WHITESTONE REIT You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following information, you should read the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Overview of Our Company
We are a fully integrated real estate company that owns and operates commercial properties in culturally diverse markets in major metropolitan areas. Founded in 1998, we are internally managed with a portfolio of commercial properties 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.
As of
Consolidated Operating Portfolio •52 properties that meet our Community Centered Properties® strategy containing approximately 4.9 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of$889.0 million ; and Redevelopment, New Acquisitions Portfolio •one wholly-owned property that meets our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of$34.5 million ; and
•five parcels of land held for future development that meet our Community
Centered Properties® strategy having a total carrying amount of
As ofDecember 31, 2020 , we had an aggregate of 1,391 tenants. We have a diversified tenant base with our largest tenant comprising only 2.8% of our total revenues for the year endedDecember 31, 2020 . 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 306 new and renewal leases during 2020, totaling 981,629 square feet and$75.5 million in total lease value. We employed 88 full-time employees as ofDecember 31, 2020 . 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 ofDecember 31, 2020 , 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. 33 --------------------------------------------------------------------------------
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 ofMarch 8, 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. We anticipate that the global health crisis caused by COVID-19 and the related responses intended to control its spread will continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. As part of the initial responses to the virus, many governmental authorities implemented measures such as enhanced screenings, quarantine or shelter in place requirements and travel restrictions, including local governments inTexas andArizona , where all but one of our properties are located. InMay 2020 , parts of theU.S. began to ease certain restrictions and allow for the reopening of businesses but with required or recommended safety protocols. Due to the increase in the number of COVID-19 cases in the fall of 2020, parts of theU.S. implemented additional stay in place orders and other restrictions. While as of the date of this Annual Report on Form 10-K, service businesses are permitted to be open with limited occupancy inTexas andArizona , the timing and ultimate impact of any steps to reopen the economy as a whole and on our and our tenants' businesses and financial condition remains uncertain. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 inTexas and/orArizona , any of which may adversely impact our or our tenants' businesses and their ability to pay their rental payments or otherwise continue to occupy their space. Though COVID-19 vaccines have become available in theU.S. , there remain uncertainties as to the logistics of distribution and the overall efficacy of the vaccine program, and there can be no assurances regarding the timing for when vaccines or other therapies will be widely available and effective and the related impact on the economic recovery. 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 Annual Report on Form 10-K, all of our properties are
open and operating in compliance with federal, state and local COVID-19
guidelines and mandates.
•Approximately 99% of our tenants (based on annualized base rent ("ABR") are
open and operating as of February 23, 2021 .
•Included in our adjustments to rental revenue for the year ending December 31,
2020 , was a bad debt adjustment of $2.3 million and a straight-line rent reserve
adjustment of $1.2 million related to credit loss for the conversion of 102
tenants to cash basis revenue as a result of COVID-19 collectability analysis.
•As of the date of this Annual Report on Form 10-K, we have received payments of
approximately 95% of contractual base rent and common area maintenance
reimbursables billed for the fourth quarter. As is believed to be the case with
retail landlords across the U.S. , we have received a number of rent relief
requests from tenants, most often in the form of rent deferral requests, which
we are evaluating on an individual basis. Collections and rent relief requests
to-date may not be indicative of collections or requests in any future period.
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 ofDecember 31, 2020 , subject to any potential future paydowns or increases in the borrowing base, we had$18.4 million of remaining availability under our revolving credit facility. We had cash, cash equivalents and restricted cash of approximately$26.0 million as ofDecember 31, 2020 . •We have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on an individual basis. 34 -------------------------------------------------------------------------------- •Our board of trustees has reduced our quarterly dividend resulting in approximately$7.7 million of quarterly cash savings. The board of trustees 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. •We have put in place a temporary response team to address tenant concerns. The response team is in ongoing communication with our tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the CARES Act and/or under the additional stimulus relief bill that is expected to be passed by theU.S. Congress in the first quarter of 2021. •We are proactively implementing expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability. •The health and safety of our employees and their families is a top priority. We adapted our operations to protect employees, including by implementing a work from home policy in the first quarter of 2020. All employees returned to work in the second quarter of 2020. While we believe these steps have been effective to date, we expect there will be additional challenges ahead that may impact either our operations or those of our tenants, which could have an adverse effect on our and our tenants' businesses and financial performance. We expect to continue to implement proactive measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees and tenants. As a result, we may incur additional expenses in future periods in response to the pandemic, which could adversely affect our results of operations. In addition, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees and tenants. 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$117,915,000 for the year endedDecember 31, 2020 as compared to$119,251,000 for the year endedDecember 31, 2019 , a decrease of$1,336,000 , or 1%.
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. As a result of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis, and there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term following the end of the pandemic or at all. 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 Annual Report on Form 10-K, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 95% of contractual base rent and common area maintenance reimbursables billed for the fourth quarter. As is believed to be the case with retail landlords across theU.S. , we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. In addition, included in our adjustments to rental revenue for the year endingDecember 31, 2020 , was a bad debt adjustment of$2.3 million and a straight-line rent reserve adjustment of$1.2 million related to credit loss for the conversion of 102 tenants 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.
Scheduled Lease Expirations
We tend to lease space to smaller businesses that desire shorter term leases. As ofDecember 31, 2020 , approximately 29% of our GLA was subject to leases that expire prior toDecember 31, 2022 . Over the last three years, we have renewed expiring leases with respect to approximately 83% of our GLA. We routinely seek to renew leases with our existing tenants 35 -------------------------------------------------------------------------------- prior to their expiration and typically begin discussions with tenants as early as 18 months prior to the expiration date of the existing lease. Inasmuch as our early renewal program and other leasing and marketing efforts target these expiring leases, we hope to re-lease most of that space prior to expiration of the leases. In the markets in which we operate, we obtain and analyze market rental rates through review of third-party publications, which provide market and submarket rental rate data and through inquiry of property owners and property management companies as to rental rates being quoted at properties that are located in close proximity to our properties and we believe display similar physical attributes as our nearby properties. We use this data to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental rates, we believe that, in the aggregate, our current leases are at market rates. Market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate and/or the rental rates we are able to negotiate. We continue to monitor our tenants' operating performances as well as overall economic trends to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our cash flow and ability to make distributions to our shareholders.
Acquisitions
We seek to grow our GLA through the acquisition of additional properties. Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis. We believe that we will continue to have excellent opportunities to acquire quality properties at historically attractive prices once we recommence acquisition activity as the impact of COVID-19 decreases; however, there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term or at all. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe enables us to take advantage of these market opportunities and maintain an active acquisition pipeline.
Property Acquisitions and Dispositions
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties® strategy. We define Community Centered Properties® as visibly located properties in established or developing, culturally diverse neighborhoods in our target markets, primarily in and aroundPhoenix ,Chicago ,Dallas ,Fort Worth ,San Antonio andHouston . We may acquire properties in other high growth cities in the future. We market, lease and manage our centers to match tenants with the shared needs of the surrounding neighborhood. Those needs may include specialty retail, grocery, restaurants and medical, educational and financial services. Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property. Property Dispositions. We seek to continually upgrade our portfolio by opportunistically selling properties that do not have the potential to meet our Community Centered Property® strategy and redeploying the sale proceeds into properties that better fit our strategy. Some of our properties that we owned at the time our current management team assumed the management of the Company may not fit our Community Centered Property® strategy, and we may look for opportunities to dispose of these properties as we continue to execute our strategy. OnDecember 8, 2016 , we, through ourOperating Partnership , entered into a Contribution Agreement (the "Contribution Agreement") with Pillarstone and Pillarstone REIT pursuant to which we contributed all of the equity interests in four of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, aDelaware limited liability company ("CP Woodland");Whitestone Industrial-Office, LLC , aTexas limited liability company ("Industrial-Office");Whitestone Offices, LLC , aTexas limited liability company ("Whitestone Offices"); andWhitestone Uptown Tower, LLC , aDelaware limited liability company ("Uptown Tower", and together with CP Woodland, Industrial-Office and Whitestone Offices, the "Entities") that own 14 non-core properties (the "Pillarstone Properties ") that 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"), issued at a price of$1.331 per Pillarstone OP Unit; and (2) the assumption of approximately$65.9 million of liabilities, consisting of (a) approximately$15.5 million of our liability under the 2018 Facility (see Note 9 to the accompanying consolidated financial statements); (b) an approximately$16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as ofSeptember 26, 2013 , between Uptown Tower, as borrower, andU.S. Bank, National Association , as successor toMorgan Stanley Mortgage Capital Holdings LLC , as lender; and (c) an approximately$34.1 million promissory note (the "Industrial-Office Promissory Note") of Industrial-Office issued under the Loan Agreement, dated as ofNovember 26, 2013 (the "Industrial-Office Loan Agreement"), between Industrial-Office, as borrower, andJackson National Life Insurance Company , as lender (collectively, the "Contribution"). 36 -------------------------------------------------------------------------------- In connection with the Contribution, onDecember 8, 2016 , theOperating Partnership entered into an OP Unit Purchase Agreement (the "OP Unit Purchase Agreement") with Pillarstone REIT and Pillarstone pursuant to which theOperating Partnership agreed to purchase up to an aggregate of$3.0 million of Pillarstone OP Units at a price of$1.331 per Pillarstone OP Unit over the two-year term of the OP Unit Purchase Agreement on the terms set forth therein. The OP Unit Purchase Agreement contains customary closing conditions and the parties have made certain customary representations, warranties and indemnifications to each other in the OP Unit Purchase Agreement. No Pillarstone OP Units were purchased under the OP Unit Purchase Agreement. In addition, pursuant to the OP Unit Purchase Agreement, in the event of a Change of Control (as defined therein) of the Company, Pillarstone shall have the right, but not the obligation, to repurchase the Pillarstone OP Units issued thereunder from theOperating Partnership at their initial issue price of$1.331 per Pillarstone OP Unit. In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower),Whitestone TRS, Inc. , a subsidiary of the Company ("Whitestone TRS"), entered into a Management Agreement with the Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone (collectively, the "Management Agreements"). Pursuant to the Management Agreements with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. In connection with the Contribution, onDecember 8, 2016 , theOperating Partnership entered into a Tax Protection Agreement with Pillarstone REIT and Pillarstone pursuant to which Pillarstone agreed to indemnify theOperating Partnership for certain tax liabilities resulting from its recognition of income or gain prior toDecember 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of thePillarstone Properties or if Pillarstone fails to maintain and allocate to theOperating Partnership for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that must be paid to maintain its REIT status for federal tax purposes. As ofDecember 31, 2020 , we owned approximately 81.4% of the total outstanding Pillarstone OP Units, which we account for under the equity method. Additionally, certain of our officers and trustees serve as officers and trustees of Pillarstone REIT. See Note 5 Investment inReal Estate Partnership to the accompanying consolidated financial statements for more information on our accounting treatment of our investment in Pillarstone OP. Property Acquisitions. OnDecember 6, 2019 , we acquiredLas Colinas Village , a property that meets our Community Centered Property® strategy, for$34.8 million in cash and net prorations.Las Colinas Village , a 104,919 square foot property, was 86% leased at the time of purchase and is located inIrving, Texas . 37 --------------------------------------------------------------------------------
Leasing Activity
As ofDecember 31, 2020 , we wholly-owned 58 properties with 4,953,571 square feet of GLA, which were approximately 88% occupied. The following is a summary of the Company's leasing activity for the year endedDecember 31, 2020 : 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 196 742,219 3.9 $ 0.97 $ 15.66 $ 15.13 11.1 % New Leases 57 113,900 5.2 11.03 22.73 23.98 (0.4) % Total/Average 253 856,119 4.1 $ 2.31 $ 16.60 $ 16.31 8.9 % 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 201 750,552 3.9 $ 1.07 $ 15.77 New Leases 105 231,077 4.9 9.65 21.04 Total/Average 306 981,629 4.1 $ 3.09 $ 17.01
(1) Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and the new or renewal square footage was within 25% of the expired square footage.
(2) Weighted average lease term (in years) is determined on the basis of square footage.
(3) Estimated amount per signed leases. Actual cost of construction may vary.
Does not include first generation costs for tenant improvements ("TI") and
leasing commission costs needed for new acquisitions, development or
redevelopment of a property to bring to operating standards for its intended
use.
(4) Contractual minimum rent under the new lease for the first month, excluding concessions.
(5) Contractual minimum rent under the prior lease for the final month.
Capital Expenditures
Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis.
The following is a summary of the Company's capital expenditures, excluding
property acquisitions, for the years ended
2020 2019
Capital expenditures:
Tenant improvements and allowances $ 3,744 $ 4,989
Developments / redevelopments 617 4,041
Leasing commissions and costs 1,223 2,568
Maintenance capital expenditures 3,252 4,213
Total capital expenditures $ 8,836 $ 15,811
38--------------------------------------------------------------------------------
Summary of Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. We prepared these financial statements in conformity with GAAP. The preparation of these financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Our results may differ from these estimates. Currently, we believe that our accounting policies do not require us to make estimates using assumptions about matters that are highly uncertain. For a better understanding of our accounting policies, you should read Note 2 to our accompanying consolidated financial statements in conjunction with this "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We have described below the critical accounting policies that we believe could impact our consolidated financial statements most significantly.
Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income (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. Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly. Revenues are governed by the Management Agreements (as defined in Note 5 to our accompanying consolidated financial statements). Refer to Note 5 to our accompanying consolidated financial statements for additional information regarding the Management Agreements with Pillarstone OP. Additionally, we recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied. Profit-sharing Method. In accordance with theFinancial Accounting Standards Board's ("FASB") guidance applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification ("ASC") 360-20, "Real Estate Sales," Topic 606, "Revenue from Contracts with Customers" and ASC 610, "Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets," we did not recognize the sale of assets to Pillarstone OP in the Contribution and accounted for the transaction under the profit-sharing method for the year endedDecember 31, 2017 . We recognized Pillarstone OP's real estate assets and notes payables in our consolidated balance sheets. Additionally, the profits and losses of Pillarstone OP not attributable to the Company are reported as profit sharing expense. As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities associated with the Contribution as ofJanuary 1, 2018 and recognized the Company's investment in Pillarstone OP under the equity method. Equity Method. For the years prior toDecember 31, 2017 , Pillarstone OP was accounted for under the profit-sharing method. In accordance with the FASB guidance applicable to sales of real estate or interests therein, specifically FASB ASC 360-20, "Real Estate Sales," Topic 606, "Revenue from Contracts with Customers" and ASC 610, "Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets," we adopted Topic 606 and ASC 610 as ofJanuary 1, 2018 , resulting in the derecognition of the underlying assets and liabilities associated with the Contribution as ofJanuary 1, 2018 and the recognition of the Company's investment in Pillarstone OP under the equity method. See Note 5 to our accompanying consolidated financial statements for additional disclosure on Pillarstone OP.Development Properties . Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying charges (interest, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction), are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. For the year endedDecember 31, 2020 , approximately$481,000 and$306,000 in interest expense and real estate taxes, respectively, were capitalized. For the year endedDecember 31, 2019 , approximately$500,000 and$320,000 in interest expense and real estate taxes, respectively, were capitalized. For the year ended 39 --------------------------------------------------------------------------------December 31, 2018 , approximately$574,000 and$365,000 in interest expense and real estate taxes, respectively, were capitalized. Due to the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis.Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values at the time of purchase. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt. Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings, respectively. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter. Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as ofDecember 31, 2020 . 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. With the adoption of ASC No. 842, Leases ("Topic 842"), as ofJanuary 1, 2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As ofDecember 31, 2020 and 2019, we had an allowance for uncollectible accounts of$16.4 million and$11.2 million , respectively. For the years endingDecember 31, 2020 and 2019, we recorded an adjustment to rental revenue in the amount of$5.6 million and$1.5 million , respectively. Included in the adjustment to rental revenue for the year endingDecember 31, 2020 , was a bad debt adjustment of$2.3 million and a straight-line rent reserve adjustment of$1.2 million related to credit loss for the conversion of 102 tenants to cash basis revenue as a result of COVID-19 collectability analysis. For the year endingDecember 31, 2018 , we recorded bad debt expense in the amount of$1.4 million . 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 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 40 -------------------------------------------------------------------------------- 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 ofDecember 31, 2020 , 2019 and 2018, we recorded a margin tax provision of$0.4 million ,$0.4 million and$0.4 million , respectively. Fair Value of Financial Instruments. Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts and notes payable and investments in marketable securities. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to their short-term nature. The fair value of our long-term debt, consisting of fixed rate secured notes, variable rate secured notes and an unsecured revolving credit facility aggregate to approximately$646.4 million and$653.7 million as compared to the book value of approximately$645.2 million and$645.9 million as ofDecember 31, 2020 and 2019, 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 ofDecember 31, 2020 and 2019, respectively. Disclosure about fair value of financial instruments is based on pertinent information available to management as ofDecember 31, 2020 and 2019. 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 sinceDecember 31, 2020 and current estimates of fair value may differ significantly from the amounts presented herein. Derivative Instruments and Hedging Activities. We occasionally utilize derivative financial instruments, principally interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income (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 ofDecember 31, 2020 , we consider our cash flow hedges to be highly effective. Recent Accounting Pronouncements. InApril 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. 41 -------------------------------------------------------------------------------- InMay 2014 , the FASB issued guidance, as amended in subsequent updates, establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most of the existing revenue recognition guidance. The standard also required an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also required certain additional disclosures. This guidance became effective for the reporting periods beginning on or afterDecember 15, 2017 , and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginningJanuary 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as ofJanuary 1, 2018 and have recognized the Company's investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the Company's accumulated deficit as ofJanuary 1, 2018 by$19.1 million . See Note 5 to our accompanying consolidated financial statements for further details. InFebruary 2016 , FASB issued ASU No. 2016-2 which provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance and targeted improvements to Topic 842 were made through the issuance of supplementary ASUs inJuly 2018 ,December 2018 andMarch 2019 . EffectiveJanuary 1, 2019 , we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as ofDecember 31, 2018 ) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized onJanuary 1, 2019 (a) a lease liability of approximately$1.1 million , which represents the present value of the remaining lease payments of approximately$1.2 million discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately$1.1 million . The adoption of Topic 842 did not have a material impact to our net income and related per share amounts. Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842: •Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements as well as leases that commenced after that date. Under this method, prior comparative periods presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented, a cumulative-effect adjustment is recognized at that date. •Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would not be adjusted under this method. We have elected an optional transition method that allows entities to initially apply Topic 842 atJanuary 1, 2019 , the date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We will continue to amortize unamortized legal costs as ofDecember 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles. Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-term leases entered into or modified afterJanuary 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards. We elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease 42 -------------------------------------------------------------------------------- component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). 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. Each tenant is included in one of several portfolios and an allowance is calculated using the calculation methodology for the respective portfolio. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. InNovember 2016 , the FASB issued guidance requiring that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance became effective for the reporting periods beginning on or afterDecember 15, 2017 , and interim periods within those fiscal years. We adopted this guidance effectiveJanuary 1, 2018 , and we have reconciled cash and cash equivalents and restricted cash and restricted cash equivalents on a retrospective basis, whereas under the previous guidance, we reported restricted cash and restricted cash equivalents under cash flows from financing activities. InJanuary 2017 , the FASB issued guidance clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This guidance became effective for the reporting periods beginning on or afterDecember 15, 2017 , and interim periods within those fiscal years. We adopted this guidance on a prospective basis beginningJanuary 1, 2018 and believe the majority of our future acquisitions will qualify as asset acquisitions and the associated transaction costs will be capitalized as opposed to expensed under previous guidance. InFebruary 2017 , the FASB issued guidance clarifying the scope of asset derecognition guidance, adding guidance for partial sales of nonfinancial assets and clarifying recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This guidance became effective for the reporting periods beginning on or afterDecember 15, 2017 , and interim periods within those fiscal years. We adopted this guidance on a modified retrospective basis beginningJanuary 1, 2018 and have derecognized the underlying assets and liabilities associated with the Contribution as ofJanuary 1, 2018 and have recognized the Company's investment in Pillarstone OP under the equity method of accounting. The Company made an adjustment which decreased the Company's accumulated deficit as ofJanuary 1, 2018 by$19.1 million . See Note 5 to our accompanying consolidated financial statements for further details. 43 --------------------------------------------------------------------------------
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 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 endedDecember 31, 2020 , our cash provided from operating activities was$42,776,000 and our total dividends and distributions paid were$25,714,000 . Therefore, we had cash flow from operations in excess of distributions of approximately$17,062,000 . The 2019 Facility included a$300 million unsecured borrowing capacity under a revolving credit facility, two$50 million term loans and one$100 million term loan. The 2019 Facility also included an accordion feature that allowed theOperating Partnership to increase the borrowing capacity to$700 million , upon the satisfaction of certain conditions. We anticipate that cash flows from operating activities and our borrowing capacity under the 2019 Facility will provide adequate capital for our distributions, working capital requirements, anticipated capital expenditures and scheduled debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT for federal income tax purposes. Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements, development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness, sales of common shares, issuance of OP units, sales of underperforming and non-core properties and other financing opportunities, including debt financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. 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 ofDecember 31, 2020 , subject to any potential future paydowns or increases in the borrowing base, we have$18.4 million remaining availability under the revolving credit facility. In addition, in light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares, including under the 2019 equity distribution agreements, until the price of our common shares increases significantly. 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 & Trust 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. The Rights will 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. The Rights are in all respects subject to and governed by the provisions of the 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; and
44
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•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, in March 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 of December 31, 2020 ,
subject to any potential future paydowns or increases in the borrowing base, we
have $18.4 million remaining availability under the revolving credit facility.
As of December 31, 2020 , we have cash, cash equivalents and restricted cash of
approximately $26.0 million .
•We have taken a prudent pause in acquisitions activity and are carefully
evaluating development and redevelopment activities on an individual basis.
•Our board of trustees (the "Board") has reduced our quarterly dividend
resulting in approximately $7.7 million of quarterly cash savings. 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. 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.
•We have put in place a temporary response team to address tenant concerns. The
response team is in ongoing communication with our tenants and is assisting
tenants in identifying local, state and federal resources that may be available
to support their businesses and employees during the pandemic, including
stimulus funds that may be available under the Coronavirus Aid, Relief, and
Economic Security Act of 2020 (the "CARES Act").
•We are proactively implementing expense reductions at the property level to
minimize cost pass-throughs to our tenants and at the corporate level to
preserve profitability.
•The health and safety of our employees and their families is a top priority. We
adapted our operations to protect employees, including by implementing a work
from home policy in the first quarter of 2020. All employees returned to work in
the second quarter of 2020.
We believe that we could see decreases in our collection of contracted rent from
our tenants and may see tenant closures or bankruptcies. If and when 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.
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. Principal and interest were payable in 18 monthly installments
of $96,864.28 , beginning on December 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 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 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. If
the loan is partially or wholly forgiven and legal release is received, the
liability is reduced by the amount forgiven and a gain on extinguishment is
recognized. 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 .
On
45
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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, 2020 and 2019, we sold 170,942 and 1,612,389 common shares,
respectively, under the 2019 equity distribution agreements, with net proceeds
to us of approximately $2.2 million and $21.2 million , respectively. In
connection with such sales, we paid compensation of approximately $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 9 to the accompanying consolidated financial statements), which is
collateralized by our Anthem Marketplace property, we were required by the
lenders thereunder to establish a cash management account controlled by the
lenders to collect all amounts generated by our Anthem Marketplace property in
order to collateralize such promissory note. Amounts in the cash management
account are classified as restricted cash.
Cash and Cash Equivalents
We had cash and cash equivalents and restricted cash of approximately
Sources of Cash
•Cash flow from operations of
•Proceeds of
•Proceeds from issuance of common shares, net of offering costs of
•Proceeds from note receivable of
•Net proceeds of
Uses of Cash
•Payment of dividends and distributions to common shareholders and OP unit
holders of
•Additions to real estate of
•Payments of notes payable of
•Repurchase of common shares of
We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.
Equity Offerings
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. Actual sales will depend on a variety of factors determined by us from time to time, including 46 -------------------------------------------------------------------------------- (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 endedDecember 31, 2020 and 2019, we sold 170,942 and 1,612,389 common shares, respectively, under the 2019 equity distribution agreements, with net proceeds to us of approximately$2.2 million and$21.2 million , respectively. In connection with such sales, we paid compensation of approximately$34,000 and$324,000 , respectively, to the sales agents. In light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares under the 2019 equity distribution agreements until the price of our common shares increases significantly. 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. OnJune 4, 2015 , we entered into nine amended and restated equity distribution agreements (the "2015 equity distribution agreements") for an at-the-market distribution program. Pursuant to the terms and conditions of the 2015 equity distribution agreements, we could issue and sell up to an aggregate of$50 million of our common shares pursuant to our Registration Statement on Form S-3 (File No. 333-203727), which expired onApril 29, 2018 . Actual sales depended on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in transactions that will be deemed to be "at-the-market" offerings as defined in Rule 415 under the Securities Act. We had no obligation to sell any of our common shares, and could at any time suspend offers under the 2015 equity distribution agreements or terminate the 2015 equity distribution agreements. For the year endedDecember 31, 2018 , we did not sell any common shares under the 2015 equity distribution agreements.
Debt
Debt consisted of the following as of the dates indicated (in thousands):
December 31,
Description 2020 2019
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 18,687 19,000
$20.2 million 4.28% Note, due June 6, 2023 18,222 18,616
$14.0 million 4.34% Note, due September 11, 2024 13,236 13,482
$14.3 million 4.34% Note, due September 11, 2024 14,014 14,243
$15.1 million 4.99% Note, due January 6, 2024 14,165 14,409
$2.6 million 5.46% Note, due October 1, 2023 2,339 2,386
$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
119,500 109,500
Total notes payable principal 645,163 645,896
Less deferred financing costs, net of accumulated
amortization (978) (1,197)
$ 644,185 $ 644,699
47-------------------------------------------------------------------------------- (1) Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term throughSeptember 24, 2018 and 4.85% beginningSeptember 25, 2018 throughSeptember 24, 2020 . The promissory note was paid off inSeptember 2020 .
(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.
(3) 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
(4) Unsecured line of credit includes certain
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. 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;
•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
48
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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 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 ofDecember 31, 2020 , the interest rate on the 2019 Revolver was 1.80%. 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. 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$30.0 million under the 2019 Revolver. As ofDecember 31, 2020 , subject to any potential future paydowns or increases in the borrowing base, we have$18.4 million remaining availability under the revolving credit facility. As ofDecember 31, 2020 ,$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 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital. 49 -------------------------------------------------------------------------------- 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. OnNovember 7, 2014 , we, through ourOperating Partnership , entered into an unsecured revolving credit facility (the "2014 Facility") with the lenders party thereto, withBMO Capital Markets Corp. ,Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated andU.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. OnOctober 30, 2015 , we, through ourOperating Partnership , entered into the First Amendment to the 2014 Facility (the "First Amendment") with the guarantors party thereto, the lenders party thereto and the Agent. We refer to the 2014 Facility, as amended by the First Amendment, as the "2018 Facility."
Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:
•extended the maturity date of the$300 million unsecured revolving credit facility under the 2014 Facility (the "2018 Revolver") toOctober 30, 2019 fromNovember 7, 2018 ; •converted$100 million of outstanding borrowings under the Revolver to a new$100 million unsecured term loan under the 2014 Facility ("Term Loan 3") with a maturity date ofOctober 30, 2022 ; •extended the maturity date of the first$50 million unsecured term loan under the 2014 Facility ("Term Loan 1") toOctober 30, 2020 fromFebruary 17, 2017 ; and •extended the maturity date of the second$50 million unsecured term loan under the 2014 Facility ("Term Loan 2" and together with Term Loan 1 and Term Loan 3, the "2018 Term Loans") toJanuary 29, 2021 fromNovember 7, 2019 . Borrowings under the 2018 Facility accrued interest (at theOperating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. The applicable margin for Adjusted LIBOR borrowings ranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 Term Loans. Base Rate means the higher of: (a) the Agent's prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by theBoard of Governors of theFederal Reserve System on eurocurrency liabilities. 50 --------------------------------------------------------------------------------
Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working capital.
OnMay 26, 2017 , we, through our subsidiary,Whitestone BLVD Place LLC , aDelaware limited liability company, issued a$80.0 million promissory note toAmerican General Life Insurance Company (the "BLVD Note"). The BLVD Note has a fixed interest rate of 3.72% and a maturity date ofJune 1, 2027 . Proceeds from the BLVD Note were used to fund a portion of the purchase price of the acquisition of BLVD Place (See Note 4 to our accompanying consolidated financial statements). As ofDecember 31, 2020 , our$160.7 million in secured debt was collateralized by seven properties with a carrying value of$250.9 million . Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. In 2018, we were not in compliance with respect to the tangibleNet Worth covenant as defined in the 2018 Facility and had received two waivers in 2018. Had we been unable to obtain a waiver or other suitable relief from the lenders under the 2018 Facility, an Event of Default (as defined in the 2018 Facility) would have occurred, permitting the lenders holding a majority of the commitments under the 2018 Facility to, among other things, accelerate the outstanding indebtedness, which would make it immediately due and payable. The 2019 Facility and the Notes contain similar tangibleNet Worth covenants that reset at a new threshold and change the definition ofNet Worth to add back accumulated depreciation. However, we can make no assurances that we will be in compliance with these covenants or other covenants under the 2019 Facility or the Notes in future periods or, if we are not in compliance, that we will be able to obtain a waiver. As ofDecember 31, 2020 , we were in compliance with all loan covenants.
Scheduled maturities of our outstanding debt as of
Amount Due
Year (in thousands)
2021 $ 1,829
2022 101,683
2023 147,363
2024 228,573
2025 17,143
Thereafter 148,572
Total $ 645,163
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 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.
51--------------------------------------------------------------------------------
Contractual Obligations
As ofDecember 31, 2020 , we had the following contractual obligations (see Note 9 of our accompanying consolidated financial statements for further discussion regarding the specific terms of our debt): Payment due by period (in thousands) More than Less than 1 1 - 3 years 3 - 5 years 5 years Consolidated Contractual Obligations Total year (2021) (2022 - 2023) (2024 - 2025) (after
2025)
Long-Term Debt - Principal$ 645,163 $
1,829
85,931 21,301 37,830 16,281 10,519
Long-Term Debt - Variable Interest (1) 9,918 4,959 4,959 - - Unsecured Credit Facility - Unused commitment fee (2) 679 326 353 - - Operating Lease Obligations 255 85 106 64 - Related Party Rent Lease Obligations 380 362 18 - - Total$ 742,326 $ 28,862 $ 292,312 $ 262,061 $ 159,091 (1) As of December 31, 2020, 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 ofDecember 31, 2020 , of 0.15%. (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 ourDecember 31, 2020 balance of$384.5 million . 52 --------------------------------------------------------------------------------
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 ofMaryland 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. OnMarch 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 has resulted in approximately$7.7 million of quarterly cash savings. OnFebruary 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 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. During 2020, we paid distributions to our common shareholders and OP unit holders of$25.7 million , compared to$46.7 million in 2019. 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 endedDecember 31, 2020 and 2019: 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 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 2019 Fourth Quarter $ 0.2850$ 11,580 $ 0.2850$ 262 $ 11,842 Third Quarter 0.2850 11,430 0.2850 264 11,694 Second Quarter 0.2850 11,316 0.2850 265 11,581 First Quarter 0.2850 11,301 0.2850 264 11,565 Total $ 1.1400$ 45,627 $ 1.1400$ 1,055 $ 46,682 53
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Results of Operations
Year Ended
The comparability of our results of operations for the year endedDecember 31, 2020 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a general comparison of our results of operations for the years endedDecember 31, 2020 and 2019 (dollars in thousands, except per share data):
Year Ended
2020 2019
Number of properties owned and operated 58 58
Aggregate GLA (sq. ft.)(1) 4,848,652 4,848,652
Ending occupancy rate - operating portfolio(1) 89 % 90 %
Ending occupancy rate 88 % 90 %
Total revenues $ 117,915 $ 119,251
Total operating expenses 88,184 85,305
Total other expense 24,122 24,988Income before equity investment in real estate partnership and income tax
5,609 8,958
Equity in earnings of real estate partnership 921 15,076
Provision for income taxes (379) (400)
Income from continuing operations 6,151 23,634
Income from discontinued operations - 594
Net income 6,151 24,228
Less: Net income attributable to noncontrolling interests 117 545
Net income attributable to Whitestone REIT Funds from operations(2)$ 36,375 $ 38,026 Funds from operations core(3) 40,704 44,935 Property net operating income(4) 83,903 88,578 Distributions paid on common shares and OP units 25,714 46,682 Distributions per common share and OP unit$ 0.6000 $ 1.1400 (1) Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting. (2) For an explanation and reconciliation of funds from operations and funds from operations core to net income, see "Funds From Operations" below. (3) For a reconciliation of funds from operations core to net income, see "FFO Core" below. (4) For an explanation and reconciliation of property net operating income to net income, see "Property Net Operating Income" below. 54 -------------------------------------------------------------------------------- We define "Same Stores" as properties that have been owned for the entire period being compared. For purposes of comparing the year endedDecember 31, 2020 to the year endedDecember 31, 2019 , Same Stores include properties owned during the entire period fromJanuary 1, 2019 toDecember 31, 2020 . We define "Non-Same Stores" as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations.
Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):
Year Ended December 31,
Revenue 2020 2019 Change % Change
Same Store
Rental revenues (1) $ 84,902 $ 86,555 $ (1,653) (2) %
Recoveries (2) 32,318 31,670 648 2 %
Bad debt (3) (5,163) (1,461) (3,702) 253 %
Total rental 112,057 116,764 (4,707) (4) %
Other revenues (4) 2,199 1,286 913 71 %
Same Store Total 114,256 118,050 (3,794) (3) %
Non-Same Store and Management Fees
Rental revenues 2,389 196 2,193 1,119 %
Recoveries 1,124 77 1,047 1,360 %
Bad debt (486) (23) (463) 2,013 %
Total rental (5) 3,027 250 2,777 1,111 %
Other revenues 34 96 (62) (65) %
Management fees (6) 598 855 (257) (30) %
Non-Same Store and Management Fees Total 3,659 1,201 2,458 205 %
Total revenue $ 117,915 $ 119,251 $ (1,336) (1) %
(1) The Same Store tenant rent decrease of $1,653,000 resulted from a decrease
of $828,000 from the decrease in the average leased square feet to 4,340,926
from 4,382,812, and by the decrease of $825,000 from the average rent per leased
square foot decreasing from $19.75 to $19.56 . Included in the average rent per
leased square foot decrease mentioned above is a Same Store rental revenue
decrease of $1,185,000 from straight-line rent write offs during the year ended
December 31, 2020 as a result of converting 97 tenants to cash basis accounting.
(2) The Same Store recoveries revenue increase of $648,000 is primarily
attributable to increases in Same Store real estate tax costs recovered from
tenants.
(3) Bad debt decreased Same Store total rental revenue by $5,163,000 during
the year ended December 31, 2020 , as compared to a reduction of $1,461,000
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 increase in Same Store other revenues is primarily comprised of increased lease termination fees.
(5)Non-Same Store total rental revenue for the years endedDecember 31, 2020 andDecember 31, 2019 were primarily generated from our acquisition of theLas Colinas Village property onDecember 6, 2019 .Non-Same Store revenues for the year endedDecember 31, 2020 were significantly higher than the year endedDecember 31, 2019 because we ownedLas Colinas for the entire year. Please refer to Note 4 (Real Estate) to the accompanying consolidated financial statements for more information regarding the property acquisitions and property sales.
(6) On
55
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Operating expenses. The primary components of operating expenses for the year
ended December 31, 2020 and 2019 are detailed in the table below (in thousands,
except percentages):
Year Ended
Operating Expenses 2020 2019 Change % Change
Same Store
Operating and maintenance (1) $ 19,081 $ 19,655 $ (574) (3) %
Real estate taxes (2) 17,195 16,245 950 6 %
Same Store total 36,276 35,900 376 1 %
Non-Same Store and affiliated company rents
Operating and maintenance 550 143 407 285 %
Real estate taxes (3) 820 48 772 1,608 %
Affiliated company rents (4) 932 813 119 15 %
Non-Same Store and affiliated company rents
total 2,302 1,004 1,298 129 %
Depreciation and amortization 28,303 26,740 1,563 6 %
General and administrative (5) 21,303 21,661 (358) (2) %
Total operating expenses $ 88,184 $ 85,305 $ 2,879 3 %
(1) The
(2) The$950,000 Same Store real estate tax increase is primarily comprised of increases in 2020 tax assessments in ourTexas markets. We were still actively protesting certain 2020 valuations inTexas onDecember 31, 2020 and expect to have lower settled values. 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)Non-Same Store real estate taxes for the years endedDecember 31, 2020 andDecember 31, 2019 were primarily generated from our acquisition of theLas Colinas Village property onDecember 6, 2019 .Non-Same Store real estate taxes for the year endedDecember 31, 2020 were significantly higher than the year endedDecember 31, 2019 because we ownedLas Colinas for the entire year. Please refer to Note 4 (Real Estate) to the accompanying consolidated financial statements for more information regarding the property acquisitions and property sales.
(4) Affiliated company rents are spaces that we lease from Pillarstone OP.
(5) The$358,000 general and administrative expense decrease was attributable to a$579,000 reduction in professional fees, a$452,000 reduction in share-based compensation expense, a$451,000 reduction in travel expenses and a$198,000 reduction in other expenses, offset by a$1,322,000 increase in payroll costs. The increased payroll costs included a$2,030,000 increase in annual incentive bonuses, offset by a decrease of$708,000 in other payroll costs. Please refer to Note 15 (Incentive Share Plan) to the accompanying consolidated financial statements for more information regarding share-based compensation expense. 56 -------------------------------------------------------------------------------- Other expenses (income). The primary components of other expenses (income) for the year endedDecember 31, 2020 and 2019 are detailed in the table below (in thousands, except percentages): Year Ended December 31, Other Expenses (Income) 2020 2019 Change % Change Interest expense (1)$ 25,770 $ 26,285 $ (515) (2) % Loss (gain) on sale or disposal of assets (2) 364 (638) 1,002 (157) % Gain on loan forgiveness (3) (1,734) - (1,734) Not Meaningful Interest, dividend and other investment income (4) (278) (659) 381 (58) % Total other expense$ 24,122 $ 24,988 $ (866) (3) % (1) The$515,000 decrease in interest expense is attributable to a decrease in our effective interest rate to 3.73% for the year endedDecember 31, 2020 as compared to 4.02% for the year endedDecember 31, 2019 , resulting in a$1,960,000 decrease in interest expense, and an increase in our average outstanding notes payable balance of$35,457,000 that resulted in$1,427,000 in increased interest expense. Amortization of loan fees increased interest expense by$18,000 for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 .
(2) The
(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
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$14,155,000 from$15,076,000 for the year endedDecember 31, 2019 to$921,000 for the year endedDecember 31, 2020 . The$14,155,000 decrease was comprised of decreases of$13,816,000 from our pro rata share of gains on properties Pillartone OP sold during the year endedDecember 31, 2019 ,$915,000 from our pro rata share of net income from properties Pillarstone OP sold during the year endedDecember 31, 2019 ,$912,000 from our pro rata share of net income from the operating activities of Pillarstone OP's eight properties that were owned during the entire period fromJanuary 1, 2019 toDecember 31, 2020 , offset by increases of$1,297,000 from our pro rata share of interest expense savings from debt reductions made by Pillarstone OP during the year endedDecember 31, 2019 and$191,000 from our pro rata share of other increases in net income from Pillarstone OP. Please refer to Note 5 (Investment inReal Estate Partnership ) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP. Gain on sale of property from discontinued operations. During the year endedDecember 31, 2019 , we received a$0.7 million principal payment in connection with the sale of three office buildings we completed onDecember 31, 2014 . In 2014, we provided seller-financing for the office buildings, Zeta,Royal Crest and Featherwood, and deferred a$2.5 million gain until principal payments on the seller-financed loan are received. The purchaser of the office buildings sold Zeta onApril 24, 2019 and paid the entire principal balance of the loan related to Zeta. As ofDecember 31, 2020 and 2019, we had a total of$2.1 million and$2.7 million , respectively, in deferred gains for seller-financed loans to be recognized upon receipt of principal payments. 57 --------------------------------------------------------------------------------
Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):
Year Ended
December 31, Increase % Increase
2020 2019 (Decrease) (Decrease)
Same Store (51 properties, excluding development
land)
Property revenues
Rental $ 112,057 $ 116,764 $ (4,707) (4) %
Management, transaction and other fees 2,199 1,286 913 71 %
Total property revenues 114,256 118,050 (3,794) (3) %
Property expenses
Property operation and maintenance 19,081 19,655 (574) (3) %
Real estate taxes 17,195 16,245 950 6 %
Total property expenses 36,276 35,900 376 1 %
Total property revenues less total property
expenses 77,980 82,150 (4,170) (5) %
Same Store straight-line rent adjustments 632 (1,110) 1,742 (157) %
Same Store amortization of above/below market
rents (787) (761) (26) 3 %
Same Store lease termination fees (1,613) (576) (1,037) 180 %
Same Store NOI(1) $ 76,212 $ 79,703 $ (3,491) (4) %
(1) See below for a reconciliation of property net operating income to net income.
58
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Year Ended December 31,
PROPERTY NET OPERATING INCOME ("NOI") 2020 2019
Net income attributable to Whitestone REIT $ 6,034 $ 23,683
General and administrative expenses 21,303 21,661
Depreciation and amortization 28,303 26,740
Equity in earnings of real estate partnership (921) (15,076)
Interest expense 25,770 26,285
Interest, dividend and other investment income (278) (659)
Provision for income taxes 379 400
Gain on sale of property from discontinued operations - (594)
Management fee, net of related expenses 334 (42)
Loss (gain) on sale or disposal of assets, net 364 (638)
Gain on loan forgiveness (1,734) -
NOI of real estate partnership (pro rata) 4,232 6,273
Net income attributable to noncontrolling interests 117 545
NOI $ 83,903 $ 88,578
Non-Same Store NOI (1) (1,691) (155)
NOI of real estate partnership (pro rata) (4,232) (6,273)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)
77,980 82,150
Same Store straight line rent adjustments 632 (1,110)
Same Store amortization of above/below market rents (787) (761)
Same Store lease termination fees (1,613) (576)
Same Store NOI (2) $ 76,212 $ 79,703
(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, 2020 to the twelve months ended December 31, 2019 ,
Non-Same Stores include properties acquired between January 1, 2019 and
December 31, 2020 and properties sold between January 1, 2019 and December 31,
2020 , 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, 2020 to the twelve months ended December 31, 2019 , Same Stores
include properties owned before January 1, 2019 and not sold before December 31,
2020 . Straight line rent adjustments, above/below market rents, and lease
termination fees are excluded.
59
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Year Ended
For a discussion and comparison of the results of our operations for the year endedDecember 31, 2019 with the year endedDecember 31, 2018 , refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year endedDecember 31, 2019 filed with theSEC onMarch 2, 2020 . 60
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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 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 comparable GAAP financial measure (in
thousands):
Year Ended December 31,
FFO AND FFO CORE 2020 2019 2018
Net income attributable to Whitestone REIT $
6,034
Adjustments to reconcile to FFO:(1) Depreciation and amortization of real estate assets 28,096 26,468 25,401
Depreciation and amortization of real estate assets of real estate partnership (pro rata) (2)
1,673 2,362 2,903
Loss (gain) on sale or disposal of assets 364 (638) (4,547)
Gain on sale of property from discontinued operations - (594) -
Loss (gain) on sale or disposal of properties or assets of real estate partnership (pro rata) (2)
91 (13,800) (6,340)
Net income attributable to noncontrolling interests 117 545 550
FFO $
36,375
Share-based compensation expense$ 6,063 $ 6,483 $ 6,758 Proxy contest professional fees - - 2,534 Early debt extinguishment costs of real estate partnership - 426 88 Gain on loan forgiveness (1,734) - - FFO Core$ 40,704 $ 44,935 $ 48,778 (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 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") 2020 2019 2018
Net income attributable to Whitestone REIT $ 6,034 $ 23,683 $ 21,431
General and administrative expenses 21,303 21,661 23,281
Depreciation and amortization 28,303 26,740 25,679
Equity in earnings of real estate partnership (921) (15,076) (8,431)
Interest expense 25,770 26,285 25,177
Interest, dividend and other investment income (278) (659) (1,055)
Provision for income taxes 379 400 347
Gain on sale of property from discontinued operations - (594) -
Management fee, net of related expenses 334 (42) (208)
Loss (gain) on sale or disposal of assets, net 364 (638) (4,547)
Gain on loan forgiveness (1,734) - -
NOI of real estate partnership (pro rata) 4,232 6,273 7,725
Net income attributable to noncontrolling interests 117 545 550
NOI $ 83,903 $ 88,578 $ 89,949
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.
Inflation
We anticipate that the majority of our leases will continue to be triple-net
leases or otherwise provide that tenants pay for increases in operating expenses
and will contain provisions that we believe will mitigate the effect of
inflation. In addition, many of our leases are for terms of less than five
years, which allows us to adjust rental rates to reflect inflation and other
changing market conditions when the leases expire. Consequently, increases due
to inflation, as well as ad valorem tax rate increases, generally do not have a
significant adverse effect upon our operating results.
Off-Balance Sheet Arrangements
Guarantees We may guarantee the debt of a real estate partnership primarily because it allows the real estate partnership to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the real estate partnership on its investment, and a higher return on our investment in the real estate partnership. We may receive a fee from the real estate partnership for providing the guarantee. Additionally, when we issue a guarantee, the terms of the real estate partnership's partnership agreement typically provide that we may receive indemnification from the real estate partnership or have the ability to increase our ownership interest. See Note 5 to the accompanying consolidated financial statements for information related to our guarantees of our real estate partnership's debt as ofDecember 31, 2020 and 2019. 63
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