2019 ANNUAL REPORTAUSTIN | DALLAS | HOUSTON | PHOENIX | SAN ANTONIOCOMMUNITIES THATTHRIVECREATING LOCAL CONNECTIONS 2019 FINANCIAL HIGHLIGHTS
Credit Facility
Expansion to $515M, extending the term by additional 5 years
Inaugural Corp Bond Private Placement
Completion $100M bond issuance of 10-year corporate bonds
Annualized Base Rent
Growth per square foot of 2.2% to $19.77
Same Store NOI
Growth of 4.7% in Q4 and 2.4% for the full year
G & A Expenses
Improvement by 80bps reduction to 16.6% of revenue
Rental Rates (Signed Leases)
New & Renewal Leases signed in 2019 increased 9.6% & 10.2%
Non-Core Disposition
Gain on sale of $13.8M, net proceeds of $11M, reduction of debt
Net Debt to EBITDA
Improvement by reduction to 8.6x from 8.7x
LONG-TERM TOTAL SHAREHOLDER RETURN RANK AMONGST U.S. PUBLIC REIT SHOPPING CENTERS*
#1 of 17
over 3 years
#2 of 17
over 5 years
AUSTIN - SAN ANTONIO
Davenport Village | Quinlan Crossing | City View Village | Parkside Village North | Parkside Village South
The Strand at Huebner Oaks | Windsor Park
DALLAS - FORT WORTH
Eldorado Plaza | Headquarters Village | Heritage Trace Plaza | Keller Place | Las Colinas Village | Shops at Starwood
BLVD Place | Bissonnet Beltway Plaza | Kempwood Plaza | Lion Square | Providence Plaza | Shaver Street Center
Shops at Williams Trace | South Richey | Sugar Park Plaza | Sunridge Center | Town Park Plaza
Woodlake Plaza | Westchase Plaza | Williams Trace Plaza
HOUSTON
PHOENIX
Ahwatukee Plaza | Anthem Marketplace | Desert Canyon | Fountain Hills Plaza | Fountain Square
Fulton Ranch Towne Center | Gilbert Tuscany Village | La Mirada Center | Market Street at DC Ranch
Marketplace at Central | Mercado at Scottsdale Ranch | Paradise Plaza | Pima Norte
Pinnacle of Scottsdale | Scottsdale Seville | Sunset at Pinnacle Peak | Terravita Marketplace | The Citadel
The Promenade at Fulton Ranch | The Shops at Pecos Ranch | Village Square at Dana Park
*Whitestone REIT Total Shareholder Return as compared to its peers based on SNL data. All periods ending Dec 31, 2019. 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.
COMMITMENT TO OUR
COMMUNITIES
CUBEXEC MEETING VENUE
MARKET STREET AT DC RANCH
ROOFTOP CINEMA CLUB
BLVD PLACE
SANTA SUNDAYS
VILLAGE SQUARE AT DANA PARK
COCOA STROLL
MARKET STREET AT DC RANCH
DANCE HOUSE FITNESS EVENT
BLVD PLACE
COCOA STROLL
MARKET STREET AT DC RANCH
1
VALUE CREATION
2019 ACQUISITION | LAS COLINAS VILLAGE
LAS COLINAS VILLAGE | IRVING, TEXAS
PROPERTY HIGHLIGHTS
• 104,915 Total Leasable Square Feet
• Daytime VPD of 187,000
• Average 3-mile radius HHI of $101,000
• 85.6% occupied at timing of purchase; offering significant upside opportunity with the potential for
additional pad site developments on land which was included in the original purchase price
• Also included are options to acquire three adjacent non-owned single-tenant pads
2
VALUE CREATION
2019 DEVELOPMENT | REDEVELOPMENT
PROVIDENCE PLAZA
REDEVELOPMENT
WILLIAMS TRACE PLAZA
REDEVELOPMENT
FULTON RANCH TOWNE CENTER
PAD SITE DEVELOPMENT
3
Dear Fellow Shareholders:
At Whitestone, each day we strive to perform better than we did the day before. 2019 was a strong year as we continued to execute on our
strategic plan to deliver excellence to all stakeholders, and we are working hard to achieve even greater success in 2020.
2019 Highlights
• Successfully sold non-core properties, reducing debt and resulting in a gain on sale of $13.8 million and net proceeds received by
Whitestone of $11 million
• Increased annualized base rent per square foot 2.2% to $19.77
• Achieved same store net operating income growth of 4.7% in Q4 and 2.4% for the full year
• Reduced general and administrative expense 80bps to 16.6% of revenue, and
• Completed our inaugural bond issuance with $100 million of 10-year corporate bonds.
Outstanding Employees, Rooted in Core Values
Our commitment begins with our employees – the driving force connecting Whitestone to our other stakeholders, especially our tenants and the
communities where we operate.
Our team is, and always has been, passionate about serving our tenants and communities, which is a reflection of our core values. These values
underpin our commitment to our tenants and communities as we develop our assets and re-develop and enhance our properties, which in turn
creates jobs, improves home values and drives business tax revenue.
Our Unique Approach Drives Superior Results
We focus on specific markets, specific product types and specific tenants. Whitestone has created systems, processes and operating standards
that enable us to scale our business and portfolio in a sustainable way. In 2019 we stayed the course, timed our capital raising needs with our
late 2019 acquisition, and successfully leased and renewed spaces to thriving businesses.
As a result of our long-term commitment and the efforts of our team, Whitestone REIT achieved the number one ranking among all Public U.S.
Shopping Center REITs for Total Shareholder Return (“TSR”) over the past three years, and the number two ranking over the past five years.
Source: S&P Global Market Intelligence
This achievement is even more significant when taking into account the challenges faced by many of our retail tenants. As the landscape
continues to evolve, Whitestone’s strategy is to stay ahead of the curve. We attract tenants that meet the needs of today’s consumers, avoid
restrictive tenant covenants, and have largely avoided the financial impact of store closures and vacancies by carefully curating our tenant mix.
As a result, we finished 2019 with minimal store closings, a solid balance sheet, operating profits, a larger tenant base, and a portfolio of real
estate with increased value.
Creating Incremental Value through Prudent Investment
In addition to our strong operational performance, we continue to create value in properties we own in high-growth markets through the
redevelopment and development of out-parcels and pads that are contiguous to our community shopping centers.
From 2016 through 2019, we invested approximately $28 million in development and redevelopment at eight owned properties, resulting in an
incremental $3.3 million in net operating income, producing an 11.9% unlevered return on investment
Currently, given the uncertainty presented by the COVID-19 pandemic, we are evaluating redevelopment and development on a case-by-case
basis, but over the long term, we plan to continue investing judiciously. We plan to invest approximately $230 million in our current portfolio,
adding an incremental value of $175 million, for a total value of approximately $405 million.(1) We expect this aggregate investment will
produce an additional $24 million of annual net operating income.
(1) Incremental value and total value based on an assumed exit market capitalization rate of 6%
Value-Enhancing Growth through Acquisitions
In addition to development and redevelopment, Whitestone has also produced profitable growth through acquisitions. From 2010 to 2019,
we invested approximately $920 million in the acquisition of 43 high-quality properties. Since making these acquisitions, we have grown
net operating income by 17.5% and improved our unlevered cash-on-cash return from 6.8% to 7.5% through operations, redevelopment and
development.
We are taking a prudent pause in acquisitions due to the ongoing COVID-19 pandemic, but over the longer term, we plan to resume making off-
market acquisitions. In fact, we have already identified opportunities that exhibit growth and demographic trends similar to Whitestone’s current
markets, and over time we intend to take advantage of these opportunities and integrate them as part of our overall portfolio.
4
Our Commitment to Good Governance, Diversity and Sustainability
By staying true to our values and strategic plan, we are delivering on our objectives. Our core values are what differentiate Whitestone and
make us strong.
In 2019 we instituted an ESG Committee and established a charter to support the Company’s on-going commitment to environmental, health
and safety, corporate social responsibility, corporate governance, sustainability, and other public policy matters relevant to the Company
The ESG Committee is a cross-functional senior management committee of the Company. Its mission is to assist the executive management of the
Company in:
• Setting general strategy relating to ESG Matters
• Developing, implementing, and monitoring initiatives and policies based on that strategy
• Overseeing communications with employees, investors and stakeholders with respect to ESG Matters, and
• Monitoring and assessing developments relating to, and improving the Company’s understanding of ESG Matters.
We remain committed to sound corporate governance, diversity and inclusion among our associates, and a sustainable environment.
The Future is Bright for Whitestone REIT
As we consider 2020 and beyond, our list of our goals and objectives is clear. We are committed to creating value for all stakeholders as we
advance on our long-term goals of reducing debt leverage and scaling general and administrative costs.
When the COVID-19 pandemic was becoming apparent that it could create a shock to businesses and our community shopping centers,
Whitestone’s management team and Board moved quickly, taking proactive measures to ensure adequate liquidity and maintain the strength of
our business, to allow the Company to ride out the storm.
We focused on our “Operations” and “Capital Structure,” that we built on a platform that could sustain a down cycle. We drew down $30
million of the availability of our revolving credit facility, reduced our overhead by 10% and froze all salaries. In further pursuit of ensuring
financial flexibility, Whitestone’s Board of Trustees reduced our second quarter 2020 dividend by 63%. The dividend reduction will result in over
$30 million of annualized cash savings. The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and
severity of the national COVID-19 crisis and as business conditions improve.
The steps we took permit us to focus on our tenants and revenues through this pandemic and its economic impact. We strongly believe that we
are well positioned, with increased liquidity, leaner operations, and an exceptionally experienced management team to resume acquisitions
from our pipeline and quickly source new opportunities. We have successfully managed through adverse economic cycles before, and with our
well-located Community Centered PropertiesTM, diversified tenant base, and contractual lease agreements with limited covenants and annual
rent escalations, we remain positive about the future of Whitestone.
While the internet has had a significant impact on brick-and-mortar retail businesses and a contagion impact on retail real estate values, we
have successfully and profitably navigated the industry shift with our e-commerce resistant business model and data research. And now, we
expect to successfully navigate through another shift, the economic impact of the COVID-19 pandemic across the country.
It is a testament to our Community Centered PropertiesTM that many tenants currently remain open to provide essential goods and services for
daily living to local residents. All of us at Whitestone greatly appreciate the hard work of our employees and our tenants who are tirelessly
supporting their neighborhoods during this unprecedented period in history.
In closing, I commit to serve God first, and through Him, to hold strongly to my commitment and responsibility to our shareholders, bondholders,
lenders, employees, tenants, and the communities where we operate.
Respectfully and Sincerely,
James C. Mastandrea
Chairman and CEO
5
SUSTAINABILITY STATEMENT
At Whitestone, we understand that managing our environmental, social and governance responsibilities is critical to creating and
sustaining long-term value. Our priorities in those efforts are providing sustainable, high quality rental spaces with credit-worthy
tenants; investing in our people to ensure we can attract and retain the talent we need to remain successful; and operating to the
highest possible standards of ethics and transparency.
Environment
Redeveloping and Revitalizing
When redeveloping our properties, we seek opportunities to improve their environmental footprint. Examples include providing
parking spaces for low emission and fuel-efficient vehicles; installing low voltage lighting; installing enclosed trash collectors.
Furthermore, we undertake extensive due diligence related to any possible contamination at all the properties we purchase,
investing in any necessary clean up to ensure we and new tenants comply with all environmental regulations.
Whitestone usually provides triple net (NNN) leases that pass on the utility expenses directly to its tenants. Tenants are incentivized
to economize on utilities such as electricity and water usage and improve their profitability by reducing expenses they pay.
Looking forward, Whitestone plans to evaluate the possibility of Energy Star and LEED certifications for select properties, as well as
voluntarily participate in GRESB assessments and CDP disclosure in the future.
Social
Employees
We believe that our people are the heart of our culture, philosophy and strategy. Our employees are in direct contact with our
tenants and the communities we serve. We continually focus on developing associates who are self-disciplined and motivated
and display at all times a high degree of character and competence. Employee engagement is critical to our long term success, so
employees’ performance are reviewed annually. Employees are provided with equity incentives to align their interests with those of
our shareholders. Every Whitestone associate is encouraged to be an owner by being issued stock as part of their compensation
package.
Tenants
We lease to tenants who share and will uphold the same high values that are legal, ethical, moral and honest in all areas related
to our company, and in the services these tenants will provide to Whitestone's Community Centered Properties. Evaluation of
our tenants as well as their satisfaction is done through several processes administered by our Strategy Team and our Property
Management and Leasing departments.
Governance
The Whitestone Board of Trustees strives to achieve the highest standards, with respect to transparency, accounting and auditing
progress towards achieving our long-term goals.
• Whitestone avoids conflicts of interest with full disclosure policies and maintains a lead independent director as well as an
independent Board with oversight from designated committees and chairpersons.
• The company has taken steps to declassify its Board.
• The Board takes its refreshment very seriously. Three of the seven trustees have served less than four years on the Whitestone
Board.
• Trustees receive a percentage of compensation in stock, furthering their alignment with shareholder interests.
• Whitestone does not make political contributions, nor does it identify with any political party to obtain favorable treatment.
• Board members regularly visit properties to provide oversight around the Community-Centered properties philosophy.
• Members of senior management present to the Board on an annual basis the performance of their respective departments.
6
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
For the fiscal year ended December 31, 2019
OR
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 001-34855
WHITESTONE REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(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
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per share
WSR
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 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 □
Accelerated filer ☒
Non-accelerated filer □
Smaller reporting company □
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No ☒
The aggregate market value of the common shares held by nonaffiliates of the registrant as of June 28, 2019 (the last business day of the registrant’s
most recently completed second fiscal quarter) was $509,334,507.
As of February 28, 2020, the registrant had 42,046,732 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 2020 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, 2019.
7
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8
WHITESTONE REIT
FORM 10-K
Year Ended December 31, 2019
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4. Mine Safety Disclosures.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.
Item 9B.
Controls and Procedures.
Other Information.
PART III
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.
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
Index to Exhibits
SIGNATURES.
Page
11
15
28
29
34
34
35
37
40
74
74
74
74
76
77
77
77
77
78
78
78
78
79
9
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 reflect 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:
•
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 or Arizona, Houston and Phoenix in particular;
increases in interest rates, operating costs or general and administrative expenses;
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;
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; and
the risk that we are unable to raise capital for working capital, acquisitions or other uses on attractive terms or at all.
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors”
section of this Annual Report on Form 10-K.
10
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, 2019, we wholly-owned a real estate portfolio of 58 properties
that meet our Community Centered Property® strategy containing approximately 5.0 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 $353 million as of December 31, 2019.
Further, as of December 31, 2019, we, through our equity-method investment in Pillarstone Capital REIT Operating
Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in 8 properties that do not meet our Community
Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone Properties”). We own
81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-
to-day operations of Pillarstone OP. 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, 2019, we wholly-owned 58 commercial properties, including 15 properties in Houston, eight
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
1
11
Orlando, Florida and Denver, Colorado, both of which have economic, demographic and cultural profiles
similar to our Arizona and Texas markets.
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.
•
•
•
•
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 “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.
Prudent Management of Capital Structure. Of our 58 properties, we currently have 50 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 debt, net of cash, to
undepreciated book value of real estate assets, including our proportional share of real estate from our unconsolidated
real estate partnership, that is at or less than 60%. As of December 31, 2019, our ratio of debt, net of cash, to
undepreciated book value of real estate assets was 56%.
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, 2019, we owned a 97.9% interest in the Operating Partnership.
As of December 31, 2019, we wholly-owned a real estate portfolio consisting of 58 properties located in three
states. The aggregate occupancy rate of our portfolio was 90% based on GLA as of December 31, 2019.
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, 2019, our total revenues
were approximately $119.3 million.
Additionally, we, through our equity-method investment in Pillarstone, owned a majority interest in eight properties
located in Dallas and Houston, Texas. The aggregate occupancy rate of the Pillarstone properties was 75% based on GLA as of
December 31, 2019.
12
2
Our largest property, BLVD Place (“BLVD”), a retail community purchased on May 26, 2017 and located in Houston,
Texas, accounted for 13.4% of our total revenues for the year ended December 31, 2019. BLVD also accounted for 16.9% of
our consolidated real estate assets, net of accumulated depreciation, as of the year ended December 31, 2019. Of our 58
properties, 15 and 27 are located in the Houston, Texas and Phoenix, Arizona metropolitan areas, respectively.
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.
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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.
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, 2019, we had 108 full-time 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. 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 we believe is likely to continue as a result of, among other
things, the upcoming U.S. election, and 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, 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, health and safety epidemics, such as the coranavirus outbreak 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
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periods of high interest rates, inflation or tight money supply.
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, 2019, 25% 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 were to experience 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 1,400 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, 2019, approximately
28% of the aggregate GLA of our properties is subject to leases that expire prior to December 31, 2021. 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, including as a result of climate change, 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;
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, health and safety concerns such as the recent coronavirus outbreak 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. We have experienced
cyber-attacks, and while to date none of these incidents have been material to our operations, we expect to continue to face
such threats in the future. We employ a number of measures to prevent, detect and mitigate these threats, but there is no
guarantee such efforts will be successful in preventing future cyber-attacks. In addition, cybersecurity incidents could
compromise the confidential information of our tenants, employees and third party vendors that we collect in the ordinary
course of our business. Laws and expectations relating to data protection and privacy vary by jurisdiction and continue to
evolve, and we believe increased regulation in additional jurisdictions is likely to develop in the future. For example, the
California Consumer Privacy Act (CCPA), that went into effect on January 1, 2020, requires covered companies to, among
other things, provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain
sales of personal information. A cyber-attack or our ability or perceived inability to comply with regulations related to
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cybersecurity and/or data protection and privacy could materially and adversely affect the efficiency of our business operations,
which in turn could have a material adverse effect on our reputation, competitiveness and results of operations.
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.
Any weaknesses identified in our system of internal controls by us and our independent registered public accounting firm
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business.
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. We may identify deficiencies in our system of internal controls over financial
reporting that may require remediation. For example, we identified a material weakness in our internal controls over financial
reporting as of December 31, 2018 that resulted in a material misstatement in our previously filed interim unaudited
consolidated financial statements and concluded that our internal controls over financial reporting were not effective as of
December 31, 2018 and that our disclosure controls and procedures were not effective as of March 31, 2018, June 30, 2018 and
September 30, 2018. As a result, we restated our unaudited financial statements for the periods ended March 31, 2018, June 30,
2018 and September 30, 2018 and implemented a remediation plan for our internal controls over financial reporting and our
disclosure controls and procedures. Although we believe we have adequately remediated our prior deficiencies, there can be no
assurances that we will not identify future deficiencies and that any such future deficiencies may not be material weaknesses
that would be required to be reported in future periods. Any deficiencies or material weaknesses could result in significant time
and expense to remediate, which could have a material adverse effect on our financial condition, results of operations and
ability to make distributions to our shareholders.
Expectations of the Company relating to environmental, social and governance factors may impose additional costs and
expose us to new risks.
There is an increasing focus from certain investors, employees and other stakeholders concerning corporate social
responsibility (“CSR”), specifically related to environmental, social and governance factors. Some investors may use these
factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies
relating to CSR are inadequate. Third-party providers of CSR ratings and reports on companies have increased to meet growing
investor demand for measurement of CSR performance. In addition, the criteria by which companies’ CSR practices are
assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such
new criteria. Alternatively, if we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies
with respect to CSR are inadequate. We may face reputational damage in the event that our CSR procedures or standards do not
meet the standards set by various constituencies. Furthermore, if our competitors’ CSR performance is perceived to be greater
than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we
communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be
perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or
goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as
planned, our reputation and financial results could be materially and adversely affected.
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21
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.
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, 2019, we had
fixed rate hedges on $274.3 million of our variable rate debt, including $265 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
$109.5 million as of December 31, 2019. 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.
As of December 31, 2019, we had outstanding indebtedness, net of cash, of $630.4 million, including, through our
Operating Partnership, $100.0 million aggregate principal amount of the Notes (as defined below) and $374.5 million drawn on
the 2019 Facility (as defined below). As of December 31, 2019, our unused borrowing capacity under our 2019 Facility was
$140.5 million. Obligations under the Notes and the 2019 Facility are guaranteed by the Company and certain subsidiary
guarantors. Our current debt agreements, including the agreements governing the Notes and the 2019 Facility, contain, and any
future debt agreements may contain, a number of restrictive and financial covenants that impose significant operating and
financial restrictions on us. Such restrictive covenants may significantly limit our ability to:
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12
•
•
incur additional debt, including issuing guarantees;
incur liens;
• make certain investments;
•
sell or otherwise dispose of assets;
• make acquisitions;
•
engage in mergers or consolidations or certain other “change of control” transactions;
• make distributions to our shareholders;
•
•
•
engage in restructuring activities;
engage in certain sale and leaseback transactions; and
issue or repurchase common shares or other securities.
Such agreements may also require us to satisfy other requirements, including maintaining certain financial ratios and
condition tests. Our ability to meet these requirements can be affected by events beyond our control, and we may be unable to
meet them. To the extent we fail to meet any such requirements and are in default under our debt obligations, our financial
condition may be materially adversely affected. Further, these restrictions may limit our ability to engage in activities that could
otherwise benefit us. To the extent that we are unable to engage in activities that support the growth, profitability and
competitiveness of our business, our results of operations may be materially adversely affected.
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, 2019, we had approximately $171.4 million of mortgage debt secured by
eight 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.
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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.
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.
Changes in how LIBOR is determined, or the potential replacement of LIBOR with an alternative reference rate, may
adversely affect our interest expense.
A number of our current debt agreements, including our 2019 Facilities, have an interest rate tied to the London
Interbank Offered Rate (“LIBOR”). On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates
LIBOR, announced its intention to stop persuading or compelling banks to submit LIBOR quotations by the end of 2021. We
cannot predict the impact of the potential phase out of LIBOR on our debt agreements and interest rates. While some of our
current debt agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued,
not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be
more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company
intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to
ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances
regarding the impact of the discontinuation of LIBOR on its financial condition or whether the discontinuation of LIBOR
would have a material adverse effect on its results of operations.
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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.
•
•
•
•
•
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.
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:
•
•
•
•
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.
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25
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.
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.
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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.
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
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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.
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.
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Item 2. Properties.
General
As of December 31, 2019, we wholly-owned 58 commercial properties, including 15 properties in Houston, eight 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 2.9% of
our total revenues for the year ended December 31, 2019.
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, 2019:
Commercial Properties
Whitestone
GLA
4,953,571
Average
Occupancy as of
12/31/19
Annualized Base
Rental Revenue
(in thousands) (1)
87,290
90% $
Average
Annualized
Base
Rental Revenue
Per Sq. Ft. (2)
$
19.58
(1) Calculated as the tenant’s actual December 31, 2019 base rent (defined as cash base rents including abatements) multiplied by
12. Excludes vacant space as of December 31, 2019. 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, 2019 equaled approximately $76,000 for the month ended December 31, 2019.
(2) Calculated as annualized base rent divided by GLA leased as of December 31, 2019. Excludes vacant space as of December 31, 2019.
Our largest property, BLVD Place, a retail community purchased on May 26, 2017 and located in Houston, Texas, accounted for
13.4% of our total revenues for the year ended December 31, 2019. BLVD also accounted for 16.9% of our real estate assets, net of
accumulated depreciation, for the year ended December 31, 2019.
As of December 31, 2019, approximately $171.4 million of our total debt of $645.9 million was secured by 8 of our properties with
a combined net book value of $270.4 million.
Location of Properties
Of our 58 wholly-owned properties, 15 are located in the greater Houston metropolitan statistical area. These 15 properties
represent 30% of our revenue for the year ended December 31, 2019. 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, 2019.
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, 2019. The following table sets forth information about the unemployment rate in
Houston, Phoenix and nationally during the last six months of 2019.
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.
3.7%
4.0%
4.8%
3.7%
3.9%
4.7%
3.5%
3.6%
3.8%
3.6%
3.5%
3.7%
3.5%
3.6%
3.8%
3.5%
3.6%
3.7% (3)
19
29
General Physical and Economic Attributes
The following table sets forth certain information relating to each of our properties owned as of December 31, 2019.
Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2019
Community Name
Location
Year Built/
Renovated
Gross
Leasable
Square
Feet
Percent
Occupied
at
12/31/2019
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
Anthem Marketplace Phase II
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
Las Colinas Village
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
Phoenix
Phoenix
Phoenix
Houston
Houston
Phoenix
San
Antonio
Austin
Phoenix
Dallas
Phoenix
Phoenix
Phoenix
Phoenix
Phoenix
Dallas
Dallas
Dallas
Houston
Phoenix
Dallas
Houston
Phoenix
Phoenix
Phoenix
Phoenix
Austin
Austin
Phoenix
Phoenix
Phoenix
Phoenix
Houston
Austin
Phoenix
Houston
Phoenix
Dallas
Houston
Houston
Chicago
Dallas
30
1979
2000
2019
1978
2014
2013
2005
1999
2000
2004
2009
1986
2005
2009
2009
2006
2009
2001
1974
1997
2000
2014
2012
2003
1987
1983
2005
2012
2007
1991
2017
2007
1980
2012
1990
1978
2009
2006
1985
1980
1987
2016
72,650
113,293
6,853
29,205
216,944
28,547
17,870
128,934
62,533
219,287
111,289
118,209
120,575
49,415
14,603
70,431
89,134
93,541
91,302
147,209
104,919
117,592
111,130
244,888
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
20
86% $
826
$
13.22
$
96%
100%
85%
99%
99%
100%
97%
95%
97%
88%
80%
92%
100%
100%
98%
79%
95%
97%
86%
86%
90%
99%
98%
85%
90%
100%
91%
58%
96%
100%
88%
96%
96%
78%
100%
79%
97%
94%
100%
82%
86%
1,756
63
376
8,739
502
520
3,250
873
3,201
1,626
1,741
1,881
975
124
1,536
2,149
1,002
1,139
2,845
2,403
1,496
1,037
4,846
1,644
1,421
826
2,173
368
2,260
750
1,279
975
2,389
2,361
342
1,704
1,446
1,996
757
691
1,102
16.15
9.19
15.15
40.69
17.76
29.10
25.99
14.70
15.05
16.60
18.41
16.96
19.73
8.49
22.25
30.52
11.28
12.86
22.47
26.63
14.14
9.43
20.19
16.29
12.54
30.54
26.50
18.07
20.81
27.71
14.71
11.24
22.65
33.62
15.60
27.38
26.92
15.97
10.83
20.33
36.25
12.80
16.04
27.58
14.50
43.48
16.42
29.10
25.71
14.38
15.17
16.52
17.86
18.93
19.02
8.90
22.51
30.86
11.22
13.45
23.06
27.29
13.07
8.99
19.95
16.35
13.22
30.87
26.55
19.20
21.25
26.16
15.46
11.29
23.50
34.24
15.55
26.47
29.37
15.73
10.85
20.83
35.66
Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2019
Community Name
Location
Year Built/
Renovated
Gross
Leasable
Square
Feet
Percent
Occupied
at
12/31/2019
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)
San
Antonio
Houston
Houston
Phoenix
Phoenix
Houston
Phoenix
Houston
Houston
San
Antonio
Houston
Houston
Phoenix
Dallas
Phoenix
Phoenix
The Strand at Huebner Oaks
SugarPark Plaza
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:
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
2000
1974
1979
2000
1997
1978
2009
1978
1983
2012
1974
N/A
N/A
N/A
N/A
N/A
73,920
95,032
49,359
41,530
102,733
43,526
323,026
50,332
129,222
196,458
106,169
4,953,571
—
—
—
—
—
—
97%
100%
79%
82%
52%
100%
86%
88%
93%
97%
62%
90%
—
—
—
—
—
—
1,639
1,222
528
606
1,198
1,002
6,357
642
1,858
1,879
969
87,290
—
—
—
—
—
—
22.86
12.86
13.54
17.79
22.43
23.02
22.88
14.49
15.46
9.86
14.72
19.58
—
—
—
—
—
—
22.80
13.03
12.54
18.56
21.68
22.01
22.74
14.04
15.24
9.58
14.16
19.77
—
—
—
—
—
—
4,953,571
90% $
87,290
$
19.58
$
19.77
(1) Calculated as the tenant’s actual December 31, 2019 base rent (defined as cash base rents including abatements) multiplied by 12.
Excludes vacant space as of December 31, 2019. 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, 2019 equaled approximately $76,000 for the month ended December 31, 2019.
(2) Calculated as annualized base rent divided by gross leasable area leased as of December 31, 2019. Excludes vacant space as of
December 31, 2019.
(3) Represents (i) the contractual base rent for leases in place as of December 31, 2019, 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, 2019.
(4) As of December 31, 2019, these parcels of land were held for development and, therefore, had no gross leasable area.
21
31
Significant Tenants
The following table sets forth information about our 15 largest tenants as of December 31, 2019, based upon consolidated annualized
rental revenues at December 31, 2019.
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
Walgreens & Co. (3)
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
Original Ninfas LP
Austin,
Houston and
Phoenix
Houston
Houston
Houston
Houston and
Phoenix
Houston and
Phoenix
Phoenix
Austin
Houston and
Phoenix
Phoenix
Dallas
Phoenix
Houston
Phoenix
Houston
$
$
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
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
8/29/2018
2021, 2021,
2022, 2024,
2025 and 2034
2035
2024
2026
2022, 2027,
2049 and 2056
2020, 2022,
2023, 2024 and
2024
2024 and 2029
2027
2021, 2023,
2025, 2025 and
2027
2022 and 2023
2022
2030
2025
2023
2029
2,498
2,042
1,910
1,029
2.9%
2.3%
2.2%
1.2%
946
1.1%
917
848
690
628
565
483
466
442
427
395
14,286
1.0%
1.0%
0.8%
0.7%
0.6%
0.6%
0.5%
0.5%
0.5%
0.5%
16.4%
(1) Annualized Base Rental Revenues represents the monthly base rent as of December 31, 2019 for each applicable tenant multiplied by 12.
(2) As of December 31, 2019, 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 $1,047,000, 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 $43,000, 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 2025, 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 2021, was $425,000, which represents approximately 0.5% of
our total annualized base rental revenue.
32
22
(3) As of December 31, 2019, 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 $189,000, 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 0.3% of
our total annualized rental revenue.
(4) As of December 31, 2019, 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 2020, 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 $132,000, 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 2024, was
$38,000, 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 $719,000, 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, 2019, 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 $729,000, which represents approximately 0.8% of our total annualized base rental revenue.
(6) As of December 31, 2019, we had five leases with the same tenant occupying space at properties in Houston and Phoenix. The
annualized rental revenue for the lease that commenced on August 10, 1999, and is scheduled to expire in 2025, 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 2025, 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 $169,000, 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 $110,000, 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, 2019, 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 0.1% 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 $434,000, which represents approximately 0.5% of our total annualized base rental revenue.
23
33
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, 2019
Number of
Leases
Approximate
Square Feet
Percent of
Total
Amount
(in thousands)
Percent of
Total
408
222
203
164
182
83
31
30
21
25
1,369
779,390
607,382
678,521
497,112
676,861
380,917
203,577
177,173
107,029
177,331
4,285,293
15.7 % $
12.3 %
13.7 %
10.0 %
13.7 %
7.7 %
4.1 %
3.6 %
2.2 %
3.6 %
86.6% $
14,195
11,402
12,816
10,352
14,018
6,354
4,228
3,588
2,444
3,360
82,757
16.2 %
13.0 %
14.6 %
11.8 %
16.0 %
7.3 %
4.8 %
4.1 %
2.8 %
3.8 %
94.4%
Year
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
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.
On December 12, 2017, a property owner that owns a land parcel adjacent to a Whitestone property filed suit against Whitestone
Pinnacle of Scottsdale - Phase II, LLC (“Whitestone Pinnacle”) alleging breach of contract and resulting in the delay of the construction of
the their assisted living facility. In May 2019, the claimant amended their report of damages and seeks approximately $2.7 million in
restitution from Whitestone Pinnacle. The Company intends to vigorously defend the matter as it believes that these claims are without merit
and that it has substantial legal and factual defenses to the claims and allegations contained in the complaint.
We are a participant in various other 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.
34
24
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 February 28, 2020, we had
42,046,732 common shares of beneficial interest outstanding held by a total of 982 shareholders of record.
On February 28, 2020, the closing price of our common shares reported on the NYSE was $12.29 per share.
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, 2019, 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 2018 Long-Term
Equity Incentive Ownership Plan (the “2018 Plan”). The following table summarizes all of these repurchases during the three
months ended December 31, 2019.
Period
October 1, 2019 through October 31, 2019
November 1, 2019 through November 30, 2019
December 1, 2019 through December 31, 2019
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
— $
—
—
— $
—
—
—
—
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 2018 Plan. With
respect to these shares, the price paid per share is based on the fair market value at the time of tender.
25
35
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, 2014 to December 31, 2019. 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, 2014 and that all dividends were reinvested. The closing price of our
common shares on December 31, 2014 (on which the graph is based) was $15.11. 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.
36
26
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
Operating expenses
Interest expense
Gain on sale of property
Loss on disposal of assets
Interest, dividend and other investment income
Income from operations before equity investments in real estate
partnerships and income tax
Equity in earnings of real estate partnership
Provision for income tax
Profit sharing expense
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)
2019
2018
2017
2016
2015
$
119,251
$
119,863
$
125,959
$
104,437
$
93,416
85,305
26,285
(853)
215
(659)
8,958
15,076
(400)
—
86,391
25,177
(4,629)
82
(1,055)
13,897
8,431
(347)
—
93,299
23,651
(16)
183
(410)
9,252
—
(386)
(278)
23,634
21,981
8,588
—
594
24,228
545
—
—
21,981
550
—
—
8,588
254
80,471
19,239
(3,357)
96
(429)
8,417
—
(289)
(15)
8,113
—
—
8,113
182
71,408
14,910
—
185
(313)
7,226
—
(372)
—
6,854
11
—
6,865
116
Net income attributable to Whitestone REIT
$
23,683
$
21,431
$
8,334
$
7,931
$
6,749
27
37
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)
2019
2018
2017
2016
2015
0.54
—
0.54
0.52
—
0.52
$
$
$
$
0.22
—
0.22
0.22
—
0.22
$
$
$
$
0.26
—
0.26
0.26
—
0.26
$
$
$
$
0.25
—
0.25
0.24
—
0.24
938,938
$ 1,018,420
$
813,052
$
745,958
0.57
0.02
0.59
0.56
0.01
0.57
962,022
94,238
$
$
$
$
$
$
$
$
$
$
$
$
89,934
51,748
1,056,260
$ 1,028,872
$ 1,070,168
703,162
$
669,722
$
711,764
345,317
7,781
350,456
8,694
347,604
10,800
$
$
38,327
851,379
583,751
255,687
11,941
$
$
36,127
782,085
535,094
242,974
4,017
$
1,056,260
$ 1,028,872
$ 1,070,168
$
851,379
$
782,085
$
$
$
$
$
21,244
48,047
1.13
38,026
90%
4,859
19.58
$
$
$
$
$
— $
118,412
11,638
1.14
39,398
90%
4,925
18.81
$
$
$
$
231,120
1.13
35,039
88%
6,403
16.81
$
$
$
$
$
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
(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.”
38
28
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)
2019
2018
2017
2016
2015
$
23,683
$
21,431
$
8,334
$
7,931
$
6,749
Depreciation and amortization of real estate assets (2)
26,468
25,401
26,290
22,179
19,646
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 of assets and properties of discontinued operations, net
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)
2,362
(638)
(594)
2,903
(4,547)
—
(13,800)
(6,340)
545
550
—
167
—
—
254
—
(3,261)
—
—
182
—
185
—
—
116
FFO
$
38,026
$
39,398
$
35,045
$
27,031
$
26,696
(1) Includes pro rata share attributable to real estate partnership in 2019 and 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.
29
39
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.
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, 2019, we wholly-owned 58 commercial properties consisting of:
Consolidated Operating Portfolio
•
53 properties that meet our Community Centered Properties® strategy containing approximately 5.0 million
square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $943.6 million;
and
Redevelopment, New Acquisitions Portfolio
•
five parcels of land held for future development that meet our Community Centered Properties® strategy having
a total carrying amount of $18.4 million.
As of December 31, 2019, we had an aggregate of 1,400 tenants. We have a diversified tenant base with our largest
tenant comprising only 2.9% of our total revenues for the year ended December 31, 2019. 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 317 new and renewal
leases during 2019, totaling 952,780 square feet and $88.0 million in total lease value.
We employed 108 full-time employees as of December 31, 2019. 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, 2019, we, through our investment in Pillarstone OP, owned a majority interest in eight properties
that do not meet our Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the
“Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity
method. We also manage the day-to-day operations of Pillarstone OP.
How We Derive Our Revenue
Substantially all of our revenue is derived from rents received from leases at our properties. We had total revenues of
approximately $119,251,000 for the year ended December 31, 2019 as compared to $119,863,000 for the year ended
December 31, 2018, a decrease of $612,000, or 1%.
40
30
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 2020.
Scheduled Lease Expirations
We tend to lease space to smaller businesses that desire shorter term leases. As of December 31, 2019, approximately
28% of our GLA was subject to leases that expire prior to December 31, 2021. 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
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 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. In 2019,
31
41
Pillarstone OP, through an indirect wholly owned subsidiary, Whitestone Industrial-Office, LLC, sold another 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.
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, 2019, 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.
42
32
Property Acquisitions. On December 6, 2019, we acquired Las Colinas Village, a property that meets our Community
Centered Property® strategy, for $34.8 million in cash and net prorations. Las Colinas Village, a 104,919 square foot property,
was 86% leased at the time of purchase and is located in Irving, Texas.
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.
Leasing Activity
As of December 31, 2019, we wholly-owned 58 properties with 4,953,571 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,
2019:
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
202
46
248
707,320
79,177
786,497
4.0
5.0
4.1
$
$
1.60
9.22
2.37
$
$
17.66
22.20
18.12
$
$
17.34
21.86
17.80
10.2%
9.6%
10.1%
Number of
Leases Signed
GLA Signed
Weighted
Average Lease
Term (2)
TI and
Incentives per
Sq. Ft. (3)
Contractual Rent
Per Sq. Ft (4)
208
109
317
726,246
226,534
952,780
4.0
5.1
4.3
$
$
1.73
14.28
4.71
$
$
17.62
20.95
18.41
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.
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43
Capital Expenditures
The following is a summary of the Company’s capital expenditures, excluding property acquisitions, 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
2019
2018
$
$
4,989
$
4,041
2,568
4,213
15,811
$
4,622
4,142
2,113
2,874
13,751
44
34
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 combine lease and nonlease components in lease contracts, which includes combining base rent,
recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and
comprehensive income. Additionally, we have tenants who pay real estate taxes directly to the taxing authority. We exclude
these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property
operating expense.
Other property income primarily includes amounts recorded in connection with management fees and lease
termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and
administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly.
Revenues are governed by the Management Agreements (as defined in Note 5 to our accompanying consolidated financial
statements). Refer to Note 5 to our accompanying consolidated financial statements for additional information regarding the
Management Agreements with Pillarstone OP. Additionally, we recognize lease termination fees in the year that the lease is
terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point
in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.
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 years prior to December 31, 2017, Pillarstone OP was accounted for under the profit-sharing
method. In accordance with the FASB guidance applicable to sales of real estate or interests therein, specifically FASB ASC
360-20, “Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and
Losses from the Derecognition of Nonfinancial Assets,” we adopted Topic 606 and ASC 610 as of January 1, 2018, resulting in
the derecognition of the underlying assets and liabilities associated with the Contribution (defined below) as of January 1, 2018
and the recognition of the Company’s investment in Pillarstone OP under the equity method. See Note 5 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, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction),
are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed
portion, becomes available for occupancy. For the year ended December 31, 2019, approximately $500,000 and $320,000 in
interest expense and real estate taxes, respectively, were capitalized. For the year ended December 31, 2018, approximately
35
45
$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.
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, 2019.
Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant
reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges
under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment
history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic
conditions in the area where the property is located. With the adoption of ASC No. 842, Leases (“Topic 842”), as of January 1,
2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the
adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable.
Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method
of reporting rental revenue. As of December 31, 2019 and 2018, we had an allowance for uncollectible accounts of $11.2
million and $9.7 million, respectively. For the year ending December 31, 2019, we recorded an adjustment to rental revenue in
the amount of $1.5 million. For the year ending December 31, 2018 and 2017, we recorded bad debt expense in the amount of
$1.4 million and $2.3 million, respectively.
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.
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36
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, FASB ASC 740, “Income Taxes” (“ASC 740”) applies to the Texas Margin Tax. As
of December 31, 2019, 2018 and 2017, we recorded a margin tax provision of $0.4 million, $0.4 million and $0.4 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 $653.7 million and $618.6 million as compared to the book value of approximately
$645.9 million and $619.4 million as of December 31, 2019 and 2018, 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.
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. The fair value of the loan guarantee is $0.1 million and $0.3 million as compared to the book
value of approximately $0.1 million and $0.3 million as of December 31, 2019 and 2018, respectively.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of
December 31, 2019 and 2018. 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,
2019 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, 2019, 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 superseded most of the existing revenue recognition guidance. The standard also required an entity to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also required certain additional disclosures. This guidance
became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal
years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the
underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s
investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the
Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5 to our accompanying consolidated
financial statements for further details.
In February 2016, FASB issued ASU No. 2016-2 which provided the principles for the recognition, measurement,
presentation and disclosure of leases. Additional guidance and targeted improvements to Topic 842 were made through the
issuance of supplementary ASUs in July 2018, December 2018 and March 2019.
Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we
have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing
operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under
Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the
unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial
direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the
lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting
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guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $1.1 million, which represents
the present value of the remaining lease payments of approximately $1.2 million discounted using our incremental borrowing
rate of 4.5%, and (b) a right-of-use asset of approximately $1.1 million. The adoption of Topic 842 did not have a material
impact to our net income and related per share amounts.
Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach.
Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:
•
•
Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the
financial statements as well as leases that commenced after that date. Under this method, prior comparative periods
presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented,
a cumulative-effect adjustment is recognized at that date.
Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity
first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would
not be adjusted under this method.
We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the
date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will
not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to
amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-
effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the
new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented
in accordance with prior generally accepted accounting principles.
Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance
for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing
commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However,
Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-
term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases.
We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new
lease standards.
We elected a practical expedient which allows lessors to not separate non-lease components from the lease component
when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease
component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a
single line item, Rental, within the consolidated statements of operations and comprehensive income.
We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration
changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry
in which the tenant operates and economic conditions in the area where the property is located. Each tenant is included in one
of several portfolios and an allowance is calculated using the calculation methodology for the respective portfolio. With the
adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be
collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the
specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to
the straight-line method of reporting rental revenue.
In November 2016, the FASB issued guidance requiring that the statement of cash flows explain the change during the
period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
This guidance became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within
those fiscal years. We adopted this guidance effective January 1, 2018, and we have reconciled cash and cash equivalents and
restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported
restricted cash and restricted cash equivalents under cash flows from financing activities.
In January 2017, the FASB issued guidance clarifying the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of
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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, adding guidance for
partial sales of nonfinancial assets and clarifying recognizing gains and losses from the transfer of nonfinancial assets in
contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15,
2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning
January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1,
2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company
made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5 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, 2019, our cash provided from operating activities was $47,748,000 and our total
dividends and distributions paid were $46,682,000. Therefore, we had cash flow from operations in excess of distributions of
approximately $1,066,000. 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.
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 $15,643,000 at December 31, 2019, as compared to $13,786,000
at December 31, 2018. The increase of $1,857,000 was primarily the result of the following:
Sources of Cash
Cash flow from operations of $47,748,000 for the year ended December 31, 2019;
Proceeds of $100,000,000 from issuance of bonds pursuant to the Note Agreement (as defined below);
Proceeds from issuance of common shares, net of offering costs of $21,124,000;
Net cash provided from investing activities of discontinued operations of $594,000;
Net proceeds from financed receivable due from related party of $5,661,000;
•
•
•
•
•
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Uses of Cash
Payment of dividends and distributions to common shareholders and OP unit holders of $46,682,000;
Acquisitions of real estate of $34,804,000;
Additions to real estate of $13,243,000;
Payments of loan origination costs of $2,970,000;
Net payments of $66,700,000 to the 2019 Facility;
Payments of notes payable of $8,095,000; and
Repurchase of common shares of $776,000.
•
•
•
•
•
•
•
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Equity Offerings
On May 15, 2019, our new universal shelf registration statement on Form S-3 was declared effective by the SEC,
allowing us to offer up to $750 million in securities from time to time, including common shares, preferred shares, debt
securities, depositary shares and subscription rights.
On May 31, 2019, we entered into nine equity distribution agreements for an at-the-market equity distribution program
(the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the
Company’s common shares. Actual sales will depend on a variety of factors determined by us from time to time, including
(among others) market conditions, the trading price of our common shares, capital needs and our determinations of the
appropriate sources of funding for us, and were made in transactions that will be deemed to be “at the-market” offerings as
defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time
suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. For the
year ended December 31, 2019, we sold 1,612,389 common shares under the 2019 equity distribution agreements, with net
proceeds to us of approximately $21.2 million. In connection with such sales, we paid compensation of
approximately $324,000 to the sales agents.
We have used and anticipate using net proceeds from common shares issued pursuant to the 2019 equity distribution
agreements for general corporate purposes, which may include acquisitions of additional properties, the repayment of
outstanding indebtedness, capital expenditures, the expansion, redevelopment and/or re-tenanting of properties in our portfolio,
working capital and other general purposes.
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.
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December 31,
2019
2018
Debt
Debt consisted of the following as of the dates indicated (in thousands):
Description
Fixed rate notes
$10.5 million, 4.85% 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 1.35% to 1.90% Note, due October 30, 2022 (4)
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (5)
$80.0 million, 3.72% Note, due June 1, 2027
$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
$15.1 million 4.99% Note, due January 6, 2024
$2.6 million 5.46% Note, due October 1, 2023
$50.0 million, 5.09% Note, due March 22, 2029
$50.0 million, 5.17% Note, due March 22, 2029
$
9,260
$
—
—
100,000
165,000
80,000
—
19,000
18,616
13,482
14,243
14,409
2,386
50,000
50,000
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31,
2023 (6)
Total notes payable principal
Less deferred financing costs, net of accumulated amortization
109,500
645,896
(1,197)
644,699
$
$
9,500
50,000
50,000
100,000
—
80,000
5,657
19,000
18,996
13,718
14,300
14,643
2,430
—
—
241,200
619,444
(1,239)
618,205
(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 25, 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 4, 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 note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of 2.24%
for the duration of the term through January 31, 2024.
(6) Unsecured line of credit includes certain Pillarstone Properties as of December 31, 2018, in determining the amount of
credit available under the 2018 Facility which were released from collateral during 2019.
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LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied
to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is
discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether
such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of
LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and
work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can
provide no assurances regarding the impact of the discontinuation of LIBOR.
On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement
(the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary
Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively,
the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of
which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50
million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series
A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations
under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.
The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of
approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal
payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in
each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less
than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount.
The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with
respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In
addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is
required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions
of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including
limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other
restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating
Partnership’s existing senior revolving credit facility, including the following:
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges
ratio of 1.50 to 1.00;
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372
million plus 75% of the net proceeds from additional equity offerings (as defined therein).
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the
lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as
described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the
Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations
and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The
occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all
obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are
substantially similar to those contained in the Operating Partnership’s existing credit facility.
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Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and
will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the
United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes
were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019
Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson
Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson
Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated
the 2018 Facility (as defined below).
The 2019 Facility is comprised of the following three tranches:
•
•
•
$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term
Loan A, the “2019 Term Loans”).
Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of December 31, 2019, the interest rate
on the 2019 Revolver was 3.35%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the
2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime
commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the
Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the
principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus
1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve
Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal
Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in
the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for
newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest
rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to
such alternate interest rate.
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity by $200.0 million, upon the satisfaction of certain conditions. As of December 31, 2019, $374.5 million was drawn on
the 2019 Facility and our unused borrowing capacity was $140.5 million, assuming that we use the proceeds of the 2019
Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base.
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;
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44
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million
plus 75% of the net proceeds from additional equity offerings (as defined therein).
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility
contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information
reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes,
depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019
Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment,
breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major
indebtedness, change of control, bankruptcy and loss of REIT tax status.
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the
“2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and
Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured
revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the
2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to
the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•
•
•
•
extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “2018
Revolver”) to October 30, 2019 from November 7, 2018;
converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under
the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;
extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October
30, 2020 from February 17, 2017; and
extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and
together with Term Loan 1 and Term Loan 3, the “2018 Term Loans”) to January 29, 2021 from November 7, 2019.
Borrowings under the 2018 Facility accrued interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. The applicable margin for Adjusted LIBOR
borrowings ranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 Term Loans. Base Rate
means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or
more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in
an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c)
the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve
Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the
Board of Governors of the Federal Reserve System on eurocurrency liabilities.
Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt
repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working
capital.
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).
45
55
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, 2019, our $171.4 million in secured debt was collateralized by eight properties with a carrying
value of $270.4 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 in 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 and the Notes
contain similar tangible Net Worth covenants that reset at a new threshold and change the definition of Net Worth to add back
accumulated depreciation. However, we can make no assurances that we will be in compliance with these covenants or other
covenants under the 2019 Facility or the Notes in future periods or, if we are not in compliance, that we will be able to obtain a
waiver. As of December 31, 2019, we were in compliance with all loan covenants.
Scheduled maturities of our outstanding debt as of December 31, 2019 were as follows (in thousands):
Year
2020
2021
2022
2023
2024
Thereafter
Total
Amount Due
(in thousands)
$
$
10,951
1,611
101,683
137,363
228,573
165,715
645,896
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.
56
46
Contractual Obligations
As of December 31, 2019, 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 (2020)
1 - 3 years
(2021 -
2022)
3 - 5 years
(2023 -
2024)
More than
5 years
(after
2024)
Long-Term Debt - Principal
$ 645,896
$
10,951
$ 103,294
$ 365,936
$ 165,715
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
107,674
13,633
1,077
212
1,170
21,742
4,544
351
126
790
41,975
9,089
702
82
380
26,746
—
17,211
—
24
4
—
—
—
—
$ 769,662
$
38,504
$ 155,522
$ 392,710
$ 182,926
(1) As of December 31, 2019, we had one loan totaling $109.5 million which bore interest at a floating rate. The variable
interest rate payments are based on LIBOR plus 1.40% to LIBOR plus 1.90%, which reflects our new interest rates under
our 2019 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, 2019, of 1.76%.
(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, 2019 balance of $374.5 million.
47
57
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.
During 2019, we paid distributions to our common shareholders and OP unit holders of $46.7 million, compared to
$46.1 million in 2018. 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, 2019 and 2018:
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
2019
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
$
$
$
$
0.2850
0.2850
0.2850
0.2850
1.1400
$
$
11,580
11,430
11,316
11,301
45,627
$
$
0.2850
0.2850
0.2850
0.2850
1.1400
$
$
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
$
262
264
265
264
1,055
265
286
295
309
1,155
$
$
$
$
11,842
11,694
11,581
11,565
46,682
11,567
11,580
11,498
11,454
46,099
58
48
Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table provides a general comparison of our results of operations for the years ended December 31, 2019
and 2018 (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
Total revenues
Total operating expenses
Total other expense
Income from operations before equity investments in real estate partnerships and
income tax
Equity in earnings of real estate partnership
Provision for income taxes
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,
2019
58
4,848,652
90%
90%
2018
57
4,841,660
90%
90%
$
119,251
$
119,863
85,305
24,988
8,958
15,076
(400)
23,634
594
24,228
545
23,683
38,026
44,935
88,578
46,682
1.1400
$
$
$
86,391
19,575
13,897
8,431
(347)
21,981
—
21,981
550
21,431
39,398
48,778
89,949
46,099
1.1400
$
$
$
(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.
49
59
We define “Same Stores” as properties that have been owned for the entire period being compared. For purposes of
comparing the the year ended December 31, 2019 to the the year ended December 31, 2018, Same Stores include properties
owned during the entire period from January 1, 2018 to December 31, 2019. 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.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
Revenue
2019
2018
Change
% Change
Year Ended December 31,
Same Store
Rental revenues (1)
Recoveries(2)
Bad debt(3)
Total rental
Other revenues (4)
Same Store Total
Non-Same Store and Management Fees
Rental revenues
Recoveries
Bad debt
Total rental (5)
Other revenues
Management fees (6)
Non-Same Store and Management Fees Total
$
86,555
$
86,046
$
509
1 %
31,670
(1,461)
116,764
1,286
118,050
196
77
(23)
250
96
855
1,201
30,588
—
116,634
1,387
118,021
598
232
—
830
4
1,008
1,842
4 %
1,082
(1,461) Not meaningful
0 %
(7)%
130
(101)
29
0 %
(402)
(67)%
(155)
(67)%
(23) Not meaningful
(580)
(70)%
92 Not meaningful
(153)
(641)
(15)%
(35)%
Total revenue
$
119,251
$
119,863
$
(612)
(1)%
(1) The Same Store tenant rent increase of $509,000 resulted from a decrease of $324,000 from the decrease in the average
leased square feet to 4,382,812 from 4,399,134, offset by increase of $833,000 from the average rent per leased square foot
increasing from $19.56 to $19.75.
(2) The Same Store recoveries revenue increase of $1,082,000 is primarily attributable to increases in Same Store real estate
taxes and property maintenance costs.
(3) Same Store bad debt of $1,461,000 is included as a reduction of revenue for the year ended December 31, 2019. Prior to
our adoption of Topic 842 in 2019, we recognized bad debt in total operating expenses. For the year ended December 31,
2018, the Same Store bad debt expense recognized in total operating expenses was $1,466,000. No bad debt expense is
recognized in total operating expenses for 2019.
(4) The decrease in Same Store other revenues is primarily comprised of decreased lease termination fees.
(5) Non-Same Store total rental revenue for the year ended December 31, 2019 was primarily generated from our acquisition
of the Las Colinas Village property on December 6, 2019. Non-Same Store total rental revenue for the year ended
December 31, 2018 was generated from the Torrey Square and Bellnott Square properties prior to their sales during 2018.
Please refer to Note 4 (Real Estate) to the accompanying consolidated financial statements for more information regarding
the property acquisitions and property sales.
(6) On December 27, 2018, Pillarstone OP, through an indirect wholly owned subsidiary, Whitestone Industrial-Office, LLC,
sold a portfolio of three properties. The decrease in management fees is primarily due to less properties under
management.
60
50
Operating expenses. The primary components of operating expenses for the year ended December 31, 2019 and 2018
are detailed in the table below (in thousands, except percentages):
Operating Expenses
2019
2018
Change
% Change
Year Ended December 31,
Same Store
Operating and maintenance, excluding bad debt
Bad debt (1)
Real estate taxes
Same Store total
Non-Same Store and affiliated company rents
Operating and maintenance
Real estate taxes (2)
Affiliated company rents (3)
Non-Same Store and affiliated company rents
total
$
19,655
$
18,672
$
—
16,245
35,900
143
48
813
1,466
16,146
36,284
131
216
800
1,004
1,147
983
(1,466)
99
(384)
12
(168)
13
(143)
Depreciation and amortization
26,740
25,679
1,061
General and administrative (4)
21,661
23,281
(1,620)
Total operating expenses
$
85,305
$
86,391
$
(1,086)
5 %
(100)%
1 %
(1)%
9 %
(78)%
2 %
(12)%
4 %
(7)%
(1)%
(1) Prior to our adoption of Topic 842 in 2019, we recorded an allowance for bad debt as a component of operating and
maintenance expense. Subsequent to the adoption of Topic 842, we included the impact of tenant allowances as a
reduction of revenue. Bad debt expense was $1,466,000 for the year ended December 31, 2018, and for the year ended
December 31, 2019, we recorded a $1,461,000 reduction to Same Store revenue for tenant rent allowances.
(2) Non-Same Store real estate tax expense for the year ended December 31, 2019 resulted from our acquisition of our Las
Colinas Village property on December 6, 2019. Non-Same Store real estate tax expense for the year ended December 31,
2018 was incurred from the Torrey Square and Bellnott Square properties prior to their sales during 2018. Please refer to
Note 4 (Real Estate) to the accompanying consolidated financial statements for more information regarding the property
acquisitions and property sales.
(3) Affiliated company rents are spaces that we lease from Pillarstone OP.
(4) The general and administrative expense decrease was attributable to a $2,534,000 reduction in professional fees and other
expenses incurred in connection with our 2018 Annual Meeting of Shareholders and a $275,000 decrease in share-based
compensation expense, offset by increases of $812,000 in legal fees, $171,000 of salaries and benefits, net of allocated
costs, and $206,000 in other general and administrative expenses. Please refer to Note 17 (Commitments and
Contingencies) and Note 15 (Incentive Share Plan) to the accompanying consolidated financial statements for more
information regarding legal fees and share-based compensation expense.
51
61
Other expenses (income). The primary components of other expenses (income) for the year ended December 31, 2019
and 2018 are detailed in the table below (in thousands, except percentages):
Other Expenses (Income)
2019
2018
Change
% Change
Year Ended December 31,
Interest expense (1)
Gain on sale of properties (2)
Loss on sale or disposal of assets
Interest, dividend and other investment income (3)
Total other expense
$
$
26,285
(853)
215
(659)
24,988
$
$
25,177
(4,629)
82
(1,055)
19,575
$
$
1,108
3,776
133
396
5,413
4 %
(82)%
162 %
(38)%
28 %
(1) The $1,108,000 increase in interest expense is attributable to an increase in our effective interest rate to 4.02% for the year
ended December 31, 2019 as compared to 3.89% for the year ended December 31, 2018, resulting in a $844,000 increase
in interest expense, and an increase in our average outstanding notes payable balance of $6,733,000 that resulted in
$262,000 in increased interest expense. Amortization of loan fees increased interest expense by $2,000 for the year ended
December 31, 2019 as compared to the year ended December 31, 2018.
(2) During the year ended December 31, 2019, we received an $0.8 million principal payment in connection with the sale of
two retail buildings we completed on November 29, 2016. In 2016, we provided seller-financing for the retail buildings,
Webster Pointe and Centre South, and deferred a $1.7 million gain until principal payments on the seller-financed loan are
received. The purchaser of the retail buildings sold the Webster Pointe property on November 15, 2019 and paid the entire
principal balance of the loan related to Webster Pointe. As of December 31, 2019, we had a total of $2.7 million in deferred
gains for seller-financed loans to be recognized upon receipt of principal payments. The $2.7 million in deferred gains
includes amounts from the sale for Centre South discussed above and amounts from the sales of Royal Crest and
Featherwood discussed below.
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. 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 or Torrey Square in
discontinued operations as neither property sale meets the definition of discontinued operations. Please refer to Note 4
(Real Estate) to the accompanying consolidated financial statements for more information regarding the property sales.
(3) The $396,000 decrease in interest, dividend and other investment income was primarily comprised of a $411,000 decrease
in interest income from our financed receivable from Pillarstone OP. As of December 31, 2019, the balance of the financed
receivable from Pillarstone OP was paid off, and we do not expect to receive any interest income from financed receivables
with Pillarstone OP in 2020.
Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated
from our 81.4% ownership of Pillarstone OP, increased $6,645,000 from $8,431,000 for the year ended December 31, 2018 to
$15,076,000 for the year ended December 31, 2019. Please refer to Note 5 (Investment in Real Estate Partnership) to the
accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.
Gain on sale of property from discontinued operations. During the year ended December 31, 2019, we received a $0.7
million principal payment in connection with the sale of three office buildings we completed on December 31, 2014. In 2014,
we provided seller-financing for the office buildings, Zeta, Royal Crest and Featherwood, and deferred a $2.5 million gain until
principal payments on the seller-financed loan are received. The purchaser of the office buildings sold Zeta on April 24, 2019
and paid the entire principal balance of the loan related to Zeta. As of December 31, 2019, we had a total of $2.7 million in
deferred gains for seller-financed loans to be recognized upon receipt of principal payments. The $2.7 million in deferred gains
includes amounts from the sale for Royal Crest and Featherwood discussed above and amounts from the sale of Centre South
that was completed in November 2016.
.
62
52
Same Store net operating income. The components of Same Store net operating income is detailed in the table below
(in thousands):
Year Ended
December 31,
2019
2018
Increase % Increase
(Decrease)
(Decrease)
Same Store (51 properties, excluding development land)
Property revenues
Rental
Management, transaction and other fees
Total property revenues
$ 116,764
$ 116,634
$
1,286
1,387
118,050
118,021
Property expenses
Property operation and maintenance
Real estate taxes
Total property expenses
19,655
16,245
35,900
20,138
16,146
36,284
130
(101)
29
(483)
99
(384)
Total property revenues less total property expenses
82,150
81,737
413
Same Store straight line rent adjustments
Same Store amortization of above/below market rents
Same Store lease termination fees
(1,110)
(761)
(576)
(2,125)
(1,018)
(729)
1,015
257
153
— %
(7)%
— %
(2)%
1 %
(1)%
1 %
(48)%
(25)%
(21)%
Same Store NOI(1)
$
79,703
$
77,865
$
1,838
2 %
(1) See below for a reconciliation of property net operating income to net income.
53
63
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 assets and properties of continuing operations, net
Gain on sale of assets and properties of discontinued operations, net
Management fee, net of related expenses
Loss on disposal of assets and properties of continuing operations, net
NOI of real estate partnership (pro rata)
Net income attributable to noncontrolling interests
NOI
Non-Same Store NOI (1)
NOI of real estate partnership (pro rata)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
Same Store straight line rent adjustments
Same Store amortization of above/below market rents
Same Store lease termination fees
Same Store NOI (2)
Year Ended December 31,
2019
2018
$
23,683
$
21,661
26,740
(15,076)
26,285
(659)
400
(853)
(594)
(42)
215
6,273
545
88,578
(155)
(6,273)
82,150
(1,110)
(761)
(576)
79,703
$
$
$
$
21,431
23,281
25,679
(8,431)
25,177
(1,055)
347
(4,629)
—
(208)
82
7,725
550
89,949
(487)
(7,725)
81,737
(2,125)
(1,018)
(729)
77,865
(1) We define “Non-Same Stores” as properties that have been acquired since the beginning of the period being compared and
properties that have been sold, but not classified as discontinued operations. For purposes of comparing the twelve months
ended December 31, 2019 to the twelve months ended December 31, 2018, Non-Same Stores include properties acquired
between January 1, 2018 and December 31, 2019 and properties sold between January 1, 2018 and December 31, 2019, but
not included in discontinued operations.
(2) We define “Same Stores” as properties that have been owned during the entire period being compared. For purposes of
comparing the twelve months ended December 31, 2019 to the twelve months ended December 31, 2018, Same Stores
include properties owned before January 1, 2018 and not sold before December 31, 2019. Straight line rent adjustments,
above/below market rents, and lease termination fees are excluded.
64
54
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
Total revenues
Total operating expenses
Total other expense
Income before equity investments in real estate partnerships, income tax, and profit
sharing expense
Equity in earnings of real estate partnership
Provision for income taxes
Profit sharing expense
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%
91%
90%
$
119,863
$
125,959
86,391
19,575
13,897
8,431
(347)
—
21,981
550
21,431
39,398
48,778
89,949
46,099
1.1400
$
$
$
93,299
23,408
9,252
—
(386)
(278)
8,588
254
8,334
35,045
47,096
83,849
41,713
1.1400
$
$
$
(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.
55
65
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.
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.
Operating and maintenance and real estate taxes. Our operating and maintenance and real estate tax 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%. Operating and maintenance and real estate tax 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. Operating and
maintenance and real estate tax 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 operating and maintenance and real
estate tax expenses, Same Store operating and maintenance and real estate tax expenses and Non-Same Store operating and
maintenance and real estate tax expenses are detailed in the tables below (in thousands):
Overall Operating Maintenance and Real Estate
Tax Expenses
Year Ended December 31,
2018
2017
$
$
$
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
Same Store Operating Maintenance and Real
Estate Tax Expenses
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
16,362
4,470
7,017
3,900
1,391
4,291
37,431
$
$
17,897
5,514
7,186
5,052
2,356
4,105
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,
2018
2017
Increase
(Decrease)
% Increase
(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 %
— %
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56
Non-Same Store Operating Maintenance and Real
Estate Tax Expenses
Year Ended December 31,
2018
2017
Increase
(Decrease)
% Increase
(Decrease)
Real estate taxes
Utilities
Contract services
Repairs and maintenance
Bad debt
Labor and other
Total
$
3,109
$
2,273
$
654
1,415
329
30
1,100
417
764
309
100
239
836
237
651
20
(70)
861
$
6,637
$
4,102
$
2,535
37 %
57 %
85 %
6 %
(70)%
360 %
62 %
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.
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
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67
Other expenses. Our other expenses were $19,575,000 for the year ended December 31, 2018, as compared to
$23,408,000 for the year ended December 31, 2017, a decrease of $3,833,000, or 16%. The primary components of other
expenses, net are detailed in the table below (in thousands):
Interest expense
Gain on sale of properties
Loss on sale or disposal of assets
Interest, dividend and other investment income
Total other expenses
Year Ended December 31,
Increase % Increase
2018
2017
(Decrease)
(Decrease)
25,177
$
23,651
$
1,526
6 %
(4,629)
82
(1,055)
19,575
$
(16)
183
(410)
23,408
$
(4,613)
(101)
(645)
(3,833)
Not
Meaningful
(55)%
157 %
(16)%
$
$
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.
Gain on sale of properties. 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. 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 or Torrey Square in discontinued operations as neither property sales meets the definition of discontinued operations.
Please refer to Note 4 (Real Estate) to the accompanying consolidated financial statements for more information regarding the
property sales.
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.
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.
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58
Same Store net operating income. The components of Same Store net operating income is detailed in the table below
(in thousands):
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
Year Ended December 31,
2018
2017
Increase
(Decrease
)
%
Increase
(Decrease
)
$
72,454
$
26,130
98,584
16,741
13,253
29,994
$
$
71,987
24,746
96,733
467
1,384
1,851
17,801
13,032
30,833
(1,060)
221
(839)
1 %
6 %
2 %
(6)%
2 %
(3)%
Total property revenues less total property expenses
68,590
65,900
2,690
4 %
Same Store straight line rent adjustments
Same Store amortization of above/below market rents
Same Store lease termination fees
(1,168)
(172)
(595)
(2,264)
(365)
(537)
1,096
193
(58)
(48)%
(53)%
11 %
Same Store NOI(1)
$
66,655
$
62,734
$
3,921
6 %
(1) See below for a reconciliation of property net operating income to net income.
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69
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 assets and properties of continuing operations, net
Management fee, net of related expenses
Profit sharing expense
Loss on disposal of assets and properties of continuing operations, net
NOI of real estate partnership (pro rata)
Net income attributable to noncontrolling interests
NOI
Non-Same Store NOI (1)
Pillarstone OP properties NOI
NOI of real estate partnership (pro rata)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
Same Store straight line rent adjustments
Same Store amortization of above/below market rents
Same Store lease termination fees
Same Store NOI (2)
Year Ended December 31,
2018
2017
$
21,431
$
23,281
25,679
(8,431)
25,177
(1,055)
347
(4,629)
(208)
—
82
7,725
550
89,949
(13,634)
—
(7,725)
68,590
(1,168)
(172)
(595)
66,655
$
$
$
$
8,334
23,949
27,240
—
23,651
(410)
386
(16)
—
278
183
—
254
83,849
(9,683)
(8,266)
—
65,900
(2,264)
(365)
(537)
62,734
(1) We define “Non-Same Stores” as properties that have been acquired since the beginning of the period being compared and
properties that have been sold, but not classified as discontinued operations. For purposes of comparing the twelve months
ended December 31, 2018 to the twelve months ended December 31, 2017, Non-Same Stores include properties acquired
between January 1, 2017 and December 31, 2018 and properties sold between January 1, 2017 and December 31, 2018, but
not included in discontinued operations.
(2) We define “Same Stores” as properties that have been owned during the entire period being compared. For purposes of
comparing the twelve months ended December 31, 2018 to the twelve months ended December 31, 2017, Same Stores
include properties owned before January 1, 2017 and not sold before December 31, 2018. Straight line rent adjustments,
above/below market rents, and lease termination fees are excluded.
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60
Reconciliation of Non-GAAP Financial Measures
Funds From Operations (NAREIT) (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to
common shareholders computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains
or losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of
certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of
depreciable real estate held by the entity. We calculate FFO in a manner consistent with the NAREIT definition and also
include adjustments for our unconsolidated real estate partnership.
Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain
limitations associated with using GAAP net income (loss) alone as the primary measure of our operating performance.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real
estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market
conditions, management believes that the presentation of operating results for real estate companies that use historical cost
accounting is insufficient by itself. In addition, securities analysts, investors and other interested parties use FFO as the
primary metric for comparing the relative performance of equity REITs.
FFO should not be considered as an alternative to net income or other measurements under GAAP, as an indicator of
our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.
Although our calculation of FFO is consistent with that of NAREIT, there can be no assurance that FFO presented by us is
comparable to similarly titled measures of other REITs.
Funds From Operations Core (“FFO Core”)
Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items
that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period
performance. These items include, but are not limited to, legal settlements, proxy contest fees, debt extension costs, non-cash
share-based compensation expense, rent support agreement payments received from sellers on acquired assets, management
fees from Pillarstone and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to
exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not
indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure
for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified
FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of
other REITs.
61
71
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 on disposal of assets and properties of continuing operations, net
Gain on sale of assets and properties of discontinued operations, net
(Gain) loss 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,
2018
2017
2019
$
23,683
$
21,431
$
8,334
26,468
25,401
26,290
2,362
(638)
(594)
(13,800)
545
38,026
6,483
—
426
—
44,935
$
$
$
$
$
$
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
(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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62
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 assets and properties of continuing operations, net
Gain on sale of assets and properties of discontinued operations, net
Management fee, net of related expenses
Profit sharing expense
Loss on disposal of assets and properties of continuing operations, net
NOI of real estate partnership (pro rata)
Net income attributable to noncontrolling interests
NOI
Taxes
Year Ended December 31,
2019
2018
2017
$
23,683
$
21,431
$
8,334
21,661
26,740
(15,076)
26,285
(659)
400
(853)
(594)
(42)
—
215
6,273
545
88,578
$
23,281
25,679
(8,431)
25,177
(1,055)
347
(4,629)
—
(208)
—
82
7,725
550
89,949
$
23,949
27,240
—
23,651
(410)
386
(16)
—
—
278
183
—
254
83,849
$
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 to the accompanying consolidated financial statements for
information related to our guarantees of our real estate partnership’s debt as of December 31, 2019 and 2018.
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73
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, 2019, $536.4 million, or approximately 83%, 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, 2019 of approximately 4.1% per annum with expirations ranging from 2020 to 2029
(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 $21.6 million decline or increase, respectively, in the fair value for our fixed
rate debt.
Variable Interest Rate Debt
As of December 31, 2019, $109.5 million, or approximately 17%, of our outstanding debt was subject to floating
interest rates of LIBOR plus 1.40% to 1.90% 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 $1.1 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.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, as of December 31, 2019, an evaluation was
performed under the supervision and with the participation of the Company's management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management
reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the CEO and
CFO concluded that as of December 31, 2019, these disclosure controls and procedures were effective and designed to ensure
that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported
on a timely basis. In designing and evaluating disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. Management is required to apply judgment in evaluating the cost-benefit relationship of possible controls
and procedures. 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 CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure.
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64
Our management, under the supervision and with the participation of our CEO and CFO, 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 CEO and CFO concluded that,
as of December 31, 2018, our disclosure controls and procedures were not effective as of December 31, 2018 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.
Previously Identified Material Weakness
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 concluded that, as of December 31, 2018, our
internal control over financial reporting was not effective. This material weakness was remediated as of June 30, 2019.
Remediation of Material Weakness in Internal Control over Financial Reporting
We completed and tested the following remediation efforts during the first and second quarters of 2019 with:
•
•
•
•
•
The formation and implementation of a disclosure review committee, including outside technical advisors, the Chief
Financial Officer, accounting staff, and other members of management. The committee meets 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. The committee met twice and reviewed its work with the Audit
Committee prior to filing of the Quarterly Report on Form 10-Q for the three months ended March 31, 2019 and met
once and reviewed its work with the Audit Committee prior to the filing of the Quarterly Report on Form 10-Q for the
three and six months ended June 30, 2019.
Enhancements to our internal controls regarding the adoption of new accounting pronouncements, including quarterly
review of new accounting pronouncements with the Audit Committee and a discussion of key judgment areas.
Engagement of outside technical experts to assist the Company in the application and adoption of new accounting
pronouncements.
Completion of training of accounting personnel.
The hiring of additional qualified accounting staff.
As a result of the implementation of the remediation efforts above and based on our evaluation of our disclosure
controls and procedures as of December 31, 2019, our principal executive and principal financial officer concluded that, as of
such date, our disclosure controls and procedures were effective.
65
75
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.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the Company’s quarter
ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting other than the remediation of material weakness discussed above.
Item 9B. Other Information.
None.
76
66
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 2020 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 2020 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, 2019:
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) $
—
— $
—
—
—
1,792,528 (2)
— (3)
1,792,528
Plan Category
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
(1) Excludes 1,135,172 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”) and 1,575,418 common shares granted
pursuant to our 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”).
(2) At our annual meeting of shareholders on May 11, 2017, our shareholders voted to approve 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 2020 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 2020 Annual Meeting of Shareholders.
67
77
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 2020 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.
78
68
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 2, 2020
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 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
/s/ James C. Mastandrea
James C. Mastandrea, Chairman and CEO
(Principal Executive Officer)
/s/ David K. Holeman
David K. Holeman, Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
/s/ Nandita Berry
Nandita Berry, Trustee
/s/ Jeffrey A. Jones
Jeffrey A. Jones, Trustee
/s/ Donald F. Keating
Donald F. Keating, 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
74
79
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80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31,
2019, 2018 and 2017
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
Schedule III – Real Estate and Accumulated Depreciation
Page
82
84
86
89
91
93
126
127
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.
F- 1
81
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the years in the three year period ended December 31, 2019, 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, 2019, 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 2, 2020, expressed an unqualified 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 2, 2020
82
F- 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Whitestone REIT:
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, 2019, 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, the Company has maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-
Integrated Framework (2013) issued by COSO.
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 2, 2020, 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.
/s/ Pannell Kerr Forster of Texas, P.C.
We have served as the Company’s auditors since 2002.
Houston, Texas
March 2, 2020
F- 3
83
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
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, legal fees and loan costs
Prepaid expenses and other assets(1)
LIABILITIES AND EQUITY
Total assets
Liabilities:
Notes payable
Accounts payable and accrued expenses(2)
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, 2019 and December 31, 2018
Common shares, $0.001 par value per share; 400,000,000 shares authorized;
41,492,117 and 39,778,029 issued and outstanding as of December 31, 2019 and
December 31, 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive gain (loss)
Total Whitestone REIT shareholders' equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
$
$
$
December 31,
2019
2018
$
1,099,955
(137,933)
962,022
1,052,238
(113,300)
938,938
$
$
34,097
15,530
113
8,388
22,854
477
—
8,960
3,819
1,056,260
644,699
39,336
307
6,617
12,203
703,162
—
—
41
554,816
(204,049)
(5,491)
345,317
7,781
353,098
26,236
13,658
128
8,211
21,642
394
5,661
6,698
7,306
1,028,872
618,205
33,729
58
6,130
11,600
669,722
—
—
39
527,662
(181,361)
4,116
350,456
8,694
359,150
$
1,056,260
$
1,028,872
See the accompanying notes to consolidated financial statements.
84
F- 4
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
(1) Operating lease right of use assets (net) (related to adoption of Topic 842)
(2) Operating lease liabilities (related to adoption of Topic 842)
December 31,
2019
2018
$
$
1,328
1,331
N/A
N/A
See accompanying notes to consolidated financial statements.
F- 5
85
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands)
Revenues
Rental(1)
Management, transaction, and other fees
Total revenues
Operating expenses
Depreciation and amortization
Operating and maintenance
Real estate taxes
General and administrative(2)
Total operating expenses
Other expenses (income)
Interest expense
Gain on sale of properties
Loss on sale or disposal of assets
Interest, dividend and other investment income
Total other expense
Year Ended December 31,
2019
2018
2017
$ 117,014
$ 117,464
$ 124,792
2,237
2,399
1,167
119,251
119,863
125,959
26,740
20,611
16,293
21,661
85,305
26,285
(853)
215
(659)
24,988
25,679
21,069
16,362
23,281
86,391
25,177
(4,629)
82
(1,055)
19,575
27,240
24,213
17,897
23,949
93,299
23,651
(16)
183
(410)
23,408
Income before equity investments in real estate partnerships and income tax
8,958
13,897
9,252
Equity in earnings of real estate partnership
Provision for income tax
Profit sharing expense
Income from continuing operations
Gain on sale of property from discontinued operations
Income from discontinued operations
Net income
15,076
(400)
—
23,634
594
594
8,431
(347)
—
21,981
—
—
—
(386)
(278)
8,588
—
—
24,228
21,981
8,588
Less: Net income attributable to noncontrolling interests
545
550
254
Net income attributable to Whitestone REIT
$
23,683
$
21,431
$
8,334
See the accompanying notes to consolidated financial statements.
86
F- 6
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Basic Earnings Per Share:
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
Diluted Earnings Per Share:
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
Weighted average number of common shares outstanding:
Basic
Diluted
Consolidated Statements of Comprehensive Income
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
0.57
0.02
$
0.54
0.00
0.22
0.00
0.59
$
0.54
$
0.22
$
0.56
0.01
$
0.52
0.00
0.22
0.00
0.57
$
0.52
$
0.22
40,184
41,462
39,274
40,612
35,428
36,255
Net income
$
24,228
$
21,981
$
8,588
Other comprehensive gain (loss)
Unrealized gain (loss) on cash flow hedging activities
Unrealized gain on available-for-sale marketable securities
(9,828)
—
1,192
18
2,022
118
Comprehensive income
14,400
23,191
10,728
Less: Net income attributable to noncontrolling interests
Less: Comprehensive gain (loss) attributable to noncontrolling interests
545
(221)
550
30
254
63
Comprehensive income attributable to Whitestone REIT
$
14,076
$
22,611
$
10,411
See the accompanying notes to consolidated financial statements.
F- 7
87
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2018
2017
2019
(1) Rental
Rental revenues
Recoveries
Bad debt
Total rental
$
86,750
$
86,644
$
94,568
31,748
(1,484)
$ 117,014
30,820
N/A
30,224
N/A
$ 117,464
$ 124,792
(2) Bad debt included in operating and maintenance expenses prior to adoption of
Topic 842
N/A $
1,391
$
2,340
See accompanying notes to consolidated financial statements.
88
F- 8
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, 2016
29,468
$
29
$
396,494
$
(141,695) $
859
$
255,687
1,103
$
11,941
$ 267,628
Exchange of noncontrolling
interest OP units for common
shares
Issuance of common shares under
dividend reinvestment plan
Issuance of common shares -
ATM Program, net of offering
costs
Issuance of common shares -
overnight offering, net of
offering 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
19
9
1,324
8,019
(324)
707
—
—
—
—
—
Balance, December 31, 2017
39,222
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
$
—
—
1
8
—
—
—
—
—
—
—
38
—
38
1
—
—
—
—
—
—
—
—
—
39
206
127
18,516
99,887
(4,339)
10,410
—
—
—
13
—
—
—
—
—
—
—
(43,323)
—
—
—
8,334
—
—
—
—
—
—
—
206
127
18,517
99,895
(4,339)
10,410
(43,323)
1,962
1,962
115
—
—
115
13
8,334
—
—
—
—
—
—
—
—
—
—
(19)
(206)
—
127
—
—
18,517
—
—
—
99,895
(4,339)
10,410
(1,239)
(44,562)
60
2,022
3
118
(13)
254
—
8,588
521,314
(176,684)
2,936
347,604
1,084
10,800
358,404
—
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
See the accompanying notes to consolidated financial statements.
F- 9
89
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
Exchange of noncontrolling
interest OP units for common
shares
Issuance of common shares under
dividend reinvestment plan
Issuance of common shares -
ATM Program, net of offering
costs
Exchange offer costs
Repurchase of common shares (2)
Share-based compensation
Distributions
Unrealized loss on change in fair
value of cash flow hedge
Net income
10
1,612
—
(65)
137
—
—
—
20
$
— $
186
$
— $
— $
137
21,244
(120)
(776)
6,483
—
—
—
—
—
—
—
—
(46,371)
—
23,683
—
—
—
—
—
—
(9,607)
—
—
2
—
—
—
—
—
—
41
186
137
21,246
(120)
(776)
6,483
(46,371)
(9,607)
23,683
(20) $
(186) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
137
21,246
(120)
(776)
6,483
(1,051)
(47,422)
(221)
545
(9,828)
24,228
Balance, December 31, 2019
41,492
$
$
554,816
$
(204,049) $
(5,491) $
345,317
909
$
7,781
$ 353,098
(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, 2019, 2018 and 2017, 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.
90
F- 10
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income from continuing operations
Net income from discontinued operations
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
Gain on sale or disposal of assets and properties
Bad debt
Share-based compensation
Equity in earnings of real estate partnership
Changes in operating assets and liabilities:
Escrows and acquisition deposits
Accrued rents and accounts receivable
Receivable due from (to) related party
Distributions from real estate partnership
Unamortized lease commissions, legal fees and loan costs
Prepaid expenses and other assets
Accounts payable and accrued expenses
Payable due to (from) 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 (used in) investing activities
Net cash provided by investing activities of discontinued operations
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
Proceeds from bonds payable
Net proceeds from (payments of) 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
Cash, cash equivalents and restricted cash at end of period (1)
(1)
For a reconciliation of cash, cash equivalents and restricted cash, see supplemental disclosures below.
Year Ended December 31,
2018
2019
2017
$
23,634
$
21,981
$
8,588
594
24,228
26,740
1,095
—
—
(638)
1,484
6,483
—
21,981
25,679
1,092
—
20
(4,547)
1,391
6,741
(15,076)
(8,431)
(177)
(2,998)
(83)
6,926
(1,824)
(4,163)
5,609
249
487
47,748
(295)
(1,893)
610
1,324
(1,676)
1,175
(2,429)
(1,621)
436
39,557
—
8,588
27,240
1,283
508
91
167
2,340
10,410
—
(3,570)
(5,430)
—
—
(2,299)
168
1,337
—
565
41,398
(34,804)
(13,243)
—
(125,468)
(11,638)
(17,575)
—
5,661
—
—
12,574
9,812
—
30
26
—
(2,394)
513
(42,386)
10,778
(144,898)
594
—
—
(45,627)
(1,055)
21,244
(120)
100,000
(66,700)
(8,095)
(2,970)
(776)
(4,099)
1,857
13,786
(44,944)
(1,155)
—
(126)
—
9,000
(2,543)
(30)
(1,961)
(41,759)
8,576
5,210
$
15,643
$
13,786
$
(40,472)
(1,241)
118,412
—
—
45,600
(11,543)
(695)
(4,339)
105,722
2,222
2,988
5,210
91
Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures
(in thousands)
Year Ended December 31,
2019
2018
2017
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
Debt issued with acquisitions of real estate
Property received as termination fee
Cash, cash equivalents and restricted cash
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
$
$
$
$
$
$
$
$
$
$
$
$
$
25,360
396
234
1,238
137
186
$
$
$
$
$
$
— $
24,610
304
937
1,273
133
1,546
18
(9,828) $
1,192
$
$
$
$
$
$
$
$
$
22,541
337
1,036
1,115
127
206
118
2,022
13
— $
— $
— $
15
— $
80,000
250
$
—
December 31,
2019
2018
2017
15,530
113
15,643
$
$
13,658
128
13,786
$
$
5,005
205
5,210
See the accompanying notes to consolidated financial statements.
92
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019, 2018 and 2017, we
owned 58, 57, and 73 commercial properties, respectively, in and around Austin, Chicago, Dallas-Fort Worth, Houston,
Phoenix and San Antonio.
As of December 31, 2019, these properties consist of:
Consolidated Operating Portfolio
•
•
53 wholly-owned properties that meet our Community Centered Properties® strategy; and
five parcels of land held for future development.
As of December 31, 2019, we, through our equity-method investment in Pillarstone Capital REIT Operating
Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in eight properties that do not meet our
Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone
Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method.
We also manage the day-to-day operations of Pillarstone OP.
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, 2019, 2018 and 2017, 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 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.
F- 13
93
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
Equity Method. For the years prior to December 31, 2017, Pillarstone OP was accounted for under the profit-sharing
method. We adopted Topic 606 and ASC 610 as of January 1, 2018, resulting in the derecognition of the underlying assets and
liabilities associated with the Contribution (defined below) as of January 1, 2018 and the recognition of the Company’s
investment in Pillarstone OP under the equity method. See Note 5 for additional disclosure on Pillarstone OP.
As of December 31, 2019, we, through our investment in Pillarstone OP, owned a majority interest in eight properties
that do not meet our Community Centered Property® strategy containing approximately 0.9 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.
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 2018
Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). Awarded shares and units vest when certain performance
conditions are met. We recognize compensation expense when achievement of the performance conditions is probable based
on management’s most recent estimates using the fair value of the shares as of the grant date. We recognized $6.5 million, $6.8
million and $10.4 million in share-based compensation expense for the years ended December 31, 2019, 2018 and 2017,
respectively.
At our annual meeting of shareholders on May 11, 2017, our shareholders voted to approve 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
94
F- 14
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding
costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent,
recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and
comprehensive income. Additionally, we have tenants who pay real estate taxes directly to the taxing authority. We exclude
these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property
operating expense.
Other property income primarily includes amounts recorded in connection with management fees and lease
termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and
administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly.
Revenues are governed by the Management Agreements (as defined in Note 5). Refer to Note 5 to our accompanying
consolidated financial statements for additional information regarding the Management Agreements with Pillarstone OP.
Additionally, we recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable.
Amounts recorded within other property income are accounted for at the point in time when control of the goods or services
transfers to the customer and our performance obligation is satisfied.
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, 2019 and 2018 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.
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, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction)
are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed
portion, becomes available for occupancy. For the year ended December 31, 2019, approximately $500,000 and $320,000 in
interest expense and real estate taxes, respectively, were capitalized. 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.
F- 15
95
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019.
Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant
reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges
under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment
history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic
conditions in the area where the property is located. With the adoption of ASC No. 842, Leases (“Topic 842”), as of January 1,
2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the
adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable.
Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method
of reporting rental revenue. As of December 31, 2019 and 2018, we had an allowance for uncollectible accounts of $11.2
million and $9.7 million, respectively. For the year ending December 31, 2019, we recorded an adjustment to rental revenue in
the amount of $1.5 million. For the year ending December 31, 2018 and 2017, we recorded bad debt expense in the amount of
$1.4 million and $2.3 million, respectively.
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.
96
F- 16
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019, 2018 and 2017, we recorded a margin tax provision of $0.4 million, $0.4 million and
$0.4 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 $653.7 million and $618.6 million as compared to the book value of approximately
$645.9 million and $619.4 million as of December 31, 2019 and 2018, 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. The fair value of the loan guarantee is $0.1 million and $0.3 million as compared to the book
value of approximately $0.1 million and $0.3 million as of December 31, 2019 and 2018, respectively.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of
December 31, 2019 and 2018. 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,
2019 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, 2019, 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 superseded most of the existing revenue recognition guidance. The standard also required an entity to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also required certain additional disclosures. This guidance
became effective for the reporting periods beginning on or after December 15, 2017, and interim periods within those fiscal
years. We adopted this guidance on a modified retrospective basis beginning January 1, 2018 and have derecognized the
underlying assets and liabilities associated with the Contribution as of January 1, 2018 and have recognized the Company’s
investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the
Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5 for further details.
In February 2016, FASB issued ASU No. 2016-2 which provided the principles for the recognition, measurement,
presentation and disclosure of leases. Additional guidance and targeted improvements to Topic 842 were made through the
issuance of supplementary ASUs in July 2018, December 2018 and March 2019.
F- 17
97
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we
have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing
operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under
Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the
unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial
direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the
lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting
guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $1.1 million, which represents
the present value of the remaining lease payments of approximately $1.2 million discounted using our incremental borrowing
rate of 4.5%, and (b) a right-of-use asset of approximately $1.1 million. The adoption of Topic 842 did not have a material
impact to our net income and related per share amounts.
Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach.
Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:
•
•
Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the
financial statements as well as leases that commenced after that date. Under this method, prior comparative periods
presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented,
a cumulative-effect adjustment is recognized at that date.
Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity
first applies the lease standard with a cumulative-effect adjustment as of that date. Prior comparative periods would
not be adjusted under this method.
We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the
date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will
not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to
amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-
effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the
new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented
in accordance with prior generally accepted accounting principles.
Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance
for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing
commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However,
Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-
term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases.
We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new
lease standards.
We elected a practical expedient which allows lessors to not separate non-lease components from the lease component
when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease
component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a
single line item, Rental, within the consolidated statements of operations and comprehensive income.
We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration
changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry
in which the tenant operates and economic conditions in the area where the property is located. Each tenant is included in one
of several portfolios and an allowance is calculated using the calculation methodology for the respective portfolio. With the
adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be
collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the
specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to
the straight-line method of reporting rental revenue.
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F- 18
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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. For the year ending December 31, 2019, we capitalized $0.1
million in associated transaction costs.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition guidance, adding guidance for
partial sales of nonfinancial assets and clarifying recognizing gains and losses from the transfer of nonfinancial assets in
contracts with noncustomers. This guidance became effective for the reporting periods beginning on or after December 15,
2017, and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginning
January 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as of January 1,
2018 and have recognized the Company’s investment in Pillarstone OP under the equity method of accounting. The Company
made an adjustment which decreased the Company’s accumulated deficit as of January 1, 2018 by $19.1 million. See Note 5
for further details.
3. MARKETABLE SECURITIES
In January 2018, we sold all of our remaining marketable securities and had no marketable securities as of
December 31, 2019.
During the year ended December 31, 2018, available-for-sale securities were sold for total proceeds of $30,000. The
gross realized losses on these sales totaled $20,000. For purposes of determining gross realized gains and losses, the cost of
securities sold is based on specific identification.
4. REAL ESTATE
As of December 31, 2019, we owned 58 commercial properties in the Austin, Chicago, Dallas-Fort Worth, Houston,
Phoenix and San Antonio areas comprised of approximately 5.0 million square feet of gross leasable area (“GLA”). Five of the
58 commercial properties are land parcels held for future development.
Property Acquisitions. On December 6, 2019, we acquired Las Colinas Village, a property that meets our Community
Centered Property® strategy, for $34.8 million in cash and net prorations. Las Colinas Village, a 104,919 square foot property,
was 86% leased at the time of purchase and is located in Irving, Texas. Revenue and net income attributable to Las Colinas of
$0.3 million and $0.2 million, respectively, have been included in our results of operations for the year ended December 31,
2019.
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.
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99
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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.
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, 2019, 2018 and 2017 were acquired
on January 1, 2017. 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)
2019
2018
2017
Year Ended December 31,
Total 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)
$
$
$
$
$
122,286
24,047
23,502
0.58
0.57
$
$
$
$
$
123,243
21,876
21,326
0.54
0.52
$
$
$
$
$
40,184
41,462
39,274
40,612
137,043
11,217
10,888
0.28
0.27
37,933
38,760
(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, 2017, 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, 2017.
Acquisition costs. Acquisition-related costs of $0.1 million are capitalized in real estate assets in our balance sheets
for the year ended December 31, 2019. Acquisition-related costs of $0.0 million and $1.6 million are included in general and
administrative expenses in our statements of operations and comprehensive income for the year ended December 31, 2018 and
2017, respectively.
Development properties. As of December 31, 2019, we had substantially completed construction at our Anthem
Marketplace Phase II property. As of December 31, 2019, we had incurred approximately $1.4 million in construction costs.
The 6,853 square foot Community Centered Property® was 100% occupied as of December 31, 2019 and is located in Phoenix,
Arizona, and adjacent to Anthem Marketplace.
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 December 31, 2018 and is located in Scottsdale, Arizona, 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 December 31, 2018 and is located in Frisco, Texas, a northern suburb of Dallas, Texas, adjacent to Shops at
Starwood.
100
F- 20
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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.
On November 15, 2019, we received a $0.8 million principal payment in connection with the sale of two retail
buildings we completed on November 29, 2016. We recorded a gain on sale of $0.8 million. In 2016, we provided seller-
financing for the retail buildings, Webster Pointe and Centre South, and deferred a $1.7 million gain until principal payments
on the seller-financed loan are received. The purchaser of the retail buildings sold Webster Pointe on November 15, 2019 and
paid the entire principal balance of the loan related to the property. We have not included the gain in discontinued operations as
it did not meet the definition of discontinued operations at the date of the sale.
On April 24, 2019, we received a $0.7 million principal payment in connection with the sale of three office buildings
we completed on December 31, 2014. We recorded a gain on sale of $0.7 million. In 2014, we provided seller-financing for the
office buildings, Zeta, Royal Crest and Featherwood, and deferred a $2.5 million gain until principal payments on the seller-
financed loan are received. The purchaser of the office buildings sold Zeta on April 24, 2019 and paid the entire principal
balance of the loan related to the property. We have included the gain in discontinued operations as it did meet the definition of
discontinued operations at the date of sale.
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 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, (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,
F- 21
101
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019.
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, 2019, 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 an 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
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
102
F- 22
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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.
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 periods after December 31, 2017.
The table below presents the real estate partnership investment in which the Company held an ownership interest (in
thousands):
The Company’s Investment as of
December 31,
2019
2018
Real estate partnership
Pillarstone OP(1)(2)
Total real estate partnership(3)
Ownership Interest
81.4%
$
$
34,097
34,097
$
$
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 eight property interests and 0.9 million square feet of GLA, as of December 31, 2019, and 11 property interests
and 1.3 million square feet of GLA, as of December 31, 2018.
On October 8, 2019, 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 $39.7 million in cash. Pillarstone OP
used the net proceeds to make a large distribution to Whitestone of $5.4 million after customary closing deductions, to pay off
mortgage debt on the three properties, and pay off the remaining $5.7 million of its $15.5 million loan from Whitestone.
Included in 2019 equity in earnings from real estate partnership is a $13.8 million gain related to this sale.
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):
Year Ended December 31,
2019
2018
Pillarstone OP
$
15,076
$
8,431
F- 23
103
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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 of the Company’s share of
underlying net book value
Carrying value of investment in real estate partnership
Rental revenues
Property expenses
Other expenses
Gain on sale of properties or disposal of assets
Net income
Year Ended December 31,
2019
2018
$
50,338
$
6,742
57,080
15,434
3,575
38,071
57,080
31,008
3,089
34,097
$
Year Ended December 31,
2018
2019
14,253
(9,045)
(3,449)
16,943
18,702
$
$
$
$
$
72,661
6,617
79,278
47,064
4,322
27,892
79,278
22,717
3,519
26,236
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 both years ended December 31, 2019 and 2018 was $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.
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 years ended December 31, 2019 and 2018. For the year ended December 31, 2017, Pillarstone
OP was accounted for using the profit-sharing method.
104
F- 24
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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. The Company's maximum exposure to loss relating to Pillarstone OP as of December 31, 2017 was 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, 2019, 2018, and 2017, the amortization of the
guarantee liability were $182,000, $106,000, and $112,000, respectively.
F- 25
105
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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
December 31,
2019
2018
$
$
16,741
$
16,983
(11,173)
303
22,854
$
14,686
16,423
(9,746)
279
21,642
7. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES 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,
2019
2018
$
$
9,868
393
3,908
14,169
(4,200)
(179)
(830)
8,960
$
$
8,789
406
4,076
13,271
(3,534)
(125)
(2,914)
6,698
A summary of expected future amortization of deferred costs is as follows (in thousands):
Years Ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Leasing
Commissions
Deferred
Legal Costs
Deferred
Financing
Costs
Total
$
$
1,593
1,365
1,117
853
612
128
$
59
45
35
22
20
33
$
900
900
839
220
192
27
$
5,668
$
214
$
3,078
$
2,552
2,310
1,991
1,095
824
188
8,960
106
F- 26
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
8. LEASES
Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we
have elected the package of practical expedients permitted in Topic 842. See Note 2 for additional disclosure on Topic 842.
As a Lessor. All leases on our properties are classified as noncancelable operating leases, and the related rental
income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned
and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts
receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been
met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the
corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining
base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and
comprehensive income.
A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, contingent rents,
and collectability adjustments under Topic 842) under noncancelable operating leases in existence as of December 31, 2019 is
as follows (in thousands):
Years Ended December 31,
Minimum Future
Rents(1)
2020
2021
2022
2023
2024
Thereafter
Total
$
$
83,552
72,507
60,766
48,812
36,988
110,496
413,121
(1) These amounts do not reflect future rental revenues from the renewal or replacement of existing leases and exclude
reimbursements of operating expenses and rental increases that are not fixed.
As a Lessee. We have office space, automobile, and office machine leases, which qualify as operating leases, with
remaining lease terms of one to four years.
The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are
discounted by our weighted average incremental borrowing rates to calculate the lease liabilities for our operating leases in
existence as of December 31, 2019 in which we are the lessee (in thousands):
Years Ended December 31,
Minimum Future Rents
2020
2021
2022
2023
Total undiscounted rental payments
Less imputed interest
Total lease liabilities
$
$
919
412
50
4
1,385
54
1,331
For the year ended December 31, 2019, the total lease costs were $952,000. The weighted average remaining lease
term for our operating leases was 1.7 years at December 31, 2019. We do not include renewal options in the lease term for
calculating the lease liability unless we are reasonably certain we will exercise the option or the lessor has the sole ability to
exercise the option. The weighted average incremental borrowing rate was 4.5% at December 31, 2019.
F- 27
107
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
Prior to the adoption of Topic 842, 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
Minimum Future
Rents
$
$
81,149
70,181
59,550
48,431
37,327
122,102
418,740
Prior to the adoption of Topic 842, as of December 31, 2018, we had the following lease obligations (in thousands):
Lease Obligations
Operating Lease Obligations
Related Party Rent Lease Obligations
Total
Payment due by period
Less than
1
year (2019)
1 - 3 years
(2020 -
2021)
3 - 5 years
(2022 -
2023)
Total
More than
5 years
(after
2023)
185
963
1,148
$
$
85
441
526
$
100
522
622
$
—
—
— $
—
—
—
108
F- 28
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
9. DEBT
Mortgages and other notes payable consist of the following (in thousands):
December 31,
2019
2018
Description
Fixed rate notes
$10.5 million, 4.85% 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 1.35% to 1.90% Note, due October 30, 2022 (4)
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (5)
$80.0 million, 3.72% Note, due June 1, 2027
$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
$15.1 million 4.99% Note, due January 6, 2024
$2.6 million 5.46% Note, due October 1, 2023
$50.0 million, 5.09% Note, due March 22, 2029
$50.0 million, 5.17% Note, due March 22, 2029
$
9,260
$
—
—
100,000
165,000
80,000
—
19,000
18,616
13,482
14,243
14,409
2,386
50,000
50,000
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31,
2023 (6)
Total notes payable principal
Less deferred financing costs, net of accumulated amortization
109,500
645,896
(1,197)
644,699
$
$
9,500
50,000
50,000
100,000
—
80,000
5,657
19,000
18,996
13,718
14,300
14,643
2,430
—
—
241,200
619,444
(1,239)
618,205
(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 25, 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 4, 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 note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate
of 2.24% for the duration of the term through January 31, 2024.
(6) Unsecured line of credit includes certain Pillarstone Properties as of December 31, 2018, in determining the amount of
credit available under the 2018 Facility which were released from collateral during 2019.
F- 29
109
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied
to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is
discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether
such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of
LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and
work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can
provide no assurances regarding the impact of the discontinuation of LIBOR.
On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement
(the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary
Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively,
the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of
which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50
million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series
A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations
under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.
The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of
approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal
payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in
each year until maturity.
The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less
than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount.
The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with
respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In
addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is
required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.
The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions
of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including
limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other
restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating
Partnership’s existing senior revolving credit facility, including the following:
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges
ratio of 1.50 to 1.00;
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372
million plus 75% of the net proceeds from additional equity offerings (as defined therein).
In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the
lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as
described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the
Operating Partnership’s existing senior revolving credit facility.
The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations
and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The
occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all
110
F- 30
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are
substantially similar to those contained in the Operating Partnership’s existing credit facility.
Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and
will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the
United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes
were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019
Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson
Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson
Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated
the 2018 Facility (as defined below).
The 2019 Facility is comprised of the following three tranches:
•
•
•
$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);
$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and
$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term
Loan A, the “2019 Term Loans”).
Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of December 31, 2019, the interest rate
on the 2019 Revolver was 3.35%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the
2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime
commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the
Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the
principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus
1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve
Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal
Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in
the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for
newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest
rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to
such alternate interest rate.
The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing
capacity by $200.0 million, upon the satisfaction of certain conditions. As of December 31, 2019, $374.5 million was drawn on
the 2019 Facility and our unused borrowing capacity was $140.5 million, assuming that we use the proceeds of the 2019
Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base.
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:
F- 31
111
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
• maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
• maximum secured debt to total asset value ratio of 0.40 to 1.00;
• minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges
ratio of 1.50 to 1.00;
• maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
• maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million
plus 75% of the net proceeds from additional equity offerings (as defined therein).
We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility
contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information
reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes,
depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019
Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment,
breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major
indebtedness, change of control, bankruptcy and loss of REIT tax status.
On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the
“2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and
Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured
revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the
2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to
the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•
•
•
•
extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “2018
Revolver”) to October 30, 2019 from November 7, 2018;
converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under
the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;
extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October
30, 2020 from February 17, 2017; and
extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and
together with Term Loan 1 and Term Loan 3, the “2018 Term Loans”) to January 29, 2021 from November 7, 2019.
Borrowings under the 2018 Facility accrued interest (at the Operating Partnership's option) at a Base Rate or an
Adjusted LIBOR plus an applicable margin based upon our then existing leverage. The applicable margin for Adjusted LIBOR
borrowings ranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 Term Loans. Base Rate
means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or
more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in
an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c)
the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve
Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the
Board of Governors of the Federal Reserve System on eurocurrency liabilities.
Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt
repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working
capital.
112
F- 32
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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.
As of December 31, 2019, our $171.4 million in secured debt was collateralized by eight properties with a carrying
value of $270.4 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 in 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 and the Notes
contain 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 these covenants or
other covenants under the 2019 Facility or the Notes in future periods or, if we are not in compliance, that we will be able to
obtain a waiver. As of December 31, 2019, we were in compliance with all loan covenants.
Scheduled maturities of our outstanding debt as of December 31, 2019 were as follows (in thousands):
Year
2020
2021
2022
2023
2024
Thereafter
Total
Amount Due
10,951
1,611
101,683
137,363
228,573
165,715
645,896
$
$
As of December 31, 2019, we had the following contractual obligations (in thousands):
Consolidated Contractual Obligations
Total
Payment due by period (in thousands)
Less than
1
year (2020)
1 - 3 years
(2021 -
2022)
3 - 5 years
(2023 -
2024)
More than
5 years
(after
2024)
Long-Term Debt - Principal
$ 645,896
$
10,951
$
103,294
$
365,936
$
165,715
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
107,674
13,633
1,077
212
1,170
21,742
4,544
351
126
790
41,975
9,089
702
82
380
26,746
—
17,211
—
24
4
—
—
—
—
$ 769,662
$
38,504
$
155,522
$
392,710
$
182,926
(1) As of December 31, 2019, we had one loan totaling $109.5 million which bore interest at a floating rate. The variable
interest rate payments are based on LIBOR plus 1.40% to LIBOR plus 1.90%, which reflects our new interest rates under
the 2019 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, 2019, of 1.76%.
F- 33
113
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(2) The unused commitment fees on the 2019 Facility, payable quarterly, are based on the average daily unused amount of the
2019 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 2019 Facility based on our December 31, 2019
balance of $374.5 million.
10. DERIVATIVES AND HEDGING ACTIVITIES
The estimated 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
Balance Sheet Location
Prepaid expenses and other assets
Accounts payable and accrued expenses
December 31, 2019
Estimated Fair Value
$
$
59
(5,660)
December 31, 2018
Estimated Fair Value
$
$
4,286
(59)
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $65 million with
Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the
agreement governing the interest rate swap, Bank of Montreal assigned $12.9 million of the swap to U.S. Bank, National
Association, $11.6 million of the swap to Regions Bank, $15.7 million of the swap to SunTrust Bank, and $5.9 million of the
swap to Associated Bank. See Note 9 (Debt) for additional information regarding the 2019 Facility. The swap began on
February 7, 2019 and will mature on November 9, 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 January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $115 million with
Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the
agreement governing the interest rate swap, Bank of Montreal assigned $22.7 million of the swap to U.S. Bank, National
Association, $20.5 million of the swap to Regions Bank, $27.9 million of the swap to SunTrust Bank, and $10.5 million of the
swap to Associated Bank. See Note 9 (Debt) for additional information regarding the 2019 Facility. The swap will begin on
November 9, 2020 and will mature on February 8, 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.
On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $165 million with
Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the
agreement governing the interest rate swap, Bank of Montreal assigned $32.6 million of the swap to U.S. Bank, National
Association, $29.4 million of the swap to Regions Bank, $40.0 million of the swap to SunTrust Bank, and $15.0 million of the
swap to Associated Bank. See Note 9 (Debt) for additional information regarding the 2019 Facility. The swap will begin on
February 8, 2021 and will mature on January 31, 2024. We have designated the interest rate swap as a cash flow hedge with the
effective portion of the changes in fair value to be recorded in comprehensive income 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.
114
F- 34
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
On September 5, 2018, we, through our Operating Partnership, entered into an interest rate swap with Bank of
America that fixed the LIBOR portion of the $9.6 million extension loan on the Whitestone Terravita Marketplace property at
2.85%. The swap began on September 25, 2018 and 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.
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, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Amount Recognized
as Comprehensive
Income (Loss)
Location of Income
(Loss) Recognized in
Earnings
Amount of Income
(Loss) Recognized in
Earnings (1)
$
$
$
(9,828)
1,192
2,022
Interest expense
Interest expense
Interest expense
$
$
$
1,036
646
(1,575)
(1) There was no ineffective portion of our interest rate swaps recognized in earnings for the years ended December 31, 2019,
2018 and 2017.
F- 35
115
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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,
2019, 2018 and 2017, 924,314, 1,011,268 and 1,088,292 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, 2019, 2018 and 2017, distributions of $41,000, $317,000 and $472,000,
respectively, were made to the holders of certain restricted common shares, $0, $16,000, and $16,000 of which were charged
against earnings, annually for the years ended December 31, 2019, 2018, and 2017, respectively. See Note 15 for information
related to restricted common shares under the 2008 Plan.
116
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WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
(in thousands, except per share data)
Numerator:
Income from continuing operations
Less: Net income attributable to noncontrolling interests
Distributions paid on unvested restricted shares
Income from continuing operations attributable to Whitestone REIT
excluding amounts attributable to unvested restricted shares
Income from discontinued operations
Less: Net income attributable to noncontrolling interests
Income from discontinued operations attributable to Whitestone REIT
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares
Denominator:
Weighted average number of common shares - basic
Effect of dilutive securities:
Unvested restricted shares
Weighted average number of common shares - dilutive
Earnings Per Share:
Basic:
Year Ended
December 31,
2019
2018
2017
$
$
23,634
(511)
(41)
$
21,981
(550)
(301)
8,588
(254)
(456)
23,082
21,130
7,878
594
(34)
560
—
—
—
—
—
—
$
23,642
$
21,130
$
7,878
40,184
39,274
35,428
1,278
41,462
1,338
40,612
827
36,255
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
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
$
$
$
$
$
0.57
0.02
$
0.54
0.00
0.59
$
0.54
$
$
0.56
0.01
$
0.52
0.00
0.57
$
0.52
$
0.22
0.00
0.22
0.22
0.00
0.22
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.
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.
F- 37
117
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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
13. RELATED PARTY TRANSACTIONS
2019
2018
2017
28.6 %
19.4 %
52.0 %
100.0%
39.1 %
26.5 %
34.4 %
100.0%
15.3 %
84.7 %
—
100.0%
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 78.6% 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 26.8%
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 periods prior to January 1, 2018, Pillarstone OP was accounted for 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 as of January 1, 2018, 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 and comprehensive income for the years ended December 31, 2019 and 2018 (in thousands):
Rent
Property management fee
income
Interest income
Location of Revenue
(Expense)
Operating and maintenance
Management, transaction,
and other fees
Interest, dividend and other
investment income
$
$
$
2019
2018
(813) $
856
171
$
$
(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. The financed receivable was paid off on October 17, 2019.
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.
118
F- 38
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
Equity Offerings
On May 31, 2019, we entered into nine equity distribution agreements for an at-the-market equity distribution program
(the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the
Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will
depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading
price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made
in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no
obligation to sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements
or terminate the 2019 equity distribution agreements. For the year ended December 31, 2019, we sold 1,612,389 common
shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $21.2 million. In connection
with such sales, we paid compensation of approximately $324,000 to the sales agents.
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, 2019 and 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.
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, 2019, we owned a 97.9% 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, 2019 and 2018, there were
42,279,849 and 40,585,688 OP units outstanding, respectively. We owned 41,371,277 and 39,657,207 OP units as of
December 31, 2019 and 2018, 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 97.7%, 97.5% and 97.0% for
the years ended December 31, 2019, 2018 and 2017, respectively. For the years ended December 31, 2019 and 2018, 19,909
and 155,100 OP units, respectively, were redeemed for an equal number of common shares.
F- 39
119
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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
2019
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Total
$
$
$
$
0.2850
$
11,580
$
0.2850
$
0.2850
0.2850
0.2850
1.1400
0.2850
0.2850
0.2850
0.2850
1.1400
$
$
$
11,430
11,316
11,301
45,627
11,302
11,294
11,203
11,145
44,944
$
$
$
0.2850
0.2850
0.2850
1.1400
0.2850
0.2850
0.2850
0.2850
1.1400
$
$
$
262
264
265
264
1,055
265
286
295
309
1,155
$
$
$
$
11,842
11,694
11,581
11,565
46,682
11,567
11,580
11,498
11,454
46,099
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 due to the performance targets not being met.
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.
120
F- 40
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
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 be 200% based 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 January 1,
2020, the remaining unvested 247,978 TSR units that were granted on September 6, 2017 vested at 200% achievement into
495,956 common shares.
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.
On June 30, 2019, the Compensation Committee approved the grant of an aggregate of 405,417 TSR Units and
317,184 time-based restricted common share units under the 2018 Plan to certain of our employees. On September 30, 2019,
the Compensation Committee approved the grant of 17,069 time-based restricted common share units under the 2018 Plan to
certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer
group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period,
the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s
F- 41
121
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR
Unit of $8.22 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation
expense ratably from the June 30, 2019 grant date to the end of the performance period, December 31, 2021. The Monte Carlo
simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in
the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a
historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on
the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common
share units have a grant date fair value of $10.63 and $11.69 and vest annually in three equal installments for the June 30, 2019
and September 30, 2019 grants, respectively.
A summary of the share-based incentive plan activity as of and for the year ended December 31, 2019 is as follows:
Non-vested at January 1, 2019
Granted
Vested
Forfeited
Non-vested at December 31, 2019
Available for grant at December 31, 2019
Weighted-
Average
Grant Date
Fair Value (1)
12.41
9.46
11.76
12.62
11.52
Shares
1,923,382
$
762,630
(284,964)
(61,116)
2,339,932
1,792,528
$
(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, 2019, 2018 and 2017 is
presented below:
Year Ended
Year Ended December 31, 2019
Year Ended December 31, 2018
Year Ended December 31, 2017
Shares Granted
Shares Vested
Non-Vested
Shares Issued
Weighted-
Average Grant-
Date Fair Value
Vested Shares
Total Vest-Date
Fair Value
(in thousands)
762,630
653,472
1,354,534
$
$
$
9.46
11.07
12.92
(284,964) $
(560,126) $
(881,710) $
3,352
7,978
12,829
Total compensation recognized in earnings for share-based payments for the years ended December 31, 2019, 2018
and 2017 was $6.5 million, $6.8 million and $10.4 million, respectively.
Based on our current financial projections, we expect 100% of the unvested awards, exclusive of 895,000 CIC Units,
to vest over the next 33 months. As of December 31, 2019, there was approximately $4.2 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 $4.2 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, 2020.
122
F- 42
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
We expect to record approximately $8.4 million in share-based compensation subsequent to the year ended
December 31, 2019. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 23
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, 2019, the TSR Peer Group Ranking called for 200%, 100%, and 50%
attainment of the TSR Units granted in 2017, 2018, and 2019, respectively. 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.
F- 43
123
16. GRANTS TO TRUSTEES
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 12, 2019, each of our six independent trustees and one trustee emeritus were granted approximately
3,000 common shares, which vest immediately and are prorated based on date appointed. The 19,562 common shares granted
to our trustees had a grant fair value of $13.54 per share. On December 12, 2019, two of our independent trustees each elected
to receive a total of 3,398 common shares with a grant date fair value of $13.54 in lieu of cash for board fees. The fair value of
the shares granted during the year ended December 31, 2019 was determined using quoted prices available on the date of grant.
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 approximately
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.
17. COMMITMENTS AND CONTINGENCIES
We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are
generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes
the final outcome of such matters will not have a material adverse effect on our financial position, results of operations, cash
flows or liquidity.
On April 16, 2019, a purported shareholder of the Company filed a class action lawsuit in the United States District
Court for the Southern District of Texas against the Company, James C. Mastandrea, and David K. Holeman, entitled Clark v.
Whitestone REIT, et al., Case 4:19-cv-01379. A second class action lawsuit was filed but was consolidated into the Clark case.
The complaint alleges, among other things, that the Company and the individual defendants violated certain federal securities
laws by making materially false and misleading statements in the Company’s Forms 10-Q for the first three quarterly periods of
the year ended December 31, 2018 as a result of the accounting errors that required the restatement of our consolidated
financial statements for the first three quarterly periods of the year ended December 31, 2018. The purported class period runs
from May 9, 2018 through February 27, 2019. The complaint sought, among other things, compensatory damages in an
amount to be proven at trial, plus interest, attorneys’ fees, and costs. In August 2019, the complainants in these purported class
actions withdrew their claims, and the Court issued an order dismissing them with prejudice. On July 17, 2019, the Company
received a demand letter from a purported shareholder containing allegations similar to those contained in the purported class
actions. Subsequent to the dismissal of the purported class actions, in September 2019, counsel for the purported shareholder
withdrew its demand.
On December 12, 2017, a property owner that owns a land parcel adjacent to a Whitestone property filed suit against
Whitestone Pinnacle of Scottsdale - Phase II, LLC (“Whitestone Pinnacle”) alleging breach of contract and resulting in the
delay of the construction of the their assisted living facility. In May 2019, the claimant amended their report of damages and
seeks approximately $2.7 million in restitution from Whitestone Pinnacle. The Company intends to vigorously defend the
matter as it believes that these claims are without merit and that it has substantial legal and factual defenses to the claims and
allegations contained in the complaint. Based upon the present status of this matter, the Company does not believe it is probable
that a loss will be incurred. Accordingly, the Company has not recorded a charge as a result of this action.
18. SEGMENT INFORMATION
Our management historically has not differentiated by property types and therefore does not present segment
information.
124
F- 44
WHITESTONE REIT AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019
19. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of our unaudited quarterly financial information for the years ended December 31, 2019
and 2018 (in thousands, except per share data):
2019
Revenues
Net income
Net income attributable to Whitestone REIT
Basic Earnings per share:
Income from continuing operations attributable to Whitestone REIT,
excluding amounts attributable to unvested restricted shares(1)
Income from discontinued operations attributable to Whitestone
REIT(1)
Net income attributable to common shareholders, excluding amounts
attributable to unvested restricted shares(1)
Diluted Earnings per share:
Income from continuing operations attributable to Whitestone REIT,
excluding amounts attributable to unvested restricted shares(1)
Income from discontinued operations attributable to Whitestone
REIT(1)
Net income attributable to common shareholders, excluding amounts
attributable to unvested restricted shares(1)
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)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
29,694
2,839
2,774
$
$
$
29,578
3,404
3,327
$
$
$
29,879
1,849
1,807
$
$
$
30,100
16,136
15,776
0.07
$
0.06
$
0.04
$
0.39
0.00
0.02
0.00
0.00
0.07
$
0.08
$
0.04
$
0.39
0.07
$
0.06
$
0.04
$
0.38
0.00
0.02
0.00
(0.01)
0.07
$
0.08
$
0.04
$
0.37
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
$
$
$
$
$
$
$
$
$
$
$
$
(1) 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.
20. SUBSEQUENT EVENTS
Management evaluated subsequent events through March 2, 2020, which was the date the financial statements were
available to be issued, and determined that there are no subsequent events to be reported.
F- 45
125
Whitestone REIT and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
December 31, 2019
Description
Allowance for doubtful accounts:
(in thousands)
Balance at
Beginning
of Year
Charges(1)
Deductions
Balance at
from
Reserves
End of
Year
Year ended December 31, 2019
$
9,746
$
1,484
$
Year ended December 31, 2018
Year ended December 31, 2017
8,608
7,133
1,391
2,340
(57) $
(253)
(865)
11,173
9,746
8,608
(1) For the year ended December 31, 2019, charges were reductions to revenue. For the years ended December, 31 2018 and
2017, charges were additions to costs and expense.
126
F- 46
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2019
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
Anthem Marketplace Phase II
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
Las Colinas Village
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
$
5,126
$
4,086
$
365
$
— $
5,126
$
4,451
$
4,790
204
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
16,706
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
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
18,098
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
1,722
492
484
1,507
2,900
108
1,279
2,566
250
255
2,327
2,515
1,599
169
622
1,363
790
2,076
1,166
(167)
4,573
1,337
6,786
1,553
1,356
199
424
2,748
1,885
2,722
681
2,931
732
637
101
792
529
2,168
759
1,960
940
817
1,337
532
756
1,086
450
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,153
—
—
—
—
—
—
—
—
—
4,790
204
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
16,706
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
19,695
492
2,431
92,449
4,677
4,257
35,380
4,270
30,996
15,595
12,155
25,127
4,832
963
14,443
19,802
8,367
3,874
25,630
17,931
8,862
6,661
33,565
14,113
11,577
8,828
27,578
9,910
24,351
7,381
14,048
6,606
29,415
26,155
734
15,915
12,016
10,390
15,056
4,544
8,236
13,152
8,462
1,718
3,490
10,478
3,361
9,577
24,485
696
2,846
156,342
5,149
6,301
46,747
6,246
47,547
20,708
17,728
32,731
6,599
1,819
20,652
26,973
14,344
4,607
38,483
34,637
10,408
7,966
43,275
22,841
17,732
12,705
33,140
10,996
30,999
8,264
19,246
7,524
38,976
33,068
918
19,696
16,109
12,208
20,976
5,322
10,576
18,957
10,243
1,994
7,100
17,649
4,211
F- 47
127
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2019
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
Village Square at Dana Park
Westchase
Williams Trace Plaza
Windsor Park
Woodlake Plaza
10,877
423
6,800
2,621
1,107
40,250
1,751
14,003
10,482
4,426
3,804
3,281
1,696
8,592
3,125
—
—
—
—
—
10,877
423
6,800
2,621
1,107
44,054
5,032
15,699
19,074
7,551
54,931
5,455
22,499
21,695
8,658
Total Whitestone Properties
$
305,725
$
688,999
$
85,677
$
1,153
$
305,725
$
775,829
$
1,081,554
Land Held for Development:
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
10,500
4,000
911
277
704
16,392
322,117
$
$
$
$
—
—
—
—
—
— $
15
25
30
—
—
70
688,999
$
85,747
1,939
—
—
—
—
$
$
1,939
3,092
$
$
10,500
4,000
911
277
704
16,392
322,117
1,954
25
30
—
—
$
$
2,009
777,838
$
$
12,454
4,025
941
277
704
18,401
1,099,955
128
F- 48
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2019
Property Name
Encumbrances
(in thousands)
Construction
Acquired
Life
Accumulated
Depreciation
Date of
Date
Depreciation
Whitestone Properties:
Ahwatukee Plaza
Anthem Marketplace
Anthem Marketplace Phase II
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
Las Colinas Village
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
(3)
(4)
(5)
(6)
(7)
(8)
(9)
$
943
3,206
9
3/1/2019
1,958
6,245
2,042
537
4,548
802
2,091
2,589
2,758
3,259
1,762
128
2,152
3,699
964
1,808
2,264
39
5,235
1,956
6,932
2,602
2,517
1,068
3,195
3,166
5,391
934
1,951
2,510
3,366
2,245
389
3,074
2,568
1,121
2,027
2,572
2,391
1,854
3,265
889
882
2,389
2,225
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
12/6/2019
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
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
F- 49
129
Whitestone REIT and Subsidiaries
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2019
Property Name
Encumbrances
(in thousands)
Construction
Accumulated
Depreciation
Date of
Village Square at Dana Park
(10)
Westchase
Williams Trace Plaza
Windsor Park
Woodlake Plaza
Land Held for Development:
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
8,776
2,365
1,937
9,419
2,919
$
137,933
—
—
—
—
—
—
137,933
$
$
Date
Acquired
9/21/2012
1/1/2002
12/24/2014
12/16/2003
3/14/2005
Depreciation
Life
5-39 years
5-39 years
5-39 years
5-39 years
5-39 years
5/26/2017
9/21/2012
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 (in thousands):
2019
$ 1,052,238
—
2018
$ 1,149,454
(95,146)
$
2017
920,310
—
34,804
13,474
48,278
(561)
$ 1,099,955
—
11,638
(83,508)
(13,708)
$ 1,052,238
213,545
17,575
231,120
(1,976)
$ 1,149,454
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
(2) The aggregate cost of real estate for federal income tax purposes is $1,100,000.
(3) This property secures a $15.1 million mortgage note.
(4) This property secures a $80.0 million mortgage note.
(5) This property secures a $19.0 million mortgage note.
(6) This property secures a $14.1 million mortgage note.
(7) This property secures a $14.0 million mortgage note.
(8) This property secures a $14.3 million mortgage note.
(9) This property secures a $10.5 million mortgage note.
(10) A portions of this property secures a $2.6 million mortgage note.
130
F- 50
Exhibit No. Description
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
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)
3.1.8*
Articles of Amendment
3.2
4.1*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934, as amended
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)
69
131
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)
132
70
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
10.34+
10.38
10.39
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)
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)
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)
71
133
Exhibit No. Description
10.40+
10.41+
10.42+
10.43+
10.45+
10.46
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62+
10.63
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)
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)
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).
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).
134
72
Exhibit No. Description
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, 2019 and 2018, (ii) the
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2019, 2018 and 2017,
(iii) the Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017, (iv) the
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 and (v) the Notes to
Consolidated Financial Statements.
+ Denotes management contract or compensatory plan or arrangement.
73
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CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Whitestone REIT
2600 South Gessner Road, Suite 500
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, New York 11219
ACCOUNT MAINTENANCE
INQUIRES SHOULD BE DIRECTED TO
AST Shareholder Services Department
888.999.0027
877.879.8035
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 Mining Company; 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 Realty Trust;Trustee, Pillarstone Capital REIT.
JEFFREY A. JONES, Managing Director of Stephen Inc.; former Co-Head of Blackhill
Partners, an investment banking and restructuring firm; current member of the Board of the
Alternative Asset Center at Southern Methodist University; current Board Trustee of the First
Presbyterian Church of Dallas Foundation; former Board Member of the CFA Society of Dallas.
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.
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, Executive Vice President, Acquisitions & Asset Management
CHRISTINE J. MASTANDREA, Executive Vice President, Corporate Strategy
PETER TROPOLI, General Counsel
J. SCOTT HOGAN, Vice President and Controller
DANIEL P. KOVACEVIC, Regional Vice President, Southwest Region
KEVIN REED, Director of Investor Relations
MICHELLE SIV, Director of Human Resources
MATT OKMIN, Division Director, Austin/San Antonio
DAVE SPAGNOLO, Division Director, Dallas/Fort Worth
AUSTIN - SAN ANTONIODavenport Village | Quinlan Crossing | City View Village | Parkside Village North | Parkside Village SouthThe Strand at Huebner Oaks | Windsor ParkDALLAS - FORT WORTHEldorado Plaza | Headquarters Village | Heritage Trace Plaza | Keller Place | Las Colinas Village | Shops at StarwoodHOUSTONBLVD Place | Bissonnet Beltway Plaza | Kempwood Plaza | Lion Square | Providence Plaza | Shaver Street Center Shops at Williams Trace | South Richey | Sugar Park Plaza | Sunridge Center | Town Park Plaza Woodlake Plaza | Westchase Plaza | Williams Trace PlazaPHOENIXAhwatukee Plaza | Anthem Marketplace | Desert Canyon | Fountain Hills Plaza | Fountain SquareFulton Ranch Towne Center | Gilbert Tuscany Village | La Mirada Center | Market Street at DC RanchMarketplace at Central | Mercado at Scottsdale Ranch | Paradise Plaza | Pima Norte Pinnacle of Scottsdale | Scottsdale Seville | Sunset at Pinnacle Peak | Terravita Marketplace | The Citadel The Promenade at Fulton Ranch | The Shops at Pecos Ranch | Village Square at Dana ParkHOUSTON CORPORATE HEADQUARTERS: 2600 S. Gessner Road, Suite 500, Houston,TX 77063 | Toll Free 866.789.7348ARIZONA REGIONAL OFFICE: 20789 North Pima Road, Suite 210, Scottsdale,AZ 85255 | (P) 480.584.6181DALLAS DIVISION OFFICE: 6959 Lebanon Road, Suite 214, Frisco,TX 75034 | (P) 214.824.7888AUSTIN DIVISION OFFICE: 3801 North Capital of Texas Highway, Suite E-205,Austin,TX 78746 | (P) 512.992.1507SAN ANTONIO DIVISION OFFICE: 11225 Huebner Road, San Antonio,TX 78230 | (P) 210.437.3037www.whitestonereit.com