Whitestone REIT (NYSE:WSR) Q4 2024 Earnings Call Transcript

Whitestone REIT (NYSE:WSR) Q4 2024 Earnings Call Transcript March 4, 2025

Operator: Greetings, and welcome to the Whitestone REIT Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce David Mordy, Director of Investor Relations. Thank you, sir. You may proceed.

David Mordy: Good morning, and thank you for joining Whitestone REIT’s Fourth Quarter 2024 Earnings Conference Call. Joining me on today’s call are Dave Holeman, Chief Executive Officer; Christine Mastandrea, chief Operating Officer; and Scott Hogan, Chief Financial Officer. Please note that some statements made during this call are not historical and may be deemed forward-looking statements. Actual results may differ materially from those forward-looking statements due to a number of risks, uncertainties and other factors. Please refer to the company’s earnings news release and filings with the SEC, including Whitestone’s most recent Form 10-Q and 10-K for a detailed discussion of these factors. Acknowledging the fact that the call may be webcast for a period of time, it’s also important to note that this call includes time-sensitive information that may be accurate only as of today’s date, March 4, 2025.

The company undertakes no obligation to update this information. Whitestone’s fourth quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website in the Investor Relations section. We published fourth quarter 2024 slides on our website yesterday afternoon, which highlight topics to be discussed today. I will now turn the call over to Dave Holeman, our Chief Executive Officer.

David Holeman: Thank you, David. Good morning, and thank you for joining Whitestone’s Fourth Quarter 2024 Earnings Conference Call. Yesterday, we released results, wrapping up a very strong year in terms of earnings growth, and we’re going to spend a lot of time this morning, helping investors understand what enabled us to achieve those results, and more importantly, what the blocks of our future growth are that provide us confidence in terms of our trajectory. Let’s start with who we are. We lead the peer group in concentration of high-value, high-return shop space, 77% of our ABR. That fact is a critical element in our overall strategy, allowing us to capitalize on change and deliver consistent earnings growth for investors.

I’ll start off with what we’ve delivered over the past 3 years, then cover what we plan to deliver in the years ahead and the how in terms of our delivering peer-leading earnings growth. Over the past 3 years, we have delivered compound annual growth for core FFO per share of 5.5%. In any environment, we believe this is a strong achievement. However, the particulars we overcame are important. Over the past 3 years, interest rates as represented by the 30-day SOFR curve increased 380 basis points, causing a double-digit drag on earnings. In addition, we improved our leverage represented by a 9.2x debt-to-EBITDAre in Q4 ’21 to 6.6x for Q4 2024. So we simultaneously grew earnings while reducing leverage. The earnings growth also does not fully reveal the degree to which we’ve strengthened our portfolio, both organically and inorganically.

The company’s quality of revenue initiative is largely driving the organic growth, and one evidence metric is our bad debt as a percent of revenue, improving from 1.2% in 2019 and to 0.8% in 2024. The key component of our inorganic growth has been our recycling program and our TAP score increasing 4 points over the last 1.5 years is a great measure to focus on there. Today, we are encouraging investors to focus not so much on turnaround elements, which we’ve talked about on our past calls, but rather on the strategic drivers that fueled our success and that set us up for continued outperformance. Over the next 5 years, we believe we can deliver consistent organic core FFO growth of 4% to 6% driven by 3% to 5% same-store net operating income growth.

Beyond organic growth, we are targeting adding 100 basis points of core FFO growth uplift from acquisitions. Tangential to the delivering the earnings growth benefit for investors are the benefits of scaling the model, lowering our fixed cost percentage and broadening our investor base. However, I phase this in terms of per share earnings growth. We have grown over the last 3 years in a disciplined fashion, and we will continue to grow in a disciplined fashion, delivering per share earnings growth. Our same-store NOI growth has 3 basic components: one, contractual escalators; two, the spreads we achieved on new and renewal leases; and three, the return on redevelopment capital that we spend. While the majority of the recent contracts for shop space have annual escalators in the 3% to 4% range, older and larger contracts bring our blended rate to 2.3%.

This is broken down to just under 3% for our shop spaces and just under 2% for our greater than 10,000 square foot spaces. So this is the base for our same-store NOI growth. Adding on to this, we looked at our new and renewal leases in terms of what we have achieved over the last 3 years. If we conservatively take 50% to 100% of what we’ve achieved in terms of cash leasing spreads over the last 3 years and multiply that times what we’ve got coming up over the next 5 years, we’ll add 0.8% to 1.8% to same-store NOI growth per year. This is on top of the 2.3% contractual escalators. And looking at the fundamentals in our markets, we believe this is a very solid assumption. We have chosen to be 100% in business-friendly states that are benefiting tremendously from population growth, and new business starts and job growth as manufacturing is reshoring.

This is combined with the fact that there is a growing supply-demand imbalance as new neighborhood retail centers have generally not been built in over a decade and high construction costs are indicating this trend will continue. Phoenix is leading on this front. Contracts coming up haven’t even caught up with market increases that occurred over the last 3 years, but this phenomenon is true in all of our markets. The third block of same-store NOI growth is redevelopment. We anticipate we’ll be able to add up to 100 basis points with a slightly higher redevelopment spend. We have already begun the increased capital spend on redevelopment, which will lift same-store net operating income growth into the upper portion of the range starting in 2026.

I’ll have Christine dive into redevelopment more heavily in terms of our plans there. Shifting from organic growth to inorganic growth, we continue to see plenty of opportunities in terms of accretive acquisitions of centers. Our 7 acquisitions since 2022, Lake Woodlands, Arcadia, Garden Oaks, Scottsdale Commons, 2 non-owned multi-tenant pads at Dana Park and a non-owned pad site at our Anderson Arbor property have all been accretive and continue to provide upside in terms of leasing rates and redevelopment and development potential. We can be very selective in terms of our acquisitions. We’ve done approximately $125 million in acquisitions over the last 26 months. Going forward, we will continue to use a disciplined mix of cash flow from operations, property dispositions, debt and equity in terms of sources.

Since 2021, our average same-store growth of 5.3% has been boosted by approximately 1% from occupancy gains. So our 3% to 5% long-term projection is perfectly in line with what we’ve demonstrated we can achieve. Our organic growth is the engine behind the 11% earnings growth we delivered in 2024. Now about $0.03 of the growth in ’24 was higher than average termination fees from our quality of revenue focus, and our 2025 guidance incorporates replacing those tenants with stronger tenants producing higher NOI. I’ll have Scott talk about the guidance walk in greater detail. All in all, I would recommend looking at our combined 2024 and 2025 performance in assessing our longer-term sustainable core FFO target of 5% to 7% growth. As you may have seen in our recent December press release, we raised the dividend by over 9% bringing the dividend CAGR since 2021 to 6.5% growth per year while maintaining an approximately 50% core FFO payout ratio.

The core long-term value proposition for those evaluating Whitestone stock is the current approximately 4% dividend plus 5% to 7% targeted core FFO growth, which we intend to translate into dividend growth as well. This team is focused on delivering that value proposition for investors, and we believe we have the right model and the right strategy to do it. Christine?

Christine C. Mastandrea: Good morning, everyone. As Dave indicated, we’ve delivered strong results for 2024, headlined by our 5.1% same-store NOI growth. Sequentially, our same-store NOI growth was 3.1% in quarter 1, 6.6% in quarter 2, 4.6% in quarter 3 and then 5.8% in quarter 4. I’ve spoken in the last several quarters on the quality of revenue and our strong same-store NOI growth is a result of that initiative. Our occupancy was relatively stable for the year at slightly over 94%, and the key driver of the NOI growth was proactively upgrading the strength of our tenants to the changing demographic spend. Today, I wanted to take some time and put together the larger picture that quality of revenue fits within, covering how this company was designed to proactively identify change, thrive as change occurs and deliver consistent earnings as a result of change.

We have identified early on the centers with a high percentage of small shop space provided more flexibility to adapt to surrounding demand and more flexibility to a wider range of uses and also works well with sophisticated multichannel businesses. In addition, the smaller spaces require less capital versus a big box or anchor tenants. Complementing the physical design advantage of high-value shop space centers was our focus to use technology and the data that would allow us to constantly pay attention to the demand drivers that would translate into success for the businesses populating our centers. This matching to the demand drivers, utilizing strong local knowledge, supplemented with the data from ESRI and placer.ai is what we mean when we say connecting to the community.

And so our competitive advantage to connecting to the community isn’t represented by one element of the business. It is the foundation of our business. The acquisitions team utilizes the local knowledge and data to understand the community and the opportunity before we acquire a center. And we have a very specific center profile, as shown on Slide 9, for our acquisitions. Our leasing team specializes in understanding that community and determining the future demand gaps as part of the process in identifying new tenants. Our underwriting processes have additional elements in utilizing the data to understand the business’ capability to take advantage of the surrounding demand. Our quality of revenue initiative is the willingness to constantly evaluate the capability of our tenants to meet demand and be far ahead enough of the changing demographic so that our driving center traffic replacing tenants rather than staying with a business that’s not meeting the needs and aspirations of a surrounding community.

Our redevelopment dollars are proactive spend as community demand grows and evolves and our dispositions are done primarily if we believe there are limitations or the community has fully evolved. The next 2 components setting Whitestone up to take advantage of change after center configuration and threading the community connection through all of our processes are intentionally shorter leases and are focused on service-oriented businesses. The shorter leases allow us much more flexibility in putting the puzzle pieces together as we properly curate a center in service-oriented businesses that are much less capital intensive and meeting the new demography. All in all, adaptability of our centers, our ability to use local knowledge and data to assess the changes of demand in demography plus the flexibility of our model provides us the confidence that we can strengthen our business to change occurs rather than in reverse.

In 2024, we continue to upgrade our tenant base, moving out nonperforming tenants who then, in turn, paid termination fees and moving in new tenants driving our center traffic up 3.5% in the fourth quarter versus the fourth quarter of 2023. That’s the proactive result we’ve designed for and pleased to deliver to our communities and shareholders. So to put into specific, the changes we’re seeing right now in demographic trends are continuing to drive changing spending patterns. With higher income group’s wealth is growing with a younger demographic and a younger demographic is focused on self-care, fitness and experiences in connecting with others, most notably around food, we’re able to get ahead of the change as we shift to business owners serving the direction of consumer spend and sophisticated marketing to those needs.

The pace of this change is accelerating, and we’re seeing it with a higher number of our communities because those are properties we’ve kept or acquired over the past several years. This evolution of certain communities is providing Whitestone with the opportunity to increase same-store NOI growth with selective redevelopment capital. We’ve already boosted our redevelopment capital and see this continuing years ahead. This will boost same-store NOI growth in 2026 and beyond, keeping us at the top of the peer group even without the occupancy gains that have helped us over the last several years. One of the more exciting of these redevelopments is already a good portion of the way through the process. That is our Williams Trace Center in Houston.

Our improvements to that center and the replacement of an underperforming grocer with an EOS fitness has boosted center traffic by 60%. And now with the new focus on leasing activity, we target businesses forward an active and upwardly mobile demographic new for that community as well, and we’re driving returns from an increased traffic to the center. Another center where the evolution of community around the center is driving change is Lion Square, which is the heart of the Asian community in Houston. This community is thriving and has almost no occupancy available anywhere near at our center. We have the opportunity to modernize the center and transform it with a strong traffic up to 18 hours a day. We’ll do this at the same time additional development is going on around the center.

But importantly, we can do it efficiently without interrupting the center’s cash flow. We provided detail on the redevelopments on the horizon in Slides 20 through 21. Importantly, we can do most of this redevelopment for $10 to $20 per square foot and deliver very high returns. I started with Whitestone’s foundational approach to change in our redevelopment efforts. But I’d be remiss if I didn’t talk about what we delivered in 2024. This is our 11th consecutive quarter with leasing spreads in excess of 17%. In the fourth quarter, we’ve achieved renewal leasing spreads of 19% and new leasing spreads of 36.1% for a combined overall positive leasing spread of 21.9%. The year-over-year net effective average base rent increased 5% to $24.51 a square foot, demonstrating a marked increase in the value of our real estate.

We have major new deals, including our second deal with EOS Fitness now under construction at Windsor Park in San Antonio after opening the first EOS at Williams Trace earlier this year to great success. We have exciting new restaurants opening across the portfolio, including Farmand’s Family Kitchen in Quinlan Crossing in Austin and Elvira’s at Market Street in Phoenix. We’ve also just signed our second Picklr deal at the Terravita Center in Arizona. The community around Terravita is evolving as Phoenix booming job market is causing what were once high-end vacation homes to change in the homes occupied by younger, up-and-coming professionals. The Picklr is a perfect fit to capitalize on this change and drive traffic to the center. This continued leasing success not only drives results and increases the value of our real estate as we prove exactly what our type of center can do in the right hands.

Our covering analysts continue to increase their NAV assessment of our portfolio as we deliver growth. I’d like to congratulating the leasing and operations team on finishing the year strong. We have a very dedicated team, and they’re part of the big reason that we have a robust growth lined up in the runway ahead. Scott?

J. Scott Hogan: Thanks, Christine. We delivered very strong results, both for the fourth quarter and for the year. Let me start with the 2024 highlights. We delivered $1.01 in core FFO per share versus $0.91 in 2023, representing 11% growth. The by quarter breakdown for 2024’s core FFO was $0.24 in the first quarter, $0.24 in the second quarter, $0.25 in the third quarter and $0.28 in the fourth quarter. That’s about what we anticipated in terms of seeing growth during the year with some additional revenues in the fourth quarter from percent sales clauses that typically help accelerate things in the fourth quarter. We anticipate a similar distribution in 2025. We delivered same-store NOI growth of 5.8% for the fourth quarter and 5.1% for the full year.

EOS opening at Williams Trace helped boost same-store NOI growth, and we anticipate their Windsor Park opening will boost 2026 same-store NOI growth. We also expect several other large tenants we signed at the end of 2024 or so far this year to do the same. Occupancy came in at 94.1%. And as a reminder, we only include tenants in our occupancy when they take possession not when the contract is signed. Both our process and our heavier mix of shop space tenants equates to a much lower signed-not-occupied list, and we view the quicker turnaround as one of our competitive advantages. Turning to Slide 4, I’ll discuss a few items on the walk in terms of what we anticipate for growth from 2024 to 2025. As I mentioned, we finished the year a $1.01.

Similar to 2024, I anticipate the majority of our growth will come from same-store NOI, which is anticipated to add $0.07 to core FFO per share. While we plan to continue our pace of acquisitions, our guidance makes no assumptions in terms of non-same-store NOI growth as we do not yet know the timing. G&A is anticipated to reduce earnings by $0.01 per share, and we are projecting a $0.03 per share improvement in interest expense due to lower leverage levels and interest rates. On the balance sheet front, we had a long-term goal of getting our debt-to-EBITDAre ratio under 7x. We anticipate we will continue to reduce our leverage and improve this metric. The fourth quarter is our strongest quarter, so the metric has some predictable quarter-to-quarter variability.

In terms of Whitestone’s liquidity, we have $15 million in cash and we have $125 million available under the credit facility. In 2024, cash flow from operations was $58.2 million and dividends were $24.9 million, leaving strong cash flow after dividends to fund growth in 2024 and to fuel earnings growth in the years ahead. We have no remaining maturities in 2025. However, we’re in a position to be opportunistic if rates drop, and we’re able to ladder out maturities further. Our dividend remains one of the most secure, highest growing dividends within the peer group, and we believe we have the right plan in place to continue the growth trajectory. With that, we’ll open the line for questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Mitch Germain with Citizens Capital Markets.

Mitch Germain: Congrats on the year. I wanted to circle back on some of the redevelopment opportunities that you talked about. Obviously, there were some pad sites, but I know you have some bigger redevelopment opportunities that are attached to a couple of your centers, whether it be expansion of the existing shopping center or some sort of other use. When do you foresee the potential for some of those opportunities to begin to materialize?

Christine C. Mastandrea: Thanks for the question, Mitch. Let me break it out really on a couple of different parts. So yes, we’ve had pad sites, but there are also a number of centers that I would consider well placed a little bit older. We also have them at a basis that is a relatively practical basis to be able to reinvest in those locations and remerchandise. We’ve been actively been doing that. So I consider those sort of your bread and butter centers where over time, and I have to stack them, right, to make sure that we match the timing of delivery for the team and also for execution and cash flow. So I’d say there’s a larger group of that, that we’ll be working into. And then the other centers that we’ve been talking about, some of the bigger ones.

We’ve been actively positioning tenants to make those changes and to move forward, so those have a little bit longer time frame. But yes, they definitely have some upside opportunity to it. So we’re actively moving in that direction as well on three of our larger centers.

Mitch Germain: Great. That’s helpful. Maybe circling over to the capital plan. We’ve got redevelopment. Dave spoke about how it appears that you would anticipate acquisition activity to begin to materialize in a greater extent. And then Scott in his comments talked about a further reduction in leverage. So how does this entire picture fit together where you are able to continue to deliver leverage reduction while also increasing your external or deployment efforts?

David Holeman: Mitch, good question. This is Dave. I think for me, it starts with the core engine of this business. If you look at what we’re doing and the momentum we have, I think Scott mentioned the cash flow and the amount of free cash that we’re producing, I think we have a balance sheet that’s in very good position. We have opportunities. We have growing leasing spreads, and with that, we’re in a very attractive space. So we’ve got a number of opportunities. We’re going to be disciplined. I think we’ve always said we’re going to focus on growth as defined by earnings growth and value growth. So we’ve got opportunities in the redev area. Christine mentioned some of the larger development areas that are working. Scott mentioned continuing to improve leverage.

And I think we’ve also begun looking at opportunities to grow and scale this business. I think there’s going to be some opportunities that we’re now in position for. But our focus is always on, are we going to do that in an accretive fashion? We’ve done some recycling. You’ve seen probably over the last couple of years where we’ve done that at a positive spread of what we’ve bought versus what we’ve sold. We still think there’s some opportunities there. But just a number of opportunities in this business, and you’ve got a team that is firing on all cylinders and is very focused on making sure all of those add to our earnings growth. I think we gave some visibility into what we think are the longer-term targets for FFO growth. All of that’s part of that strategy.

And we look forward to reporting more on future calls as we execute some of those things. So we want to, today, give a bit of a vision as to what we see the opportunity ahead.

Mitch Germain: And Dave, we talked about acquisitions. I mean, I’m curious about the competitive environment or indications appear some of the capital that was sitting on the sidelines is now becoming a bit more active, though that doesn’t seem to be changing your enthusiasm. So maybe if you can just provide some perspective as to what you’re seeing out there.

David Holeman: Sure. I think there is clearly more interest in the space we’re operating in today with a number of capital sources that doesn’t dampen our enthusiasm as a team. I think we believe that we have a little bit of the secret sauce and that we’re in these markets. We’re very deep in the markets we’re in. We have deep relationships with a number of folks in the market. So while we see more competition, Whitestone has always been looking for opportunities that are a little different. I think in our slide deck, we’ve got some of our drivers for acquisitions we talk about being a bit agnostic on the grocery anchored part. I think that separates us a bit. We talk about our focus on the smaller shop spaces being a larger component that differentiates us.

So while there is more competition, I think that means there continues to be a very good dynamic as far as the supply, supply being limited in our markets. But I think we remain positive on our ability to find assets and apply our model.

Mitch Germain: You’d like to buy smaller — sorry, let me say, tenants or smaller assets, you need to have a really good operating platform in those markets and not everyone can attest to that. Last one for me is, Scott, any one timers this quarter that need to be called out? I mean, obviously, management and transaction and other income seem to be a bit high. I don’t know if that includes percentage rent, but is there anything that needs to be referenced in our model that we should be aware of?

J. Scott Hogan: Sure. We always have higher percent rents in the fourth quarter than we do in other quarters because of tenants hitting their breakpoints. We also had some termination fees in the quarter and in the year that are a little higher than normal. Any time we have a tenant move out, we’re always looking to maximize that event. The spaces are very good. I think we’re excited to have them back. But we did have some termination fees that were higher, and those are reflected on the walk on Page 4.

Mitch Germain: Was that recorded in the fourth quarter?

J. Scott Hogan: It was recorded throughout the year. There were a couple in the fourth quarter.

Mitch Germain: I guess what I’m asking, is there anything in 4Q that I need to worry about with regards to my forward run rate?

Christine C. Mastandrea: No. I mean, Mitch, remember at the beginning of last year, I said that we’d remerchandise and the activity that we’d take doing that. That’s been active throughout the year, and that includes termination fees. That’s part of the remerchandising that we do. So I don’t see much difference now than you’re going to see next year or this year.

J. Scott Hogan: We’ll plan to have termination fees every year, Mitch. I think I’d take a look at the trajectory that we had in the quarterly earnings in ’24 and expect a similar trajectory in ’25.

Operator: The next question comes from Anthony Hau with Truist Securities.

Anthony Hau: So I noticed that the Regis lease is expiring this year. Just curious, where are you guys in the negotiation process? And what’s the plan? And what’s the mark-to-market opportunity for this space?

Christine C. Mastandrea: So I think a couple of things that are really important to talk about that this is one portion of our business that’s not as big as the rest of it, but it is office, but it relates to mixed use. And so what we’ve seen, especially in certain areas, in particular, in Houston where you have boutique office opportunities and where the pricing is starting to adjust and change for that upper end of the market, especially in this area, it’s uptown Galleria, it’s not downtown. You have a number of tenants that are moving from downtown. They’re moving out to a town and country area in City Center, and they’re also moving out to the Galleria. That’s where the demand is. So we want to make sure that we’re managing appropriately towards those upside opportunities as they come because there is a change in the need of a specific type of office space, specifically people that are looking for mixed use.

And also because the demand for talent, this is also in the neighborhood where you have. If you really want to attract a good workforce, this is the location to have it. So I just say that to be careful in talking about these things, as you know. But we see a real positive upward dynamic in this market towards that type of space.

David Holeman: Yes. Just to echo Christine, this is great property, great location, and we feel very good about it. I think if you look at our top tenant list, they’re 0.4% of revenue. And so we’re welcoming a role like this at the spaces we have.

Anthony Hau: Got you. And then my second question is, I understand the proceeds from Pillarstone is not part of the guidance, but can you provide any color on the — or any update on the liquidation process?

David Holeman: I’ll start out and Scott may want to provide some more detail. So Anthony, we feel it’s a long process, but we’re nearing the end, I feel like. I think we’ve reported previously that this is a collection mode. There’s a plan of liquidation in place. Currently, all of the properties that are part of Pillarstone are either sold, under contract or have offers. And so we feel very good about moving forward, about receiving those proceeds. I think frankly, we wanted to concentrate on the core business today and not talk as much about some of the turnaround elements or Pillarstone. And so we feel very good about collecting that. I think Scott can report we’ve got on our balance sheet roughly $45 million, I believe. And given what I just described, we feel very comfortable about the proceeds being well north of that.

J. Scott Hogan: Anthony, as we start to receive those liquidation proceeds, we’ll revise our guidance to reflect that. It’s just very hard to predict the timing in a bankruptcy court situation quarter-by-quarter.

Operator: Gaurav Mehta with Alliance Global Partners.

Gaurav Mehta: I wanted to go back to your comments around redevelopment. And just to clarify, are you expecting any capital spend associated with redevelopment in 2025?

David Holeman: Gaurav, it’s Dave. I think Christine mentioned, I think, in our slide deck on Pages 20 and 21, we show kind of our bread and butter development. I think we gave a number of $20 million to $30 million that’s probably over a couple of years. But traditionally, we have done kind of that normal amount of development, you’ll see in our cash flow statement for the year-end. So we anticipate that same level of activity and slightly starting to ramp up. And then as Christine mentioned, the larger projects are in process, but it takes a bit longer. So we’ll report on those as we get closer to the time where we’ll start to see some results. But yes, we’re going to have redevelopment activity. We’re going to have some pass sites, probably just a little bit more than our historical spend.

Gaurav Mehta: Okay. And can you guys remind us what kind of yields you’re underwriting on these redevelopments?

David Holeman: Okay. So a couple of things. This is a pretty intensive process that we go through the portfolio and we look for those opportunities. And it’s an evaluation of what the comp set is in the market, what the upside opportunities are for rents. And also, I’d like to keep the in-place existing cash flow. So some of these can take place over 6 months or they can go over 18 months just to make sure that we structure it appropriately. I’ll give you an example of this, and this might give you a little bit of an idea of how we work. So when we evaluated the opportunity at Williams Trace, where we had an underperforming grocer, we started into the process, which is a design process. It takes a little bit of time working through.

What you’re going to do to the center and tinker your way towards what I would consider an optimal result. In that, we already started targeting a certain tenant type that we thought would fit well in the center and drive traffic because we saw that traffic has fallen off significantly with an underperforming grocer. So that being said, when we targeted EOS and brought them into the market, we also saw that there was a way to start crafting a tenant mix also around that type of strength in user. And so along the way, we started adding — in one case, we started adding some patio space. We improved the walkability of the center, the overall look at the center and then applied some of the rights, what I would consider TI towards turning and remerchandising existing tenants.

And with that, we’ve had a real improvement in performance, not just traffic, but also performance as well, while keeping a lot of the existing cash flow in place. So we target — we look for double-digit returns for this, and we also look for the ability to push 20% to 30% increase in rents.

Gaurav Mehta: Okay. Last question on your maintenance CapEx, the $4.1 million maintenance CapEx that you reported in 4Q, going forward, what kind of run rate should we expect for ’25? Should we expect similar CapEx numbers that you guys reported overall for ’24?

J. Scott Hogan: I think I’d look at the last 2 or 3 years and I expect a run rate similar to the average of the last 2 or 3 years. It may have been a little higher in ’24.

Operator: Craig Kucera with Lucid Capital Markets.

Craig Kucera: First, does the guidance include any capital recycling assumptions?

J. Scott Hogan: It does not.

Craig Kucera: Got you. Changing gears, you go back to the years coming out of the pandemic, I think your occupancy was in the high 80% range, now you’re pushing towards 95%. Is that optimal for pushing leasing spreads in the 20% range? Or do you think you can take occupancy further than 95%? Or is that just sort of a natural ceiling?

Christine C. Mastandrea: I think we can. But I think, quite frankly, again, when you have such a strong market, I’m trying to get vacancy, quite frankly, so I can turn the rental rates upward. So I would say 95% is good. Could I get higher than that? Yes. But I will tell you that we’re also going to be looking for opportunities where there’s lease-up opportunities and merchandising opportunities in our acquisitions. So I think we’ve demonstrated that we’re good at this, and I think we want to stay consistent with what we do well in our business, which is looking for how do you keep adding value, right? And so part of that is looking remerchandising, looking for acquisitions where we can do the remerchandising, that upgrading in addition to that, where we see new opportunities to, I’d say, add additional value through the redevelopment like we talked about.

So yes, but again, I think I mentioned this for the last 2 years, we’re going to be taking space back where we can and turn it because that’s where the opportunity for growth is.

Craig Kucera: Okay. Great. And just one more for me. Can you talk — I think you sold Providence in Houston this quarter. Can you talk about the cap rate on dispositions?

David Holeman: Yes. Craig, we did sell Providence, which was one of the assets that was in the portfolio for a bunch of years, was one of the original assets of Whitestone. So part of our discontinuing to upgrade the quality of our portfolio was recycling out of assets like that. Solid asset just in an area of town that we don’t see evolving as the rate that we do other areas. Our total — we’re not reporting individual cap rates on sales. But if you look at everything we’ve sold, I think it’s in the mid-6s, and Providence was kind of in line with that group, I think, from a sale cap perspective. So good center, just a little bit lower ABRs than our historical portfolio. And as part of our continuing the quality of revenue, upgrade the portfolio, I think you saw one of the things the third-party measures, our tax scores continue to improve.

So if you look at the progress we’ve made, not only organically, but through recycling, I think we really continue to upgrade the portfolio.

Operator: The next question comes from John Massocca with B. Riley.

John Massocca: Sorry if I missed this earlier in the call, is there a leverage range you’re either looking at or expecting in 2025 or by year-end 2025?

J. Scott Hogan: I think ultimately, we’d like to be in the low 6s, maybe high 5s. The timing of that, John, is going to be difficult to predict just because a bit of it’s going to depend on liquidation proceeds. But I think that’s the range where we would like to end up eventually high 5s, low 6s.

John Massocca: Okay. And then any impact from some of the smaller recent retailer bankruptcies specifically, I think, Party City and Joann’s just because that would impact 1Q numbers, if you had any exposure?

Christine C. Mastandrea: No, we don’t. And we focused — as we’ve talked about, our model is different than others. We stayed away from a lot of those large spaces. That’s why we went into the smaller format, smaller spaces. We saw the disbursement of risk. And we’ve always favored that. We stayed away from that type of tenant model where it’s really — I look at — if you really look what’s not making it out there, it’s restaurants, it’s retail that is not focused on the changing demographic, right? These are older business models. They’re somewhat tired business models. It’s rather unfortunate that they weren’t able to adapt to the change. That being said, what we’re seeing is quite a bit of demand in leasing right now, and it’s mostly because it’s focusing on a new demography of spend. So we don’t have that exposure, and that was by design from the very beginning.

J. Scott Hogan: And John, I’d just add that we really don’t have a high concentration in any one tenant. 2.2% revenue is the highest tenant concentration we have. So in the few cases we have bankruptcies, I think we’re happy to have the space back and we can usually get higher rents.

John Massocca: Okay. And then a couple of clarifying ones on guidance. How much impact, if any, on G&A this year comes from stuff related to Pillarstone that maybe isn’t run rate starting in 2026?

J. Scott Hogan: Well, in 2024, we had about $1 million in bankruptcy cost, and I think we expect to have a similar level in 2025. And then hard to say where ’26 will be, but I think we expect to see that start tapering off in ’26.

John Massocca: Okay. And then last one for me. On the lease termination fees, any reason that’s not going to kind of be similar to ’24 and ’25, just given it seems like there is continued kind of portfolio refreshing, reshaping. Maybe just you don’t want to put that in guidance until it actually occurs? Or is it just something different about the portfolio and lease expirations this year?

J. Scott Hogan: I think we’re forecasting it at a lower level, but it certainly could — if you have a few tenants go out, it certainly could be at a higher level in ’25, but we don’t have that many on our radar right now for ’25.

John Massocca: Okay. And I guess with the terminations in 4Q kind of anticipated at the time of 3Q earnings or 2Q earnings just some guidance?

Christine C. Mastandrea: No, most of that — those kind of deals we work throughout the year. So it’s always a timing as to when. So let me just explain how we go about this, maybe that will help a little bit. We identified through sales where we see that quite in a market where we know where performance should be. And in most of our markets, we know where performance should be, especially with the high HHIs that we have in our neighborhoods. We can determine from those sales where a tenant should be performing. And we see that there is the lack of performance or they’re struggling, it’s at a point in time where you need to have a discussion. Those discussions take place, they don’t happen overnight. They take a little bit of time.

At the same time, we’re already looking to see where the replacement will be. So there’s very little downtime even between the timing of the lease termination to the new lease execution. And so that could take anywhere, sometimes it can take several months to 6 months or so. And then it’s just a matter of negotiating a termination fee and then they hand over to the next tenant. And we don’t do a termination fee just on the gap of the timing. It involves an investment. We look back as to what that investment was, and then we negotiate a position from that because we expect to return on our real estate. And I just want to mention, too, it’s really important because you brought this up earlier, that there is a change in demographic spend right now.

And so leaning into that new spend and where it’s going is an important place to be right now, especially for the demand for this type of space.

John Massocca: That makes sense. I was just thinking — I’m trying to get a sense of like timing of when this could hit guidance. I just look back at like, there’s a slightly more detailed walk right on Page 4 of your current investment slide in terms of how you’re getting to that guidance. And I don’t know if the lease termination income that you received in 2024 was anticipated as of kind of 3Q results. And so is it just something that’s going to kind of get layered into guidance as it happens? Or is it something where we should…

J. Scott Hogan: There’s a base level that we anticipate, John. And then as larger ones occur, we’ll factor those into the guidance.

Operator: Thank you. At this time, I would like to turn the call back to management for closing comments.

David Holeman: Dave Holeman again. Thank you for joining today’s call. We hope we’ve given investors a view into the building blocks of our future trajectory. We’re excited about what lies ahead of us. We’re excited about the guidance we’ve given, and we look forward to updating everyone on the progress we make. Everyone, have a great day. Thank you.

Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.