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.
Presentation 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, we 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.
From December 31, 2021we owned 100% 60 commercial properties consisting of:
Consolidated operating portfolio
•53 properties that meet our Community Centered Properties® strategy; and containing approximately 4.9 million square feet of GLA and having a total book value (net of accumulated amortization) of $905.9 million; and
Redevelopment, portfolio of new acquisitions
•two wholly owned properties, Lakeside Market and Anderson Arbor, that meet our Community Centered Properties® containing approximately 0.2 and 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $52.7 and $28.2 million respectively.
•five parcels of land held for future development that meet our Community Centered Properties® strategy having a total book value of $19.8 million.
As of December 31, 2021, we had an aggregate of 1,567 tenants. We have a diversified tenant base with our largest tenant comprising only 2.6% of our total revenues for the year ended December 31, 2021. 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 400 new and renewal leases during 2021, totaling 1,046,700 square feet and $131.9 million in total lease value. We employed 86 full-time employees as of December 31, 2021. 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, 2021, 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.
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Market conditions and COVID-19
COVID-19[female[feminine
The global health crisis caused by COVID-19 and the related responses intended to control its spread may continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. In light of the changing nature of the COVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of operations and cash flows.
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.
See “Item 1A – Risk Factors” of this Annual Report on Form 10-K for more information.
How we derive our income
Substantially all of our revenue is derived from rents received from leases at our properties. We had total revenues of approximately $125,365,000 for the year ended December 31, 2021 as compared to $117,915,000 for the year ended December 31, 2020, a increase of $7,450,000, or 6%.
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. During the three years prior to 2020, 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. In 2020 the impact of the COVID-19 pandemic temporarily affected this trend. However, as of the date of this Annual Report on Form 10-K, collection rates and rent increases have substantially returned to pre-pandemic levels. Included in our adjustments to rental revenue for the years ending December 31, 2021 and 2020, were bad debt adjustments of $0.1 million and $2.3 million, respectively, and a straight-line rent reserve adjustments of $0.9 million and $1.2 million. respectively, related to credit loss for the conversion of 59 and 102 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis. We are unable to predict the impact that the COVID-19 pandemic will have on our rental income in the long term. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our and our tenants' financial positions and operating results.
Expected expiration of leases
We tend to lease space to smaller businesses that desire shorter term leases. As
of December 31, 2021, approximately 28% of our GLA was subject to leases that
expire prior to December 31, 2023. Over the last three years, we have renewed
expiring leases with respect to approximately 73% 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
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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 and disposals of property
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties® strategy, 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 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. 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 Acquisitions. On December 1, 2021 we acquired Anderson Arbor, a property that meets our Community Centered Property® strategy, for $28.1 million in cash and net prorations. Anderson Arbor, a 89,746 square foot property, was 89% leased at the time of purchase and is located in Austin, Texas.
At July 8, 2021we acquired Lakeside Market, a property that meets our Community Centered Property® strategy, to $53.2 million in cash and on a net pro rata basis. Lakeside Market, a 162,649 square foot property, was 80.5% leased at the time of purchase and is located in Map, Texas.
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 own (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.
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 that, at the time, owned 14 non-core
properties (the "Pillarstone Properties") that did not fit our Community
Centered Property® strategy, to Pillarstone for aggregate consideration of
approximately $84 million, consisting of (1) approximately $18.1 million of
Class A units representing limited partnership interests in Pillarstone
("Pillarstone OP Units") and (2) the assumption of approximately $65.9 million
of liabilities (collectively, the "Contribution").
As of December 31, 2021, we owned approximately 81.4% of the total outstanding
Pillarstone OP Units, which we account for under the equity method. See Note 4
Investment in Real Estate Partnership to the accompanying consolidated financial
statements for more information on our accounting treatment of our investment in
Pillarstone OP.
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rental activity
As of December 31, 2021, we wholly-owned 60 properties with 5,205,966 square
feet of GLA, which were approximately 91% occupied. The following is a summary
of the Company's leasing activity for the year ended December 31, 2021:
Prior Contractual Straight-lined Basis
Number of Weighted Average TI and Incentives Contractual Rent Rent Per Sq. Ft. Increase (Decrease)
Leases Signed GLA Signed Lease Term (2) per Sq. Ft. (3) Per Sq. Ft (4) (5) Over Prior Rent
Comparable (1)
Renewal Leases 221 613,560 4.7 $ 4.44 $ 21.23 $ 20.87 12.2 %
New Leases 81 156,452 6.0 16.16 23.54 25.08 6.1 %
Total/Average 302 770,012 5.0 $ 6.82 $ 21.70 $ 21.72 10.8 %
Number of Weighted Average TI and Incentives Contractual Rent
Leases Signed GLA Signed Lease Term (2) per Sq. Ft. (3) Per Sq. Ft (4)
Total
Renewal Leases 235 648,227 4.7 $ 4.53 $ 21.20
New Leases 165 398,473 6.5 17.41 22.25
Total/Average 400 1,046,700 5.4 $ 9.43 $ 21.60
(1) Comparable leases represent leases signed on spaces for which there was a former tenant during the last twelve months and whose new or renewed surface area was less than 25% of the expired surface area.
(2) Weighted average lease term (in years) is determined based on 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) Minimum contractual rent of the new lease for the first month, excluding concessions.
(5) Contractual minimum rent of the previous lease for the last month.
Cash 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 $0.12
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, 2021, our cash provided from operating
activities was $47.0 million and our total dividends and distributions paid were
$19.7 million. Therefore, we had cash flow from operations in excess of
distributions of approximately $27.3 million. 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
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leverage, the value of our unencumbered assets and any borrowing restrictions that may be imposed by lenders. From December 31, 2021subject to possible future repayments or increases in the borrowing base, we have $86.8 million remaining availability under the revolving credit facility.
Our ability to access the capital markets will be dependent on a number of
factors as well, including general market conditions for REITs and market
perceptions about our Company. In light of the dynamics in the capital markets
impacted by the COVID-19 pandemic and the economic slowdown, our access to
capital may be diminished. Despite these potential challenges, we believe we
have sufficient access to capital for the foreseeable future, but we can provide
no assurance that such capital will be available to us on attractive terms or at
all.
On April 30, 2020, the Company entered into a loan in the principal amount of
$1,733,510 from U.S. Bank National Association, one of the Company's existing
lenders, pursuant to the Paycheck Protection Program (the "PPP Loan") of the
CARES Act. The PPP Loan was set to mature on May 6, 2022 (the "Maturity Date"),
and accrued interest at 1.00% per annum and could be prepaid in whole or in part
without penalty. Pursuant to the CARES Act, the Company applied for and was
granted forgiveness for all of the PPP Loan. Forgiveness was determined by the
U.S. Small Business Administration based on the use of loan proceeds for payroll
costs, mortgage interest, rent or utility costs and the maintenance of employee
and compensation levels. The Company used all proceeds from the PPP Loan to
retain employees and maintain payroll and make mortgage payments, lease payments
and utility payments to support business continuity throughout the COVID-19
pandemic. Pursuant to the guidance in Financial Accounting Standards Board
("FASB") ASC 405-20, "Liabilities - Extinguishment of Liabilities," the Company
recognized a $1,734,000 gain for the PPP Loan forgiveness during the year ended
December 31, 2020 based on the legal release from the U.S. Small Business
Administration.
At May 15, 2019our Universal Registration Statement on Form S-3 has been declared effective by the SECONDallowing us to offer up to $750 million in securities from time to time, including common stock, preferred stock, debt securities, depositary stock 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 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 years ended December 31, 2021, 2020 and 2019, we sold 6,287,087, 170,942 and 1,612,389 common shares, respectively, under the 2019 equity distribution agreements, with net proceeds to us of approximately $56.0 million, $2.2 million and $21.2 million, respectively. In connection with such sales, we paid compensation of approximately $853,000, $34,000 and $324,000, respectively, to the sales agents. 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 8 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 and restricted cash of approximately
$15,914,000 at December 31, 2021compared to $25,956,000 at December 31, 2020. The decrease in $10,042,000 was primarily the result of the following:
Sources of Cash
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•Cash flow from operations of $47,040,000 for the year ended December 31, 2021
compared to cash flow from operations of $42,776,000 for the year ended December
31, 2020;
•Proceeds from issuance of common shares, net of offering and exchange offer
costs of $55,918,000 compared to proceeds from issuance of common shares, net of
offering and exchange offer costs of $2,198,000;
• Cash provided by investing activities of discontinued operations of $1,833,000
compared to $0;
Uses of Cash
• Acquisition of real estate from $81,588,000 compared to $0;
• Payment of dividends and distributions to ordinary shareholders and holders of OP units of $19,651,000 compared to $25,714,000;
•Real estate additions of $9,642,000 compared to $7,362,000;
•Payments of notes payable from $3,261,000 compared to $12,164,000; and
• Repurchase of ordinary shares of $691,000 compared to $2,077,000.
We place all cash in highly liquid, short-term investments which we believe provide adequate security of capital.
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. 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 years ended December 31, 2021 and 2020, we sold 6,287,087 and 170,942
common shares, respectively, under the 2019 equity distribution agreements, with
net proceeds to us of approximately $56.0 million and $2.2 million,
respectively. In connection with such sales, we paid compensation of
approximately $853,000 and $34,000, respectively, 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.
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Debt
Debt consisted of the following at the dates indicated (in thousands):
December 31, Description 2021 2020
Fixed Rate Notes
$100.0 million1.73% plus 1.35% to 1.90% Note, due
October 30, 2022 (1)
$ 100,000
$100,000
$165.0 million2.24% plus 1.35% to 1.90% Note, due
January 31, 2024 (2)
165,000 165,000 $80.0 million, 3.72% Note, due June 1, 2027 80,000 80,000 $19.0 million 4.15% Note, due December 1, 2024 18,358 18,687 $20.2 million 4.28% Note, due June 6, 2023 17,808 18,222 $14.0 million 4.34% Note, due September 11, 2024 12,978 13,236 $14.3 million 4.34% Note, due September 11, 2024 13,773 14,014 $15.1 million 4.99% Note, due January 6, 2024 13,907 14,165 $2.6 million 5.46% Note, due October 1, 2023 2,289 2,339 $50.0 million, 5.09% Note, due March 22, 2029 50,000 50,000 $50.0 million, 5.17% Note, due March 22, 2029 50,000 50,000
Floating Rate Notes Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023
119,500 119,500
Total notes payable principal 643,613 645,163
Less deferred financing costs, net of accumulated
amortization (771) (978)
$ 642,842 $ 644,185
(1) The promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.
(2) The promissory note includes an interest rate swap that fixes the LIBOR portion of the interest rate at an average rate of 2.24% for the duration of the term until January 31, 2024.
A number of our current debt agreements, including our 2019 Facility (as defined
below), have an interest rate tied to the London Interbank Offered Rate
("LIBOR"). The U.K. Financial Conduct Authority announced in 2017 that it would
no longer compel banks to submit rates for the calculation of LIBOR after 2021.
It is not possible to predict whether banks will continue to provide LIBOR
submissions to the administrator of LIBOR, whether LIBOR rates will cease to be
published or supported after 2021 or whether any additional reforms to LIBOR may
be enacted in the United Kingdom or elsewhere. It is expected that a transition
away from the widespread use of LIBOR to alternative rates is likely to occur
during the next several years. We cannot predict the impact of the 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.
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.
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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 ratio of total debt to total value of assets from 0.60 to 1.00;
•maximum guaranteed debt/total asset value ratio of 0.40 to 1.00;
•a minimum EBITDA (earnings before interest, tax, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum ratio of debt with other recourse to total asset value of 0.15 to 1.00; and
• maintaining a minimum tangible net worth (adjusted for accumulated depreciation) of $372 million plus 75% of the net proceeds of the Additional Share Offerings (as defined herein).
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. 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 is made up of the following three tranches:
• $250.0 million unsecured revolving credit facility with a maturity date
January 1, 2023 (the “2019 Gun”);
• $165.0 million unsecured term loan with a maturity date January 31, 2024
(“Term Loan A”); and
• $100.0 million unsecured term loan with a maturity date October 30, 2022
(“Term Loan B” and, together with Term Loan A, the “Term Loans 2019”).
35 -------------------------------------------------------------------------------- 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, 2021, the interest rate on the 2019 Revolver was 1.74%. 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. On March 20, 2020, as a precautionary measure to preserve our financial flexibility in response to potential credit risks posed by the COVID-19 pandemic, the Company drew down approximately $30.0 million under the 2019 Revolver. As of December 31, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $86.8 million of remaining availability under the revolving credit facility. As of December 31, 2021, $384.5 million was drawn on the 2019 Facility and our unused borrowing capacity was $130.5 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 previous debt facility, which the 2019 Facility amended and restated, 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 ratio of total debt to total value of assets from 0.60 to 1.00;
•maximum guaranteed debt/total asset value ratio of 0.40 to 1.00;
•a minimum EBITDA (earnings before interest, tax, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum ratio of debt with other recourse to total asset value of 0.15 to 1.00; and
• maintaining a minimum tangible net worth (adjusted for accumulated depreciation) of $372 million plus 75% of the net proceeds of the Additional Share Offerings (as defined herein).
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.
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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.
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." The 2018 Facility was subseuqently amended
and restated by the 2019 Facility defined and described above.
As of December 31, 2021, our $159.1 million in secured debt was collateralized
by seven properties with a carrying value of $247.2 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. As of December 31, 2021, we were in compliance with all loan
covenants.
Expected maturities of our outstanding debt at December 31, 2021 were as follows (in thousands):
Amount Due Year (in thousands) 2022 $ 101,962 2023 147,363 2024 228,574 2025 17,143 2026 17,143 Thereafter 131,428 Total $ 643,613 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.
The following is a summary of the Company’s capital expenditures, excluding property acquisitions, for the years ended the 31st of December (in thousands):
2021 2020
Capital expenditures:
Tenant improvements and allowances $ 3,306 $ 3,744
Developments / redevelopments 2,081 617
Leasing commissions and costs 3,016 1,223
Maintenance capital expenditures 4,255 3,252
Total capital expenditures $ 12,658 $ 8,836
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Contractual obligations
As of December 31, 2021, we had the following contractual obligations (see Note
8 of our accompanying consolidated financial statements for further discussion
regarding the specific terms of our debt):
Payment due by period (in thousands)
More than
Less than 1 1 - 3 years 3 - 5 years 5 years
Consolidated Contractual Obligations Total year (2022) (2023 - 2024) (2025 - 2026) (after
2026)
Long-Term Debt - Principal $ 643,613 $
101,962 $375,937 $34,286 $131,428
Long Term Debt – Fixed Interest
65,865 21,419 27,235 12,502
4,709
Long-Term Debt - Variable Interest (1) 4,959 4,959 - - - Unsecured Credit Facility - Unused commitment fee (2) 374 351 23 - - Operating Lease Obligations 232 92 108 32 - Related Party Rent Lease Obligations 18 18 - - - Total $ 715,061 $ 128,801 $ 403,303 $ 46,820 $ 136,137 (1) As of December 31, 2021, we had one loan totaling $119.5 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, 2021, of 0.10%. (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, 2021 balance of $384.5 million.
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 operating funds;
• our debt service requirements;
• our capital expenditure requirements for our properties;
• our taxable income, combined with the annual distribution requirements necessary to maintain REIT eligibility;
• requirements of Maryland law;
• our overall financial condition; and
• other factors deemed relevant by our Board of Directors.
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.
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On March 24, 2020, we announced that, in further pursuit of ensuring our
financial flexibility, the Board determined to conserve additional liquidity by
reducing our distribution in response to the COVID-19 pandemic. The distribution
reduction resulted in approximately $7.7 million of quarterly cash savings in
2020. On February 10, 2021, the Company announced an increase to its quarterly
distribution to $0.1075 per common share and OP units, equal to a monthly
distribution of $0.035833, beginning with the March 2021 distribution.
During 2021, we paid distributions to our common shareholders and OP unit
holders of $19.7 million, compared to $25.7 million in 2020. 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, 2021 and 2020:
Common Shares Noncontrolling OP Unit Holders Total
Distributions Per Total Amount Distributions Per Total Amount Total Amount
Quarter Paid Common Share Paid OP Unit Paid Paid
2021
Fourth Quarter $ 0.1075 $ 5,257 $ 0.1075 $ 83 $ 5,340
Third Quarter 0.1075 4,981 0.1075 83 5,064
Second Quarter 0.1075 4,602 0.1075 83 4,685
First Quarter 0.1058 4,480 0.1058 82 4,562
Total $ 0.4283 $ 19,320 $ 0.4283 $ 331 $ 19,651
2020
Fourth Quarter $ 0.1050 $ 4,432 $ 0.1050 $ 81 $ 4,513
Third Quarter 0.1050 4,430 0.1050 81 4,511
Second Quarter 0.1050 4,413 0.1050 91 4,504
First Quarter 0.2850 11,928 0.2850 258 12,186
Total $ 0.6000 $ 25,203 $ 0.6000 $ 511 $ 25,714
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 describe below the critical accounting policies that we believe could have the most significant impact on our consolidated financial statements.
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 (loss). Additionally, we have tenants who pay real estate
taxes directly to the taxing authority. We exclude these costs paid directly by
the tenant to third parties on our behalf from revenue recognized and the
associated property operating expense.
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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 4 to our accompanying consolidated financial
statements). Refer to Note 4 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.
Equity method. In accordance with ASU 2014-09 (“Topic 606”) and ASC 610, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets”, the Company accounts for its investment in Pillarstone OP using the equity method. in equivalence.
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, 2021, approximately $414,000 and $291,000 in interest
expense and real estate taxes, respectively, were capitalized. For the year
ended December 31, 2020, approximately $481,000 and $306,000 in interest expense
and real estate taxes, respectively, were capitalized. For the year ended
December 31, 2019, approximately $500,000 and $320,000 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. 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, 2021.
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 including the impact of the COVID-19 pandemic on tenants' businesses and
financial condition. We recognize an adjustment to rental revenue if we deem it
probable that the receivable will not be collected. 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, 2021 and
2020, we had an allowance for uncollectible accounts of $14.9 million and $16.4
million, respectively. For the years ending December 31, 2021, 2020 and 2019, we
recorded an
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adjustment to rental revenue in the amount of $(0.1) million, $5.6 million and
$1.5 million, respectively. Included in the adjustment to rental revenue for the
years ending December 31, 2021 and 2020, was a bad debt adjustment of
$0.1 million and $2.3 million, respectively, and a straight-line rent reserve
adjustment of $0.9 million and $1.2 million, respectively, related to credit
loss for the conversion of 59 and 102 tenants, respectively, to cash basis
revenue as a result of COVID-19 collectability analysis.
Unamortized Lease Commissions and Loan Costs. Leasing commissions are amortized
using the straight-line method over the terms of the related lease
agreements. Loan costs are amortized on the straight-line method over the terms
of the loans, which approximates the interest method. Costs allocated to
in-place leases whose terms differ from market terms related to acquired
properties are amortized over the remaining life of the respective leases.
Prepaids and Other Assets. Prepaids and other assets include escrows established
pursuant to certain mortgage financing arrangements for real estate taxes and
insurance and acquisition deposits which include earnest money deposits on
future acquisitions.
Federal Income Taxes. We elected to be taxed as a REIT under the Code beginning
with our taxable year ended December 31, 1999. As a REIT, we generally are not
subject to federal income tax on income that we distribute to our
shareholders. If we fail to qualify as a REIT in any taxable year, we will be
subject to federal income tax on our taxable income at regular corporate
rates. We believe that we are organized and operate in such a manner as to
qualify to be taxed as a REIT, and we intend to operate so as to remain
qualified as a REIT for federal income tax purposes.
State Taxes. We are subject to the Texas Margin Tax which is computed by
applying the applicable tax rate (1% for us) to the profit margin, which,
generally, will be determined for us as total revenue less a 30% standard
deduction. Although the Texas Margin Tax is not an income tax, FASB ASC 740,
"Income Taxes" ("ASC 740") applies to the Texas Margin Tax. As of December 31,
2021, 2020 and 2019, 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 and accounts and notes
payable. The carrying value of cash, cash equivalents, accounts receivable and
accounts payable are representative of their respective fair values due to 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 $643.6 million and $646.4 million as
compared to the book value of approximately $643.6 million and $645.2 million as
of December 31, 2021 and 2020, 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 $0.1 million as compared to the book value of approximately $0.1
million and $0.1 million as of December 31, 2021 and 2020, respectively.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2021 and 2020. 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, 2021 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 (loss) 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, 2021, we consider our
cash flow hedges to be highly effective.
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Recent Accounting Pronouncements. In April 2020, the FASB issued guidance on the
application of Topic 842, relating to concessions being made by lessors in
response to the COVID-19 pandemic. The guidance notes that it would be
acceptable for entities to make an election to account for lease concessions
relating to the effects of the COVID-19 pandemic consistent with how those
concessions would be accounted for under Topic 842 as though enforceable rights
and obligations for those concessions existed, even if such enforceable rights
and obligations are not explicitly contained in the lease contract. Thus, for
concessions relating to the COVID-19 pandemic, an entity would not have to
analyze each contract to determine whether enforceable rights and obligations
for concessions exist in the contract, and would have the option to apply, or
not to apply, the general lease modification guidance in Topic 842 as it stands.
We have elected this option to account for lease concessions relating to the
effects of the COVID-19 pandemic consistent with how those concessions would be
accounted for under Topic 842 as though enforceable rights and obligations for
those concessions existed. Therefore, such concessions are not accounted for as
a lease modification under Topic 842.
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Operating results
Year ended December 31, 2021 Compared to the year ended December 31, 2020
The following table provides a general comparison of our results of operations
for the years ended December 31, 2021 and 2020 (dollars in thousands, except per
share data):
Year Ended December 31,
2021 2020
Number of properties owned and operated 60 58
Aggregate GLA (sq. ft.) 5,205,966 4,848,652
Ending occupancy rate - operating portfolio(1) 92 % 89 %
Ending occupancy rate 91 % 88 %
Total revenues $ 125,365 $ 117,915
Total operating expenses 90,897 88,184
Total other expense 24,272 24,122
Earnings before investment in a non-trading real estate company and income tax
10,196 5,609 Equity in earnings of real estate partnership 609 921 Provision for income taxes (385) (379) Income from continuing operations 10,420 6,151 Income from discontinued operations 1,833 - Net income 12,253 6,151 Less: Net income attributable to noncontrolling interests 205 117 Net income attributable to Whitestone REIT
$12,048 $6,034
Funds from operations(2) $ 40,705 $ 36,375 Funds from operations core(3) 46,618 40,704 Property net operating income(4) 90,207 83,903 Distributions paid on common shares and OP units 19,651 25,714 Distributions per common share and OP unit $ 0.4283 $ 0.6000 (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, a non-GAAP measure, to net income, see “Funds from operations” below.
(3) For an explanation and reconciliation of funds from core operations, a non-GAAP measure, to net income, see “FFO Core” below.
(4) For an explanation and reconciliation of property net operating income, a non-GAAP measure, to net income, see “Property net operating income” below.
43 -------------------------------------------------------------------------------- We define "Same Stores" as properties that have been owned for the entire period being compared. For purposes of comparing the year ended December 31, 2021 to the year ended December 31, 2020, Same Stores include properties owned during the entire period from January 1, 2020 to December 31, 2021. 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 main components of revenue are detailed in the table below (in thousands, except percentages):
Year Ended December 31,
Revenue 2021 2020 Change % Change
Same Store
Rental revenues (1) $ 89,150 $ 87,291 $ 1,859 2 %
Recoveries (2) 32,272 33,442 (1,170) (3) %
Bad debt (3) 79 (5,649) 5,728 (101) %
Total rental 121,501 115,084 6,417 6 %
Other revenues (4) 920 2,233 (1,313) (59) %
Same Store Total 122,421 117,317 5,104 4 %
Non-Same Store and Management Fees
Rental revenues 1,709 - 1,709 Not Meaningful
Recoveries 656 - 656 Not Meaningful
Bad debt 11 - 11 Not Meaningful
Total rental (5) 2,376 - 2,376 Not Meaningful
Other revenues - - - Not Meaningful
Management fees 568 598 (30) (5) %
Non-Same Store and Management Fees Total 2,944 598 2,346 392 %
Total revenue $ 125,365 $ 117,915 $ 7,450 6 %
(1) The Same Store tenant rent increase of $1,859,000 resulted from an
increase of $656,000 from the increase in the average leased square feet to
4,454,580 from 4,421,060, and by the increase of $1,203,000 from the average
rent per leased square foot increasing from $19.74 to $20.01. Included in the
average rent per leased square feet mentioned above are Same Store rental
revenue decreases of $865,000 and $1,223,000 from straight-line rent write offs
during the years ended December 31, 2021 and December 31, 2020, respectively, as
a result of converting 59 and 102 tenants, respectively, to cash basis
accounting.
(2) The Same Store recoveries revenue decrease of $1,170,000 is primarily
attributable to increases in Same Store real estate tax costs recovered from
tenants.
(3) Bad debt increased Same Store total rental revenue by $79,000 during the
year ended December 31, 2021, as compared to a reduction of $5,649,000 during
the same period a year ago. The bad debt for the year ended December 31, 2020
was primarily attributable to increases in allowances against accrued
receivables as tenants have deferred or missed payments as a result of the
COVID-19 pandemic.
(4) The decrease in other comparable store income is mainly composed of the decrease in lease termination costs.
(5) Different store rental income includes Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on 1st December2021).
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Operating expenses. The primary components of operating expenses for the year
ended December 31, 2021 and 2020 are detailed in the table below (in thousands,
except percentages):
Year Ended December 31,
Operating Expenses 2021 2020 Change % Change
Same Store
Operating and maintenance (1) $ 21,309 $ 19,631 $ 1,678 9 %
Real estate taxes (2) 16,345 18,015 (1,670) (9) %
Same Store total 37,654 37,646 8 - %
Non-Same Store and affiliated company rents
Operating and maintenance (3) 352 - 352 Not Meaningful
Real estate taxes (3) 417 - 417 Not Meaningful
Affiliated company rents (4) 899 932 (33) (4) %
Non-Same Store and affiliated company rents
total 1,668 932 736 79 %
Depreciation and amortization 28,950 28,303 647 2 %
General and administrative (5) 22,625 21,303 1,322 6 %
Total operating expenses $ 90,897 $ 88,184 $ 2,713 3 %
(1) The $1,678,000 increase in Same Store operating and maintenance costs was
comprised of $567,000 in repairs and maintenance, $536,000 in labor and other
costs, $336,000 in contract services and $239,000 in utilities. Cost saving
initiatives were implemented in March of 2020 in response to the COVID-19
pandemic resulting in lower costs during the year ended December 31, 2020.
(2) Tax valuations and tax rates were lower during the year ended December 31,
2021 in our Texas and Arizona markets. 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.
(3) Different store operations and maintenance taxes and property taxes include Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on
1st December2021).
(4) Affiliate rents are space that we rent from Pillarstone OP.
(5) The $1,322,000 general and administrative expense increase was attributable
to a $717,000 increase in accrued bonus compensation, a $494,000 increase in
salaries and benefits and a $111,000 increase in other general and
administrative costs.
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Other expenses (income). The primary components of other expenses (income) for
the year ended December 31, 2021 and 2020 are detailed in the table below (in
thousands, except percentages):
Year Ended December 31,
Other Expenses (Income) 2021 2020 Change % Change
Interest expense (1) $ 24,564 $ 25,770 $ (1,206) (5) %
(Gain) loss on sale or disposal of assets
(2) (176) 364 (540) (148) %
Gain on loan forgiveness (3) - (1,734) 1,734 Not Meaningful
Interest, dividend and other investment
income (4) (116) (278) 162 (58) %
Total other expense $ 24,272 $ 24,122 $ 150 1 %
(1) The $1,206,000 decrease in interest expense is attributable to a decrease
in our effective interest rate to 3.71% for the year ended December 31, 2021 as
compared to 3.73% for the year ended December 31, 2020, resulting in a $132,000
decrease in interest expense, and a decrease in our average outstanding notes
payable balance of $28,367,000 that resulted in $1,057,000 in decreased interest
expense. Amortization of loan fees decreased interest expense by $17,000 for the
year ended December 31, 2021 as compared to the year ended December 31, 2020.
(2) During the year ended December 31, 2021, we recognized a $0.3 million gain
in connection with the sale of a retail building we completed on November 19,
2016. In 2016, we provided seller-financing for the retail building, Webster
Pointe, and deferred the seller-financed portion of the gain until the principal
payments were received. The purchaser of the building paid the remaining
principal balance of $0.3 million during 2021. As of December 31, 2021, we have
recognized all of the deferred gains associated with the retail building. During
the year ended December 31, 2020, we recognized a $0.4 million loss on a
long-lived asset intended for sale. The remainder of the losses recorded for the
years ended December 31, 2021 and December 31, 2020 were from asset disposals
associated with tenant move outs.
(3) We applied for and were granted forgiveness for the PPP Loan, and used the
proceeds to retain employees and maintain payroll and make mortgage payments,
lease payments and utility payments to support business continuity throughout
the COVID-19 pandemic.
(4) The $162,000 the decrease in interest income, dividends and other investments was mainly composed of the decrease in interest income on notes receivable.
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, decreased $312,000 from $921,000 for the year ended December 31, 2020 to
$609,000 for the year ended December 31, 2021. The majority of the $312,000
decrease was comprised of a decrease in revenue of $484,000, due to a decrease
in occupancy, offset by a higher loss on disposals of $128,000.
Gain on sale of property from discontinued operations. During the year ended
December 31, 2021, we recognized a $1.8 million gain in connection with the sale
of three office buildings we completed on December 31, 2014. We provided
seller-financing for the office buildings, Zeta, Royal Crest and Featherwood,
and deferred the gain until principal payments on the seller-financed loans were
received. The purchaser of the office buildings paid the remaining principal
balance of $1.8 million during 2021. As of December 31, 2021, we have recognized
all the deferred gains associated with the three office buildings.
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Comparable store net operating income. The components of Same Store net operating income are detailed in the table below (in thousands):
Year Ended
December 31, Increase % Increase
2021 2020 (Decrease) (Decrease)
Same Store (53 properties, excluding development
land)
Property revenues
Rental $ 121,501 $ 115,084 $ 6,417 6 %
Management, transaction and other fees 920 2,233 (1,313) (59) %
Total property revenues 122,421 117,317 5,104 4 %
Property expenses
Property operation and maintenance 21,309 19,631 1,678 9 %
Real estate taxes 16,345 18,015 (1,670) (9) %
Total property expenses 37,654 37,646 8 - %
Total property revenues less total property
expenses 84,767 79,671 5,096 6 %
Same Store straight-line rent adjustments (1,410) 542 (1,952) (360) %
Same Store amortization of above/below market
rents (835) (822) (13) 2 %
Same Store lease termination fees (320) (1,613) 1,293 (80) %
Same Store NOI(1) $ 82,202 $ 77,778 $ 4,424 6 %
(1) See below for a reconciliation between property net operating income and net income.
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Year Ended December 31,
PROPERTY NET OPERATING INCOME ("NOI") 2021 2020
Net income attributable to Whitestone REIT $ 12,048 $ 6,034
General and administrative expenses 22,625 21,303
Depreciation and amortization 28,950 28,303
Equity in earnings of real estate partnership (609) (921)
Interest expense 24,564 25,770
Interest, dividend and other investment income (116) (278)
Provision for income taxes 385 379
Gain on sale of property from discontinued operations (1,833) -
Management fee, net of related expenses 331 334
(Gain) loss on sale or disposal of assets, net (176) 364
Gain on loan forgiveness - (1,734)
NOI of real estate partnership (pro rata) 3,833 4,232
Net income attributable to noncontrolling interests 205 117
NOI $ 90,207 $ 83,903
Non-Same Store NOI (1) (1,607) -
NOI of real estate partnership (pro rata) (3,833) (4,232)
NOI minus Non-Same Store NOI and Real Estate Partnership NOI (prorated)
84,767 79,671
Same Store straight line rent adjustments (1,410) 542
Same Store amortization of above/below market rents (835) (822)
Same Store lease termination fees (320) (1,613)
Same Store NOI (2) $ 82,202 $ 77,778
(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, 2021 to the twelve months ended December 31, 2020,
Non-Same Stores include properties acquired between January 1, 2020 and
December 31, 2021 and properties sold between January 1, 2020 and December 31,
2021, 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, 2021 to the twelve months ended December 31, 2020, Same Stores
include properties owned before January 1, 2020 and not sold before December 31,
2021. Straight line rent adjustments, above/below market rents, and lease
termination fees are excluded.
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Year ended December 31, 2020 Compared to the year ended December 31, 2019
For a discussion and comparison of the results of our operations for the year
ended December 31, 2020 with the year ended December 31, 2019, refer to
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" in our Form 10-K for the year ended December 31, 2020 filed with the
SEC on March 8, 2021.
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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, as 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 Core Operations (“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.
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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):
Year Ended December 31,
FFO AND FFO CORE 2021 2020 2019
Net income attributable to Whitestone REIT $
12,048 $6,034 $23,683
Adjustments to reconcile to FFO:(1) Depreciation and amortization of real estate assets 28,806 28,096 26,468
Depreciation and impairment of SCI real estate assets (pro rata temporis) (2)
1,674 1,673 2,362 Loss (gain) on sale or disposal of assets (176) 364 (638) Gain on sale of property from discontinued operations (1,833) - (594)
Loss (gain) on sale or disposal of property or assets of a real estate company (pro rata) (2)
(19) 91 (13,800) Net income attributable to noncontrolling interests 205 117 545 FFO $
40,705 $36,375 $38,026
Share-based compensation expense $
5,913 $6,063 $6,483
Early debt extinguishment costs of real estate partnership - - 426 Gain on loan forgiveness - (1,734) - FFO Core $ 46,618 $ 40,704 $ 44,935 (1) Includes pro-rata share attributable to real estate partnership.
(2) Included in equity in the results of the real estate partnership in the consolidated statements of income and comprehensive income.
Property Net Operating Income (“NOI”)
NOI: Net Operating Income: 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 adjusts for 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 or loss on sale of property from discontinued operations, management
fee, net of related expenses, gain or loss on sale or disposal of assets, gain
on loan forgiveness, our pro rata share of NOI of equity method investments and
net income attributable to noncontrolling interests, 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, 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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Below is the NOI calculation and reconciliation to net income, which we believe is the most comparable GAAP financial measure (in thousands):
Year Ended December 31,
PROPERTY NET OPERATING INCOME ("NOI") 2021 2020 2019
Net income attributable to Whitestone REIT $ 12,048 $ 6,034 $ 23,683
General and administrative expenses 22,625 21,303 21,661
Depreciation and amortization 28,950 28,303 26,740
Equity in earnings of real estate partnership (609) (921) (15,076)
Interest expense 24,564 25,770 26,285
Interest, dividend and other investment income (116) (278) (659)
Provision for income taxes 385 379 400
Gain on sale of buildings from discontinued operations (1,833)
- (594) Management fee, net of related expenses 331 334 (42) (Gain) loss on sale or disposal of assets, net (176) 364 (638) Gain on loan forgiveness - (1,734) - NOI of real estate partnership (pro rata) 3,833 4,232 6,273 Net income attributable to noncontrolling interests 205 117 545 NOI $ 90,207 $ 83,903 $ 88,578 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 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.
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 4 to the accompanying consolidated financial statements for information related to our guarantees of our real estate partnership's debt as of December 31, 2021 and 2020.
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