WHITESTONE REIT You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the "Report"), and the consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report. This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, pending acquisitions and the impact of such acquisitions on our financial condition and results of operations, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "potential," "predicts," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this Report. 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 Report include:
•uncertainties related to the COVID-19 pandemic, including the unknown duration and economic, operational and financial impacts of the COVID-19 pandemic and the actions taken or contemplated byU.S. and local governmental authorities or others in response to the pandemic on our business, employees and tenants, including, among others, (a) changes in tenant demand for our properties, (b) financial challenges confronting major tenants, including as a result of decreased customers' willingness to frequent, and mandated stay in place orders that have prevented customers from frequenting, some of our tenants' businesses and the impact of these issues on our ability to collect rent from our tenants; (c) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (d) significant reduction in our liquidity due to a reduced borrowing base under our 2019 Facility and limited ability to access the capital markets and other sources of financing on attractive terms or at all, and (e) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19; •adverse economic or real estate developments or conditions inTexas orArizona ,Houston andPhoenix in particular, including as a result of a surge in COVID-19 cases in such areas and the impact on our tenants' ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments; •the imposition of federal income 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; •the risk of government investigation of the Paycheck Protection Program loan (the "PPP Loan"); •uncertainties related to the national economy, the real estate industry in general and in our specific markets, including, but not limited to, the significant volatility and disruption in the global financial markets caused by the COVID-19 pandemic; •legislative or regulatory changes, including changes to laws governing REITs and the impact of the legislation commonly known as the Tax Cuts and Jobs Act; •increases in interest rates, operating costs or general and administrative expenses; •availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures; 32 -------------------------------------------------------------------------------- Table of Contents •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 tenant leases or obtain new tenant leases 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 our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as previously filed with theSecurities and Exchange Commission ("SEC") and of this Report below.
Overview
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 inTexas ,Arizona andIllinois . InOctober 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. We serve as the general partner ofWhitestone REIT Operating Partnership, L.P. (the "Operating Partnership"), which was formed onDecember 31, 1998 as aDelaware limited partnership. We currently conduct substantially all of our operations and activities through theOperating Partnership . As the general partner of theOperating Partnership , we have the exclusive power to manage and conduct the business of theOperating Partnership , subject to certain customary exceptions.
As of
Consolidated Operating Portfolio
•53 wholly-owned properties that meet our Community Centered Properties®
strategy containing approximately 5.0 million square feet of gross leasable area
("GLA") and having a total carrying amount (net of accumulated depreciation) of
$913.4 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 value of
As ofJune 30, 2021 , we had an aggregate of 1,440 tenants. We have a diversified tenant base with our largest tenant comprising only 2.9% of our annualized rental revenues for the six months endedJune 30, 2021 . Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants. Our leases include minimum monthly lease payments and generally provide for tenant reimbursements for payment of taxes, insurance and maintenance. We completed 186 new and renewal leases during the six months endedJune 30, 2021 , totaling 481,847 square feet and approximately$60.7 million in total lease value. This compares to 144 new and renewal leases totaling 401,384 square feet and approximately$36.9 million in total lease value during the same period in 2020. 33 -------------------------------------------------------------------------------- Table of Contents We employed 91 full-time employees as ofJune 30, 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.
As ofJune 30, 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 926,798 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.
Impact of COVID-19
The following discussion is intended to provide our shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management's efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our portfolio and tenants are estimates based on information available to us as ofAugust 6, 2021 . As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition, and that of our tenants, for future periods. 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 due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, the unknown timing or effectiveness of treatments, possible resurgences of COVID-19 cases in future periods and how quickly and to what extent normal economic and operating conditions can resume.
Our portfolio and tenants have been impacted by these and other factors as follows:
•As of the date of this Quarterly Report on Form 10-Q, all of our properties are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates. •Included in our adjustments to rental revenue for the six months endingJune 30, 2021 , was a bad debt adjustment of$0.6 million and a straight-line rent reserve adjustment of$0.2 million related to credit loss for the conversion of 56 tenants to cash basis revenue as a result of COVID-19 collectability analysis. •As of the date of this Quarterly Report on Form 10-Q, we have received payments of approximately 97.2% of contractual base rent and common area maintenance reimbursables billed for the second quarter.
We have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:
•To ensure adequate liquidity for a sustained period, inMarch 2020 , we drew down$30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. As ofJune 30, 2021 , subject to any potential future paydowns or increases in the borrowing base, we have$55.1 million of remaining availability under our revolving credit facility. We have cash, cash equivalents and restricted cash of approximately$22.5 million as ofJune 30, 2021 . •Our board of trustees has reduced our quarterly dividend from$0.2850 per share in the first quarter of 2020 to$0.1075 per common share and OP unit for the second quarter of 2021. The board of trustees will regularly reassess the dividend level. •We have implemented expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability. •We adapted our operations to protect employees and minimize travel through use of virtual meeting technology. We believe these steps have been effective to date and will continue to monitor pandemic-related impacts on our business and implement additional measures as needed. 34
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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$30.6 million and$27.6 million for the three months endedJune 30, 2021 and 2020, respectively, and$59.7 million and$58.2 million for the six months endedJune 30, 2021 and 2020, respectively.
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. However, as of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 97.2% of contractual base rent and common area maintenance reimbursables billed for the second quarter. Included in our adjustments to rental revenue for the conversion of 56 tenants to cash basis revenue was a bad debt adjustment of$0.1 million and a straight-line rent reserve adjustment of$0.1 million for the three months endingJune 30, 2021 , and a bad debt adjustment of$0.6 million and a straight-line rent reserve adjustment of$0.2 million for the six months endingJune 30, 2021 . 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.
Scheduled Lease Expirations
We tend to lease space to smaller businesses that desire shorter term leases. As ofJune 30, 2021 , approximately 21% of our GLA was subject to leases that expire prior toDecember 31, 2022 . Over the last three calendar years, we have renewed expiring leases with respect to approximately 83% 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 24 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 work 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 seek to grow our GLA through the acquisition of additional properties, and we are carefully evaluating development and redevelopment activities on a case-by-case basis. 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, Dispositions and Development
We seek to acquire commercial properties in high-growth markets. Our acquisition
targets are properties that fit our Community Centered Properties® strategy. We
may acquire properties in other high-growth cities in the future.
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On July 8, 2021 , we acquired Lakeside Market, a property that meets our
Community Centered Property® strategy, for $53.2 million in cash and net
prorations. Lakeside Market, a 163,000 square foot property, was 80.5% leased at
the time of purchase and is located in Plano, Texas .
Leasing Activity
As ofJune 30, 2021 , we owned 58 properties with 4,953,571 square feet of GLA and our occupancy rate for all properties was approximately 90% and 89% occupied as ofJune 30, 2021 and 2020, respectively. The following is a summary of the Company's leasing activity for the six months endedJune 30, 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 98 272,518 4.9 $ 5.05 $ 20.41 $ 20.55 8.6 % New Leases 45 95,904 6.3 19.77 24.34 26.11 4.4 % Total 143 368,422 5.3 $ 8.88 $ 21.43 $ 22.00 7.3 % Number of Weighted Average TI and Incentives Contractual Rent Leases Signed GLA Signed Lease Term (2) per Sq. Ft. (3) Per Sq. Ft. (4) Non-Comparable Renewal Leases 7 17,265 3.5 $ 2.52 $ 22.51 New Leases 36 96,160 6.5 16.53 21.11 Total 43 113,425 6.0$ 14.40 $ 21.33
(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 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 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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Capital Expenditures
The following is a summary of the Company's capital expenditures for the three
and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Capital expenditures:
Tenant improvements and allowances $ 485
Developments / redevelopments 284 192 736 379 Leasing commissions and costs 929 302 1,728 678 Maintenance capital expenditures 1,202 728 1,803 1,446 Total capital expenditures$ 2,900 $
1,762
Critical Accounting Policies
In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , under "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no significant changes to these policies during the six months endedJune 30, 2021 . For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Comparison of the Three Months Ended
The comparability of our results of operations for the three months endedJune 30, 2021 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the three months endedJune 30, 2021 and 2020 (dollars in thousands, except per share and per OP unit amounts):
Three Months Ended
2021 2020
Number of properties owned and operated 58 58
Aggregate GLA (sq. ft.) 4,953,571 4,848,652
Ending occupancy rate - operating portfolio 90 % 89 %
Ending occupancy rate 90 % 89 %
Total revenues $ 30,618 $ 27,597
Total operating expenses 21,439 20,394
Total other expense 5,896 7,052Income before equity investment in real estate partnership and income tax
3,283 151
Equity in earnings of real estate partnership 189 364
Provision for income tax (87) (96)
Income from continuing operations 3,385 419
Gain on sale of property from discontinued operations 1,833 -
Net income 5,218 419
Less: Net income attributable to noncontrolling interests 92 9
Net income attributable to Whitestone REIT $ 5,126 $ 410
Funds from operations(1) $ 10,618 $ 8,413
Funds from operations core(2) 11,862 9,609
Property net operating income(3) 22,049 20,037
Distributions paid on common shares and OP units 4,685 4,504
Distributions per common share and OP unit $ 0.1075 $ 0.1050
Distributions paid as a percentage of funds from operations core 39 % 47 %
(1) For a reconciliation of funds from operations to net income, see "-Reconciliation of Non-GAAP Financial Measures-Funds From Operations ("FFO")" below.
(2) For a reconciliation of funds from operations core to net income, see "-Reconciliation of Non-GAAP Financial Measures-FFO Core" below.
(3) For a reconciliation of property net operating income to net income, see
"-Reconciliation of Non-GAAP Financial Measures-Property Net Operating Income
("NOI")" below.
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We define "Same Store" as properties that have been owned for the entire period
being compared. For purposes of comparing the three months ended June 30, 2021
to the three months ended June 30, 2020 , Same Store includes properties owned
during the entire period from April 1, 2020 to June 30, 2021 . We define
"Non-Same Store " as properties acquired since the beginning of the period being
compared and properties that have been sold, but not classified as discontinued
operations. As of June 30, 2021 , we did not have any Non-Same Store properties.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
Three Months Ended June 30,
Revenue 2021 2020 Change % Change
Same Store
Rental revenues (1) $ 22,238 $ 21,706 $ 532 2 %
Recoveries (2) 8,057 7,674 383 5 %
Bad debt (3) (143) (2,328) 2,185 (94) %
Total rental 30,152 27,052 3,100 11 %
Other revenues 321 390 (69) (18) %
Same Store Total 30,473 27,442 3,031 11 %
Non-Same Store and Management Fees
Rental revenues - - - Not meaningful
Recoveries - - - Not meaningful
Bad debt - - - Not meaningful
Total rental - - - Not meaningful
Other revenues - - - Not meaningful
Management fees 145 155 (10) (6) %
Non-Same Store and Management Fees Total 145 155 (10) (6) %
Total revenue $ 30,618 $ 27,597 $ 3,021 11 %
(1) The Same Store rental revenues increase of $532,000 resulted from a
decrease of $43,000 from lower average leased square feet from 4,431,681 to
4,422,648, and an increase of $575,000 from higher average rent per leased
square foot from $19.59 to $20.11 . Same Store rental revenues include
straight-line rent write offs for tenants converted to cash basis accounting of
$76,000 and $457,000 for the three months ended June 30, 2021 and June 30, 2020 ,
respectively.
(2)
(3) Bad debt decreased Same Store total rental revenue by$143,000 , including$142,000 from cash basis accounting, during the three months endedJune 30, 2021 , as compared to a reduction of$2,328,000 , including$717,000 from cash basis accounting, during the same period a year ago. As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 97.2% of contractual base rent and common area maintenance reimbursables billed for the second quarter. 39
-------------------------------------------------------------------------------- Table of Contents Operating expenses. The primary components of operating expenses for the three months endedJune 30, 2021 and 2020 are detailed in the table below (in thousands, except percentages): Three Months Ended June 30, Operating Expenses 2021 2020 Change % Change Same Store Operating and maintenance (1)$ 5,216 $ 4,184 $ 1,032 25 % Real estate taxes 4,160 4,385 (225) (5) % Same Store total 9,376 8,569 807 9 %Non-Same Store and affiliated company rents Operating and maintenance - - - Not meaningful Real estate taxes - - - Not meaningful Affiliated company rents (2) 228 211 17 8 %Non-Same Store and affiliated company rents total 228 211 17 8 % Depreciation and amortization 7,105 6,970 135 2 % General and administrative (3) 4,730 4,644 86 2 % Total operating expenses$ 21,439 $ 20,394 $ 1,045 5 % (1) The$1,032,000 Same Store operating and maintenance cost increase included$333,000 in increased contract services costs,$303,000 in increased repair and maintenance costs,$258,000 in increased utility costs and$138,000 in other increased costs. Cost saving initiatives implemented by the Company in March of 2020 in response to the COVID-19 pandemic generally lowered operating and maintenance costs during three months endedJune 30, 2020 . Operating and maintenance costs were closer to normal levels during the three months endedJune 30, 2021 .
(2) Affiliated company rents are spaces that we lease from Pillarstone OP.
(3) The general and administrative expense increase is attributable to a$690,000 increase in accrued bonus compensation, a$337,000 increase in other payroll costs and a$83,000 increase other G&A expenses, offset by a decrease in legal and professional fees of$1,024,000 primarily from a legal fee reimbursement of$750,000 received during the three months endedJune 30, 2021 as part of a legal settlement with a property owner of a land parcel adjacent to a Whitestone property inScottsdale, Arizona . For further discussion of the legal settlement see Footnote 17 "Commitments and Contingences." 40 -------------------------------------------------------------------------------- Table of Contents Other expenses (income). The primary components of other expenses (income) for the three months endedJune 30, 2021 and 2020 are detailed in the table below (in thousands, except percentages): Three Months Ended
Other Expenses (Income) 2021 2020 Change % Change
Interest expense (1) $ 6,143 $ 6,468 $ (325) (5) %
(Gain) loss on sale or disposal of assets,
net (2) (224) 657 (881) (134) %
Interest, dividend and other investment
income (23) (73) 50 (68) %
Total other expense $ 5,896 $ 7,052 $ (1,156) (16) %
(1) The $325,000 decrease in interest expense for the three months ended
June 30, 2021 as compared to the three months ended June 30, 2020 included
$422,000 from a decrease in the average outstanding notes payable from $676
million to $630 million offset by a $103,000 increase from an increase in the
effective annual interest rate from 3.66% to 3.73%, and a $6,000 decrease in the
amortization of loan fees.
(2) During the three months ended June 30, 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 June 30, 2021 , we have
recognized all of the deferred gains associated with the retail building. During
the three months ended June 30, 2020 , we recognized a $0.4 million impairment on
a long-lived asset intended for sale. The remainder of the losses recorded for
the three months ended June 30, 2021 and June 30, 2020 were from asset disposals
associated with tenant move outs.
Gain on sale of property from discontinued operations. During the three months
ended June 30, 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 June 30, 2021 we have recognized all
the deferred gains associated with the three office buildings.
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 $175,000 from $364,000 for the three months ended June 30, 2020 to
$189,000 for the three months ended June 30, 2021 . Please refer to Note 6
(Investment in Real Estate Partnership ) to the accompanying consolidated
financial statements for more information regarding our investment in
Pillarstone OP.
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Table of
Three Months Ended June 30, Increase % Increase
2021 2020 (Decrease) (Decrease)
Same Store (53 properties, excluding development
land)
Property revenues
Rental $ 30,152 $ 27,052 $ 3,100 11 %
Management, transaction and other fees 321 390 (69) (18) %
Total property revenues 30,473 27,442 3,031 11 %
Property expenses
Property operation and maintenance 5,216 4,184 1,032 25 %
Real estate taxes 4,160 4,385 (225) (5) %
Total property expenses 9,376 8,569 807 9 %
Total property revenues less total property
expenses 21,097 18,873 2,224 12 %
Same Store straight-line rent adjustments (484) 285 (769) (270) %
Same Store amortization of above/below market
rents (240) (226) (14) 6 %
Same Store lease termination fees (150) (271) 121 (45) %
Same Store NOI(1) $ 20,223 $ 18,661 $ 1,562 8 %
(1) See below for a reconciliation of property net operating income to net income.
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Three Months Ended June 30,
PROPERTY NET OPERATING INCOME ("NOI") 2021 2020
Net income attributable to Whitestone REIT $ 5,126 $ 410
General and administrative expenses 4,730 4,644
Depreciation and amortization 7,105 6,970
Equity in earnings of real estate partnership (189) (364)
Interest expense 6,143 6,468
Interest, dividend and other investment income (23) (73)
Provision for income taxes 87 96
Gain on sale of property from discontinued operations (1,833) -
Management fee, net of related expenses 83 56
(Gain) loss on sale or disposal of assets, net (224) 657
NOI of real estate partnership (pro rata) 952 1,164
Net income attributable to noncontrolling interests 92 9
NOI $ 22,049 $ 20,037
Non-Same Store NOI (1) - -
NOI of real estate partnership (pro rata) (952) (1,164)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
21,097 18,873
Same Store straight-line rent adjustments (484) 285
Same Store amortization of above/below market rents (240) (226)
Same Store lease termination fees (150) (271)
Same Store NOI (2) $ 20,223 $ 18,661
(1) We define "Non-Same Store " 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 three
months ended June 30, 2021 to the three months ended June 30, 2020 , Non-Same
Store includes properties acquired between April 1, 2020 and June 30, 2021 and
properties sold between April 1, 2020 and June 30, 2021 , but not included in
discontinued operations.
(2) We define "Same Store" as properties that have been owned during the entire
period being compared. For purposes of comparing the three months ended June 30,
2021 to the three months ended June 30, 2020 , Same Store includes properties
owned before April 1, 2020 and not sold before June 30, 2021 . Straight-line rent
adjustments, above/below market rents, and lease termination fees are excluded.
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Comparison of the Six Months Ended
The comparability of our results of operations for the six months endedJune 30, 2021 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the six months endedJune 30, 2021 and 2020 (dollars in thousands, except per share and per OP unit amounts):
Six Months Ended
2021 2020
Number of properties owned and operated 58 58
Aggregate GLA (sq. ft.) 4,953,571 4,848,652
Ending occupancy rate - operating portfolio 90 % 89 %
Ending occupancy rate 90 % 89 %
Total revenues $ 59,663 $ 58,181
Total operating expenses 42,963 42,598
Total other expense 11,978 13,890
Income before equity investment in real estate partnership and income tax
4,722 1,693
Equity in earnings of real estate partnership 278 556
Provision for income tax (174) (183)
Income from continuing operations 4,826 2,066
Gain on sale of property from discontinued operations 1,833 -
Net income 6,659 2,066
Less: Net income attributable to noncontrolling interests 118 44
Net income attributable to Whitestone REIT $ 6,541 $ 2,022
Funds from operations(1) $ 19,443 $ 17,678
Funds from operations core(2) 22,155 20,200
Property net operating income(3) 43,188 41,693
Distributions paid on common shares and OP units 9,247 16,690
Distributions per common share and OP unit $ 0.2133 $ 0.3900
Distributions paid as a percentage of funds from operations core 42 % 83 %
(1) For a reconciliation of funds from operations to net income, see "-Reconciliation of Non-GAAP Financial Measures-Funds From Operations ("FFO")" below.
(2) For a reconciliation of funds from operations core to net income, see "-Reconciliation of Non-GAAP Financial Measures-FFO Core" below.
(3) For a reconciliation of property net operating income to net income, see
"-Reconciliation of Non-GAAP Financial Measures-Property Net Operating Income
("NOI")" below.
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We define "Same Store" as properties that have been owned for the entire period
being compared. For purposes of comparing the six months ended June 30, 2021 to
the six months ended June 30, 2020 , Same Store includes properties owned during
the entire period from January 1, 2020 to June 30, 2021 . We define "Non-Same
Store " 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):
Six Months Ended June 30,
Revenue 2021 2020 Change % Change
Same Store
Rental revenues (1) $ 43,864 $ 43,783 $ 81 - %
Recoveries(2) 15,655 16,637 (982) (6) %
Bad debt(3) (672) (3,172) 2,500 (79) %
Total rental 58,847 57,248 1,599 3 %
Other revenues 532 622 (90) (14) %
Same Store Total 59,379 57,870 1,509 3 %
Non-Same Store and Management Fees
Rental revenues - - - Not meaningful
Recoveries - - - Not meaningful
Bad debt - - - Not meaningful
Total rental - - - Not meaningful
Other revenues - - - Not meaningful
Management fees 284 311 (27) (9) %
Non-Same Store and Management Fees Total 284 311 (27) (9) %
Total revenue $ 59,663 $ 58,181 $ 1,482 3 %
(1) The Same Store rental revenues increase of $81,000 resulted from an
increase of $463,000 from the average rent per leased square foot increasing
from $19.69 to $19.90 and a decrease of $382,000 from the decrease in the
average leased square feet to 4,409,335 from 4,446,914. Same Store rental
revenues include straight-line rent write offs for tenants converted to cash
basis accounting of $228,000 and $947,000 for the six months ended June 30, 2021
and June 30, 2020 , respectively.
(2)
(3) Bad debt decreased Same Store total rental revenue by$672,000 , including$568,000 from cash basis accounting, during the six months endedJune 30, 2021 , as compared to a reduction of$3,172,000 , including$1,078,000 from cash basis accounting, during the same period a year ago. As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 97.2% of contractual base rent and common area maintenance reimbursables billed for the second quarter. 45 -------------------------------------------------------------------------------- Table of Contents Operating expenses. The primary components of operating expenses for the six months endedJune 30, 2021 and 2020 are detailed in the table below (in thousands, except percentages): Six Months Ended
Operating Expenses 2021 2020 Change % Change
Same Store
Operating and maintenance (1) $ 9,836 $ 9,516 $ 320 3 %
Real estate taxes (2) 8,198 8,921 (723) (8) %
Same Store total 18,034 18,437 (403) (2) %
Non-Same Store and affiliated company rents
Operating and maintenance - - - Not meaningful
Real estate taxes - - - Not meaningful
Affiliated company rents (3) 447 476 (29) (6) %
Non-Same Store and affiliated company rents
total 447 476 (29) (6) %
Depreciation and amortization 14,118 13,941 177 1 %
General and administrative (4) 10,364 9,744 620 6 %
Total operating expenses $ 42,963 $ 42,598 $ 365 1 %
(1) The
(2) Real estate taxes included
(3) Affiliated company rents are spaces that we lease from Pillarstone OP.
(4) The general and administrative expense increase is attributable to a$1,657,000 increase in accrued bonus compensation, a$190,000 increase in share-based compensation costs and a$12,000 increase other G&A expenses, offset by a decrease in legal and professional fees of$1,239,000 primarily from a legal fee reimbursement of$750,000 received during the six month endedJune 30, 2021 as part of a legal settlement with a property owner of a land parcel adjacent to a Whitestone property inScottsdale, Arizona . For further discussion of the legal settlement see Footnote 17 "Commitments and Contingences." 46 -------------------------------------------------------------------------------- Table of Contents Other expenses (income). The primary components of other expenses (income) for the six months endedJune 30, 2021 and 2020 are detailed in the table below (in thousands, except percentages): Six Months Ended June 30, Other Expenses (Income) 2021 2020 Change % Change Interest expense (1)$ 12,275 $ 13,161 $ (886) (7) % (Gain) loss on sale or disposal of assets, net (2) (225) 864 (1,089) (126) % Interest, dividend and other investment income (72) (135) 63 (47) % Total other expense$ 11,978 $ 13,890 $ (1,912) (14) % (1) The$886,000 decrease in interest expense for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 included$585,000 from a decrease in the average outstanding notes payable from$665 million to$635 million , a$287,000 decrease from a decrease in the effective annual interest rate from 3.79% to 3.70%, and a$14,000 decrease in the amortization of loan fees. (2) During the six months endedJune 30, 2021 , we recognized a$0.3 million gain in connection with the sale of a retail building we completed onNovember 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 ofJune 30, 2021 , we have recognized all of the deferred gains associated with the retail building. During the six months endedJune 30, 2020 , we recognized a$0.4 million impairment on a long-lived asset intended for sale. The remainder of the losses recorded for the six months endedJune 30, 2021 andJune 30, 2020 were from asset disposals associated with tenant move outs. Gain on sale of property from discontinued operations. During the six months endedJune 30, 2021 , we recognized a$1.8 million gain in connection with the sale of three office buildings we completed onDecember 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 ofJune 30, 2021 we have recognized all the deferred gains associated with the three office buildings. 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$278,000 from$556,000 for the six months endedJune 30, 2020 to$278,000 for the six months endedJune 30, 2021 . Please refer to Note 6 (Investment inReal Estate Partnership ) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP. 47
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Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):
Six Months Ended June 30, Increase % Increase
2021 2020 (Decrease) (Decrease)
Same Store (53 properties, excluding development
land)
Property revenues
Rental $ 58,847 $ 57,248 $ 1,599 3 %
Management, transaction and other fees 532 622 (90) (14) %
Total property revenues 59,379 57,870 1,509 3 %
Property expenses
Property operation and maintenance 9,836 9,516 320 3 %
Real estate taxes 8,198 8,921 (723) (8) %
Total property expenses 18,034 18,437 (403) (2) %
Total property revenues less total property
expenses 41,345 39,433 1,912 5 %
Same Store straight-line rent adjustments (694) 619 (1,313) (212) %
Same Store amortization of above/below market
rents (441) (434) (7) 2 %
Same Store lease termination fees (227) (301) 74 (25) %
Same Store NOI(1) $ 39,983 $ 39,317 $ 666 2 %
(1) See below for a reconciliation of property net operating income to net income.
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Six Months Ended June 30,
PROPERTY NET OPERATING INCOME ("NOI") 2021 2020
Net income attributable to Whitestone REIT $ 6,541 $ 2,022
General and administrative expenses 10,364 9,744
Depreciation and amortization 14,118 13,941
Equity in earnings of real estate partnership (278) (556)
Interest expense 12,275 13,161
Interest, dividend and other investment income (72) (135)
Provision for income taxes 174 183
Gain on sale of property from discontinued operations (1,833) -
Management fee, net of related expenses 163 165
(Gain) loss on sale or disposal of assets, net (225) 864
NOI of real estate partnership (pro rata) 1,843 2,260
Net income attributable to noncontrolling interests 118 44
NOI $ 43,188 $ 41,693
Non-Same Store NOI (1) - -
NOI of real estate partnership (pro rata) (1,843) (2,260)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
41,345 39,433
Same Store straight-line rent adjustments (694) 619
Same Store amortization of above/below market rents (441) (434)
Same Store lease termination fees (227) (301)
Same Store NOI (2) $ 39,983 $ 39,317
(1) We define "Non-Same Store " 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 six
months ended June 30, 2021 to the six months ended June 30, 2020 , Non-Same Store
includes properties acquired between January 1, 2020 and June 30, 2021 and
properties sold between January 1, 2020 and June 30, 2021 , but not included in
discontinued operations.
(2) We define "Same Store" as properties that have been owned during the entire
period being compared. For purposes of comparing the six months ended June 30,
2021 to the six months ended June 30, 2020 , Same Store includes properties owned
before January 1, 2020 and not sold before June 30, 2021 . Straight-line rent
adjustments, above/below market rents, and lease termination fees are excluded.
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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) (calculated 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.
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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 comparableU.S. GAAP financial measure (in thousands): Three Months Ended June 30, Six Months Ended June 30, FFO (NAREIT) AND FFO-CORE 2021 2020 2021 2020 Net income attributable to Whitestone REIT$ 5,126
Adjustments to reconcile to FFO:(1) Depreciation and amortization of real estate 7,068 6,909 14,048 13,818
Depreciation and amortization of real estate assets of real estate partnership (pro rata)
409 427 814 876
(Gain) loss on sale or disposal of assets, net (224) 657 (225) 864
Gain on sale of property from discontinued operations (1,833) - (1,833) -
(Gain) loss on sale or disposal of properties or
assets of real estate partnership (pro rata)(2) (20) 1 (20) 54
Net income attributable to noncontrolling interests 92 9 118 44
FFO (NAREIT) 10,618
8,413
1,244 1,196 $ 2,712 $ 2,522
FFO Core $ 11,862 $ 9,609 $ 22,155 $ 20,200 (1) Includes pro-rata share attributable to real estate partnership.
(2) Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).
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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Below is the calculation of NOI and the reconciliations to net income, which we
believe is the most comparable U.S. GAAP financial measure (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
PROPERTY NET OPERATING INCOME 2021 2020 2021 2020
Net income attributable to Whitestone REIT $ 5,126 $ 410 $ 6,541 $ 2,022
General and administrative expenses 4,730 4,644 10,364 9,744
Depreciation and amortization 7,105 6,970 14,118 13,941
Equity in earnings of real estate partnership (189) (364) (278) (556)
Interest expense 6,143 6,468 12,275 13,161
Interest, dividend and other investment income (23) (73) (72) (135)
Provision for income taxes 87 96 174 183
Gain on sale of property from discontinued
operations (1,833) - (1,833) -
Management fee, net of related expenses 83 56 163 165
(Gain) loss on sale or disposal of assets, net (224) 657 (225) 864
NOI of real estate partnership (pro rata) 952 1,164 1,843 2,260
Net income attributable to noncontrolling
interests 92 9 118 44
NOI $ 22,049 $ 20,037 $ 43,188 $ 41,693 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$0.1075 per common 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 six months endedJune 30, 2021 , our cash provided from operating activities was$14,089,000 and our total distributions were$9,247,000 . Therefore, we had cash flow from operations in excess of distributions of approximately$4,842,000 . We anticipate that cash flows from operating activities and our borrowing capacity under our unsecured revolving credit facility will provide adequate capital for our 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 properties 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. To ensure adequate liquidity for a sustained period, inMarch 2020 , we drew down$30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. OnFebruary 10, 2021 , the Company announced an increase to its quarterly distribution to$0.1075 per common share and OP unit, equal to a monthly distribution of$0.035833 , beginning with theMarch 2021 distribution. The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve. As ofJune 30, 2021 , subject to any potential future paydowns or increases in the borrowing base, we have$55.1 million remaining availability under the revolving credit facility. OnMay 14, 2020 , the Board authorized a dividend of one preferred share purchase right (a "Right") for each outstanding common share payable onMay 26, 2020 (the "Record Date"), to the holders of record of common shares as of5:00 P.M. ,New York City time, on the Record Date. In connection with the Rights, the Company andAmerican Stock Transfer & 52 -------------------------------------------------------------------------------- Table of ContentsTrust Company, LLC , as rights agent, entered into a Rights Agreement, dated as ofMay 14, 2020 (the "Rights Agreement"). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a "Unit") of a Series A Preferred Share, par value$0.001 per share (each a "Preferred Share"), of the Company at a purchase price of$30.00 per Unit, subject to adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a one-for-one basis. Pursuant to the Rights Agreement, the Rights were scheduled to expire on the earliest of (i) the close of business onMay 13, 2021 , (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. OnApril 21, 2021 , the Company entered into the First Amendment to Rights Agreement (the "First Amendment to Rights Agreement") withAmerican Stock Transfer and Trust, LLC , as rights agent, solely to extend the expiration date of the Rights under the Rights Agreement from the close of business onMay 13, 2021 to the close of business onMay 13, 2022 , unless earlier exercised, exchanged, amended, redeemed, or terminated, as described above. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement, as amended by the First Amendment to Rights Agreement.
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 due to, among other things:
•the potential reduction in the borrowing base under our 2019 Facility due to the potential reduction in real estate values and a reduction in our NOI as a result of our tenants' inability or unwillingness to pay rent timely or at all and increased vacancy rates due to the risk of tenants closing their businesses and delays in leasing vacant space due to potential lack of demand for retail space; •the price of our common shares being below our estimates of our net asset value, which would result in any offering of our common shares to be dilutive to our existing shareholders. Despite these challenges, we believe we have sufficient access to capital for the foreseeable future, but we can provide no assurance that, if the impact of the COVID-19 pandemic continues for an extended period of time significantly worsens, that such capital will be available to us on attractive terms or at all. We are unable to predict and determine the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in the long term. We have taken a number of proactive measures to maintain the strength of our business and manage the impact of the COVID-19 pandemic on our operations and liquidity, including the following: •To ensure adequate liquidity for a sustained period, inMarch 2020 , we drew down$30 million of the availability of the revolving credit facility as a precautionary measure to preserve our financial flexibility, which we subsequently paid down in the fourth quarter of 2020. As ofJune 30, 2021 , subject to any potential future paydowns or increases in the borrowing base, we have$55.1 million remaining availability under the revolving credit facility. As ofJune 30, 2021 , we have cash, cash equivalents and restricted cash of approximately$22.5 million . •Our board of trustees has reduced our quarterly dividend from$0.2850 per share in the first quarter of 2020 to$0.1075 per common share and OP unit for the second quarter of 2021. The board of trustees will regularly reassess the dividend level. •We have implemented expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability. •We adapted our operations to protect employees and minimize travel through use of virtual meeting technology. We believe these steps have been effective to date and will continue to monitor pandemic-related impacts on our business and implement additional measures as needed. As economic conditions improve and favorable opportunities arise, we intend to continue acquiring additional properties that meet our Community Centered Property® strategy through equity issuances and debt financing. 53 -------------------------------------------------------------------------------- Table of Contents OnApril 30, 2020 , the Company entered into a loan in the principal amount of$1,733,510 fromU.S. Bank National Association , one of the Company's existing lenders, pursuant to the Paycheck Protection Program (the "PPP Loan") of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"). The PPP Loan was set to mature onMay 6, 2022 (the "Maturity Date"), and accrued interest at 1.00% per annum and could be prepaid in whole or in part without penalty. Principal and interest were payable in 18 monthly installments of$96,864.28 , beginning onDecember 6, 2020 , plus a final payment equal to all unpaid principal and accrued interest on the Maturity Date. Pursuant to the CARES Act, the Company applied for and was granted forgiveness for all of the PPP Loan. Forgiveness was determined by theU.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 intended to and 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, which amounts were eligible for forgiveness, subject to the provisions of the CARES Act. Based on the guidance in FASB ASC 405-20, "Liabilities - Extinguishment of Liabilities," the PPP loan remains a liability until either (1) it is wholly or partially forgiven and we have been legally released, or (2) it is paid off. Since the loan was partially or wholly forgiven and legal release was received, the liability was reduced by the amount forgiven and a gain on extinguishment was recognized. The Company recognized a$1,734,000 gain for the PPP Loan forgiveness during the year endedDecember 31, 2020 based on the legal release from theU.S. Small Business Administration .
On
OnMay 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. During the three and six months endedJune 30, 2021 , we sold 3,024,980 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately$25.4 million . In connection with such sales, we paid compensation of approximately$386,000 to the sales agents. During the three months endedJune 30, 2020 we did not sell shares under the 2019 equity distribution agreements. During the six months endedJune 30, 2020 , we sold 170,942 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately$2.2 million . In connection with such sales, we paid compensation of approximately$34,000 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. Our capital structure includes non-recourse mortgage debt that we have assumed or originated on certain properties. We may hedge the future cash flows of certain variable rate debt transactions principally through interest rate swaps with major financial institutions. See Note 8 (Derivatives and Hedging Activities) to the accompanying consolidated financial statements for a description of our current cash flow hedges. As discussed in Note 2 (Summary of Significant Accounting Policies) to the accompanying consolidated financial statements, pursuant to the terms of our$15.1 million 4.99% Note, dueJanuary 6, 2024 (see Note 7 (Debt) to the accompanying consolidated financial statements), which is collateralized by ourAnthem 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 ourAnthem Marketplace property in order to collateralize such promissory note. Amounts in the cash management account are classified as restricted cash.
Cash, Cash Equivalents and Restricted Cash
We had cash, cash equivalents and restricted cash of approximately
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Sources of Cash
•Cash flow from operations of
•Proceeds from issuance of common shares, net of offering costs of
Uses of Cash
•Net payments of credit facility
•Payment of distributions to common shareholders and OP unit holders of
•Additions to real estate of
•Repurchase of common shares of
•Payments of notes payable of
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Debt
Debt consisted of the following as of the dates indicated (in thousands): Description
June 30, 2021 December 31, 2020
Fixed rate notes
$
100,000 $ 100,000
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 18,523 18,687
$20.2 million 4.28% Note, due June 6, 2023 18,016 18,222
$14.0 million 4.34% Note, due September 11, 2024 13,108 13,236
$14.3 million 4.34% Note, due September 11, 2024 13,894 14,014
$15.1 million 4.99% Note, due January 6, 2024 14,037 14,165
$2.6 million 5.46% Note, due October 1, 2023 2,314 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
$1.7 million 3.25% Note, due December 28, 2021 924 -
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%,
due
89,500 119,500
Total notes payable principal 615,316 645,163
Less deferred financing costs, net of accumulated
amortization (875) (978)
Total notes payable $ 614,441 $ 644,185
(1) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 at 1.73%.
(2) 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
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Scheduled maturities of our outstanding debt as of June 30, 2021 were as follows
(in thousands):
Year Amount Due
2021 (remaining) $ 1,981
2022 101,684
2023 117,363
2024 228,574
2025 17,143
Thereafter 148,571
Total $ 615,316
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
•$165.0 million unsecured term loan with a maturity date of
•$100.0 million unsecured term loan with a maturity date of
Borrowings under the 2019 Facility accrue interest (at theOperating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As ofJune 30, 2021 , the interest rate on the 2019 Revolver was 1.75%. 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 theBoard of Governors of theFederal 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, theOperating 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. 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. The 2019 Facility includes an accordion feature that will allow theOperating Partnership to increase the borrowing capacity by$200.0 million , upon the satisfaction of certain conditions. OnMarch 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 million under the 2019 Revolver, which we subsequently paid down in the fourth quarter of 2020. As ofJune 30, 2021 , subject to any potential future paydowns or increases in the borrowing base, we have$55.1 million remaining availability under the 2019 Revolver. As ofJune 30, 2021 ,$354.5 million was drawn on the 2019 Facility. 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, 56
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The Company, each direct and indirect material subsidiary of theOperating Partnership and any other subsidiary of theOperating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by theOperating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, customary representations and warranties and affirmative and negative covenants including, without limitation, information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
•maximum secured debt to total asset value ratio of 0.40 to 1.00;
•minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;
•maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and
•maintenance of a minimum tangible net worth (adjusted for accumulated
depreciation and amortization) of
We serve as the guarantor for funds borrowed by theOperating 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. OnMarch 22, 2019 , we, through ourOperating 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") andThe 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 theOperating Partnership , of which (i)$50 million are designated as 5.09% Series A Senior Notes dueMarch 22, 2029 (the "Series A Notes") and (ii)$50 million are designated as 5.17% Series B Senior Notes dueMarch 22, 2029 (the "Series B Notes" and, together with the Series A Notes, the "Notes") pursuant to a private placement that closed onMarch 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 onMarch 22, 2023 with annual principal payments of approximately$7.1 million . The principal of the Series B Notes will begin to amortize onMarch 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), theOperating 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 theOperating 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 theOperating Partnership's existing senior revolving credit facility, including the following:
•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;
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•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
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 theOperating 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 theOperating Partnership's existing credit facility. Net proceeds from the Private Placement will be 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 inthe 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. As ofJune 30, 2021 , our$159.9 million in secured debt was collateralized by seven properties with a carrying value of$248.8 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 ofJune 30, 2021 , we were in compliance with all loan covenants.
Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding debt.
Capital Expenditures
We continually evaluate our properties' performance and value. In light of the
COVID-19 pandemic, we are continuing to monitor and, if necessary, reduce our
capital expenditures to maintain financial flexibility. We may determine it is
in our shareholders' best interest to invest capital in properties that 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 the markets on which we
focus 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.
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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.
On February 10, 2021 , the Company announced an increase to its quarterly
distribution to $0.1075 per common share and OP unit, equal to a monthly
distribution of $0.035833 , beginning with the March 2021 distribution. The Board
will regularly reassess the dividend level.
During the six months ended June 30, 2021 , we paid distributions to our common
shareholders and OP unit holders of $9.2 million , compared to $16.7 million in
the six months ended June 30, 2020 . Common shareholders and OP unit holders
receive monthly distributions. Payments of distributions are declared quarterly
and paid monthly. The following table summarizes the cash distributions paid or
payable to holders of our common shares and noncontrolling OP units during each
quarter of 2020 and the six months ended June 30, 2021 (in thousands, except per
share data):
Common Shares Noncontrolling OP Unit Holders Total
Distributions Per Distributions Per
Quarter Paid Common Share Amount Paid OP Unit Amount Paid Amount Paid 2021 Second Quarter $ 0.1075$ 4,602 $ 0.1075 $ 83$ 4,685 First Quarter 0.1058 4,480 0.1058 82 4,562 Total $ 0.2133$ 9,082 $ 0.2133 $ 165$ 9,247 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 59
-------------------------------------------------------------------------------- Table of Contents Taxes We elected to be taxed as a REIT under the Code beginning with our taxable year endedDecember 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. Environmental Matters Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.
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 6 (Investment inReal Estate Partnership ) to the accompanying consolidated financial statements for information related to our guarantee of our real estate partnership's debt. 60
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