306
4,095
5,005
205
32
7,916
21,140
—
—
7,157
6,198
1,028,872
$
1,070,168
$
618,205
33,729
58
6,130
11,600
669,722
—
—
39
527,662
(181,361)
4,116
350,456
8,694
359,150
1,028,872
$
659,068
35,536
—
5,694
11,466
711,764
—
—
38
521,314
(176,684)
2,936
347,604
10,800
358,404
1,070,168
See the accompanying notes to consolidated financial statements.
85
8785
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per 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 and amortization
Equity in earnings of real estate partnership
Interest expense
Interest, dividend and other investment income
Total other expense
Year Ended December 31,
2018
2017
2016
$
86,644
$
94,568
$
80,068
33,219
119,863
31,391
125,959
24,369
104,437
21,069
16,362
37,431
24,213
17,897
42,110
19,709
14,383
34,092
23,281
25,679
(8,431)
25,177
(1,055)
64,651
23,949
27,240
—
23,651
(410)
74,430
23,922
22,457
—
19,239
(429)
65,189
Income before gain (loss) on sale or disposal of properties or assets, income
taxes, and profit sharing expense
17,781
9,419
5,156
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on sale or disposal of assets
Net income
(347)
4,629
—
(82)
(386)
16
(278)
(183)
(289)
3,357
(15)
(96)
21,981
8,588
8,113
Less: Net income attributable to noncontrolling interests
550
254
182
Net income attributable to Whitestone REIT
$
21,431
$
8,334
$
7,931
See the accompanying notes to consolidated financial statements.
88
86
86
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Year Ended December 31,
2018
2017
2016
Basic Earnings Per Share:
Net income attributable to common shareholders, excluding amounts attributable to
unvested restricted shares
Diluted Earnings Per Share:
Net income attributable to common shareholders, excluding amounts attributable to
unvested restricted shares
$
$
0.54
$
0.22
$
0.26
0.52
$
0.22
$
0.26
Weighted average number of common shares outstanding:
Basic
Diluted
39,274
40,612
35,428
36,255
27,618
28,383
Distributions declared per common share / OP unit
$
1.1400
$
1.1400
$
1.1400
Consolidated Statements of Comprehensive Income
Net income
Other comprehensive gain
$
21,981
$
8,588
$
8,113
Unrealized gain on cash flow hedging activities
Unrealized gain on available-for-sale marketable securities
1,192
18
2,022
118
929
82
Comprehensive income
23,191
10,728
9,124
Less: Net income attributable to noncontrolling interests
Less: Comprehensive gain attributable to noncontrolling interests
550
30
254
63
182
23
Comprehensive income attributable to Whitestone REIT
$
22,611
$
10,411
$
8,919
See the accompanying notes to consolidated financial statements.
87
8987
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except per share and unit data)
Additional
Other
Total
Noncontrolling
Common Shares
Shares Amount
Paid-in
Capital
Accumulated Comprehensive
Shareholders’
Interests
Total
Deficit
Gain (Loss)
Equity
Units
Dollars
Equity
Accumulated
Balance, December 31, 2015
26,991
$
27
$
359,971
$
(116,895) $
(129) $
242,974
497
$
4,017
$ 246,991
Exchange of noncontrolling
interest OP units for common
shares
Issuance of common shares under
dividend reinvestment plan
Issuance of common shares, net
of offering costs
Issuance of OP units
Repurchase of common shares (2)
Shared-based compensation
Distributions
Unrealized gain on change in fair
value of cash flow hedge
Unrealized loss on change in fair
value of available-for sale
marketable securities
Reallocation of ownership
percentage between parent and
subsidiary
Net income
15
9
2,064
—
(282)
671
—
—
—
—
—
Balance, December 31, 2016
29,468
Exchange of noncontrolling
interest OP units for common
shares
Issuance of common shares under
dividend reinvestment plan
Issuance of common shares, net
of offering costs
Issuance of OP units
Repurchase of common shares (2)
Share-based compensation
Distributions
Unrealized gain on change in fair
value of cash flow hedge
Unrealized gain on change in fair
value of available-for sale
marketable securities
Reallocation of ownership
percentage between parent and
subsidiary
Net income
19
9
1,324
8,019
(324)
707
—
—
—
—
—
Balance, December 31, 2017
39,222
—
—
2
—
—
—
—
—
—
—
—
29
—
—
1
8
—
—
—
—
—
—
—
38
125
114
30,012
—
(3,948)
10,231
—
—
—
(11)
—
—
—
—
—
—
—
(32,731)
—
—
—
7,931
396,494
(141,695)
206
127
18,516
99,887
(4,339)
10,410
—
—
—
13
—
—
—
—
—
—
—
(43,323)
—
—
—
8,334
—
—
—
—
—
—
—
908
80
—
—
859
—
—
—
—
—
—
—
125
114
30,014
—
(3,948)
10,231
(32,731)
908
80
(11)
7,931
206
127
18,517
99,895
(4,339)
10,410
(43,323)
(15)
(125)
—
114
30,014
8,738
(3,948)
10,231
—
—
8,738
—
—
(905)
(33,636)
21
2
11
182
929
82
—
8,113
—
127
18,517
99,895
(4,339)
10,410
—
—
—
—
—
(1,239)
(44,562)
60
2,022
3
118
(13)
254
—
8,588
—
—
621
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
255,687
1,103
11,941
267,628
(19)
(206)
1,962
1,962
115
—
—
115
13
8,334
521,314
(176,684)
2,936
347,604
1,084
10,800
358,404
See the accompanying notes to consolidated financial statements.
90
88
88
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except per share and unit data)
Additional
Other
Total
Noncontrolling
Common Shares
Shares Amount
Paid-in
Capital
Accumulated Comprehensive
Shareholders’
Interests
Total
Deficit
Gain (Loss)
Equity
Units
Dollars
Equity
Accumulated
Impact of change in accounting
principal:
ASU 2014-09(1)
Balance January 1, 2018
Exchange of noncontrolling
interest OP units for common
shares
Issuance of common shares under
dividend reinvestment plan
Exchange offer costs
Repurchase of common shares (2)
Share-based compensation
Distributions
Unrealized gain on change in fair
value of cash flow hedge
Unrealized gain on change in fair
value of available-for sale
marketable securities
Reallocation of ownership
percentage between parent and
subsidiary
Net income
—
39,222
155
10
—
(160)
551
—
—
—
—
—
Balance, December 31, 2018
39,778
$
—
38
1
—
—
—
—
—
—
—
—
—
39
—
19,119
521,314
(157,565)
—
2,936
19,119
—
—
19,119
366,723
1,084
10,800
377,523
1,545
133
(126)
(1,961)
6,742
—
—
—
15
—
—
—
—
—
—
(45,227)
—
—
—
21,431
1,546
(155)
(1,546)
—
—
—
—
—
—
—
133
(126)
(1,961)
6,742
(45,227)
1,162
1,162
18
—
—
18
15
21,431
—
—
—
—
—
—
—
—
—
—
—
—
—
133
(126)
(1,961)
6,742
(1,125)
(46,352)
30
—
(15)
550
1,192
18
—
21,981
$
527,662
$
(181,361) $
4,116
$
350,456
929
$
8,694
$ 359,150
(1)
(2)
Represents the impact of change in accounting principal for our modified retrospective adoption of ASU 2014-09. See Note 2 of the notes to the consolidated financial statements
for additional disclosure.
During the years ended December 31, 2018, 2017 and 2016, the Company acquired common shares held by employees who tendered owned common shares to satisfy the tax
withholding on the lapse of certain restrictions on restricted shares.
See the accompanying notes to consolidated financial statements.
89
9189
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred loan costs
Amortization of notes payable discount
Loss on sale of marketable securities
Loss (gain) on sale or disposal of assets and properties
Bad debt expense
Share-based compensation
Equity in earnings of real estate partnership
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rent and accounts receivable
Receivable due from related party
Distributions from real estate partnership
Unamortized lease commissions
Prepaid expenses and other assets
Accounts payable and accrued expenses
Payable due to related party
Tenants' security deposits
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions of real estate
Additions to real estate
Proceeds from sales of properties
Proceeds from financed receivable due from related party
Investment in real estate partnership
Proceeds from sales of marketable securities
Year Ended December 31,
2018
2017
2016
$
21,981
$
8,588
$
8,113
25,679
1,092
—
20
(4,547)
1,391
6,741
(8,431)
(295)
(1,893)
610
1,324
(1,676)
1,175
(2,429)
(1,621)
436
39,557
27,240
1,283
508
91
167
2,340
10,410
—
(3,570)
(5,430)
—
—
22,457
1,554
391
—
(3,261)
1,585
10,231
—
2,322
(3,630)
—
—
(2,299)
(1,474)
168
1,337
—
565
1,396
1,089
—
(125)
41,398
40,648
—
(125,468)
(11,638)
(17,575)
12,574
9,812
—
30
26
—
(2,394)
513
(60,616)
(22,036)
6,897
—
(2,704)
—
Net cash provided by (used in) investing activities
10,778
(144,898)
(78,459)
Cash flows from financing activities:
Distributions paid to common shareholders
Distributions paid to OP unit holders
Proceeds from issuance of common shares, net of offering costs
Payments of exchange offer costs
Net proceeds from credit facility
Repayments of notes payable
Payments of loan origination costs
Repurchase of common shares
Net cash provided by (used in) financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
(44,944)
(1,155)
(40,472)
(1,241)
—
118,412
(126)
9,000
(2,543)
(30)
(1,961)
(41,759)
8,576
5,210
—
45,600
(11,543)
(695)
(4,339)
105,722
2,222
2,988
Cash, cash equivalents and restricted cash at end of period
$
13,786
$
5,210
$
See the accompanying notes to consolidated financial statements.
(31,911)
(729)
30,014
—
59,000
(14,335)
—
(3,948)
38,091
280
2,708
2,988
92
90
90
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures
(in thousands)
Year Ended December 31,
2018
2017
2016
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes
Non cash investing and financing activities:
Disposal of fully depreciated real estate
Financed insurance premiums
Value of shares issued under dividend reinvestment plan
Value of common shares exchanged for OP units
Change in fair value of available-for-sale securities
Change in fair value of cash flow hedge
Acquisition of real estate in exchange for OP units
Reallocation of ownership percentage between parent and subsidiary
Debt issued with acquisitions of real estate
Property received as termination fee
$
$
$
$
$
$
$
$
$
$
$
$
See the accompanying notes to consolidated financial statements.
24,610
304
937
1,273
133
1,546
18
1,192
$
$
$
$
$
$
$
$
— $
15
$
— $
22,541
337
1,036
1,115
127
206
118
2,022
$
$
$
$
$
$
$
$
18,287
284
690
1,060
114
125
82
929
— $
8,738
13
80,000
$
$
11
—
—
250
$
— $
91
9391
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
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, we changed our state of organization from Texas to Maryland pursuant
to a merger where we merged directly with and into a Maryland real estate investment trust formed for the sole purpose of the
reorganization and the conversion of each of our outstanding common shares of beneficial interest of the Texas entity into
1.42857 common shares of beneficial interest of the Maryland entity. We serve as the general partner of Whitestone REIT
Operating Partnership, L.P. (the “Operating Partnership” or “WROP” or “OP”), which was formed on December 31, 1998 as a
Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating
Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the
business of the Operating Partnership, subject to certain customary exceptions. As of December 31, 2018, 2017 and 2016, we
owned 57, 73, and 69 commercial properties, respectively, in and around Austin, Chicago, Dallas-Fort Worth, Houston,
Phoenix and San Antonio.
These properties consist of:
Consolidated Operating Portfolio
•
51 wholly-owned properties that meet our Community Centered Properties® strategy; and
Redevelopment, New Acquisitions Portfolio
•
six parcels of land held for future development.
As of December 31, 2018, we, through our investment in Pillarstone Capital REIT Operating Partnership LP
(“Pillarstone” or “Pillarstone OP”), owned a majority interest in 11 properties that do not meet our Community Centered
Property® strategy containing approximately 1.3 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of
the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day
operations of Pillarstone OP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. We are the sole general partner of the Operating Partnership and possess full legal control and
authority over the operations of the Operating Partnership. As of December 31, 2018, 2017 and 2016, we owned a majority of
the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements
include the accounts of the Operating Partnership.
Noncontrolling interest in the accompanying consolidated financial statements represents the share of equity and
earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income or loss is allocated
to noncontrolling interests based on the weighted-average percentage ownership of the Operating Partnership during the
year. Issuance of additional common shares of beneficial interest in Whitestone (the “common shares”) and units of limited
partnership interest in the Operating Partnership that are convertible into cash or, at our option, common shares on a one-for-
one basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.
Profit-sharing Method. In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance
applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification (“ASC”) 360-20,
“Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and Losses
from the Derecognition of Nonfinancial Assets,” we did not recognize the sale of assets to Pillarstone OP in the Contribution (as
defined in Note 5) and accounted for the transaction under the profit-sharing method for the year ended December 31, 2017.
We recognized Pillarstone OP’s real estate assets and notes payables in our consolidated balance sheets. Additionally, the
profits and losses of Pillarstone OP not attributable to the Company were reported as profit sharing expense. As a result of the
adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities associated with the
Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the equity method.
94
92
92
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Equity Method. For the year ended December 31, 2017, Pillarstone OP was accounted under the profit-sharing
method. As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities
associated with the Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the
equity method. See Note 5 and Note 19 for additional disclosure on Pillarstone OP.
As of December 31, 2018, we, through our investment in Pillarstone OP, owned a majority interest in 11 properties
that do not meet our Community Centered Property® strategy containing approximately 1.3 million square feet of GLA. We
own 81.4% of the total outstanding units of Pillarstone OP. We also manage the day-to-day operations of Pillarstone OP. In
this Annual Report on Form 10-K, unless otherwise indicated, we do not include the Pillarstone Properties when we refer to our
properties.
Basis of Accounting. Our financial records are maintained on the accrual basis of accounting whereby revenues are
recognized when earned and expenses are recorded when incurred.
Use of Estimates. The preparation of financial statements in conformity with U.S. 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 fair values of properties acquired, the
estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts, the
estimated fair value of interest rate swaps and the estimates supporting our impairment analysis for the carrying values of our
real estate assets. Actual results could differ from those estimates.
Reclassifications. We have reclassified certain prior year amounts in the accompanying consolidated financial
statements in order to be consistent with the current fiscal year presentation. Other than the effects noted below, these
reclassifications had no effect on net income, total assets, total liabilities or equity.
Restricted Cash. We classify all cash pledged as collateral to secure certain obligations and all cash whose use is
limited as restricted cash. During 2015, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024, which is
collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management
account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize
such promissory note.
Immaterial Error Correction. During the second quarter of 2018, we determined that certain prior period amounts
contained errors due to our initial determination that we were the primary beneficiary of a variable interest entity (“VIE”),
Pillarstone OP. See Note 5 and Note 19 for additional disclosure on Pillarstone OP. Management evaluated the materiality of
the errors quantitatively and qualitatively, and concluded that they were not material to the financial statements of any period
presented, and elected to correct them in the accompanying prior period consolidated financial statements.
The following table presents the effects of the immaterial error correction on the consolidated statements of operations
and comprehensive income (in thousands):
Year Ended December 31, 2017
Correction of
Error
As Adjusted
As Reported
Net income
Net income attributable to noncontrolling interests
Net income
Net income attributable to noncontrolling interests
$
$
$
8,866
532
(278) $
(278)
8,588
254
Year Ended December 31, 2016
Correction of
Error
As Adjusted
As Reported
8,128
$
197
(15) $
(15)
8,113
182
93
9593
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
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 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. We recognized
$6.8 million, $10.4 million and $10.2 million in share-based compensation expense for the years ended December 31, 2018,
2017 and 2016, respectively.
At our annual meeting of shareholders on May 11, 2017, our shareholders voted to approve the 2018 Long-Term
Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common
shares and OP units pursuant to awards under the 2018 Plan. The 2018 Plan became effective on July 30, 2018, which was the
day after the 2008 Plan expired.
Noncontrolling Interests. Noncontrolling interests are 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 consolidated balance sheets but separate from Whitestone’s equity. On the
consolidated statements of operations and comprehensive income, 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 rents and accounts
receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been
met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the
corresponding costs are incurred. We 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, 2018 and 2017 consisted of demand
deposits at commercial banks and brokerage accounts. We may have net book credit balances in our primary disbursement
accounts at the end of a reporting period. We classify such credit balances as accounts payable in our consolidated balance
sheets as checks presented for payment to these accounts are not payable by our banks under overdraft arrangements, and,
therefore, do not represent short-term borrowings. As of December 31, 2018 and 2017, there were net book credit balances of
$0.0 and $0.8 million, respectively, in our primary disbursement accounts that were classified as accounts payable on our
consolidated balance sheets.
Marketable Securities. We classify our existing marketable equity securities as available-for-sale in accordance with
the Financial Accounting Standards Board’s (“FASB”) Investments-Debt and Equity Securities guidance. These securities are
carried at fair value with unrealized gains and losses reported in equity as a component of accumulated other comprehensive
income or loss. The fair value of the marketable securities is determined using Level 1 inputs under FASB Accounting
Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” Level 1 inputs represent quoted prices
available in an active market for identical investments as of the reporting date. Gains and losses on securities sold are based on
the specific identification method, and are reported as a component of interest, dividend and other investment income.
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 and development costs. Carrying
charges (interest and real estate taxes) are capitalized as part of construction in progress. The capitalization of such costs ceases
when the property, or any completed portion, becomes available for occupancy. For the year ended December 31, 2018,
approximately $574,000 and $365,000 in interest expense and real estate taxes, respectively, were capitalized. For the year
ended December 31, 2017, approximately $439,000 and $277,000 in interest expense and real estate taxes, respectively, were
capitalized. For the year ended December 31, 2016, approximately $324,000 and $71,000 in interest expense and real estate
taxes, respectively, were capitalized.
96
94
94
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
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 at the time of purchase. 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 improvements and buildings, respectively. 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 at least 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, 2018.
Accrued Rents 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, 2018 and 2017, we had an allowance for uncollectible accounts of $9.7 million and $8.6 million, respectively.
As of December 31, 2018, 2017 and 2016, we recorded bad debt expense in the amount of $1.4 million, $2.3 million and $1.6
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.
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.
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.
95
9795
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
State Taxes. We are subject to the Texas Margin Tax, which 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
the Texas Margin Tax is not considered an income tax, FASB ASC 740, “Income Taxes” (“ASC 740”) applies to the Texas
Margin Tax. As of December 31, 2018, 2017 and 2016, we recorded a margin tax provision of $0.4 million, $0.4 million and
$0.2 million, respectively.
Fair Value of Financial Instruments. Our financial instruments consist primarily of cash, cash equivalents, accounts
receivable, accounts and notes payable and investments in marketable securities. The carrying value of cash, cash equivalents,
accounts receivable and accounts payable are representative of their respective fair values due to their short-term nature. The
fair value of our long-term debt, consisting of fixed rate secured notes, variable rate secured notes and an unsecured revolving
credit facility aggregate to approximately $618.6 million and $659.6 million as compared to the book value of approximately
$619.4 million and $660.9 million as of December 31, 2018 and 2017, respectively. The fair value of our long-term debt is
estimated on a Level 2 basis (as provided by ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”)), using a
discounted cash flow analysis based on the borrowing rates currently available to us for loans with similar terms and maturities,
discounting the future contractual interest and principal payments.
The fair value of our loan guarantee to Pillarstone OP is estimated on a Level 3 basis (as provided by ASC 820, “Fair
Value Measurements and Disclosures”), using a probability-weighted discounted cash flow analysis based on a discount rate,
discounting the loan balance.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of
December 31, 2018 and 2017. Although management is not aware of any factors that would significantly affect the fair value
amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31,
2018 and current estimates of fair value may differ significantly from the amounts presented herein.
Derivative Instruments and Hedging Activities. We utilize derivative financial instruments, principally interest rate
swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk
assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate
swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income and
subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a
cash flow hedge’s change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using
Level 2 inputs under ASC 820. Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted
prices in markets that are not active; and model-derived valuations whose inputs are observable. As of December 31, 2018, we
consider our cash flow hedges to be highly effective.
Concentration of Risk. Substantially all of our revenues are obtained from office, warehouse and retail locations in the
Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio 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
sometimes exceed the federally insured limits, although no losses have been incurred in connection with these deposits.
Recent Accounting Pronouncements. In May 2014, the FASB issued guidance, as amended in subsequent updates,
establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most of the existing revenue recognition guidance. The standard also requires an entity to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. This guidance
became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal
years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the
underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s
investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the
Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5 and Note 19 for further details.
In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for
all leases. Lessor accounting will remain largely unchanged with the exception of changes related to costs which qualify as
initial direct costs. The guidance will also require new qualitative and quantitative disclosures to help financial statement users
better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance is effective for reporting
98
96
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
periods beginning on or after December 15, 2018, with early adoption permitted. We adopted the guidance and its related
amendments as of January 1, 2019 using the transition practical expedient which allows us to recognize a cumulative-effect
adjustment to the opening balance of retained earnings as of the adoption date as well as other elected practical expedients.
Additionally, we have elected the optional transition practical expedient for lessors that permits lessors to make an accounting
policy election to not separate nonlease components from the associated lease components, if the following two criteria are
met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the lease component
would be classified as an operating lease if accounted for separately. As a result, leases where we are the lessor are accounted
for in a similar manner to existing standards with the underlying leased asset being reported and recognized as a real estate
asset.
We have identified our lease commitments and finalized our evaluation on our consolidated financial statements and
on our internal accounting processes. Substantially all of our real estate lessor commitments continued to be accounted for as
operating leases, and the new leasing standard did not have a material impact on rental revenues. Our lessee operating lease
commitments are subject to the standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Our
adoption of the new leasing standard did not have a material impact on our consolidated financial statements. Upon our
adoption of the guidance as of January 1, 2019, we increased lease liabilities and corresponding right-of-use assets. Such
adoption resulted in certain costs (primarily legal costs related to lease negotiations) being expensed rather than capitalized. We
capitalized $406,000 in legal related costs for the year ended December 31, 2018. These transition adjustments did not have a
material impact on our consolidated balance sheet. Additionally, this guidance did not have a material impact on our
consolidated statement of income upon adoption.
In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the
period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within
those fiscal years. We adopted this guidance effective January 1, 2018, and we have reconciled cash and cash equivalents and
restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported
restricted cash and restricted cash equivalents under cash flows from financing activities.
In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of
assets or businesses. This guidance became effective for the reporting periods beginning on or after December 15, 2017, and
interim periods within those fiscal years. We adopted this guidance on a prospective basis beginning January 1, 2018 and
believe the majority of our future acquisitions will qualify as asset acquisitions and the associated transaction costs will be
capitalized as opposed to expensed under previous guidance.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adds guidance for
partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in
contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15,
2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning
January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1,
2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company
made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5
and Note 19 for further details.
97
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
3. MARKETABLE SECURITIES
In January 2018, we sold all of our remaining marketable securities and had no marketable securities as of
December 31, 2018. All of our marketable securities were classified as available-for-sale securities as of December 31, 2017.
Available-for-sale securities consist of the following (in thousands):
December 31, 2018
Gains in
Accumulated
Other
Comprehensive
Income
Losses in
Accumulated
Other
Comprehensive
Income
Estimated Fair
Value
Amortized Cost
Real estate sector common stock
Total available-for-sale securities
$
$
— $
— $
— $
— $
— $
— $
—
—
December 31, 2017
Gains in
Accumulated
Other
Comprehensive
Income
Losses in
Accumulated
Other
Comprehensive
Income
Estimated Fair
Value
Amortized Cost
Real estate sector common stock
Total available-for-sale securities
$
$
50
50
$
$
— $
— $
(18) $
(18) $
32
32
During the years ended December 31, 2018 and 2017, available-for-sale securities were sold for total proceeds of
$30,000 and $513,000, respectively. The gross realized losses on these sales totaled $20,000 and $5,000, respectively. For the
purpose of determining gross realized gains and losses, the cost of securities sold is based on specific identification. A net
unrealized holding loss on available-for-sale securities in the amount of $0 and $18,000 for the years ended December 31, 2018
and 2017, respectively, has been included in accumulated other comprehensive income.
4. REAL ESTATE
As of December 31, 2018, we owned 57 commercial properties in the Austin, Chicago, Dallas-Fort Worth, Houston,
Phoenix and San Antonio areas comprised of approximately 4.8 million square feet of gross leasable area (“GLA”).
Property Acquisitions. On December 29, 2017, we acquired a 1.83 acre parcel of undeveloped land for $0.9 million in
cash and net prorations. The undeveloped land parcel is the hard corner at our Eldorado Plaza property.
On May 26, 2017, we acquired BLVD Place, a property that meets our Community Centered Property® strategy, for
$158.0 million, including $80.0 million of asset level mortgage financing and $78.0 million in cash and net prorations. BLVD
Place, a 216,944 square foot property, was 99% leased at the time of purchase and is located in Houston, Texas. Included in the
purchase of BLVD Place is approximately 1.43 acres of developable land.
On May 3, 2017, we acquired Eldorado Plaza, a property that meets our Community Centered Property® strategy, for
$46.6 million in cash and net prorations. Eldorado Plaza, a 221,577 square foot property, was 96% leased at the time of
purchase and is located in McKinney, Texas, a suburb of Dallas, Texas.
On September 30, 2016, we acquired La Mirada and Seville, properties that meet our Community Centered Property®
strategy, for 621,053 OP units and $60.7 million in cash and net prorations. The OP units are redeemable for cash or, at our
option, Whitestone REIT common shares on a one-for-one basis, subject to certain restrictions. La Mirada, a 147,209 square
foot property, was 90% leased at the time of purchase. Seville, a 90,042 square foot property, was 88% leased at the time of
purchase. Both properties are located in Scottsdale, Arizona.
100
98
98
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Unaudited pro forma results of operations. The following unaudited pro forma results summarized below reflect our
consolidated results of operations as if our acquisitions for the years ended December 31, 2017 and 2016 were acquired on
January 1, 2016. The unaudited consolidated pro forma results of operations is not necessarily indicative of what the actual
results of operations would have been, assuming the transactions had been completed as set forth above, nor do they purport to
represent our results of operations for future periods.
(in thousands, except per share data)
Total property revenues
Net income
Net income attributable to Whitestone REIT (1)
Basic Earnings Per Share:
Diluted Earnings Per Share:
Weighted-average common shares outstanding:
Basic (2)
Diluted (2)
$
$
$
$
$
Year Ended December 31,
2017
2016
133,663
11,322
10,990
0.28
0.27
$
$
$
$
$
37,933
38,760
129,385
16,963
16,583
0.45
0.44
35,637
36,402
(1) Net income attributable to Whitestone REIT reflects historical ownership percentages and does not reflect the effects of the
April 2017 Offering (as defined in Note 14), assuming the sale of the common shares took place on January 1, 2016, as the
related impact on ownership percentage is minimal.
(2) Pro forma weighted averages reflect the April 2017 Offering, assuming the sale of the common shares took place on
January 1, 2016.
Acquisition costs. Acquisition-related costs of $0.0 million, $1.6 million and $2.1 million are included in general and
administrative expenses in our income statements for the years ended December 31, 2018, 2017 and 2016, respectively.
Development properties. As of December 31, 2018, we had substantially completed construction at our Pinnacle of
Scottsdale Phase II property. As of December 31, 2018, we had incurred approximately $5.5 million in construction costs,
including approximately $0.6 million in previously capitalized interest and real estate taxes. The 27,063 square foot
Community Centered Property® was 100% leased at year end and is located in Scottsdale, Arizona, and adjacent to Pinnacle of
Scottsdale.
As of December 31, 2018, we had substantially completed construction at our Shops at Starwood Phase III property.
As of December 31, 2018, we had incurred approximately $8.4 million in construction costs, including approximately $1.1
million in previously capitalized interest and real estate taxes. The 35,351 square foot Community Centered Property® was
72% leased at year end and is located in Frisco, Texas, a northern suburb of Dallas, Texas, and adjacent to Shops at Starwood.
Property dispositions. On September 24, 2018, we completed the sale of Torrey Square, located in Houston, Texas,
for $8.7 million. We recorded a gain on sale of $4.4 million. We have not included Torrey Square in discontinued operations
as it did not meet the definition of discontinued operations.
On February 27, 2018, we completed the sale of Bellnott Square, located in Houston, Texas, for $4.7 million. We
recorded a gain on sale of $0.3 million. We have not included Bellnott Square in discontinued operations as it did not meet the
definition of discontinued operations.
99
10199
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
On November 29, 2016, we completed the sale of Centre South and Webster Pointe, located in Houston, Texas, for
$4.9 million. This disposition was pursuant to our strategy of recycling capital by disposing of Non-Core Properties, primarily
properties that we owned at the time our current management team assumed the management of the Company, that do not fit
our Community Centered Property® strategy. As part of the transaction, we provided short-term seller financing of $1.7 million.
We recorded a gain on sale of $2.2 million, including recognizing a $0.5 million gain on sale for the year ended December 31,
2016 and are deferring the remaining $1.7 million gain on sale to be recognized upon receipt of principal payments on the
financing provided by us. We have not included Centre South and Webster Pointe in discontinued operations as the sale did not
meet the definition of discontinued operations.
On March 3, 2016, we completed the sale of Brookhill, located in Houston, Texas, for $3.1 million. This disposition
was pursuant to our strategy of recycling capital by disposing of Non-Core Properties, primarily properties that we owned at
the time our current management team assumed the management of the Company, that do not fit our Community Centered
Property® strategy. We recorded a gain on sale of $1.9 million. The sale was structured as a like-kind exchange within the
meaning of Section 1031 of the Code and sales proceeds were deposited into a Section 1031 exchange escrow account with a
qualified intermediary and subsequently distributed for general corporate purposes. We have not included Brookhill in
discontinued operations as it did not meet the definition of discontinued operations.
On February 17, 2016, we completed the sale of approximately 0.5 acres of our 4.5 acre Pinnacle Phase II
development parcel, located in Scottsdale, Arizona, for $1.1 million. We recorded a gain on sale of $1.0 million.
Hurricane Harvey. In August 2017, Hurricane Harvey impacted the South Texas region, including Houston, Texas.
The majority of our Houston properties incurred minor damage and as a result, we recorded approximately $0.5 million in
Harvey related repairs recorded in property operation and maintenance expense for the year ended December 31, 2017.
5. INVESTMENT IN REAL ESTATE PARTNERSHIP
On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the
“Contribution Agreement”) with Pillarstone OP and Pillarstone Capital REIT (“Pillarstone REIT”) pursuant to which we
contributed all of the equity interests in four of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a
Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company
(“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone
Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower,” and together with CP Woodland, Industrial-
Office and Whitestone Offices, the “Entities”) that own 14 non-core properties that do not fit our Community Centered
Property® strategy (the “Pillarstone Properties”), to Pillarstone OP for aggregate consideration of approximately $84 million,
consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP
(“Pillarstone OP Units”), issued at a price of $1.331 per Pillarstone OP Unit; and (2) the assumption of approximately $65.9
million of liabilities, consisting of (a) approximately $15.5 million of our liability under the 2018 Facility (as defined in Note
9); (b) an approximately $16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26,
2013, between Uptown Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage
Capital Holdings LLC, as lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory
Note”) of Industrial-Office issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan
Agreement”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively,
the “Contribution”).
In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into an OP Unit
Purchase Agreement (the “OP Unit Purchase Agreement”) with Pillarstone REIT and Pillarstone OP pursuant to which the
Operating Partnership agreed to purchase up to an aggregate of $3.0 million of Pillarstone OP Units at a price of $1.331 per
Pillarstone OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit
Purchase Agreement contains customary closing conditions and the parties have made certain customary representations,
warranties and indemnifications to each other in the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit
Purchase Agreement, in the event of a Change of Control (as defined therein) of the Company, Pillarstone OP shall have the
right, but not the obligation, to repurchase the Pillarstone OP Units issued thereunder from the Operating Partnership at their
initial issue price of $1.331 per Pillarstone OP Unit.
102
100
100
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower),
Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the
Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management
Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with
respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property
management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a
monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset
management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the
respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement,
excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management
Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-
day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to
3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown
Tower. The initial term of each Management Agreement expired on December 31, 2017, after which each Management
Agreement became automatically renewable on a month to month basis; provided that each Management Agreement can be
terminated by either party thereto upon not less than thirty days’ prior written notice to the other party. None of the
Management Agreements had been terminated as of December 31, 2018.
In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection
Agreement with Pillarstone REIT and Pillarstone OP pursuant to which Pillarstone OP agreed to indemnify the Operating
Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such
liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone
Properties or if Pillarstone OP fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels
of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the
Company incurs taxes that must be paid to maintain its REIT status for federal income tax purposes.
As of December 31, 2018, we owned approximately 81.4% of the total outstanding units of Pillarstone OP.
Additionally, certain of our officers and trustees serve as officers and trustees of Pillarstone REIT. In connection with the
Contribution, in December 2016, we determined that we were the primary beneficiary of Pillarstone OP, through our power to
direct the activities of Pillarstone OP, additional working capital required by Pillarstone OP under the OP Unit Purchase
Agreement and our obligation to absorb losses and receive benefits based on our ownership percentage. Accordingly, we
accounted for Pillarstone OP as a VIE and fully consolidated it in our consolidated financial statements for the year ended
December 31, 2016 and in the subsequent periods.
In November 2017, we received a comment letter from the Staff of the Division of Corporation Finance of the SEC
(the “Staff”) relating to our Annual Report on Form 10-K for the year ended December 31, 2016. In their letter, the Staff
requested that we provide them with an analysis to support our determination that Pillarstone OP is a VIE of which we are the
primary beneficiary and that Pillarstone OP should be consolidated in our financial statements in accordance with GAAP. In
response to the Staff’s comment, we provided the Staff with our analysis of our accounting and financial reporting obligations
relating to our interest in Pillarstone OP. After communicating our analysis and conclusions to the Staff and responding to
additional questions from the Staff relating to this matter, the Staff did not object to or otherwise take exception to our initial
determinations at the time of the consummation of the Contribution in December 2016 but provided a verbal reminder that the
determination of the primary beneficiary of a VIE should be continually reassessed, noting that the initial terms of the
Management Agreements expired in December 2017, and suggesting that we consider pre-clearing future accounting treatment
of Pillarstone OP with the Staff of the Office of the Chief Accountant (“OCA”).
In connection with the preparation and review of the Company’s financial statements for the quarter ended March 31,
2018, the Company concluded, after consultation with the Company’s outside advisors, that it would be prudent to seek the pre-
clearance from the Staff of the SEC’s Office of the Chief Accountant (“OCA”) of the proposed treatment of Pillarstone OP in
the Company’s financial statements for such quarter. Accordingly, in April 2018, the Company submitted a letter to the OCA
seeking their concurrence with the Company’s determinations that it maintained its status as the primary beneficiary of
Pillarstone OP and, accordingly, should continue to consolidate Pillarstone OP in its financial statements for the quarter ended
March 31, 2018 in accordance with GAAP. After further correspondence, including telephonic meetings between the Company,
its advisors and the OCA, the OCA informed the Company that it objected to the conclusions that the Company was the
101
103101
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
primary beneficiary of Pillarstone OP and was required to consolidate it in the Company’s financial statements since the
Contribution in December 2016 and during the subsequent periods.
After consideration of the OCA’s objection to the Company’s original accounting, the Company determined that the
correct accounting treatment was to apply certain industry specific accounting guidance applicable to real estate transactions,
ASC 360-20, the profit sharing method, which required the Company to continue to recognize the underlying assets and
liabilities associated with the Contribution in the Company’s financial statements, and revised its accounting treatment
accordingly. Management evaluated the quantitative and qualitative materiality of the errors and concluded that the difference
between applying ASC 360-20 and the consolidation of Pillarstone OP under the VIE guidance was not material to the financial
statements of any period presented through December 31, 2017. As a result, the company elected to correct them in future
financial statements, beginning with the consolidated financial statements as and for the period ended June 30, 2018 and in the
accompanying prior period consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the
period ended June 30, 2018.
On January 1, 2018, the Company adopted ASU 2014-09 (“Topic 606”), as subsequently amended, using the modified
retrospective method and applied Topic 606 to those contracts that were not completed as of January 1, 2018. Topic 606 added
a new section, ASC 610, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets,” which effectively
superseded industry specific accounting guidance applicable to real estate transactions. The Company considered the
applicability of the new accounting requirements to the Contribution and concluded that, in the judgment of management, the
transfer of control criteria requirement in Topic 606 had not been met and continued to recognize the assets and liabilities
associated with the Contribution in the Company’s financial statements subsequent the adoption of Topic 606.
In August 2018, the Company received a comment letter from the Staff relating to its Quarterly Report on Form 10-Q
for the period ended June 30, 2018. The Staff requested that the Company provide them with an analysis of the Company’s
determination that the Contribution did not meet the requirements for derecognition of the underlying assets under Topic 606
and ASC 610, and an explanation of the Company’s consideration of the immaterial accounting errors related to Pillarstone OP
in its conclusion that disclosure controls and procedures and internal controls over financial reporting were effective as of June
30, 2018 and December 31, 2017. In September 2018, the Company responded to the Staff’s letter with the requested analysis
and explanation. In October 2018, the Company received a comment letter from the Staff with certain follow up questions.
Subsequently, the Company engaged in verbal discussions with the Staff regarding its responses, and in February 2019, the
Staff verbally informed the Company that it objected to management’s conclusion regarding the assessment of the transfer of
control criteria in Topic 606 with respect to the Contribution and objected to the Company’s continued recognition of the
underlying assets and liabilities associated with the Contribution subsequent to January 1, 2018, the adoption date of Topic 606
and ASC 610. On February 26, 2019, the Audit Committee of the Board of Trustees of Whitestone REIT, after consultation
with members of senior management of the Company, concluded that the Company’s unaudited consolidated financial
statements as of and for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018 included in the Company’s
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018,
respectively, should be restated to correct the accounting error described in Note 19. Because this change from the profit
sharing method is only applicable for periods ending after giving effect to the implementation of Topic 606 and ASC 610, no
periods prior to January 1, 2018 are affected by this error.
As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities
associated with the Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the
equity method for the year ended December 31, 2018.
104
102
102
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
The table below presents the real estate partnership investment in which the Company held an ownership interest (in
thousands):
Real estate partnership
Pillarstone OP(1)(2)
Total real estate partnership(3)
Ownership Interest
81.4%
$
The Company’s Investment as
of December 31,
2018
26,236
26,236
(1) The Company manages these real estate partnership investments and, where applicable, earns acquisition fees, leasing
commissions, property management fees, and asset management fees.
(2) As of December 31, 2017, the Company had a net deferred gain of $18.0 million relating to the sale of properties to
Pillarstone OP prior to the adoption of ASU 2017-05. These deferred gains were included in the Company’s investment
above. Upon adoption, the Company recorded a cumulative-effect adjustment of $19.1 million to its beginning accumulated
deficit as of January 1, 2018 on the Company’s Consolidated Statements of Changes in Equity.
(3) Representing 11 property interests and 1.3 million square feet of GLA, as of December 31, 2018, and 14 property interests
and 1.5 million square feet of GLA, as of December 31, 2017.
On December 27, 2018, Pillarstone OP, through an indirect wholly owned subsidiary, Whitestone Industrial-Office,
LLC, sold a portfolio of three properties in Houston, Texas to an unaffiliated third party for $15.8 million in cash. Pillarstone
OP used the net proceeds, after customary closing deductions, to pay off mortgage debt on the three properties, and repay $8.0
million of its $14.5 million loan from Whitestone. Included in 2018 equity in earnings from real estate partnership is a $6.3
million gain related to this sale.
The table below presents the Company’s share of net income from its investment in the real estate partnership which is
included in equity in earnings of real estate partnership, net on the Company’s Consolidated Statements of Operations and
Comprehensive Income (in thousands):
Pillarstone OP
Year Ended December 31,
2018
$
8,431
103
105103
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Summarized financial information for the Company’s investment in real estate partnership is as follows (in thousands):
Assets:
Real estate, net
Other assets
Total assets
Liabilities and equity:
Notes payable
Other liabilities
Equity
Total liabilities and equity
Company’s share of equity
Cost of investment in excess (deficit) of the Company’s share of underlying net
book value
Carrying value of investment in real estate partnership
Property revenues
Property expenses
Other expenses
Gain on sale of properties
Net income
December 31,
2018
72,661
6,617
79,278
47,064
4,322
27,892
79,278
22,717
3,519
26,236
$
$
Year Ended December 31,
2018
$
$
17,180
(6,687)
(7,848)
7,839
10,484
The amortization of the basis difference between the cost of investment and the Company's share of underling net book
value for the years ended December 31, 2018 is $108,000. The Company amortized the difference into equity in earnings of real
estate partnership on the consolidated statements of operations and comprehensive income statement.
106
104
104
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
As a result of the adoption of Topic 606 and ASC 610, the Company recognized the Company’s investment in
Pillarstone OP under the equity method for the year ended December 31, 2018. For the year ended December 31, 2017,
Pillarstone OP was accounted for using the profit-sharing method.
The carrying amounts and classification of certain assets and liabilities for Pillarstone OP under the profit sharing
method as of December 31, 2017 and consisted of the following (in thousands):
Real estate assets, at cost
Property
Accumulated depreciation
Total real estate assets
Investment in real estate partnership
Liabilities
Notes payable(1)
Net carrying value
$
$
95,146
(35,980)
59,166
4,095
(48,840)
14,421
(1) Excludes approximately $15.5 million in notes payable due to Whitestone as of December 31, 2017.
The Company's maximum exposure to loss relating to Pillarstone OP is limited to its investment in Pillarstone OP and
its guarantee of promissory notes issued to Pillarstone OP. Since the date of the Contribution, the Company has not provided
financial support to Pillarstone OP that it was not previously contractually required to provide under the Management
Agreements or OP Unit Purchase Agreement. The Company's maximum exposure to loss relating to Pillarstone OP as of
December 31, 2017 is as follows (in thousands):
Net carrying value
OP Unit Purchase Agreement
Notes payable
Maximum exposure to loss
$
$
14,421
3,000
48,840
66,261
The Company has evaluated its guarantee to Pillarstone OP pursuant to ASC 460, Guarantees, and has determined the
guarantee to be a performance guarantee, for which ASC 460 contains initial recognition and measurement requirements, and
related disclosure requirements. The Company is obligated in two respects: (i) a noncontingent liability, which represents the
Company’s obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering
event(s) occur; and (ii) the contingent liability, which represents the Company’s obligation to make future payments if those
triggering events occur. The Company recognized a noncontingent liability of $462,000 at the inception of the guarantee at fair
value and is recorded on the the Company’s consolidated balance sheet as a liability. The Company amortizes the guarantee
liability into income over seven years. For the years ended December 31, 2018 and December 31, 2017, the amortization of the
guarantee liability was $106,000 and $112,000, respectively.
105
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
6. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET
Accrued rents and accounts receivable, net, consists of amounts accrued, billed and due from tenants, allowance for
doubtful accounts and other receivables as follows (in thousands):
Tenant receivables
Accrued rents and other recoveries
Allowance for doubtful accounts
Other receivables
Totals
7. UNAMORTIZED LEASE COMMISSIONS AND LOAN COSTS
Costs which have been deferred consist of the following (in thousands):
Leasing commissions
Deferred legal cost
Deferred financing cost
Total cost
Less: leasing commissions accumulated amortization
Less: deferred legal cost accumulated amortization
Less: deferred financing cost accumulated amortization
Total cost, net of accumulated amortization
December 31,
2018
2017
14,686
$
16,423
(9,746)
279
21,642
$
14,128
15,620
(8,608)
—
21,140
December 31,
2018
2017
8,789
406
4,076
13,271
(3,534)
(125)
(2,914)
6,698
$
$
7,861
386
4,071
12,318
(3,046)
(52)
(2,063)
7,157
$
$
$
$
A summary of expected future amortization of deferred costs is as follows (in thousands):
Years Ended December 31,
Leasing
Commissions
$
$
1,193
1,038
869
681
489
985
5,255
2019
2020
2021
2022
2023
Thereafter
Total
Deferred
Legal Costs(1)
281
$
—
—
—
—
—
281
$
Deferred
Financing
Costs
Total
$
$
224
199
187
187
168
197
1,162
$
$
1,698
1,237
1,056
868
657
1,182
6,698
(1) The Company will recognize a cumulative-effect adjustment to the opening balance of retained earnings of $281,000 in
deferred legal costs in 2019 from the modified retrospective adoption of ASC 842.
108
106
106
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
8. FUTURE MINIMUM LEASE INCOME
We lease the majority of our properties under noncancelable operating leases, which provide for minimum base rents
plus, in some instances, contingent rents based upon a percentage of the tenants’ gross receipts. A summary of minimum future
rents to be received (exclusive of renewals, tenant reimbursements, and contingent rents) under noncancelable operating leases
in existence as of December 31, 2018 is as follows (in thousands):
Years Ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
9. DEBT
Mortgages and other notes payable consist of the following (in thousands):
Minimum Future
Rents
$
$
81,149
70,181
59,550
48,431
37,327
122,102
418,740
December 31,
2018
2017
Description
Fixed rate notes
$10.5 million, LIBOR plus 2.00% Note, due September 24, 2020 (1)
$50.0 million, 1.75% plus 1.35% to 1.90% Note, due October 30, 2020 (2)
$50.0 million, 1.50% plus 1.35% to 1.90% Note, due January 29, 2021 (3)
$100.0 million, 1.73% plus 1.65% to 2.25% Note, due October 30, 2022 (4)
$80.0 million, 3.72% Note, due June 1, 2027
$37.0 million 3.76% Note, due December 1, 2020 (5)
$6.5 million 3.80% Note, due January 1, 2019
$19.0 million 4.15% Note, due December 1, 2024
$20.2 million 4.28% Note, due June 6, 2023
$14.0 million 4.34% Note, due September 11, 2024
$14.3 million 4.34% Note, due September 11, 2024
$16.5 million 4.97% Note, due September 26, 2023 (5)
$15.1 million 4.99% Note, due January 6, 2024
$2.6 million 5.46% Note, due October 1, 2023
Floating rate notes
$
9,500
$
50,000
50,000
100,000
80,000
—
5,657
19,000
18,996
13,718
14,300
—
14,643
2,430
Unsecured line of credit, LIBOR plus 1.40% to 1.95%, due October 30,
2019 (6)
Total notes payable principal
Less deferred financing costs, net of accumulated amortization
241,200
619,444
(1,239)
618,205
$
$
9,740
50,000
50,000
100,000
80,000
33,148
5,842
19,000
19,360
13,944
14,300
16,058
14,865
2,472
232,200
660,929
(1,861)
659,068
(1) Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term through
September 24, 2018 and 4.85% beginning September 24, 2018 through September 24, 2020.
107
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 1 (as defined below) at 0.84%
through February 3, 2017 and 1.75% beginning February 3, 2017 through October 30, 2020.
(3) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 2 (as defined below) at 1.50%.
(4) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.
(5) Promissory notes were assumed by Pillarstone OP in December 2016 and included in our consolidated balance sheet under
the profit-sharing method of accounting through December 31, 2017, as discussed in Note 5.
(6) Unsecured line of credit includes certain Pillarstone Properties (as defined and described in more detail below) in
determining the amount of credit available under the 2018 Facility (as defined and described in more detail below).
On May 26, 2017, we, through our subsidiary, Whitestone BLVD Place LLC, a Delaware limited liability company,
issued a $80.0 million promissory note to American General Life Insurance Company (the “BLVD Note”). The BLVD Note
has a fixed interest rate of 3.72% and a maturity date of June 1, 2027. Proceeds from the BLVD Note were used to fund a
portion of the purchase price of the acquisition of BLVD Place (See Note 4).
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the
“2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and
Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured
revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the
2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to
the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•
•
•
•
extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “Revolver”)
to October 30, 2019 from November 7, 2018;
converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under
the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;
extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October
30, 2020 from February 17, 2017; and
extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and
together with Term Loan 1 and Term Loan 3, the “Term Loans”) to January 29, 2021 from November 7, 2019.
Borrowings under the 2018 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of December 31, 2018, the interest rate
was 4.28%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.95% for the Revolver and 1.35%
to 2.25% for the Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the
average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value
of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being
determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by
one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at
which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities.
110
108
108
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2018 Facility. The 2018 Facility
contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information
reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes,
depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2018
Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment,
breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major
indebtedness, change of control, bankruptcy and loss of REIT tax status.
The 2018 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity to $700 million, upon the satisfaction of certain conditions. As of December 31, 2018, $441.2 million was drawn on
the 2018 Facility and our unused borrowing capacity was $58.8 million, assuming that we use the proceeds of the 2018 Facility
to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base. Proceeds
from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital
expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working capital. We intend to
use the additional proceeds from the 2018 Facility for general corporate purposes, including property acquisitions, debt
repayment, capital expenditure, the expansion, redevelopment and re-tenanting of properties in our portfolio and working
capital.
On December 8, 2016, in connection with the Contribution, the Operating Partnership entered into the Second
Amendment to the 2018 Facility and Reaffirmation of Guaranties (the “Second Amendment”) with Pillarstone OP, the
Company and the other Guarantors party thereto, the lenders party thereto and the Agent. Pursuant to the Second Amendment,
following the Contribution, Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC were permitted to remain
Material Subsidiaries (as defined in the 2018 Facility) and Guarantors under the 2018 Facility and their respective Pillarstone
Properties were each permitted to remain an Eligible Property (as defined in the 2018 Facility) and be included in the
Borrowing Base (as defined in the 2018 Facility) under the 2018 Facility. In addition, on December 8, 2016, Pillarstone OP
entered into the Limited Guarantee (the “Limited Guarantee”) with the Agent, pursuant to which Pillarstone OP agreed to be
joined as a party to the 2018 Facility to provide a limited guarantee up to the amount of availability generated by the Pillarstone
Properties owned by Whitestone Offices, LLC and Whitestone CP Woodland Ph. 2, LLC. As of December 31, 2018,
Pillarstone accounted for approximately $5.7 million of the total amount drawn on the 2018 Facility.
As of December 31, 2018, our $178.2 million in secured debt was collateralized by 9 properties with a carrying value
of $279.1 million. Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of
outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases
associated with those properties. In 2018, we were not in compliance with respect to the tangible Net Worth covenant as
defined in the 2018 Facility and had received two waivers as of December 31, 2018. Had we been unable to obtain a waiver or
other suitable relief from the lenders under the 2018 Facility, an Event of Default (as defined in the 2018 Facility) would have
occurred, permitting the lenders holding a majority of the commitments under the 2018 Facility to, among other things,
accelerate the outstanding indebtedness, which would make it immediately due and payable. As referred to in Note 20, the 2019
Facility contains a similar tangible Net Worth covenant that resets at a new threshold and changes the definition of Net Worth
to add back accumulated depreciation. However, we can make no assurances that we will be in compliance with this covenant
or other covenants under the 2019 Facility in future periods or, if we are not in compliance, that we will be able to obtain a
waiver.
109
111109
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Scheduled maturities of our outstanding debt as of December 31, 2018 were as follows (in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Total
Amount Due
(in thousands)
248,199
60,801
51,611
101,683
20,720
136,430
619,444
$
$
Contractual Obligations
As of December 31, 2018, we had the following contractual obligations:
Consolidated Contractual Obligations
Total
Payment due by period (in thousands)
Less than
1
year (2019)
1 - 3 years
(2020 -
2021)
3 - 5 years
(2022 -
2023)
More than
5 years
(after
2023)
Long-Term Debt - Principal
$ 619,444
$
248,199
$
112,412
$
122,403
$
136,430
Long-Term Debt - Fixed Interest
Long-Term Debt - Variable Interest (1)
Unsecured credit facility - Unused commitment fee (2)
Operating Lease Obligations
Related Party Rent Lease Obligations
Total
60,492
6,633
98
185
963
13,131
6,633
98
85
441
22,772
—
—
100
522
12,689
—
11,900
—
—
—
—
—
—
—
$ 687,815
$
268,587
$
135,806
$
135,092
$
148,330
(1) As of December 31, 2018, we had one loan totaling $241.2 million which bore interest at a floating rate. The variable
interest rate payments are based on LIBOR plus 1.40% to LIBOR plus 1.95%, which reflects our new interest rates under
the 2018 Facility. 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, 2018, of 2.35%.
(2) The unused commitment fees on the 2018 Facility, payable quarterly, are based on the average daily unused amount of the
2018 Facility. The fees are 0.20% for facility usage greater than 50% or 0.25% for facility usage less than 50%. The
information in the table above reflects our projected obligations for the 2018 Facility based on our December 31, 2018
balance of $441.2 million.
112
110
110
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
10. DERIVATIVES AND HEDGING ACTIVITIES
The fair value of our interest rate swaps is as follows (in thousands):
Balance Sheet Location
Prepaid expenses and other assets
Accounts payable and accrued expenses
December 31, 2018
Estimated Fair Value
$
$
4,286
(59)
Balance Sheet Location
December 31, 2017
Estimated Fair Value
Prepaid expenses and other assets
$
3,036
On September 5, 2018, we, through our Operating Partnership, entered into an interest rate swap with Bank of
America that fixed the LIBOR portion of the $9.6 million extension loan on the Whitestone Terravita Marketplace property at
2.85%. The swap began on September 24, 2018 and will mature on September 24, 2020. We have designated the interest rate
swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income and
subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the
change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing
gains or losses to be reclassified into earnings within the next 12 months.
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of
Montreal that fixed the LIBOR portion of Term Loan 3 under the 2018 Facility at 1.73%. In the fourth quarter of 2015,
pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $35.0 million of the swap to
U.S. Bank, National Association, and $15.0 million of the swap to SunTrust Bank. See Note 9 for additional information
regarding the 2018 Facility. The swap began on November 30, 2015 and will mature on October 28, 2022. We have designated
the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in
comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings.
The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not
expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of
Montreal that fixed the LIBOR portion of Term Loan 1 under the 2018 Facility at 1.75%. In the fourth quarter of 2015,
pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to
Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank,
National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See
Note 9 for additional information regarding the 2018 Facility. The swap began on February 3, 2017 and will mature on October
30, 2020. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value
to be recorded in comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction
affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The
Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.
111
113111
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of
Montreal that fixed the LIBOR portion of Term Loan 2 under the 2018 Facility at 1.50%. In the fourth quarter of 2015,
pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to
Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank,
National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. See
Note 9 for additional information regarding the 2018 Facility. The swap began on December 7, 2015 and will mature on
January 29, 2021. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in
fair value to be recorded in comprehensive income and subsequently reclassified into earnings in the period that the hedged
transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings.
The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12
months.
A summary of our interest rate swap activity is as follows (in thousands):
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Amount Recognized
as Comprehensive
Income
$
$
$
1,192
2,022
929
Location of Loss
Recognized in
Earnings
Interest expense
Interest expense
Interest expense
$
$
$
Amount of Loss
Recognized in
Earnings (1)
646
(1,575)
(2,385)
(1) Amounts represent the effective portions of our interest rate swaps. We did not recognize any ineffective portion of our
interest rate swaps in earnings for the years ended December 31, 2018, 2017 and 2016.
11. EARNINGS PER SHARE
Basic earnings per share for our common shareholders is calculated by dividing income from continuing operations
excluding amounts attributable to unvested restricted shares and the net income attributable to non-controlling interests by our
weighted-average common shares outstanding during the period. Diluted earnings per share is computed by dividing the net
income attributable to common shareholders excluding amounts attributable to unvested restricted shares and the net income
attributable to non-controlling interests by the weighted-average number of common shares including any dilutive unvested
restricted shares.
Certain of our performance-based 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,
2018, 2017 and 2016, 1,011,268, 1,088,292 and 642,132 OP units, respectively, were excluded from the calculation of diluted
earnings per share because their effect would be anti-dilutive.
For the years ended December 31, 2018, 2017 and 2016, distributions of $317,000, $472,000 and $636,000,
respectively, were made to the holders of certain restricted common shares, $16,000 of which were charged against earnings,
annually. See Note 15 for information related to restricted common shares under the 2008 Plan.
114
112
112
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
(in thousands, except per share data)
Numerator:
Net income
Less: Net income attributable to noncontrolling interests
Distributions paid on unvested restricted shares
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares
Year Ended December 31,
2018
2017
2016
$
$
21,981
(550)
(301)
$
8,588
(254)
(456)
8,113
(182)
(620)
$
21,130
$
7,878
$
7,311
Denominator:
Weighted average number of common shares - basic
39,274
35,428
27,618
Effect of dilutive securities:
Unvested restricted shares
Weighted average number of common shares - dilutive
Earnings Per Share:
Basic:
1,338
40,612
827
36,255
765
28,383
Net income attributable to common shareholders excluding amounts attributable to
unvested restricted shares
Diluted:
Net income attributable to common shareholders excluding amounts attributable to
unvested restricted shares
$
$
0.54
$
0.22
$
0.26
0.52
$
0.22
$
0.26
12. 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 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 on our taxable
income at regular corporate tax rates.
Income earned by our taxable REIT subsidiary, Whitestone Davenport TRS LLC (“Davenport TRS”), is subject to
federal income tax. For the year ended December 31, 2016, we recognized $45,000 in income tax expense related to
Davenport TRS taxable year. Davenport TRS was dissolved in the fourth quarter of 2016.
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 distributions to shareholders are characterized as follows for the years ended
December 31:
Ordinary income (unaudited)
Return of capital (unaudited)
Capital gain distributions (unaudited)
Total
2018
2017
2016
39.1 %
26.5 %
34.4 %
100.0%
15.3 %
84.7 %
— %
100.0%
49.0 %
33.7 %
17.3 %
100.0%
113
115113
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
13. RELATED PARTY TRANSACTIONS
The Contribution. Mr. James C. Mastandrea, the Chairman and Chief Executive Officer of the Company, also serves
as the Chairman and Chief Executive Officer of Pillarstone REIT and beneficially owns approximately 78.5% of the
outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act of 1934,
as amended (the “Exchange Act”)). Mr. John J. Dee, the Chief Operating Officer and Corporate Secretary of the Company, also
serves as the Senior Vice President and Chief Financial Officer of Pillarstone REIT and beneficially owns approximately 26.6%
of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act).
In addition, Mr. Paul T. Lambert, a Trustee of the Company, also serves as a Trustee of Pillarstone REIT. The Contribution is
pursuant to the Company’s strategy of recycling capital by disposing of Non-Core Properties that do not fit the Company’s
Community Centered Property® strategy and the terms of the Contribution Agreement, the OP Unit Purchase Agreement, the
Tax Protection Agreement and the Contribution were determined through arm’s-length negotiations. The Contribution was
unanimously approved and recommended by a special committee of independent Trustees of the Company. See Note 5 for
additional disclosure on the Contribution.
Pillarstone OP. For the year ended December 31, 2017, Pillarstone OP was accounted under the profit-sharing method
and related party transactions between the Company and Pillarstone OP were eliminated. As a result of the adoption of Topic
606 and ASC 610, the Company derecognized the underlying assets and liabilities associated with the Contribution as of
January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the equity method.
During the ordinary course of business, we have transactions with Pillarstone OP that include, but are not limited to,
rental income, interest expense, general and administrative costs, commissions, management and asset management fees, and
property expenses.
The following table presents the revenue and expenses with Pillarstone OP included in our consolidated statements of
operations for the year ended December 31, 2018 (in thousands):
Rent
Property management fee income
Interest income
Location of Revenue
(Expense)
Property operation and
maintenance
Other revenues
Interest, dividend and
other investment
income
$
$
$
(779)
1,008
582
On December 8, 2016, we received a $15.4 million financed receivable from Pillarstone OP to provide the financing
for the ordinary course of business transactions for Pillarstone OP. The financed receivable has a interest rate of 1.4%-1.95%
plus Libor and a maturity date of December 31, 2019. As of December 31, 2018, the balance of the financed receivable is $5.7
million.
14. EQUITY
Under our declaration of trust, as amended, we have authority to issue up to 400 million common shares of beneficial
interest, $0.001 par value per share, and up to 50 million preferred shares of beneficial interest, $0.001 par value per share.
116
114
114
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Equity Offerings
On April 25, 2017, we completed the sale of 8,018,500 common shares, including 1,018,500 common shares
purchased by the underwriters upon exercise of their option to purchase additional common shares, at a public offering price
per share of $13.00 (the “April 2017 Offering”). Total net proceeds from the April 2017 Offering, after deducting offering
expenses, were approximately $99.9 million, which we contributed to the Operating Partnership in exchange for OP units. The
Operating Partnership used the net proceeds from the April 2017 Offering to repay a portion of the 2018 Facility and for
general corporate purposes, including funding a portion of the purchase price of BLVD Place and Eldorado Plaza.
On June 4, 2015, we entered into nine amended and restated equity distribution agreements (the “2015 equity
distribution agreements”) for an at-the-market distribution program. Pursuant to the terms and conditions of the 2015 equity
distribution agreements, we could issue and sell up to an aggregate of $50 million of our common shares pursuant to our
Registration Statement on Form S-3 (File No. 333-203727), which expired on April 29, 2018. Actual sales depended on a
variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our
common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in
transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We had no
obligation to sell any of our common shares, and could at any time suspend offers under the 2015 equity distribution
agreements or terminate the 2015 equity distribution agreements. For the year ended December 31, 2018, we did not sell any
common shares under the 2015 equity distribution agreements. For the year ended December 31, 2017, we sold 1,324,038
common shares under the 2015 equity distribution agreements, with net proceeds to us of approximately $18.6 million. In
connection with such sales, we paid compensation of approximately $0.3 million to the sales agents. For the year ended
December 31, 2016, we sold 2,063,697 common shares under the 2015 equity distribution agreements, with net proceeds to us
of approximately $30.0 million. In connection with such sales, we paid compensation of approximately $0.5 million to the
sales agents.
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, 2018, we owned a 97.7% interest in the Operating Partnership.
Limited partners in the Operating Partnership holding OP units have the right to redeem their OP units for cash or, at
our option, common shares at a ratio of one OP unit for one common share. Distributions to OP unit holders are paid at the
same rate per unit as distributions per share to Whitestone common shares. As of December 31, 2018 and 2017, there were
40,585,688 and 40,184,532 OP units outstanding, respectively. We owned 39,657,207 and 39,100,951 OP units as of
December 31, 2018 and 2017, 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 97.5%, 97.0% and 97.8% for
the years ended December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018 and 2017, 155,100
and 19,055 OP units, respectively, were redeemed for an equal number of common shares.
115
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Distributions
The following table reflects the total distributions we have paid (including the total amount paid and the amount paid
per share) in each indicated quarter (in thousands, except per share data):
Common Shares
Noncontrolling OP Unit
Holders
Total
Quarter Paid
Distribution Per
Common Share
Total Amount
Paid
Distribution
Per OP Unit
Total Amount
Paid
Total Amount
Paid
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
$
$
$
$
0.2850
$
11,302
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
11,294
11,203
11,145
44,944
$
0.2850
0.2850
0.2850
1.1400
$
0.2850
$
11,002
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
$
10,948
10,093
8,429
40,472
$
0.2850
0.2850
0.2850
1.1400
$
265
286
295
309
1,155
309
309
310
313
1,241
$
$
$
$
11,567
11,580
11,498
11,454
46,099
11,311
11,257
10,403
8,742
41,713
15. INCENTIVE SHARE PLAN
On July 29, 2008, our shareholders approved the 2008 Plan. On December 22, 2010, our board of trustees amended
the 2008 Plan to allow for awards in or related to Class B common shares pursuant to the 2008 Plan. On June 27, 2012, our
Class B common shares were redesignated as “common shares.” The 2008 Plan, as amended, provides that awards may be
made with respect to common shares of Whitestone or OP units, which may be redeemed for cash or, at our option, common
shares of Whitestone. The maximum aggregate number of common shares that may be issued under the 2008 Plan is increased
upon each issuance of common shares by Whitestone so that at any time the maximum number of common shares that may be
issued under the 2008 Plan shall equal 12.5% of the aggregate number of common shares of Whitestone and OP units issued
and outstanding (other than shares and/or units issued to or held by Whitestone).
The Compensation Committee of our board of trustees administers the 2008 Plan, except with respect to awards to
non-employee trustees, for which the 2008 Plan is administered by our board of trustees. The Compensation Committee is
authorized to grant share options, including both incentive share options and non-qualified share options, as well as share
appreciation rights, either with or without a related option. The Compensation Committee is also authorized to grant restricted
common shares, restricted common share units, performance awards and other share-based awards.
On April 2, 2014, the Compensation Committee approved the modification of the vesting provisions with respect to
awards of an aggregate of 633,704 restricted common shares and restricted common share units for certain of our employees.
The modified time-based shares vested annually in three equal installments. The modified performance-based restricted
common shares and restricted common share units were modified to include performance-based vesting based on achievement
of certain absolute financial goals, as well as one to two years of time-based vesting post achievement of financial goals.
Continued employment is required through the applicable vesting date. Additionally, 2,049,116 restricted performance-based
common share units were granted with the same vesting conditions as the modified performance-based grants described above.
The performance targets were not met prior to December 31, 2018, any unvested performance-based restricted common shares
and restricted common share units were forfeited.
The Compensation Committee approved the grant of an aggregate of 320,000 and 143,000 time-based restricted
common share units on June 30, 2016 and 2015, respectively, to James C. Mastandrea and David K. Holeman.
118
116
116
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 267,783 performance-
based restricted common share units under the 2008 Plan with market-based vesting conditions (the “TSR Units”) to certain of
our employees. Vesting is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR
Unit award agreements over a three-year performance period. At the end of the performance period, the number of common
shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s ranking in the peer group
(the “TSR Peer Group Ranking”). Continued employment is required through the vesting date. The grant date fair value for
each TSR Unit of $12.37 was determined using the Monte Carlo simulation method and is being recognized as share-based
compensation expense ratably from the September 30, 2017 grant date to the end of the performance period, December 31,
2019. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the
market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the
model were estimated using a historical period consistent with the performance period of approximately three years. The risk-
free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.
On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 965,000 performance-
based restricted common share units under the 2008 Plan which only vest immediately prior to the consummation of a Change
in Control (as defined in the 2008 Plan) that occurs on or before September 30, 2024 (the “CIC Units”) to certain of our
employees. Continued employment is required through the vesting date. If a Change in Control does not occur on or before
September 30, 2024, the CIC Units shall be immediately forfeited. The Company considers a Change in Control on or before
September 30, 2024 to be improbable, and no expense has been recognized for the CIC Units. If a Change in Control occurs,
any outstanding CIC Units would be expensed immediately on the date of the Change in Control using the grant date fair value.
The grant date fair value for each CIC Unit of $13.05 was determined based on the Company’s closing share price on the grant
date.
At the Company’s annual meeting of shareholders on May 11, 2017, its shareholders voted to approve the 2018 Long-
Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common
shares and OP units pursuant to awards under the 2018 Plan. The 2018 Plan became effective on July 30, 2018, which was the
day after the 2008 Plan expired.
The Compensation Committee administers the 2018 Plan, except with respect to awards to non-employee trustees, for
which the 2018 Plan is administered by the Board of Trustees. The Compensation Committee is authorized to grant share
options, including both incentive share options and non-qualified share options, as well as share appreciation rights, either with
or without a related option. The Compensation Committee is also authorized to grant restricted common shares, restricted
common share units, performance awards and other share-based awards
On December 1, 2018, the Compensation Committee approved the grant of an aggregate of 229,684 TSR Units under
the 2018 Plan to certain of our employees. Vesting is contingent upon achieving Total Shareholder Return relative to the peer
group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period,
the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s
TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR
Unit of $14.89 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation
expense ratably from the December 1, 2018 grant date to the end of the performance period, December 31, 2020. The Monte
Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition
stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were
estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest
rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.
117
119117
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
A summary of the share-based incentive plan activity as of and for the year ended December 31, 2018 is as follows:
Non-vested at January 1, 2018
Granted
Vested
Forfeited
Non-vested at December 31, 2018
Available for grant at December 31, 2018
Weighted-
Average
Grant Date
Fair Value (1)
13.60
11.07
14.24
14.03
12.41
Shares
2,481,331
$
653,472
(560,126)
(651,295)
1,923,382
3,172,158
$
(1) The fair value of the shares granted were determined based on observable market transactions occurring near the date of
the grants.
A summary of our nonvested and vested shares activity for the years ended December 31, 2018, 2017 and 2016 is
presented below:
Year Ended
Year Ended December 31, 2018
Year Ended December 31, 2017
Year Ended December 31, 2016
Shares Granted
Shares Vested
Non-Vested
Shares Issued
Weighted-
Average Grant-
Date Fair Value
Vested Shares
Total Vest-Date
Fair Value
(in thousands)
653,472
1,354,534
545,778
$
$
$
11.07
12.92
14.85
(560,126) $
(881,710) $
(734,261) $
7,978
12,829
10,577
Total compensation recognized in earnings for share-based payments for the years ended December 31, 2018, 2017
and 2016 was $6.8 million, $10.4 million and $10.2 million, respectively.
Based on our current financial projections, we expect 100% of the unvested awards, exclusive of 965,000 CIC Units,
to vest over the next 33 months. As of December 31, 2018, there was approximately $4.6 million in unrecognized
compensation cost related to outstanding non-vested TSR Units, which are expected to vest over a period of 24 months and
approximately $2.9 million in unrecognized compensation cost related to outstanding non-vested time-based shares, which are
expected to be recognized over a period of approximately 33 months beginning on January 1, 2019.
We expect to record approximately $7.5 million in share-based compensation subsequent to the year ended
December 31, 2018. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 22
months. The dilutive impact of the performance-based shares will be included in the denominator of the earnings per share
calculation beginning in the period that the performance conditions are expected to be met. The dilutive impact of the TSR
Units is based on the Company’s TSR Peer Group Ranking as of the reporting date and weighted according to the number of
days outstanding in the period. As of December 31, 2018, the TSR Peer Group Ranking called for 200% attainment. The
dilutive impact of the CIC Units is based on the probability of a Change in Control. Because the Company considers a Change
in Control on or before September 30, 2024 to be improbable, no CIC Units are included in the Company’s dilutive shares.
120
118
118
16. GRANTS TO TRUSTEES
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 28, 2018, each of our six independent trustees and one trustee emeritus were granted 3,000 common
shares, which vest immediately and are prorated based on date appointed. The 21,000 common shares granted to our trustees
had a grant fair value of $12.42 per share. On December 28, 2018, two of our independent trustees each elected to receive a
total of 4,186 common shares with a grant date fair value of $12.42 in lieu of cash for board fees. The fair value of the shares
granted during the year ended December 31, 2018 was determined using quoted prices available on the date of grant.
On December 12, 2017, each of our six independent trustees and one trustee emeritus were granted 3,000 common
shares, which vest immediately and are prorated based on date appointed. The 16,281 common shares granted to our trustees
had a grant fair value of $14.46 per share. On December 12, 2017, three of our independent trustees each elected to receive a
total of 2,320 common shares with a grant date fair value of $14.46 in lieu of cash for board fees. The fair value of the shares
granted during the year ended December 31, 2017 was determined using quoted prices available on the date of grant.
On December 21, 2016, each of our four independent trustees and one trustee emeritus were granted 1,500 common
shares, which vest immediately. The 7,500 common shares granted to our trustees had a grant date fair value of $14.07 per
share. On December 21, 2016, two of our independent trustees each elected to receive a total of 3,128 common shares with a
grant date fair value of $14.07 in lieu of cash for board fees. The fair value of the shares granted during the year ended
December 31, 2016 was determined using quoted prices available on the date of grant.
17. 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.
18. SEGMENT INFORMATION
Our management historically has not differentiated by property types and therefore does not present segment
information.
119
121119
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
19. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of our unaudited quarterly financial information for the years ended December 31, 2018
and 2017 (in thousands, except per share data):
2018
Revenues
Net income
Net income attributable to Whitestone REIT
Basic Earnings per share:
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares (1)
Diluted Earnings per share:
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares (1)
2017
Revenues
Net income
Net income attributable to Whitestone REIT
Basic Earnings per share:
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares (1)
Diluted Earnings per share:
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares (1)
(1)
First
Quarter
(As
restated)
Second
Quarter
(As
restated)
Third
Quarter
(As
restated)
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
29,785
3,269
3,181
$
$
$
29,473
2,005
1,954
$
$
$
30,704
8,033
7,835
$
$
$
29,901
8,674
8,457
0.08
$
0.05
$
0.20
$
0.21
0.08
$
0.05
$
0.19
$
0.21
First
Quarter
Second
Quarter
Third
Fourth
Quarter
Quarter
28,267
1,493
1,440
$
$
$
30,208
2,043
1,983
$
$
$
33,653
3,077
2,993
$
$
$
33,831
1,975
1,921
0.05
$
0.05
$
0.07
$
0.05
0.04
$
0.05
$
0.07
$
0.05
The sum of individual quarterly basic and diluted earnings per share amounts may not agree with the year-to-date basic and
diluted earning per share amounts as the result of each period’s computation being based on the weighted average number
of common shares outstanding during that period.
Quarterly Restatement of the 2018 Unaudited Quarterly Financial Statements
As previously disclosed in the Company’s Current Form 8-K filed with the SEC on February 27, 2019, on January 1,
2018, the Company adopted Topic 606, as subsequently amended, using the modified retrospective method and applied Topic
606 to those contracts that were not completed as of January 1, 2018. We applied Topic 606 to account for sales of real estate
(that do not meet the definition of a business) to customers. We accounted for sales of real estate (that do not meet the
definition of a business) to noncustomers under Accounting Standards Codification 610, “Other Income-Gains and Losses from
the Derecognition of Nonfinancial Assets” (“ASC 610”), which requires the application of certain concepts from ASC 606. In
August 2018, the Company received a comment letter from the Staff relating to its Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2018. The Staff requested that the Company provide them with an analysis of the Company’s
determination that the contribution of assets to Pillarstone OP (as described in the Form 8-K) did not meet the requirements for
derecognition of the underlying assets under Topic 606, and an explanation of the Company’s consideration of the immaterial
accounting errors related to Pillarstone OP in its conclusion that the Company’s disclosure controls and procedures and internal
controls over financial reporting were effective as of June 30, 2018 and December 31, 2017. In September 2018, the Company
122
120
120
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
responded to the Staff’s letter with the requested analysis and explanation. In October 2018, the Company received a comment
letter from the Staff with certain follow up questions. Subsequently, the Company engaged in verbal discussions with the Staff
regarding its responses, and in February 2019, the Staff verbally informed the Company that it objected to the Company’s
conclusion regarding the assessment of the transfer of control criteria in Topic 606 with respect to the contribution and objected
to the Company’s continued recognition of the underlying assets and liabilities associated with the contribution subsequent to
the adoption of Topic 606 on January 1, 2018. Accordingly, the Company concluded that the Company’s 2018 Quarterly
Financial Statements should be restated. Because this change from the profit sharing method is only applicable for periods
ending after giving effect to the implementation of Topic 606, no periods prior to January 1, 2018 are affected by this error. See
Note 5 Investment in Real Estate Partnership for further details.
As a result of Topic 606 and ASC 610 adoptions and as reflected in the Quarterly Restatement, the Company has
derecognized the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and has recognized the
Company’s investment in Pillarstone OP under the equity method of accounting. As a part of the Quarterly Restatement, the
Company has made the following adjustments to the 2018 Quarterly Financial Statements.
121
123121
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
March 31, 2018
Previously
Reported (1)
Adjustments
Restated
ASSETS
Real estate assets, at cost
Property
Accumulated depreciation
Total real estate assets
Investment in real estate partnership
Cash and cash equivalents
Restricted cash
Escrows and acquisition deposits
Accrued rents and accounts receivable, net of allowance for doubtful
accounts
Receivable due from related party
Financed receivable due from related party
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses
Payable due to related party
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 as of March 31, 2018
Common shares, $0.001 par value per share; 400,000,000 shares
authorized; 39,179,540 issued and outstanding as of March 31, 2018
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain
Total Whitestone REIT shareholders’ equity
Redeemable operating partnership units
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
$
$
1,148,176
(135,599)
1,012,577
—
9,337
257
6,690
24,675
—
—
8,260
9,451
1,071,247
$
$
30,198
—
7,028
11,489
717,241
—
—
38
522,730
(184,853)
5,528
343,443
10,642
(79)
354,006
$
1,071,247
$
(96,192) $
36,811
(59,381)
19,298
(2,361)
—
(1,133)
(2,866)
894
15,473
(1,238)
(10)
(31,324) $
(48,540) $
(1,576)
699
(1,262)
—
(50,679)
—
—
—
—
19,272
—
19,272
4
79
19,355
(31,324) $
1,051,984
(98,788)
953,196
19,298
6,976
257
5,557
21,809
894
15,473
7,022
9,441
1,039,923
619,986
28,622
699
5,766
11,489
666,562
—
—
38
522,730
(165,581)
5,528
362,715
10,646
—
373,361
1,039,923
LIABILITIES AND EQUITY
$
668,526
$
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
124
122
122
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
June 30, 2018
Previously
Reported (1)
Adjustments
Restated
ASSETS
Real estate assets, at cost
Property
Accumulated depreciation
Total real estate assets
Investment in real estate partnership
Cash and cash equivalents
Restricted cash
Escrows and acquisition deposits
Accrued rents and accounts receivable, net of allowance for doubtful
accounts
Receivable due from related party
Financed receivable due from related party
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
$
$
1,149,528
(141,442)
1,008,086
4,419
3,125
213
6,515
20,464
—
—
6,911
10,217
$
1,059,950
$
LIABILITIES AND EQUITY
$
667,595
$
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses
Payable due to related party
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 as of June 30, 2018
Common shares, $0.001 par value per share; 400,000,000 shares
authorized; 39,743,829 issued and outstanding as of June 30, 2018
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain
Total Whitestone REIT shareholders’ equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
29,157
—
5,769
11,628
714,149
—
—
38
524,191
(194,520)
6,430
336,139
9,662
345,801
$
1,059,950
$
(96,757) $
37,746
(59,011)
15,465
—
—
—
—
772
15,473
—
—
(27,301) $
(48,241) $
347
1,067
—
—
(46,827)
—
—
—
—
19,516
—
19,516
10
19,526
(27,301) $
1,052,771
(103,696)
949,075
19,884
3,125
213
6,515
20,464
772
15,473
6,911
10,217
1,032,649
619,354
29,504
1,067
5,769
11,628
667,322
—
—
38
524,191
(175,004)
6,430
355,655
9,672
365,327
1,032,649
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
123
125123
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
September 30, 2018
Previously
Reported (1)
Adjustments
Restated
ASSETS
Real estate assets, at cost
Property
Accumulated depreciation
Total real estate assets
Investment in real estate partnership
Cash and cash equivalents
Restricted cash
Escrows and acquisition deposits
Accrued rents and accounts receivable, net of allowance for doubtful
accounts
Receivable due from related party
Financed receivable due from related party
Unamortized lease commissions and loan costs
Prepaid expenses and other assets
$
$
1,146,951
(145,807)
1,001,144
2,770
9,389
91
7,702
21,906
—
—
6,847
10,597
$
1,060,446
$
LIABILITIES AND EQUITY
$
666,624
$
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses
Payable due to related party
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 as of September 30, 2018
Common shares, $0.001 par value per share; 400,000,000 shares
authorized; 39,772,105 issued and outstanding as of September 30,
2018
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain
Total Whitestone REIT shareholders’ equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
32,846
—
5,920
11,600
716,990
—
—
38
525,780
(198,199)
7,034
334,653
8,803
343,456
$
1,060,446
$
(97,636) $
38,642
(58,994)
17,616
—
—
—
(12)
308
14,473
—
—
(26,609) $
(47,939) $
332
1,276
—
—
(46,331)
—
—
1,049,315
(107,165)
942,150
20,386
9,389
91
7,702
21,894
308
14,473
6,847
10,597
1,033,837
618,685
33,178
1,276
5,920
11,600
670,659
—
—
—
—
19,706
—
19,706
16
19,722
(26,609) $
38
525,780
(178,493)
7,034
354,359
8,819
363,178
1,033,837
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
126
124
124
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per 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 and amortization
Equity in earnings of real estate partnership
Interest expense
Interest, dividend and other investment income
Total other expense
Income before gain (loss) on sale or disposal of properties or assets, and
income taxes
Provision for income taxes
Gain on sale of properties
Loss on sale or disposal of assets
Net income
Redeemable operating partnership units
Non-controlling interests in Consolidated Partnership
Less: Net income attributable to noncontrolling interests
Unaudited
Three Months Ended
March 31, 2018
Previously
Reported (1)
Adjustments
Restated
$
24,946
$
8,650
33,596
5,708
4,657
10,365
6,314
7,221
—
6,501
(99)
19,937
3,294
(129)
266
(197)
3,234
84
122
206
(3,274) $
(537)
(3,811)
21,672
8,113
29,785
(852)
(681)
(1,533)
13
(947)
(674)
(528)
(158)
(2,294)
16
19
(17)
17
35
4
(122)
(118)
4,856
3,976
8,832
6,327
6,274
(674)
5,973
(257)
17,643
3,310
(110)
249
(180)
3,269
88
—
88
Net income attributable to Whitestone REIT
$
3,028
$
153
$
3,181
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
125
127125
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
Three Months Ended
March 31, 2018
Previously
Reported (1) Adjustments
Restated
Basic Earnings Per Share:
Net income attributable to common shareholders, excluding amounts
attributable to unvested restricted shares
Diluted Earnings Per Share:
Net income attributable to common shareholders, excluding amounts
attributable to unvested restricted shares
$
$
Weighted average number of common shares outstanding:
Basic
Diluted
0.08
$
0.00
$
0.08
0.07
$
0.01
$
0.08
39,066
40,088
—
—
39,066
40,088
Distributions declared per common share / OP unit
$
0.2850
$
— $
0.2850
Consolidated Statements of Comprehensive Income
Net income
$
3,234
$
35
$
3,269
Other comprehensive gain
Unrealized gain on cash flow hedging activities
Unrealized gain on available-for-sale marketable securities
Comprehensive income
Less: Net income attributable to noncontrolling interests
Less: Comprehensive gain attributable to noncontrolling interests
2,645
18
5,897
206
71
—
—
35
(118)
—
2,645
18
5,932
88
71
Comprehensive income attributable to Whitestone REIT
$
5,620
$
153
$
5,773
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
128
126
126
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
Three Months Ended
June 30, 2018
Unaudited
Six Months Ended
June 30, 2018
Previously
Reported (1) Adjustments
Restated
Previously
Reported (1) Adjustments
Restated
$
24,650
$
8,422
33,072
(3,268) $
(331)
(3,599)
21,382
$
49,596
$
8,091
29,473
17,072
66,668
(6,542) $
(868)
(7,410)
43,054
16,204
59,258
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 and amortization
Equity in earnings of real estate
partnership
Interest expense
Interest, dividend and other
investment income
Total other expense
Income before gain (loss) on sale
or disposal of properties or
assets, income taxes, and profit
sharing expense
5,838
4,485
10,323
6,624
7,396
—
6,854
(119)
20,755
(821)
(580)
(1,401)
54
(1,103)
(586)
(541)
(165)
(2,341)
5,017
3,905
8,922
6,678
6,293
(586)
6,313
(284)
18,414
11,546
9,142
20,688
12,938
14,617
—
13,355
(218)
40,692
1,994
143
2,137
5,288
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on sale or disposal of assets
(84)
—
(81)
(74)
25
—
81
1
(59)
—
—
(73)
(213)
266
(203)
(271)
Net income
1,755
250
2,005
4,867
Less: Net income attributable to
noncontrolling interests
Net income attributable to
Whitestone REIT
45
6
51
128
10
138
$
1,710
$
244
$
1,954
$
4,739
$
397
$
5,136
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
127
129127
(1,673)
(1,261)
(2,934)
67
(2,050)
(1,260)
(1,069)
(323)
(4,635)
159
44
(17)
203
18
407
9,873
7,881
17,754
13,005
12,567
(1,260)
12,286
(541)
36,057
5,447
(169)
249
—
(253)
5,274
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
Three Months Ended
June 30, 2018
Unaudited
Six Months Ended
June 30, 2018
Previously
Reported (1) Adjustments
Restated
Previously
Reported (1) Adjustments
Restated
Basic Earnings Per Share:
Net income attributable to common
shareholders, excluding amounts
attributable to unvested restricted
shares
Diluted Earnings Per Share:
Net income attributable to common
shareholders, excluding amounts
attributable to unvested restricted
shares
$
$
0.04
$
0.01
$
0.05
$
0.12
$
0.01
$
0.13
0.04
$
0.01
$
0.05
$
0.11
$
0.01
$
0.12
Weighted average number of
common shares outstanding:
Basic
Diluted
Distributions declared per common
share / OP unit
Consolidated Statements of
Comprehensive Income
39,204
40,679
—
—
39,204
40,679
39,136
40,519
—
—
39,136
40,519
$
0.2850
$
— $
0.2850
$
0.5700
$
— $
0.5700
Net income
$
1,755
$
250
$
2,005
$
4,867
$
407
$
5,274
Other comprehensive gain
Unrealized gain on cash flow hedging
activities
Unrealized gain on available-for-sale
marketable securities
913
—
—
—
913
—
Comprehensive income
2,668
250
2,918
Less: Net income attributable to
noncontrolling interests
Less: Comprehensive gain attributable
to noncontrolling interests
45
23
6
—
51
23
3,558
18
8,443
128
94
—
—
3,558
18
407
8,850
10
—
138
94
Comprehensive income attributable
to Whitestone REIT
$
2,600
$
244
$
2,844
$
8,221
$
397
$
8,618
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
130
128
128
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
Three Months Ended
September 30, 2018
Unaudited
Nine Months Ended
September 30, 2018
Previously
Reported (1) Adjustments
Restated
Previously
Reported (1) Adjustments
Restated
$
25,256
$
9,340
34,596
(3,292) $
(600)
(3,892)
21,964
$
74,852
$
8,740
30,704
26,412
101,264
(9,834) $
(1,468)
(11,302)
65,018
24,944
89,962
6,374
5,253
11,627
4,959
7,483
—
6,951
(84)
19,309
3,660
(115)
4,380
(73)
(15)
(922)
(874)
(1,796)
23
(1,006)
(502)
(532)
(167)
(2,184)
88
23
—
73
12
5,452
4,379
9,831
4,982
6,477
(502)
6,419
(251)
17,125
17,920
14,395
32,315
17,897
22,100
—
20,306
(302)
60,001
3,748
8,948
(92)
4,380
—
(3)
(328)
4,646
(276)
(286)
(2,595)
(2,135)
(4,730)
90
(3,056)
(1,762)
(1,601)
(490)
(6,819)
247
67
(17)
276
30
15,325
12,260
27,585
17,987
19,044
(1,762)
18,705
(792)
53,182
9,195
(261)
4,629
—
(256)
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 and amortization
Equity in earnings of real estate
partnership
Interest expense
Interest, dividend and other
investment income
Total other expense
Income before gain (loss) on sale
or disposal of properties or
assets, income taxes, and profit
sharing expense
Provision for income taxes
Gain on sale of properties
Profit sharing expense
Loss on sale or disposal of assets
Net income
7,837
196
8,033
12,704
603
13,307
Less: Net income attributable to
noncontrolling interests
Net income attributable to
Whitestone REIT
193
5
198
326
16
342
$
7,644
$
191
$
7,835
$
12,378
$
587
$
12,965
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
129
131129
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
Three Months Ended
September 30, 2018
Unaudited
Nine Months Ended
September 30, 2018
Previously
Reported (1) Adjustments
Restated
Previously
Reported (1) Adjustments
Restated
Basic Earnings Per Share:
Net income attributable to common
shareholders, excluding amounts
attributable to unvested restricted
shares
Diluted Earnings Per Share:
Net income attributable to common
shareholders, excluding amounts
attributable to unvested restricted
shares
$
$
0.19
$
0.01
$
0.20
$
0.31
$
0.02
$
0.33
0.19
$
0.00
$
0.19
$
0.30
$
0.01
$
0.31
Weighted average number of
common shares outstanding:
Basic
Diluted
Distributions declared per common
share / OP unit
Consolidated Statements of
Comprehensive Income
39,327
40,635
—
—
39,327
40,635
39,200
40,541
—
—
39,200
40,541
$
0.2850
$
— $
0.2850
$
0.8550
$
— $
0.8550
Net income
$
7,837
$
196
$
8,033
$
12,704
$
603
$
13,307
Other comprehensive gain
Unrealized gain on cash flow hedging
activities
Unrealized gain on available-for-sale
marketable securities
605
—
—
—
605
—
4,163
18
—
—
4,163
18
Comprehensive income
8,442
196
8,638
16,885
603
17,488
Less: Net income attributable to
noncontrolling interests
Less: Comprehensive gain attributable
to noncontrolling interests
193
15
5
—
198
15
326
107
16
—
342
107
Comprehensive income attributable
to Whitestone REIT
$
8,234
$
191
$
8,425
$
16,452
$
587
$
17,039
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
132
130
130
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred loan costs
Loss on sale of marketable securities
Loss (gain) on sale or disposal of assets and properties
Bad debt expense
Share-based compensation
Equity in earnings of real estate partnership
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rent and accounts receivable
Receivable due from related party
Distributions from real estate partnership
Unamortized lease commissions
Prepaid expenses and other assets
Accounts payable and accrued expenses
Payable due to related party
Tenants’ security deposits
Net cash provided by operating activities
Cash flows from investing activities:
Additions to real estate
Proceeds from sales of properties
Investment in real estate partnership
Proceeds from sales of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Distributions paid to common shareholders
Distributions paid to OP unit holders
Distributions paid to noncontrolling interest in Consolidated Partnership
Net proceeds from credit facility
Repayments of notes payable
Payments of loan origination costs
Repurchase of common shares
Net cash used in financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Unaudited
Three Months Ended
March 31, 2018
Previously
Reported (1)
Adjustments
Restated
$
3,234
$
35
$
3,269
7,221
327
20
(69)
478
1,845
—
3,414
(1,649)
—
—
(493)
494
(8,828)
—
143
6,137
(5,090)
4,433
—
30
(627)
(11,145)
(309)
(115)
9,000
(903)
—
(466)
(3,938)
1,572
8,022
(947)
(25)
—
—
(32)
—
(674)
(1,055)
534
110
505
90
(57)
1,531
(980)
(71)
(1,036)
1,047
—
—
—
1,047
—
—
115
—
325
—
—
440
451
(2,812)
6,274
302
20
(69)
446
1,845
(674)
2,359
(1,115)
110
505
(403)
437
(7,297)
(980)
72
5,101
(4,043)
4,433
—
30
420
(11,145)
(309)
—
9,000
(578)
—
(466)
(3,498)
2,023
5,210
7,233
Cash, cash equivalents and restricted cash at end of period
$
9,594
$
(2,361) $
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
131
133131
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest
Non cash investing and financing activities:
Financed insurance premiums
Value of shares issued under dividend reinvestment plan
Value of common shares exchanged for OP units
Change in fair value of available-for-sale securities
Change in fair value of cash flow hedge
Unaudited
Three Months Ended
March 31, 2018
Previously
Reported (1)
Adjustments
Restated
$
$
$
$
$
$
6,316
1,273
33
4
18
2,645
$
$
$
$
$
$
(510) $
5,806
— $
— $
— $
— $
— $
1,273
33
4
18
2,645
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
134
132
132
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six Months Ended
June 30, 2018
Previously
Reported (1)
Adjustments
Restated
$
4,867
$
407
$
5,274
14,617
(2,050)
12,567
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred loan costs
Loss on sale of marketable securities
Loss (gain) on sale or disposal of assets and properties
Bad debt expense
Share-based compensation
Equity in earnings of real estate partnership
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rent and accounts receivable
Receivable due from related party
Distributions from real estate partnership
Unamortized lease commissions
Prepaid expenses and other assets
Accounts payable and accrued expenses
Payable due to related party
Tenants’ security deposits
653
20
5
761
3,246
—
1,401
15
—
—
(852)
504
(6,370)
—
75
(50)
—
(1)
(99)
—
(1,260)
—
(1)
232
505
—
2
(40)
(612)
—
Net cash provided by operating activities
18,942
(2,967)
Cash flows from investing activities:
Additions to real estate
Proceeds from sales of properties
Investment in real estate partnership
Proceeds from sales of marketable securities
Net cash used in investing activities
Cash flows from financing activities:
Distributions paid to common shareholders
Distributions paid to OP unit holders
Payments of exchange offer costs
Net proceeds from credit facility
Repayments of notes payable
Repurchase of common shares
Net cash used in financing activities
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
(7,566)
4,433
(649)
30
(3,752)
(22,348)
(604)
(128)
9,000
(1,923)
(1,059)
(17,062)
(1,872)
5,210
1,669
—
649
—
2,318
—
—
—
—
649
—
649
—
—
Cash, cash equivalents and restricted cash at end of period
$
3,338
$
— $
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
603
20
4
662
3,246
(1,260)
1,401
14
232
505
(852)
506
(6,410)
(612)
75
15,975
(5,897)
4,433
—
30
(1,434)
(22,348)
(604)
(128)
9,000
(1,274)
(1,059)
(16,413)
(1,872)
5,210
3,338
133
135133
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes
Non cash investing and financing activities:
Disposal of fully depreciated real estate
Financed insurance premiums
Value of shares issued under dividend reinvestment plan
Value of common shares exchanged for OP units
Change in fair value of available-for-sale securities
Change in fair value of cash flow hedge
Reallocation of ownership percentage between parent and subsidiary
Unaudited
Six Months Ended
June 30, 2018
Previously
Reported (1)
Adjustments
Restated
$
$
$
$
$
$
$
$
$
12,377
392
960
1,273
66
752
18
3,558
12
$
$
$
$
$
$
$
$
$
(1,022) $
11,355
(88) $
304
(56) $
— $
— $
— $
— $
— $
— $
904
1,273
66
752
18
3,558
12
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
136
134
134
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred loan costs
Loss on sale of marketable securities
Loss (gain) on sale or disposal of assets and properties
Bad debt expense
Share-based compensation
Equity in earnings of real estate partnership
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rent and accounts receivable
Receivable due from related party
Distributions from real estate partnership
Unamortized lease commissions
Prepaid expenses and other assets
Accounts payable and accrued expenses
Accounts payable due to related party
Tenants’ security deposits
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions of real estate
Additions to real estate
Proceeds from sales of properties
Proceeds from financed receivable due from related party
Investment in real estate partnership
Proceeds from sales of marketable securities
Net cash provided by investing activities
Cash flows from financing activities:
Distributions paid to common shareholders
Distributions paid to OP unit holders
Payments of exchange offer costs
Net proceeds from credit facility
Repayments of notes payable
Payments of loan origination costs
Repurchase of common shares
Net cash used in financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Unaudited
Nine Months Ended
September 30, 2018
Previously
Reported (1)
Adjustments
Restated
$
12,704
$
603
$
13,307
22,100
(3,056)
19,044
976
20
(4,360)
1,123
4,894
—
214
(1,736)
—
—
(1,394)
618
(2,924)
—
226
(74)
—
(13)
(153)
—
(1,762)
—
12
696
505
(2)
1
(55)
(403)
—
32,461
(3,701)
—
(11,300)
12,574
—
843
30
2,147
(33,642)
(890)
(128)
9,000
(2,949)
(30)
(1,699)
(30,338)
4,270
5,210
—
2,567
—
1,000
(843)
—
2,724
—
—
—
—
977
—
—
977
—
—
902
20
(4,373)
970
4,894
(1,762)
214
(1,724)
696
505
(1,396)
619
(2,979)
(403)
226
28,760
(8,733)
12,574
1,000
—
30
4,871
(33,642)
(890)
(128)
9,000
(1,972)
(30)
(1,699)
(29,361)
4,270
5,210
9,480
137135
Cash, cash equivalents and restricted cash at end of period
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
— $
9,480
$
$
135
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures
(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes
Non cash investing and financing activities:
Disposal of fully depreciated real estate
Financed insurance premiums
Value of shares issued under dividend reinvestment plan
Value of common shares exchanged for OP units
Change in fair value of available-for-sale securities
Change in fair value of cash flow hedge
Reallocation of ownership percentage between parent and subsidiary
Unaudited
Nine Months Ended
September 30, 2018
Previously
Reported (1)
Adjustments
Restated
$
$
$
$
$
$
$
$
$
19,879
392
963
1,273
101
1,545
18
4,163
24
$
$
$
$
$
$
$
$
$
(1,698) $
18,181
(88) $
304
(59) $
— $
— $
— $
— $
— $
— $
904
1,273
101
1,545
18
4,163
24
(1) Previously reported balances are from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
20. SUBSEQUENT EVENTS
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019
Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson
Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson
Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated
the 2018 Facility.
The 2019 Facility is comprised of the following three tranches:
•
•
•
$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term
Loan A, the “2019 Term Loans”).
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity by $200.0 million, upon the satisfaction of certain conditions. The Company used $446.2 million of proceeds from the
2019 Facility to repay amounts outstanding under 2018 Facility and intends to use the remaining proceeds from the 2019
Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion,
redevelopment and re-tenanting of properties in its portfolio and working capital.
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the
Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the
Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without
limitation, customary representations and warranties and affirmative and negative covenants including, without limitation,
information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and
sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants
including the following:
138
136
136
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed char
ratio of 1.50 to 1.00;
ges
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million
plus 75% of the net proceeds from additional equity offerings (as defined).
The 2019 Facility also contains customary events of default with customary notice and cure, including, without
limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-
default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status. If an event of default occurs and
is continuing under the 2019 Facility, the lenders may, among other things, terminate their commitments under the 2019 Facility
and require the immediate payment of all amounts owed thereunder.
137
139137
Whitestone REIT and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
December 31, 2018
Description
Allowance for doubtful accounts:
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
(in thousands)
Balance at
Charged to
Deductions
Balance at
Beginning
of Year
Costs and
Expense
from
Reserves
End of
Year
$
8,608
$
1,391
$
7,133
6,647
2,340
1,585
(253) $
(865)
(1,099)
9,746
8,608
7,133
140
138
138
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2018
Initial Cost (in thousands)
to Acquisition (in thousands)
Costs Capitalized Subsequent
Gross Amount at which Carried at
(1) (2)
End of Period
(in thousands)
Property Name
Land
Improvements
(net)
Costs
Land
Improvements
Total
Building and
Improvements
Carrying
Building and
Whitestone Properties:
Ahwatukee Plaza
Anthem Marketplace
Bissonnet Beltway
BLVD Place
The Citadel
City View Village
Davenport Village
Desert Canyon
Eldorado Plaza
Fountain Hills Plaza
Fountain Square
Fulton Ranch Towne Center
Gilbert Tuscany Village
Gilbert Tuscany Village Hard Corner
Heritage Trace Plaza
Headquarters Village
Keller Place
Kempwood Plaza
La Mirada
Lion Square
The Marketplace at Central
Market Street at DC Ranch
Mercado at Scottsdale Ranch
Paradise Plaza
Parkside Village North
Parkside Village South
Pima Norte
Pinnacle of Scottsdale
Pinnacle of Scottsdale Phase II
The Promenade at Fulton Ranch
Providence
Quinlan Crossing
Seville
Shaver
Shops at Pecos Ranch
Shops at Starwood
Shops at Starwood Phase III
The Shops at Williams Trace
South Richey
Spoerlein Commons
The Strand at Huebner Oaks
SugarPark Plaza
Sunridge
Sunset at Pinnacle Peak
Terravita Marketplace
Town Park
Village Square at Dana Park
Westchase
139
$
5,126
$
4,086
$
320
$
— $
5,126
$
4,406
$
4,790
415
63,893
472
2,044
11,367
1,976
16,551
5,113
5,573
7,604
1,767
856
6,209
7,171
5,977
733
12,853
1,546
1,305
9,710
8,728
6,155
3,877
5,562
1,086
6,648
883
5,198
918
9,561
6,913
184
3,781
4,093
1,818
5,920
778
2,340
5,805
1,781
276
3,610
7,171
850
10,877
423
17,973
1,947
90,942
1,777
4,149
34,101
1,704
30,746
15,340
9,828
22,612
3,233
794
13,821
18,439
7,577
1,798
24,464
4,289
5,324
26,779
12,560
10,221
8,629
27,154
7,162
22,466
4,659
13,367
3,675
28,683
25,518
633
15,123
11,487
7,069
14,297
2,584
7,296
12,335
7,125
1,186
2,734
9,392
2,911
40,250
1,751
1,132
469
513
2,614
98
1,241
1,796
264
215
2,289
2,226
1,591
168
377
1,002
703
1,989
834
4,455
1,330
4,876
1,548
1,266
199
160
2,149
1,665
1,998
661
2,321
640
567
82
744
415
2,045
599
1,917
840
383
1,059
606
736
992
403
3,331
3,270
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
517
—
592
—
—
—
—
—
—
—
1,097
—
—
—
—
—
—
—
—
—
—
—
4,790
415
63,893
472
2,044
11,367
1,976
16,551
5,113
5,573
7,604
1,767
856
6,209
7,171
5,977
733
12,853
1,546
1,305
9,710
8,728
6,155
3,877
5,562
1,086
6,648
883
5,198
918
9,561
6,913
184
3,781
4,093
1,818
5,920
778
2,340
5,805
1,781
276
3,610
7,171
850
10,877
423
19,105
2,416
91,455
4,391
4,247
35,342
3,500
31,010
15,555
12,117
24,838
4,824
962
14,198
19,441
8,280
3,787
25,298
8,744
6,654
31,655
14,108
11,487
8,828
27,314
9,828
24,131
7,249
14,028
5,996
29,323
26,085
715
15,867
11,902
10,211
14,896
4,501
8,136
12,718
8,184
1,792
3,470
10,384
3,314
43,581
5,021
9,532
23,895
2,831
155,348
4,863
6,291
46,709
5,476
47,561
20,668
17,690
32,442
6,591
1,818
20,407
26,612
14,257
4,520
38,151
10,290
7,959
41,365
22,836
17,642
12,705
32,876
10,914
30,779
8,132
19,226
6,914
38,884
32,998
899
19,648
15,995
12,029
20,816
5,279
10,476
18,523
9,965
2,068
7,080
17,555
4,164
54,458
5,444
141139
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2018
Initial Cost (in thousands)
to Acquisition (in thousands)
Costs Capitalized Subsequent
Gross Amount at which Carried at
(1) (2)
End of Period
(in thousands)
Property Name
Land
Improvements
(net)
Costs
Land
Improvements
Total
Building and
Improvements
Carrying
Building and
Williams Trace Plaza
Windsor Park
Woodlake Plaza
Total Whitestone Properties
Land Held for Development:
Anthem Marketplace
BLVD Place Phase II-B
Dana Park Development
Eldorado Plaza Development
Fountain Hills
Market Street at DC Ranch
Total - Land Held for Development
Grand Totals - Whitestone Properties
$
$
$
$
6,800
2,621
1,107
14,003
10,482
4,426
381
8,490
2,543
—
—
—
6,800
2,621
1,107
14,384
18,972
6,969
21,184
21,593
8,076
288,815
$
670,901
$
72,512
$
2,206
$
288,815
$
745,619
$
1,034,434
204
$
— $
— $
— $
204
$
— $
10,500
4,000
911
277
704
16,596
305,411
$
$
—
—
—
—
—
1,155
25
28
—
—
—
—
—
—
—
10,500
4,000
911
277
704
1,155
25
28
—
—
— $
1,208
670,901
$
73,720
$
$
— $
16,596
2,206
$
305,411
$
$
1,208
746,827
$
$
204
11,655
4,025
939
277
704
17,804
1,052,238
142
140
140
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2018
Property Name
Encumbrances
(in thousands)
Construction
Acquired
Life
Accumulated
Depreciation
Date of
Date
Depreciation
Whitestone Properties:
Ahwatukee Plaza
Anthem Marketplace
Bissonnet Beltway
BLVD Place
The Citadel
City View Village
Davenport Village
Desert Canyon
Eldorado Plaza
Fountain Hills Plaza
Fountain Square
Fulton Ranch Towne Center
Gilbert Tuscany Village
Gilbert Tuscany Village Hard Corner
Heritage Trace Plaza
Headquarters Village
Keller Place
Kempwood Plaza
La Mirada
Lion Square
The Marketplace at Central
Market Street at DC Ranch
Mercado at Scottsdale Ranch
Paradise Plaza
Parkside Village North
Parkside Village South
Pima Norte
Pinnacle of Scottsdale
Pinnacle of Scottsdale Phase II
The Promenade at Fulton Ranch
Providence
Quinlan Crossing
Seville
Shaver
Shops at Pecos Ranch
Shops at Starwood
Shops at Starwood Phase III
The Shops at Williams Trace
South Richey
Spoerlein Commons
The Strand at Huebner Oaks
SugarPark Plaza
Sunridge
Sunset at Pinnacle Peak
Terravita Marketplace
Town Park
Village Square at Dana Park
Westchase
$
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
823
2,659
1,866
3,740
1,757
415
3,498
638
1,257
2,167
2,293
2,561
1,453
75
1,713
3,082
715
1,592
1,484
4,691
1,698
5,348
2,100
2,097
814
2,479
2,822
4,648
598
1,475
2,261
2,525
1,541
358
2,608
2,250
652
1,590
2,319
2,116
1,486
3,010
886
729
2,002
2,086
7,421
2,130
3/31/2017
12/31/2016
8/16/2011
6/28/2013
1/1/1999
5/26/2017
9/28/2010
3/31/2015
5/27/2015
4/13/2011
5/3/2017
10/7/2013
9/21/2012
11/5/2014
6/28/2011
8/28/2015
7/1/2014
3/28/2013
8/26/2015
2/2/1999
9/30/2016
1/1/2000
11/1/2010
12/5/2013
6/19/2013
8/8/2012
7/2/2015
7/2/2015
10/4/2007
12/22/2011
11/5/2014
3/30/2001
8/26/2015
9/30/2016
12/17/1999
12/28/2012
12/28/2011
12/24/2014
8/25/1999
1/16/2009
9/19/2014
9/8/2004
1/1/2002
5/29/2012
8/8/2011
1/1/1999
9/21/2012
1/1/2002
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
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
141
143141
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2018
Accumulated
Depreciation
Date of
Date
Depreciation
Property Name
Encumbrances
(in thousands)
Construction
Acquired
Williams Trace Plaza
Windsor Park
Woodlake Plaza
(12)
Land Held for Development:
Anthem Marketplace
BLVD Place Phase II-B
Dana Park Development
Eldorado Plaza Development
Fountain Hills
Market Street at DC Ranch
Total - Land Held For Development
Grand Totals - Whitestone Properties
1,519
8,638
2,615
113,300
—
—
—
—
—
—
—
113,300
$
$
$
$
12/24/2014
12/16/2003
3/14/2005
Life
5-39 years
5-39 years
5-39 years
6/28/2013
5/26/2017
9/21/2012
Land - Not Depreciated
Land - Not Depreciated
Land - Not Depreciated
12/29/2017
Land - Not Depreciated
10/7/2013
12/5/2013
Land - Not Depreciated
Land - Not Depreciated
(1) Reconciliations of total real estate carrying value for the three years ended December 31, follows:
Balance at beginning of period
Cumulative effect of accounting change for adoption of ASU 2017-05.
Additions during the period:
Acquisitions
Improvements
Deductions - cost of real estate sold or retired
Balance at close of period
2018
$ 1,149,454
(95,146)
( in thousands)
2017
920,310
—
$
—
11,638
(83,508)
(13,708)
$ 1,052,238
213,545
17,575
231,120
(1,976)
$ 1,149,454
2016
835,538
—
69,749
22,036
91,785
(7,013)
920,310
$
$
(2) The aggregate cost of real estate (in thousands) for federal income tax purposes is $1,019,001.
(3)
Includes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that
are undergoing significant redevelopment or re-tenanting.
(4) This property secures a $15.1 million mortgage note.
(5) This property secures a $80.0 million mortgage note.
(6) This property secures a $19.0 million mortgage note.
(7) This property secures a $14.1 million mortgage note.
(8) This property secures a $14.0 million mortgage note.
(9) This property secures a $14.3 million mortgage note.
(10) This property secures a $10.5 million mortgage note.
(11) This property secures a $2.6 million mortgage note.
(12) This property secures a $6.5 million mortgage note.
(13) These properties secure a $37.0 million mortgage note.
(14) This property secures a $16.5 million mortgage note.
144
142
142
Exhibit No. Description
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Articles of Amendment and Restatement 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)
Articles of Amendment (previously filed and incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K, filed on August 24, 2010)
Articles of Amendment (previously filed and incorporated by reference to Exhibit 3.2 to the Registrant’s Current
Report on Form 8-K, filed on August 24, 2010)
Articles Supplementary (previously filed and incorporated by reference to Exhibit 3.3 to the Registrant’s Current
Report on Form 8-K, filed on August 24, 2010)
Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1.1 to the Registrant's
Current Report on Form 8-K, filed June 27, 2012)
Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1.2 to the Registrant's
Current Report on Form 8-K, filed June 27, 2012)
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)
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)
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)
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)
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)
143
145143
Exhibit No. Description
10.8+
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
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)
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)
Floating Rate Promissory Note among Whitestone Industrial-Office LLC and Jackson National 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)
10.17+
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)
10.18+
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)
10.19+
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)
10.20
10.21
10.22
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)
146
144
144
Exhibit No. Description
10.23
10.24
10.25+
10.26+
10.27+
10.28+
10.29
10.30
10.31
10.32
10.33
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)
Agreement of Purchase and Sale 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)
Trustee Restricted Common Share Grant Agreement (Time Vested) 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)
Trustee Restricted Common Share Grant Agreement (Time Vested) 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)
Trustee Restricted Common Share Grant Agreement (Time Vested) 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)
Trustee Restricted Common Share Grant Agreement (Time Vested) 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)
Promissory Note dated September 10, 2010 between Whitestone REIT Operating Company IV LLC and MidFirst
Bank (previously filed and incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form
8-K, filed September 16, 2010)
Modification of Promissory Note dated September 10, 2010 between Whitestone REIT Operating Company IV
LLC and MidFirst Bank (previously filed and incorporated by reference to Exhibit 10.2 to the Registrant's Current
Report on Form 8-K, filed September 16, 2010)
Limited Guarantee dated September 10, 2010 between Whitestone REIT Operating Company IV LLC and
MidFirst Bank (previously filed and incorporated by reference to Exhibit 10.3 to the Registrant's Current Report
on Form 8-K, filed September 16, 2010)
Promissory Note between Whitestone Featherwood LLC and Viewpoint Bank dated March 31, 2011
(previously filed and incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-
K, filed April 5, 2011)
Assumption Agreement among U.S. National Bank Association, Scottsdale Pinnacle LP, Howard Bankchik,
Steven J. Fogel, Whitestone Pinnacle of Scottsdale, LLC and Whitestone REIT Operating Partnership, LP
and Whitestone REIT, dated December 22, 2011 (previously filed and incorporated by reference to Exhibit
10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011, filed on
February 29, 2012)
10.34+
First Amendment to the Whitestone REIT 2008 Long-Term Equity Incentive Ownership Plan (previously filed
and incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K, filed on
March 1, 2011)
145
147145
Exhibit No. Description
10.35+
10.36+
10.37+
10.38
10.39
10.40+
10.41+
10.42+
10.43+
10.44
10.45+
10.46
10.47
10.48
Separation Agreement between Whitestone REIT and Valarie King (previously filed and incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed August 9, 2012)
Summary of Relocation Agreement between Whitestone REIT and James C. Mastandrea (previously filed and
incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed August 9,
2012)
Separation Agreement between Whitestone REIT and Richard Rollnick (previously filed and incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed November 6, 2013)
Loan Agreement, dated November 26, 2013, by and between Whitestone Industrial-Office LLC and Jackson
National Life Insurance Company (previously filed and incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed December 3, 2013)
Fixed Rate Promissory Note by Whitestone Industrial-Office LLC to Jackson Life National Insurance
Company, dated November 26, 2013 (previously filed and incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K, filed December 3, 2013)
Employment Agreement between Whitestone REIT and James C. Mastandrea (previously filed and
incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed August 29,
2014)
Employment Agreement between Whitestone REIT and David K. Holeman (previously filed and incorporated
by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed August 29, 2014)
Change in Control Agreement between Whitestone REIT and John J. Dee (previously filed and incorporated
by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed August 29, 2014)
Change in Control Agreement between Whitestone REIT and Bradford D. Johnson (previously filed and
incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K, filed August 29,
2014)
Amended and Restated Credit Agreement between Whitestone REIT Operating Partnership, L.P. and Bank of
Montreal dated November 7, 2014 (previously filed and incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K, filed November 12, 2014)
Change in Control Agreement between Whitestone REIT and Christine J. Mastandrea (previously filed and
incorporated by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K, filed March 2,
2015)
Form of Restricted Unit Award Agreement (Time Vested) (previously filed and incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 7, 2015)
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and Wells Fargo Securities, LLC (previously filed and
incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K, filed on June 4,
2015)
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and JMP Securities LLC (previously filed and incorporated by
reference to Exhibit 1.2 to the Registrant’s Current Report on Form 8-K, filed on June 4, 2015)
150
146
146
Exhibit No. Description
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and BMO Capital Markets Corp. (previously filed and
incorporated by reference to Exhibit 1.3 to the Registrant’s Current Report on Form 8-K, filed on June 4,
2015)
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and Wunderlich Securities, Inc. (previously filed and
incorporated by reference to Exhibit 1.4 to the Registrant’s Current Report on Form 8-K, filed on June 4,
2015)
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and Ladenburg Thalmann (previously filed and incorporated by
reference to Exhibit 1.5 to the Registrant’s Current Report on Form 8-K, filed on June 4, 2015)
Amended and Restated Equity Distribution Agreement, dated June 4, 2015, by and among Whitestone REIT,
Whitestone REIT Operating Partnership, L.P., and Robert W. Baird & Co. Incorporated (previously filed and
incorporated by reference to Exhibit 1.6 to the Registrant’s Current Report on Form 8-K, filed on June 4,
2015)
First Amendment to Amended and Restated Credit Agreement between Whitestone REIT Operating
Partnership, L.P. and Bank of Montreal dated October 30, 2015 (previously filed and incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed November 5, 2015)
Contribution Agreement, dated December 8, 2016, among Whitestone REIT Operating Partnership, L.P.,
Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP (previously filed and
incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed December 9,
2016).
OP Unit Purchase Agreement, dated December 8, 2016, among Whitestone REIT Operating Partnership, L.P.,
Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP (previously filed and
incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed December 9,
2016).
Second Amendment to Amended and Restated Credit Agreement, Joinder and Reaffirmation of Guaranties,
dated December 8, 2016, among Whitestone REIT Operating Partnership, L.P., Whitestone REIT, Pillarstone
Capital REIT Operating Partnership LP, et al., as guarantors, the lenders party thereto, and Bank of Montreal,
as Administrative Agent (previously filed and incorporated by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K, filed December 9, 2016).
Limited Guarantee, dated December 8, 2016, between Pillarstone Capital REIT Operating Partnership LP and
Bank of Montreal, as Administrative Agent (previously filed and incorporated by reference to Exhibit 10.5 to
the Registrant's Current Report on Form 8-K, filed December 9, 2016).
Amended and Restated Limited Partnership Agreement of Pillarstone Capital REIT Operating Partnership LP,
dated December 8, 2016 (previously filed and incorporated by reference to Exhibit 10.6 to the Registrant's
Current Report on Form 8-K, filed December 9, 2016).
Agreement of Purchase and Sale, dated as of March 21, 2017, between Whitestone REIT Operating
Partnership, L.P. and Phase II Boulevard Place, LP (previously filed and incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q, filed on August 4, 2017).
Operating Partnership, L.P. and Phase II Boulevard Place, LP (previously filed and incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed on August 4, 2017).
Operating Partnership, L.P. and Phase II Boulevard Place, LP (previously filed and incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, filed August 4, 2017).
147
151147
Exhibit No. Description
10.62+
10.63
2018 Long-Term Equity Incentive Ownership Plan (previously filed as and incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on May 12, 2017).
Second Amended and Restated Credit Agreement, dated as of January 31, 2019, among Whitestone REIT
Operating Partnership, L.P., Whitestone REIT, et al., as guarantors, the lenders party thereto, and Bank of
Montreal, as Administrative Agent (previously filed and incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed on February 6, 2019).
21.1*
List of subsidiaries of Whitestone REIT
23.1*
Consent of Pannell Kerr Forster of Texas, P.C.
24.1
Power of Attorney (included on the signature page hereto)
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS***
XBRL Instance Document
101. SCH***
XBRL Taxonomy Extension Schema Document
101.CAL***
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB***
XBRL Taxonomy Extension Label Linkbase Document
101.PRE***
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF***
XBRL Taxonomy Extension Definition Linkbase Document
________________________
*
**
Filed herewith.
Furnished herewith.
Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL
***
(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) the
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2018, 2017 and 2016,
(iii) the Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 2017 and 2016, (iv) the
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 and (v) the Notes to
Consolidated Financial Statements.
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are
deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not
subject to liability under those sections.
+ Denotes management contract or compensatory plan or arrangement
152
148
148
CORPORATE INFORMATION
BOARD OF TRUSTEES
JAMES C. MASTANDREA, Chairman and Chief Executive Officer,Whitestone
REIT; Chairman, Chief Executive Officer and President, Pillarstone Capital REIT
and MDC Realty Corporation; former Chairman and Chief Executive Officer of
First Union REIT (NYSE); Director,Cleveland State University Foundation Board;
Adjunct Professor,Rice University; Guest Lecturer, University of Chicago.
NANDITA V. BERRY, Former 109th Texas Secretary of State; former Board
Member of the University of Houston System Board of Regents; former Senior
Counsel of Locke Lord LLP and El Paso Energy Corporation, former Board
Member of the Houston Zoo, Inc., the South Asian Chamber of Commerce and
the Community Family Center of Houston; Adjunct Professor, University of
Houston.
DONALD F. KEATING, Former Chief Financial Officer, Shell MiningCompany;
former Director, Billiton Metal Company, R&F Coal Company and
Marrowbone Coal Company.
PAUL T. LAMBERT,President, Lambert Capital Corporation; former Principal
and Managing Partner, Shidler Group; Founder and former Director and
Chief Operating Officer,First Industrial RealtyTrust;Trustee,Pillarstone Capital
REIT.
NAJEEB A. KHAN, Founder, President and Chief Executive Officer of Interlogic
Outsourcing, Inc. (“IOI” is the successor to Interlogic Systems, Inc.“ISI”); former
Vice President of Commercial Services, Midwest Commerce Data Corporation;
Chairman and Chief Executive Officer of CNA UniSource; Director of 1st Source
Bank;formerTrustee of Memorial Health Foundation,The Community Foundation
of St. Joseph County,WNIT public television, and Studebaker Museum.
JACK L. MAHAFFEY, Former Chairman, President and Chief Executive Officer,
Shell Mining Company, Former Director, National Coal Association and the
National Coal Council.
DAVID F. TAYLOR, Current Chair, of Locke Lord LLP; Managing Partner of
Houston office of Locke Lord, LLP,Board of the Greater Houston Partnership,
Central Houston, Inc,Theatre Under the Stars, and Oldham Little Church
Foundation.
CORPORATE HEADQUARTERS
Whitestone REIT
2600 South Gessner Road, Suite500
Houston,TX 77063
Toll Free: 866-789-7348
Phone: 713-827-9595
Email: IR@whitestonereit.com
Website: www.whitestonereit.com
INVESTOR RELATIONS
Shareholders are encouraged to contact
Kevin Reed, Director of Investor Relations,
at the Company with questions or requests
for information. A copy of the Company’s
Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is
included as part of this annual report and is
available upon written request and online at
the SEC website: www.sec.gov
REGISTRAR & TRANSFER AGENT
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NewYork 11219
ACCOUNT MAINTENANCE INQUIRES
SHOULD BE DIRECTED TO
AST Shareholder Services Department
888-999-0027
877-879-8035
SENIOR MANAGEMENT TEAM
JAMES C. MASTANDREA, Chairman and Chief Executive Officer
DAVID K. HOLEMAN, Chief Financial Officer
JOHN J. DEE, Chief Operating Officer
BRADFORD D. JOHNSON,ExecutiveVice President,Acquisitions & Asset Management
CHRISTINE J. MASTANDREA, ExecutiveVice President,Corporate Strategy
KEVIN REED, Director of Investor Relations
J. SCOTT HOGAN,Vice President and Controller
VINCE MOUER, Corporate Counsel
MICHELLE SIV, Director of Human Resources
DANIEL P. KOVACEVIC, Regional Vice President,Southwest Region
MATT OKMIN, Division Director, Austin/San Antonio
DAVE SPAGNOLO,Division Director,Dallas/FortWorth
AUSTIN/SAN ANTONIO
Davenport Village • Quinlan Crossing • Parkside Village North • Parkside Village South • City View Village •
The Strand at Huebner Oaks • Windsor Park Centre
DALLAS/FORT WORTH
Heritage Trace Plaza • Shops at Starwood • Headquarters Village • Keller Place • Eldorado Plaza
HOUSTON
BLVD Place • Williams Trace Plaza • The Shops at Williams Trace • South Richey • Shaver Street Center • Bissonnet Beltway
Plaza • Westchase Plaza • Sunridge Center • Town Park Plaza • Providence Plaza • Sugar Park Plaza • Kempwood Plaza •
Lion Square • Woodlake Plaza
PHOENIX/CHICAGO
Fulton Ranch Towne Center • Promenade at Fulton Ranch • Gilbert Tuscany Village • Ahwatukee Plaza • Pinnacle of Scottsdale •
Sunset at Pinnacle Peak • Village Square at Dana Park • Fountain Square • Shops at Pecos Ranch • Mercado at Scottsdale Ranch •
Pima Norte • The Citadel • Marketplace at Central • Desert Canyon • Terravita Marketplace • Paradise Plaza • Anthem
Marketplace • Fountain Hills Plaza • Market Street at DC Ranch • La Mirada Center • Scottsdale Seville • Spoerlein Commons
HOUSTON CORPORATE HEADQUARTERS: 2600 South Gessner Road,Suite 500, Houston,TX 77063 |Toll Free 866.789.7348
ARIZONA REGIONAL OFFICE: 20789 North Pima Road,Suite 210, Scottsdale,AZ 85255 | Phone 480.584.6181
DALLAS DIVISION OFFICE: 6959 Lebanon Road,Suite 214, Frisco,TX 75034 | Phone 214.824.7888
AUSTIN DIVISION OFFICE: 3801 North Capital ofTexas Highway,Suite E-205,Austin,TX 78746 | Phone 512.992.1507
SAN ANTONIO DIVISION OFFICE: 11225 Huebner Road,San Antonio,TX 78230 | Phone 210.437.3037
www.whitestonereit.com