Company Quick10K Filing
Quick10K
Pillarstone Capital REIT
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.05 40 $479
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-08 Officers
8-K 2019-01-03 M&A, Exhibits
8-K 2018-08-20 Other Events
8-K 2018-08-15 Amendment
8-K 2018-08-14 Officers
8-K 2018-05-09 Shareholder Vote
OMC Omnicom Group 17,890
KEP Korea Electric Power 16,360
APLE Apple Hospitality REIT 3,690
GEL Genesis Energy 2,820
BID Sotheby's 2,040
INOV Inovalon Holdings 1,850
CRZO Carrizo Oil & Gas 1,150
YEWB Yew Bio-Pharm 0
RGUS REGI 0
PROP Pledge Petroleum 0
WSR 2018-12-31
Part IV Item 15. Exhibits and Financial Statement Schedules. 69 Item 16. Form 10-K Summary 69 Index To Exhibits 70 Signatures. 71
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Trustees, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10-K Summary.
EX-21.1 exhibit211listofsubs.htm
EX-23.1 exhibit231pkfconsent.htm
EX-31.1 exhibit311certificationofc.htm
EX-31.2 exhibit312certificationofc.htm
EX-32.1 exhibit321certificationofc.htm
EX-32.2 exhibit322certificationofc.htm

Pillarstone Capital REIT Earnings 2018-12-31

WSR 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 wsr10-k2018.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________

FORM 10-K

(Mark One)
x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 001-34855
______________________________

WHITESTONE REIT

(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
76-0594970
(State or Other Jurisdiction of Incorporation or
 
(I.R.S. Employer
Organization)
 
Identification No.)
 
 
 
2600 South Gessner, Suite 500, Houston, Texas
 
77063
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (713) 827-9595
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per share
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o        Accelerated filer x        Non-accelerated filer o        Smaller reporting company o
Emerging growth company o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the common shares held by nonaffiliates of the registrant as of June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was $490,696,053.
As of March 15, 2019, the registrant had 39,766,240 common shares of beneficial interest, $0.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: We incorporate by reference in Part III of this Annual Report on Form 10-K portions of our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which proxy statement will be filed no later than 120 days after the end of our fiscal year ended December 31, 2018.





EXPLANATORY NOTE 

        On February 26, 2019, the Audit Committee of the Board of Trustees (the “Audit Committee”) of Whitestone REIT (“we,” “us,” “our” or the “Company”), after consultation with members of senior management of the Company, concluded that the Company’s unaudited consolidated financial statements as of and for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018 (collectively, the “2018 Quarterly Financial Statements”) included in the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively, should be restated to correct the accounting error described below under “Background on the Quarterly Restatement” and should no longer be relied upon.

In this comprehensive Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (this “Annual Report on Form 10-K”), the Company is presenting its audited consolidated financial statements as of and for the fiscal years ended December 31, 2018, 2017 and 2016, as well as restated 2018 Quarterly Financial Statements, which are included in Note 19 (Selected Quarterly Financial Data (Unaudited)) to the Company’s consolidated financial statements included in this Annual Report on Form 10-K. The Company refers to the restatement of the 2018 Quarterly Financial Statements included herein as the “Quarterly Restatement.”
        We do not intend to file separate amended Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018.
Background on the Quarterly Restatement
         As previously disclosed in the Company’s Current Form 8-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019 (the “Form 8-K”), on January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2014-09 (“Topic 606”), as subsequently amended, using the modified retrospective method and applied Topic 606 to those contracts that were not completed as of January 1, 2018. We applied Topic 606 to account for contracts (that do not meet the definition of a business) to customers. We accounted for contracts (that do not meet the definition of a business) to noncustomers under Accounting Standards Codification 610, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets” (“ASC 610”), which requires the application of certain concepts from Topic 606. In August 2018, the Company received a comment letter from the Staff of the SEC relating to its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018. The Staff requested that the Company provide them with an analysis of the Company’s determination that the contribution of assets to Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”) (as described in the Form 8-K) did not meet the requirements for derecognition of the underlying assets under Topic 606 and ASC 610, and an explanation of the Company’s consideration of the immaterial accounting errors related to Pillarstone OP in its conclusion that the Company’s disclosure controls and procedures and internal controls over financial reporting were effective as of June 30, 2018 and December 31, 2017. In September 2018, the Company responded to the Staff’s letter with the requested analysis and explanation. In October 2018, the Company received a comment letter from the Staff with certain follow up questions. Subsequently, the Company engaged in verbal discussions with the Staff regarding its responses, and in February 2019, the Staff verbally informed the Company that it objected to the Company’s conclusion regarding the assessment of the transfer of control criteria in Topic 606 with respect to the contribution and objected to the Company’s continued recognition of the underlying assets and liabilities associated with the contribution subsequent to the adoption of Topic 606 and ASC 610 on January 1, 2018. Accordingly, the Company concluded that the 2018 Quarterly Financial Statements should be restated. Because this change from the profit sharing method is only applicable for periods ending after giving effect to the implementation of Topic 606 and ASC 610, no periods prior to January 1, 2018 are affected by this error.
As described in more detail in this Annual Report on Form 10-K, as a result of the adoption of Topic 606 and ASC 610 and as reflected in the Quarterly Restatement, the Company has derecognized the underlying assets and liabilities associated with the contribution as of January 1, 2018 and has recognized the Company’s investment in Pillarstone OP under the equity method of accounting. As a part of the Quarterly Restatement, the Company has made the following adjustments to the 2018 Quarterly Financial Statements, which increased the Company’s retained earnings as of January 1, 2018 by $19.1 million:

For the three months ended March 31, 2018, the change decreased revenue by $3.8 million, decreased total expenses by $3.3 million, increased equity in earnings of real estate partnership by $0.7 million and increased net income by $0.2 million.

For the three months ended June 30, 2018, the change decreased revenue by $3.6 million, decreased total expenses by $3.2 million, increased equity in earnings of real estate partnership by $0.6 million and increased net income by $0.2 million. For the six months ended June 30, 2018, the change decreased revenue by $7.4 million, decreased total expenses by $6.5 million, increased equity in earnings of real estate partnership by $1.3 million and increased net income by $0.4 million.






For the three months ended September 30, 2018, the change decreased revenue by $3.9 million, decreased total expenses by $3.6 million, increased equity in earnings of real estate partnership by $0.5 million and increased net income by $0.2 million.

For the nine months ended September 30, 2018, the change decreased revenue by $11.3 million, decreased total expenses by $10.1 million, increased equity in earnings of real estate partnership by $1.8 million and increased net income by $0.6 million.
Internal Control Over Financial Reporting and Disclosure Controls and Procedures
        The Company identified a material weakness in its internal control over financial reporting as of December 31, 2018. As a result of the material weakness, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2018 and determined that its disclosure controls and procedures were not effective as of March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018. The Company has implemented and continues to implement measures to remediate the material weakness. See Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K for more information about the material weakness and our remediation activities.






WHITESTONE REIT
FORM 10-K
Year Ended December 31, 2018


 
Page
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B. 
 
Item 2.   
 
Item 3.    
 
Item 4.       
 
 
 

 





Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company,” “we,” “us” or “our” are to Whitestone REIT and its consolidated subsidiaries.

Forward-Looking Statements

The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto in this Annual Report on Form 10-K. 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
 
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Annual Report on Form 10-K include:
 
the imposition of federal taxes if we fail to qualify as a real estate investment trust (“REIT”) in any taxable year or forego an opportunity to ensure REIT status;
 
uncertainties related to the national economy, the real estate industry in general and in our specific markets;
 
legislative or regulatory changes, including changes to laws governing REITs;
 
adverse economic or real estate developments or conditions in Texas, Arizona or Illinois;
 
increases in interest rates, operating costs or general and administrative expenses, including those incurred in connection with the Quarterly Restatement;
 
availability and terms of capital and financing to fund our operations, distributions to shareholders and to refinance our indebtedness as it matures;

decreases in rental rates or increases in vacancy rates;
 
litigation risks, including potential litigation as a result of the Quarterly Restatement and its effects;
 
lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants;
 
our inability to renew tenants or obtain new tenants upon the expiration of existing leases;
 
our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws;
 
the need to fund tenant improvements or other capital expenditures out of operating cash flow;

the risk that we are unable to raise capital for working capital, acquisitions or other uses on attractive terms or at all; and

our inability to improve our internal control over financial reporting and disclosure controls and procedures, including our inability to remediate the identified material weakness, and the costs and time associated with such efforts.






The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of this Annual Report on Form 10-K.





PART I
 
Item 1.  Business.
 
General
 
We are a Maryland REIT engaged in owning and operating commercial properties in culturally diverse markets in major metropolitan areas. Founded in 1998, we changed our state of organization from Texas to Maryland in December 2003.  We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).
 
We are internally managed and, as of December 31, 2018, we wholly-owned a real estate portfolio of 57 properties that meet our Community Centered Property® strategy containing approximately 4.8 million square feet of gross leasable area (“GLA”), located in Texas, Arizona and Illinois.  Our consolidated property portfolio has a gross book value of approximately $1.1 billion and book equity, including noncontrolling interests, of approximately $359 million as of December 31, 2018.

Further, as of December 31, 2018, we, through our investment in Pillarstone OP, owned a majority interest in 11 properties that do not meet our Community Centered Property® strategy containing approximately 1.3 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP. In this Annual Report on Form 10-K, unless otherwise indicated, we do not include the Pillarstone Properties when we refer to our properties.

Our common shares of beneficial interest, par value $0.001 per share, are traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “WSR.”  Our offices are located at 2600 South Gessner, Suite 500, Houston, Texas 77063.  Our telephone number is (713) 827-9595 and we maintain a website at www.whitestonereit.com. The contents of our website are not incorporated into this filing.
 
Our Strategy
 
In October 2006, our current management team joined the Company and adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties®. We define Community Centered Properties® as visibly located properties in established or developing culturally diverse neighborhoods in our target markets. We market, lease and manage our centers to match tenants with the shared needs of the surrounding neighborhood. Those needs may include specialty retail, grocery, restaurants and medical, educational and financial services. Our goal is for each property to become a Whitestone-branded retail community that serves a neighboring five-mile radius around our property. We employ and develop a diverse group of associates who understand the needs of our multicultural communities and tenants.

Our primary business objective is to increase shareholder value by acquiring, owning and operating Community Centered Properties®. The key elements of our strategy include:
 
Strategically Acquiring Properties.

Seeking High Growth Markets. We seek to strategically acquire commercial properties in high-growth markets. Our acquisition targets are located in densely populated, culturally diverse neighborhoods, primarily in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.

Diversifying Geographically. Our current portfolio is concentrated in Houston and Phoenix. As of December 31, 2018, we wholly-owned 57 commercial properties, including 15 properties in Houston, seven properties in Dallas-Fort Worth, three properties in San Antonio, four properties in Austin, 27 properties in the Scottsdale and Phoenix, Arizona metropolitan areas, and one property in Buffalo Grove, Illinois, a suburb of Chicago.

We believe that continued geographic diversification in markets where we have substantial knowledge and experience will help offset the economic risk from a single market concentration. We intend to continue to focus our expansion efforts on the Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio markets. We believe our management infrastructure and capacity can accommodate substantial growth in those markets. We may also pursue opportunities in other regions that are consistent with our Community Centered Property® strategy. Markets in which we have developed some knowledge and contacts include Orlando, Florida and Denver, Colorado, both of which have economic, demographic and cultural profiles similar to our Arizona and Texas markets.

1




Capitalizing on Availability of Reasonably Priced Acquisition Opportunities. We believe that currently and during the next several years there will continue to be excellent opportunities in our target markets to acquire quality properties at historically attractive prices. We intend to acquire assets in off-market transactions negotiated directly with owners or financial institutions holding foreclosed real estate and debt instruments that are either in default or on bank watch lists. Many of these assets may benefit from our Community Centered Property® strategy and our management team’s experience in turning around distressed properties, portfolios and companies. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry with whom we regularly work to identify properties for potential acquisition.
 
Redeveloping and Re-tenanting Existing Properties. We have substantial experience in repositioning underperforming properties and seek to add value through renovating and re-tenanting our properties to create Whitestone-branded Community Centered Properties®. We seek to accomplish this by (1) stabilizing occupancy, with per property occupancy goals of 90% or higher; (2) adding leasable square footage to existing structures; (3) developing and building new leasable square footage on excess land; (4) upgrading and renovating existing structures; and (5) investing significant effort in recruiting tenants whose goods and services meet the needs of the surrounding neighborhood.
 
Recycling Capital for Greater Returns. We seek to continually upgrade our portfolio by opportunistically selling properties that do not have the potential to meet our Community Centered Property® strategy and redeploying the sale proceeds into properties that better fit our strategy. Some of our properties that we owned at the time our current management team assumed the management of the Company (the “Legacy Portfolio” or “Non-Core Properties”) may not fit our Community Centered Property® strategy, and we may look for opportunities to dispose of these properties as we continue to execute our strategy. For example, on December 31, 2016, we contributed to Pillarstone the 14 Pillarstone Properties located in Dallas and Houston that were part of the Legacy Portfolio.
 
Prudent Management of Capital Structure. Of our 57 properties, we currently have 48 properties that are unencumbered. We may seek to add mortgage indebtedness to existing and newly acquired unencumbered properties to provide additional capital for acquisitions. As a general policy, we intend to maintain a ratio of total indebtedness to undepreciated book value of real estate assets that is at or less than 60%. As of December 31, 2018, our ratio of total indebtedness to undepreciated book value of real estate assets was 58%.
 
Investing in People. We believe that our people are the heart of our culture, philosophy and strategy. We continually focus on developing associates who are self-disciplined and motivated and display, at all times, a high degree of character and competence. We provide them with equity incentives to align their interests with those of our shareholders.
 
Our Structure
 
Substantially all of our business is conducted through Whitestone REIT Operating Partnership, L.P., a Delaware limited partnership organized in 1998 (the “Operating Partnership”).  We are the sole general partner of the Operating Partnership.  As of December 31, 2018, we owned a 97.7% interest in the Operating Partnership.

As of December 31, 2018, we wholly-owned a real estate portfolio consisting of 57 properties located in three states.  The aggregate occupancy rate of our portfolio was 90% based on GLA as of December 31, 2018.

We are hands-on owners who directly manage the operations and leasing of our properties.  Substantially all of our revenues consist of base rents received under varying term leases.  For the year ended December 31, 2018, our total revenues were approximately $119.9 million.  

Additionally, we, through our investment in Pillarstone, owned a majority interest in 11 properties located in Dallas and Houston, Texas. The aggregate occupancy rate of the Pillarstone properties was 80% based on GLA as of December 31, 2018.
 
Our largest property, BLVD Place (“BLVD”), a retail community purchased on May 26, 2017 and located in Houston, Texas, accounted for 12.7% of our total revenues for the year ended December 31, 2018. BLVD also accounted for 17.4% of our consolidated real estate assets, net of accumulated depreciation, as of the year ended December 31, 2018. Of our 57 properties, 15 and 27 are located in the Houston, Texas and Phoenix, Arizona metropolitan areas, respectively.

2



 
Economic Environment

Low interest rates and desire for higher yielding investments with moderate risk has resulted in lower capitalization rates and higher prices for commercial real estate acquisitions. Each of these factors could negatively impact the value of public real estate companies, including ours.  However, the majority of our retail properties are located in densely populated metropolitan areas and are occupied by tenants that generally provide basic necessity-type items and services which have tended to be less affected by economic changes.  Furthermore, a substantial portion of our portfolio is in metropolitan areas in Texas that have been impacted less by the economic slowdown compared to other metropolitan areas.

Competition
 
All of our properties are located in areas that include competing properties.  The amount of competition in a particular area could impact our ability to acquire additional real estate, sell current real estate, lease space and the amount of rent we are able to charge.  We may be competing with owners, developers and operators, including, but not limited to, real estate investors, other REITs, insurance companies and pension funds.

Should we decide to dispose of a property, we may compete with third-party sellers of similar types of commercial properties for suitable purchasers, which may result in our receiving lower net proceeds from a sale or in our not being able to dispose of such property at a time of our choosing due to the lack of an acceptable return. In operating and managing our properties, we compete for tenants based upon a number of factors including, but not limited to, location, rental rates, security, flexibility, expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated, maintained and marketed. We may be required to provide rent concessions, incur charges for tenant improvements and other inducements, or we may not be able to timely lease vacant space, all of which could adversely impact our results of operations.

Many of our competitors have greater financial and other resources than us and also may have more operating experience. Generally, there are other neighborhood and community retail centers within relatively close proximity to each of our properties. There is, however, no dominant competitor in the Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio metropolitan areas. Our retail tenants also face increasing competition from outlet malls, internet retailers, catalog companies, direct mail and telemarketing.
 
Compliance with Governmental Regulations
 
Under various federal and state environmental laws and regulations, as an owner or operator of real estate, we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at our properties. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with any such contamination. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs the government incurs in connection with contamination on the site. The presence of contamination or the failure to remediate contamination at any of our properties may adversely affect our ability to sell or lease the properties or to borrow using the properties as collateral. We could also be liable under common law to third parties for damages and injuries resulting from environmental contamination coming from our properties.

We will not purchase any property unless we are generally satisfied with the environmental status of the property. We typically obtain a Phase I environmental site assessment for each new acquisition, which includes a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not include any sampling or testing of soil, groundwater or building materials from the property.
 
We believe that our properties are in compliance in all material respects with all applicable federal, state and local laws and regulations regarding the handling, discharge and emission of hazardous or toxic substances. Because release of chlorinated solvents can occur as a result of dry cleaning operations, we participate in the Texas Commission on Environmental Quality Dry Cleaner Remediation Program (“DCRP”) with respect to four of our properties that currently or previously had a dry cleaning facility as a tenant. The DCRP administers the Dry Cleaning Remediation fund to assist with remediation of contamination caused by dry cleaning solvents.

3




We have not been notified by any governmental authority, and are not otherwise aware of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our present or former properties. Nevertheless, it is possible that the environmental assessments conducted thus far and currently available to us do not reveal all potential environmental liabilities. It is also possible that subsequent investigations will identify material contamination or other adverse conditions, that adverse environmental conditions have arisen subsequent to the performance of the environmental assessments, or that there are material environmental liabilities of which management is unaware.
 
Under the Americans with Disabilities Act (“ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. Our properties must comply with the ADA to the extent that they are considered “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. In addition, we will continue to assess our compliance with the ADA and to make alterations to our properties as required.
 
Employees
 
As of December 31, 2018, we had 98 employees.

Materials Available on Our Website

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, proxy statements with respect to meetings of our shareholders, as well as Reports on Forms 3, 4 and 5 regarding our officers, trustees or 10% beneficial owners, filed or furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through our website (www.whitestonereit.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the SEC.  We have also made available on our website copies of our Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter, Corporate Governance Guidelines, Insider Trading Compliance Policy, and Code of Business Conduct and Ethics Policy.  In the event of any changes to these documents, revised copies will also be made available on our website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC as we do. The website address is http://www.sec.gov. Materials on our website are not part of our Annual Report on Form 10-K. The contents of these websites are not incorporated into this filing.

Financial Information
 
Additional financial information related to the Company is included in Item 8 “Financial Statements and Supplementary Data.”

4



Item 1A.  Risk Factors.
 
In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our business.  Our business, financial condition, results of operations or the trading price of our common shares could be materially adversely affected by any of these risks.  Please note that additional risks not presently known to us or which we currently consider immaterial may also impair our business and operations.
 
Risks Associated with Real Estate
 
Market disruptions may significantly and adversely affect our financial condition and results of operations.
 
World financial markets have, from time to time, experienced significant disruption. While many U.S. real estate markets have generally stabilized since the pervasive and fundamental disruptions associated with the last recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets, the financial markets have been volatile recently, and oil prices have declined dramatically over the past year. Our results of operations may be sensitive to changes in overall economic conditions that impact tenants of our properties or tenant leasing practices. Adverse economic conditions affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could reduce overall tenant leasing or cause tenants to shift their leasing practices. In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. Although the U.S. economy generally appears to have emerged from the worst aspects of the last recession, rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. In addition, financial markets may again experience significant and prolonged disruption, including as a result of unanticipated events, or as a result of recent uncertainty regarding legislative and regulatory shifts relating to, among other things, taxation and trade, which could adversely affect our tenants and our business in general. For example, a general reduction in consumer spending and the level of tenant leasing could adversely affect our ability to maintain our current tenants and gain new tenants, affecting our growth and profitability. Accordingly, if financial and macroeconomic conditions deteriorate, or if financial markets experience significant disruption, it could have a significant adverse effect on our cash flows, profitability, results of operations and the trading price of our common shares.

Real estate property investments are illiquid due to a variety of factors and therefore we may not be able to dispose of properties when appropriate or on favorable terms.
 
Our strategy includes opportunistically selling properties that do not have the potential to meet our Community Centered Property® strategy. However, real estate property investments generally cannot be disposed of quickly. In addition, the Code imposes certain restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which could cause us to incur extended losses, reduce our cash flows and adversely affect distributions to shareholders.
 
We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. To the extent we are unable to sell any properties for our book value, we may be required to take a non-cash impairment charge or loss on the sale, either of which would reduce our net income.
 
We may be required to expend funds and time to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements, which may impede our ability to sell a property. Further, we may agree to transfer restrictions that materially restrict us from selling a property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These transfer restrictions could impede our ability to sell a property even if we deem it necessary or appropriate. These facts and any others that would further contribute to the illiquid character of real estate properties and impede our ability to respond to adverse changes in the performance of our properties may have a material adverse effect on our business, financial condition, results of operations, our ability to make distributions to our shareholders and the trading price of our common shares.
 

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Our business is dependent upon our tenants successfully operating their businesses, and their failure to do so could have a material adverse effect on our ability to successfully and profitably operate our business.
 
We depend on our tenants to operate their businesses in a manner that generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or regulatory status. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their operations. Cash flow generated by the businesses of certain tenants may not be sufficient for such tenants to meet their obligations to us. Our financial position could be weakened and our ability to fulfill our obligations under our indebtedness and make distributions to our shareholders could be limited if a number of our tenants were unable to meet their obligations to us or failed to renew or extend their relationships with us as their lease terms expire, or if we were unable to lease or re-lease our properties on economically favorable terms.
 
Disruption in capital markets could adversely impact acquisition activities and pricing of real estate assets.
 
Volatility or other disruption in capital markets could adversely affect our access to or the cost of debt and equity capital, which could adversely affect our acquisition and other investment activities. Disruptions could include price volatility or decreased demand in equity markets, as seen in recent months, rising interest rates, tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold collateralized mortgage backed securities in the market. As a result, we may not be able to obtain favorable equity and debt financing in the future or at all. This may impair our ability to acquire properties at favorable returns or adversely affect our returns on investments in development and re-development projects, which may adversely affect our results of operations and distributions to shareholders. Furthermore, any turmoil in the capital markets could adversely impact the overall amount of capital available to invest in real estate, which may result in price or value decreases of real estate assets.
 
The value of investments in our common shares will be directly affected by general economic and regulatory factors we cannot control or predict.
 
Investments in real estate typically involve a high level of risk as the result of factors we cannot control or predict. One of the risks of investing in real estate is the possibility that our properties will not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or available through investments in comparable real estate or other investments. The following factors may affect income from properties and yields from investments in properties and are generally outside of our control:
 
conditions in financial markets;

continuing deterioration of the brick-and-mortar retail industry;
 
over-building in our markets;
 
a reduction in rental income as the result of the inability to maintain occupancy levels;
 
adverse changes in applicable tax, real estate, environmental or zoning laws;
 
changes in general economic conditions or economic conditions in our markets;
 
a taking of any of our properties by eminent domain;
 
adverse local conditions (such as changes in real estate zoning laws that may reduce the desirability of real estate in the area);
 
acts of God, such as hurricanes, earthquakes or floods and other uninsured losses;
 
changes in supply of or demand for similar or competing properties in an area;
 
changes in interest rates and availability of permanent debt capital, which may render the sale of a property difficult or unattractive; and
 
periods of high interest rates, inflation or tight money supply.

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Some or all of these factors may affect our properties, which could adversely affect our operations and ability to make distributions to shareholders.

All of our properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.
 
Our properties are subject to property taxes that may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. As the owner of the properties we are ultimately responsible for payment of the taxes to the government. If property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes. In addition, we will generally be responsible for property taxes related to any vacant space in our properties.

Our assets may be subject to impairment charges.
 
We periodically evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results of operations and funds from operations in the period in which the write-off occurs.
 
Compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial cost.
 
The ADA and other federal, state and local laws generally require public accommodations be made accessible to disabled persons. Noncompliance with these laws could result in the imposition of fines by the government or the award of damages to private litigants. These laws may require us to modify our existing properties, which could require a significant investment of our cash resources that could otherwise be invested in more productive assets. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require us to add other structural features which increase our construction costs. Legislation or regulations adopted in the future may impose further obligations, restrictions or increased compliance costs on us with respect to improved access by disabled persons. We may incur unanticipated expenses that may be material to our financial condition or results of operations to comply with ADA and other federal, state and local laws, or in connection with lawsuits brought by private litigants.
 
We face intense competition, which may decrease, or prevent increases of, the occupancy and rental rates of our properties.
 
We compete with a number of developers, owners and operators of commercial real estate, many of whom own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. This competitive environment could have a material adverse effect on our ability to lease our properties or any newly developed or acquired property, as well as on the rents charged.

Our acquisition strategy includes acquiring distressed commercial real estate, and we could face significant competition from other investors, REITs, hedge funds, private equity funds and other private real estate investors with greater financial resources and access to capital than us. Therefore, we may not be able to compete successfully for investments. In addition, the number of entities and the amount of purchasers competing for suitable investments may increase, all of which could result in competition for accretive acquisition opportunities and adversely affect our business plan and our ability to maintain our current dividend rate.

 

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Risks Associated with Our Operations
 
Because a majority of our GLA is in the Houston and Phoenix metropolitan areas, an economic downturn in either area could adversely impact our operations and ability to make distributions to our shareholders.
 
The majority of our assets and revenues are currently derived from properties located in the Houston and Phoenix metropolitan areas. As of December 31, 2018, 26% and 48% of our GLA was located in Houston and Phoenix, respectively. Our results of operations are directly affected by our ability to attract financially sound commercial tenants. A significant economic downturn in the Houston or Phoenix metropolitan area may adversely impact our ability to locate and retain financially sound tenants, could have an adverse impact on our existing tenants’ revenues, costs and results of operations and may adversely affect their ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Consequently, because of the geographic concentration among our current assets, if either the Houston or Phoenix metropolitan area experiences an economic downturn, our operations and ability to make distributions to our shareholders could be adversely impacted. In addition, a substantial component of the Houston economy is the oil and gas industry, and the current low prices of oil and natural gas could adversely affect companies in that industry and their employees, which could adversely affect the businesses of our Houston tenants.
 
We lease our properties to approximately 1,300 tenants and leases for approximately 10% to 20% of our GLA expire annually. Each year we face the risk of non-renewal of a significant percentage of our leases and the cost of re-leasing a significant amount of our available space, and our failure to meet leasing targets and control the cost of re-leasing our properties could adversely affect our rental revenue, operating expenses and results of operations.
 
Our Community Centered Property® business model produces shorter term leases to smaller, non-national tenants, and substantially all of our revenues consist of base rents received under these leases. As of December 31, 2018, approximately 29% of the aggregate GLA of our properties is subject to leases that expire prior to December 31, 2020. We are subject to the risk that:
 
tenants may choose not to, or may not have the financial resources to, renew these leases;
 
we may experience significant costs associated with re-leasing a significant amount of our available space;
 
we may experience difficulties and significant time lags re-leasing vacated space, which may cause us to fail to meet our occupancy and average base rent targets and experience increased costs of re-leasing; and
 
the terms of any renewal or re-lease may be less favorable than the terms of the current leases.
 
We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 18 months prior to the expiration date of the existing lease. While our early renewal program and other leasing and marketing efforts provide early focus on expiring leases, and have generally been effective in producing lease renewals prior to expiration of the leases at rates comparable to or slightly in excess of the current rates, market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally could adversely impact our renewal rate and/or the rental rates we are able to negotiate. If any of these risks materialize, our rental revenue, operating expenses and results of operations could be adversely affected.
 
Many of our tenants are small businesses, which may have a higher risk of bankruptcy or insolvency.
 
Many of our tenants are small businesses that depend primarily on cash flows from their operations to pay their rent and without other resources could be at a higher risk of bankruptcy or insolvency than larger, national tenants. If tenants are unable to comply with the terms of our leases, we may be forced to modify the leases in ways that are unfavorable to us. Alternatively, the failure of a tenant to perform under a lease could require us to declare a default, repossess the space and find a suitable replacement tenant. There is no assurance that we would be able to lease the space on substantially equivalent or better terms than the prior lease, or at all, or successfully reposition the space for other uses. If one or more of our tenants files for bankruptcy relief, the Bankruptcy Code provides that a debtor has the option to assume or reject the unexpired lease within a certain period of time.


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Any bankruptcy filing by or relating to one or more of our tenants could bar all efforts by us to collect pre-bankruptcy debts from that tenant or seize its property. A tenant bankruptcy could also delay our efforts to collect past due balances under the lease and could ultimately preclude collection of all or a portion of these sums. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if any. Furthermore, dealing with a tenant’s bankruptcy or other default may divert management’s attention and cause us to incur substantial legal and other costs. The bankruptcy or insolvency of a number of smaller tenants may have an adverse impact on our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares.
  
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect our returns.
 
We attempt to adequately insure all of our properties to cover casualty losses. However, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Our current geographic concentration in the Houston metropolitan area potentially increases the risk of damage to our portfolio due to hurricanes. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. In some instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for these losses. Also, to the extent we must pay unexpectedly large insurance premiums, we could suffer reduced earnings that would result in less cash to be distributed to shareholders.
 
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
 
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in its property. The costs of removal or remediation could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos containing materials into the air. In addition, third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distributions to our shareholders.

Certain of our properties currently include or have in the past included a dry cleaning facility as a tenant. See “Business - Compliance with Governmental Regulations.”
 
We may not be successful in consummating suitable acquisitions or investment opportunities, which may impede our growth and adversely affect the trading price of our common shares.
 
Our ability to expand through acquisitions is integral to our business strategy and requires us to consummate suitable acquisition or investment opportunities that meet our criteria and are compatible with our growth strategy. We may not be successful in consummating acquisitions or investments in properties that meet our acquisition criteria on satisfactory terms or at all. Failure to consummate acquisitions or investment opportunities, the failure of an acquired property to perform as expected, or the failure to integrate successfully any acquired properties without substantial expense, delay or other operational or financial problems, would slow our growth, which could in turn adversely affect the trading price of our common shares.
 
Our ability to acquire properties on favorable terms may be constrained by the following significant risks:
 
competition from other real estate investors with significant capital, including other REITs and institutional investment funds;
 
competition from other potential acquirers which may significantly increase the purchase price for a property we acquire, which could reduce our growth prospects;
 
unsatisfactory results of our due diligence investigations or failure to meet other customary closing conditions;

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the failure of an acquired property to perform as expected; and
 
failure to finance an acquisition on favorable terms or at all.
 
If any of these risks are realized, our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares may be materially and adversely affected.
 
Our success depends in part on our ability to execute our Community Centered Property® strategy.
 
Our Community Centered Property® strategy requires intensive management of a large number of small spaces and small tenant relationships. Our success depends in part upon our management’s ability to identify potential Community Centered Properties® and find and maintain the appropriate tenants to create such a property. Lack of market acceptance of our Community Centered Property® strategy or our inability to successfully attract and manage a large number of tenant relationships could adversely affect our occupancy rates, operating results and dividend rate.

Our business is significantly influenced by demand for retail space generally, and a decrease in such demand may have a greater adverse effect on our business than if we owned a more diversified real estate portfolio.

Because our portfolio of properties consists primarily of community and neighborhood shopping centers, a decrease in the demand for retail space, due to the economic factors discussed above or otherwise, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. The market for retail space has been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial conditions of some retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing online consumer purchases.
 
Loss of our key personnel, particularly our senior managers, could threaten our ability to execute our strategy and operate our business successfully.
 
We are dependent on the experience and knowledge of our key executive personnel, particularly certain of our senior managers who have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until qualified replacements could be found. We also believe that they could not quickly be replaced with managers of equal experience and capabilities and their successors may not be as effective.
 
Our systems may not be adequate to support our growth, and our failure to successfully oversee our portfolio of properties could adversely affect our results of operations.
 
We make no assurances that we will be able to adapt our portfolio management, administrative, accounting and operational systems, or hire and retain sufficient operational staff, to support our growth. Our failure to successfully oversee our current portfolio of properties or any future acquisitions or developments could have a material adverse effect on our results of operations and financial condition and our ability to make distributions.

We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.

Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber-attack. Cybersecurity incidents could compromise the confidential information of our tenants, employees and third party vendors and affect the efficiency of our business operations, which in turn could have a material adverse effect on our reputation, competitiveness and results of operations.
 

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There can be no assurance that we will be able to pay or maintain cash distributions or that distributions will increase over time.
 
There are many factors that can affect the availability and timing of cash distributions to shareholders. Distributions are based upon our funds from operations, financial condition, cash flows and liquidity, debt service requirements, capital expenditure requirements for our properties and other matters our board of trustees may deem relevant from time to time. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of capital available for real estate investments and increase our future interest costs.

We can give no assurance that we will be able to continue to pay distributions or that distributions will increase over time. In addition, we can give no assurance that rents from our properties will increase, or that future acquisitions of real properties, mortgage loans or our investments in securities will increase our cash available for distributions to shareholders. Our actual results may differ significantly from the assumptions used by our board of trustees in establishing the distribution rate to shareholders. Our inability to make distributions, or to make distributions at expected levels, could result in a decrease in the trading price of our common shares.

We have identified a material weakness in our system of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. If not remediated, this material weakness could result in additional material misstatements in our consolidated financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on their systems of internal control over financial reporting. In addition, our independent registered public accounting firm must report on management’s evaluation of those controls. As disclosed in Part II, Item 9A, “Controls and Procedures” of this Form 10-K, our management, including our Chief Executive Officer and our Chief Financial Officer, has determined that we had a material weakness in the Company’s internal control over financial reporting as of December 31, 2018. The material weakness contributed to the material misstatement in our previously filed interim unaudited consolidated financial statements, which were restated as part of the Quarterly Restatement. As a result of the material weakness, the Company’s management, under the supervision of the Audit Committee and with participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2018 and determined that its disclosure controls and procedures were not effective as of March 31, June 30, September 30 and December 31, 2018.

Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures, there can be no assurance as to when the remediation plan will be fully developed and implemented. Until our remediation plan is fully implemented, our management will continue to devote significant time, attention and financial resources to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future consolidated financial statements could contain errors that will be undetected. Further and continued determinations that there are one or more material weaknesses in the effectiveness of the Company’s internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and our management’s time to comply with applicable requirements. For more information relating to the Company’s internal control over financial reporting, the material weakness that existed as of December 31, 2018 and the remediation activities undertaken by us, see Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K.

We have restated certain of our prior interim unaudited financial statements, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our share price.
        We have restated our unaudited financial statements for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018. We have filed this comprehensive Annual Report on Form 10-K to, among other things, reflect the restatement of our 2018 interim financial statements.
        As a result of the Quarterly Restatement, we have become subject to a number of additional costs and risks, including costs for accounting and legal fees in connection with or related to the Quarterly Restatement and the remediation of our material weakness in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. We may be subject to shareholder and other actions in connection with the Quarterly Restatement and related matters. In addition, the Quarterly Restatement and related matters could impair our reputation or could cause our counterparties to lose confidence in us. Each of these occurrences could have a material adverse effect on our business, financial condition, results of operations and share price.

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Risks Associated with Our Indebtedness and Financing
 
Current market conditions could adversely affect our ability to refinance existing indebtedness or obtain additional financing for growth on acceptable terms or at all, which could adversely affect our ability to grow, our interest cost and our results of operations.
 
The United States credit markets have experienced significant dislocations and liquidity disruptions, including the bankruptcy, insolvency or restructuring of certain financial institutions. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of various types of debt financing. Reductions in our available borrowing capacity, or inability to refinance our revolving credit facility when required or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. In addition, we mortgage many of our properties to secure payment of indebtedness. If we are not successful in refinancing our mortgage debt upon maturity, then the property could be foreclosed upon or transferred to the mortgagee, or we might be forced to dispose of some of our properties upon disadvantageous terms, with a consequent loss of income and asset value. A foreclosure or disadvantageous disposal on one or more of our properties could adversely affect our ability to grow, financial condition, interest cost, results of operations, cash flow and ability to make distributions to our shareholders. In addition, our universal shelf registration statement on Form S-3 expired in April 2018. Until our new shelf registration statement is declared effective by the SEC, we will not have access to the public capital markets.
 
Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could adversely affect our transaction and development activity, financial condition, results of operation, cash flow, our ability to pay principal and interest on our debt and our ability to make distributions to our shareholders.
 
Our failure to hedge effectively against interest rate changes may adversely affect results of operations.
 
We currently have mortgages that bear interest at variable rates and we may incur additional variable rate debt in the future. Accordingly, increases in interest rates on variable rate debt would increase our interest expense, which could reduce net earnings and cash available for payment of our debt obligations and distributions to our shareholders.
 
We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest cap agreements and interest rate swap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such an agreement is not legally enforceable. In the past, we have used derivative financial instruments to hedge interest rate risks related to our variable rate borrowings. We will not use derivatives for speculative or trading purposes and intend only to enter into contracts with major financial institutions based on their credit rating and other factors, but we may choose to change this practice in the future. As of December 31, 2018, we had fixed rate hedges on $209.5 million of our variable rate debt, including $200 million of our unsecured credit facility. We may enter into additional interest rate swap agreements for our variable rate debt not currently subject to hedges, which totaled $241.2 million as of December 31, 2018. Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may materially and adversely affect our results of operations.
 
We currently have and may incur additional mortgage indebtedness and other borrowings, which may increase our business risks and may adversely affect our ability to make distributions to our shareholders.
 
If we determine it to be in our best interests, we may, in some instances, acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur or increase our current mortgage debt to obtain funds to acquire additional properties. We may also borrow funds if necessary to satisfy the REIT distribution requirement described above, or otherwise as may be necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes.


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On November 7, 2014, we, through our Operating Partnership, entered into an unsecured revolving credit facility (the “2014 Facility”) with the lenders party thereto, with BMO Capital Markets Corp., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Bank, National Association, as co-lead arrangers and joint book runners, and Bank of Montreal, as administrative agent (the “Agent”). The 2014 Facility amended and restated our previous unsecured revolving credit facility. On October 30, 2015, we, through our Operating Partnership, entered into the First Amendment to the 2014 Facility (the “First Amendment”) with the guarantors party thereto, the lenders party thereto and the Agent. We refer to the 2014 Facility, as amended by the First Amendment, as the “2018 Facility.”

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 herein).

The 2019 Facility is comprised of the following three tranches:

$250.0 million unsecured revolving credit facility with a maturity date of January 1, 2023 (the “2019 Revolver”);

$165.0 million unsecured term loan with a maturity date of January 31, 2024 (“Term Loan A”); and

$100.0 million unsecured term loan with a maturity date of October 30, 2022 (“Term Loan B” and together with Term Loan A, the “2019 Term Loans”).

The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital.
    
The Company, each direct and indirect material subsidiary of the Operating Partnership and any other subsidiary of the Operating Partnership that is a guarantor under any unsecured ratable debt will serve as a guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, customary representations and warranties and affirmative and negative covenants including, without limitation, information reporting requirements, limitations on investments, acquisitions, loans and advances, mergers, consolidations and sales, incurrence of liens, dividends and restricted payments. In addition, the 2019 Facility contains certain financial covenants including the following:
    
maximum total indebtedness to total asset value ratio of 0.60 to 1.00;

maximum secured debt to total asset value ratio of 0.40 to 1.00;

minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges ratio of 1.50 to 1.00;

maximum other recourse debt to total asset value ratio of 0.15 to 1.00; and

maintenance of a minimum tangible net worth (adjusted for accumulated depreciation and amortization) of $372 million plus 75% of the net proceeds from additional equity offerings.

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. If an event of default occurs and is continuing under the 2019 Facility, the lenders may, among other things, terminate their commitments under the 2019 Facility and require the immediate payment of all amounts owed thereunder.

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We may also incur mortgage debt on a particular property if we believe the property’s projected cash flow is sufficient to service the mortgage debt. As of December 31, 2018, we had approximately $178.2 million of mortgage debt secured by 9 of our properties. If there is a shortfall in cash flow, however, the amount available for distributions to shareholders may be affected. In addition, incurring mortgage debt increases the risk of loss because defaults on such indebtedness may result in loss of property in foreclosure actions initiated by lenders. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may give lenders full or partial guarantees for mortgage debt incurred by the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by that entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one property may be affected by a default. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our shareholders may be adversely affected. For more discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

If we set aside insufficient working capital or are unable to secure funds for future tenant improvements, we may be required to defer necessary property improvements, which could adversely impact the quality of our properties and our results of operations.

When tenants do not renew their leases or otherwise vacate their space, it is possible that, in order to attract replacement tenants, we may be required to expend substantial funds for tenant improvements and refurbishments to the vacated space. If we have insufficient working capital reserves, we will have to obtain financing from other sources. Because most of our leases provide for tenant reimbursement of operating expenses, we have not established a permanent reserve for maintenance and repairs for our properties. However, to the extent that we have insufficient funds for such purposes, we may establish reserves for maintenance and repairs of our properties out of cash flow generated by operating properties or out of non-liquidating net sale proceeds. If these reserves or any reserves otherwise established are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Additional borrowing for working capital purposes will increase our interest expense, and therefore our financial condition and our ability to pay cash distributions to our shareholders may be adversely affected. In addition, we may be required to defer necessary improvements to our properties that may cause our properties to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to our properties. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.

We have in the past and may continue to structure acquisitions of property in exchange for limited partnership units in our Operating Partnership on terms that could limit our liquidity or our flexibility.
 
We have in the past and may continue to acquire properties by issuing limited partnership units in our Operating Partnership (“OP units”) in exchange for a property owner contributing property to the Operating Partnership. If we enter into such transactions, in order to induce the contributors of such properties to accept OP units, rather than cash, in exchange for their properties, it may be necessary for us to provide them with additional incentives. For instance, our Operating Partnership’s limited partnership agreement provides that any holder of OP units may redeem such units for cash, or, at our option, common shares on a one-for-one basis. We may, however, enter into additional contractual arrangements with contributors of property under which we would agree to redeem a contributor’s OP units for our common shares or cash, at the option of the contributor, at set times. If the contributor required us to redeem OP units for cash pursuant to such a provision, it would limit our liquidity and thus our ability to use cash to make other investments, satisfy other obligations or pay distributions. Moreover, if we were required to redeem OP units for cash at a time when we did not have sufficient cash to fund the redemption, we might be required to sell one or more properties to raise funds to satisfy this obligation. Furthermore, we might agree that if distributions the contributor received as a limited partner in our Operating Partnership did not provide the contributor with a defined return, then upon redemption of the contributor’s OP units, we would pay the contributor an additional amount necessary to achieve that return. Such a provision could further negatively impact our liquidity and flexibility. Finally, in order to allow a contributor of a property to defer taxable gain on the contribution of property to our Operating Partnership, we might agree not to sell a contributed property for a defined period of time or until the contributor redeemed the contributor’s OP units for cash or our common shares. Such an agreement would prevent us from selling those properties, even if market conditions made such a sale favorable to us.
 

14



We may issue preferred shares with a preference in distributions over our common shares, and our ability to issue preferred shares and additional common shares may deter or prevent a sale of our common shares in which you could profit.
 
Our declaration of trust authorizes our board of trustees to issue up to 400,000,000 common shares and 50,000,000 preferred shares. Our board of trustees may amend our declaration of trust from time to time to increase or decrease the aggregate number of shares or the number of any class or series that we have authority to issue. In addition, our board of trustees may classify or reclassify any unissued common shares or preferred shares and may set the preferences, rights and other terms of the classified or reclassified shares. The terms of preferred shares could include a preference in distributions senior to our common shares. If we authorize and issue preferred shares with a distribution preference senior to our common shares, payment of any distribution preferences of outstanding preferred shares would reduce the amount of funds available for the payment of distributions on our common shares. Further, holders of preferred shares are normally entitled to receive a preference payment in the event we liquidate, dissolve or wind up before any payment is made to our common shareholders, likely reducing the amount our common shareholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of preferred shares or a separate class or series of common shares may render more difficult or tend to discourage:
 
a merger, tender offer or proxy contest;
 
assumption of control by a holder of a large block of our shares; or
 
removal of incumbent management.
 
Risks Associated with Income Tax Laws
 
If we fail to qualify as a REIT, our operations and distributions to shareholders would be adversely impacted.
 
We intend to continue to be organized and to operate so as to qualify as a REIT under the Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or the federal income tax consequences of such qualification.
 
If we were to fail to qualify as a REIT in any taxable year:
 
we would not be allowed to deduct our distributions to shareholders when computing our taxable income;
 
we would be subject to federal income tax on our taxable income at regular corporate rates;
 
we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;
 
our cash available for distributions to shareholders would be reduced; and
 
we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations that we may incur as a result of our disqualification.
  
We may need to incur additional borrowings to meet the REIT minimum distribution requirement and to avoid excise tax.
 
In order to maintain our qualification as a REIT, we are required to distribute to our shareholders at least 90% of our annual real estate investment trust taxable income (excluding any net capital gain and before application of the dividends paid deduction). In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our net capital gain for that year and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay distributions to our shareholders in a manner that allows us to meet the 90% distribution requirement and avoid this 4% excise tax, we cannot assure you that we will always be able to do so.
 

15



Our income consists almost solely of our share of our Operating Partnership’s income, and the cash available for distribution by us to our shareholders consists of our share of cash distributions made by our Operating Partnership. Because we are the sole general partner of our Operating Partnership, our board of trustees determines the amount of any distributions made by our Operating Partnership. Our board of trustees may consider a number of factors in authorizing distributions, including:
 
the amount of cash available for distribution;
 
our Operating Partnership’s financial condition;
 
our Operating Partnership’s capital expenditure requirements; and
 
our annual distribution requirements necessary to maintain our qualification as a REIT.
 
Differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion of income and deduction of expenses when determining our taxable income, as well as the effect of nondeductible capital expenditures and the creation of reserves or required debt amortization payments could require us to borrow funds on a short-term or long-term basis or make taxable distributions to our shareholders of our shares or debt securities to meet the REIT distribution requirement and to avoid the 4% excise tax described above. In these circumstances, we may need to borrow funds to avoid adverse tax consequences even if our management believes that the then prevailing market conditions generally are not favorable for borrowings or that borrowings would not be advisable in the absence of the tax consideration.
 
If our Operating Partnership were classified as a “publicly traded partnership” taxable as a corporation for federal income tax purposes under the Code, we would cease to qualify as a REIT and would suffer other adverse tax consequences.
 
We structured our Operating Partnership so that it would be classified as a partnership for federal income tax purposes. In this regard, the Code generally classifies “publicly traded partnerships” (as defined in Section 7704 of the Code) as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. In order to minimize the risk that the Code would classify our Operating Partnership as a “publicly traded partnership” for tax purposes, we placed certain restrictions on the transfer and/or redemption of partnership units in our Operating Partnership. If the Internal Revenue Service were to assert successfully that our Operating Partnership is a “publicly traded partnership,” and substantially all of its gross income did not consist of the specified types of passive income, the Code would treat our Operating Partnership as an association taxable as a corporation.
 
In such event, the character of our assets and items of gross income would change and would prevent us from continuing to qualify as a REIT. In addition, the imposition of a corporate tax on our Operating Partnership would reduce our amount of cash available for payment of distributions by us to our shareholders.
 
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
 
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
 
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders.
 

16



Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
 
For non-corporate taxpayers the maximum tax rate applicable to “qualified dividend income” paid by regular “C” corporations to U.S. shareholders generally is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Instead, our ordinary dividends generally are taxed at the higher tax rates applicable to ordinary income, the current maximum rate of which is 37%. However, for taxable years prior to 2026, individual stockholders are generally allowed to deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations, which would reduce the maximum marginal effective tax rate for individuals on the receipt of such ordinary dividends to 29.6%.
 
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
 
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction that we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through taxable REIT subsidiaries. This could increase the cost of our hedging activities because any taxable REIT subsidiary that we may form would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in taxable REIT subsidiaries will generally not provide any tax benefit, except for being carried forward against future taxable income in the taxable REIT subsidiaries.

Pursuant to the Tax Protection Agreement, the amount that Pillarstone is required to indemnify the Operating Partnership for certain tax liabilities reduces over the term of the Tax Protection Agreement.

In connection with the Contribution (as defined below), on December 8, 2016, the Operating Partnership entered into a Tax Protection Agreement (the “Tax Protection Agreement”) with Pillarstone Capital REIT (“Pillarstone REIT”), the general partner of Pillarstone, and Pillarstone pursuant to which Pillarstone agreed to indemnify the Operating Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 (a) if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or (b) if Pillarstone fails to maintain and allocate to the Operating Partnership for taxation purposes minimum levels of liabilities as specified in the Tax Protection Agreement, the result of which causes such recognition of income or gain and the Company incurs taxes that must be paid to maintain its REIT status for federal tax purposes.  However, the Tax Protection Agreement expires on the earlier of (x) December 8, 2021 and (y) the date on which the Operating Partnership disposes of 50% or more of the Pillarstone OP Units (as defined below) issued in connection with the Contribution.  Further, the amount that Pillarstone is required to indemnify the Operating Partnership reduces over the term of the Tax Protection Agreement as follows: on December 8th of each year, the amount of tax liability recognized by the Operating Partnership during that year that Pillarstone is required to indemnify is reduced by 20 percentage points.  Once the Tax Protection Agreement has expired, the Company could be subject to additional taxes upon the occurrence of certain events that must be paid to maintain its REIT status for federal tax purposes.
 
Risks Related to Ownership of our Common Shares
 
Increases in market interest rates may result in a decrease in the value of our common shares.

One of the factors that may influence the price of our common shares will be the dividend distribution rate on the common shares (as a percentage of the price of our common shares) relative to market interest rates. If market interest rates rise, prospective purchasers of shares of our common shares may expect a higher distribution rate. Higher interest rates would not, however, result in more funds being available for distribution and, in fact, would likely increase our borrowing costs and might decrease our funds available for distribution. We therefore may not be able, or we may not choose, to provide a higher distribution rate. As a result, prospective purchasers may decide to purchase other securities rather than our common shares, which would reduce the demand for, and result in a decline in the market price of, our common shares.


17



Broad market fluctuations could negatively impact the market price of our common shares.

The stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common shares. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the market price of our common shares.

Maryland takeover statutes may deter others from seeking to acquire us and prevent shareholders from making a profit in such transactions.

The Maryland General Corporation Law (“MGCL”) contains many provisions, such as the business combination statute and the control share acquisition statute, that are designed to prevent, or have the effect of preventing, someone from acquiring control of us. The business combination statute, subject to limitations, prohibits certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting shares or an affiliate or associate of our Company who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares) or an affiliate of an interested shareholder for five years after the most recent date on which the person becomes an interested shareholder and thereafter imposes super-majority voting requirements on these combinations. The control share acquisition statute provides that “control shares” of our Company (defined as shares which, when aggregated with other shares controlled by the shareholder (except solely by virtue of a revocable proxy), entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding control shares) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We are currently subject to the control share acquisition statute, although our board of trustees may amend our Amended and Restated Bylaws, or our bylaws, without shareholder approval, to exempt any acquisition of our shares from the statute. Our board of trustees has adopted a resolution exempting any business combination with any person from the business combination statute. The business combination statute (if our board of trustees revokes the foregoing exemption) and the control share acquisition statute could delay or prevent offers to acquire us and increase the difficulty of consummating any such offers, even if such a transaction would be in our shareholders’ best interest.
 
The MGCL, the Maryland REIT Law and our organizational documents limit shareholders’ rights to bring claims against our officers and trustees.
 
The MGCL and the Maryland REIT Law provide that a trustee will not have any liability as a trustee so long as he performs his duties in good faith, in a manner he reasonably believes to be in our best interests, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our declaration of trust provides that no trustee or officer will be liable to us or to any shareholder for money damages except to the extent that (a) the trustee or officer actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property, or services actually received; or (b) a judgment or the final adjudication adverse to the trustee or officer is entered in a proceeding based on a finding in the proceeding the trustee’s or officer’s action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Finally, our declaration of trust authorizes our Company to obligate itself, and our bylaws obligate us, to indemnify and advance expenses to our trustees and officers to the maximum extent permitted by Maryland law.
 

18



Our board of trustees is currently classified. Although our board of trustees has voted to recommend that our shareholders approve a proposal to declassify our board of trustees at our 2019 annual meeting of shareholders, there can be no assurance that such proposal will be approved at that the board of trustees will be declassified. A classified board of trustees may prevent others from effecting a change in the control of our board of trustees.

Our board of trustees is currently classified into three classes, with each trustee elected for a three-year term. Although our board of trustees has voted unanimously to submit a proposal to our shareholders to declassify the board of trustees at our 2019 annual meeting of shareholders, the approval of the holders of at least a majority of the outstanding common shares will be required to approve the proposal and there can be no assurance that the proposal will be approved and that the board will be declassified on the timeline anticipated, or at all. The full text of the proposal will be included in our proxy statement, which will be filed in advance of our 2019 annual meeting of shareholders. If our board remains classified, the classified board provision could have the effect of making the replacement of incumbent trustees more time-consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of trustees. Thus, the classified board provision could increase the likelihood that incumbent trustees will retain their positions. The staggered terms of trustees may delay, defer or prevent a transaction or a change in control that might involve a premium price for our common shares or otherwise be in the best interest of the shareholders.
 
The terms of our employment agreements with our executive officers and severance arrangements with other employees and the terms of certain equity awards granted to our employees may deter others from seeking to acquire us or reduce the price of any such acquisition.

We have entered into employment agreements with our executive officers and severance arrangements with other of our employees, and have granted equity awards to a number of our employees. In certain cases, upon a change of control acquisition of us, such agreements and awards would entitle the officer or employee to severance payments and vesting of otherwise unvested awards. The cost of these payments and the impact of the vesting of such awards could deter a third party from seeking to acquire us or could cause the price payable to shareholders in connection with any such acquisition to be lower than it otherwise may have been. These effects could delay or prevent offers to acquire us and increase the difficulty in consummating any such offers, even if such a transaction would be in our shareholders’ best interests.

Future offerings of debt, which would be senior to our common shares upon liquidation, and/or preferred equity securities that may be senior to our common shares for purposes of distributions or upon liquidation, may adversely affect the market price of our common shares.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred shares. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to pay distributions to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our common shareholders bear the risk of our future offerings reducing the market price of our common shares and diluting their share holdings in us.

Item 1B.  Unresolved Staff Comments.
 
None.


19



Item 2.  Properties.
 
General
 
As of December 31, 2018, we wholly-owned 57 commercial properties, including 15 properties in Houston, seven properties in Dallas-Fort Worth, three properties in San Antonio, four properties in Austin, 27 properties in the Scottsdale and Phoenix, Arizona metropolitan areas, and one property in Buffalo Grove, Illinois, a suburb of Chicago.
 
Our tenants consist of national, regional and local businesses. Our properties generally attract a mix of tenants who provide basic staples, convenience items and services tailored to the specific cultures, needs and preferences of the surrounding community. These types of tenants are the core of our strategy of creating Whitestone-branded Community Centered Properties®. We also believe daily sales of these basic items are less sensitive to fluctuations in the business cycle than higher priced retail items. Our largest tenant represented only 3.0% of our total revenues for the year ended December 31, 2018.
 
Substantially all of our revenues consist of base rents received under leases that generally have terms that range from less than one year to 15 years. The following table summarizes certain information relating to our properties as of December 31, 2018:
 
Commercial Properties
 
GLA
 
Average
Occupancy as of 
12/31/18
 
Annualized Base
Rental Revenue 
(in thousands) (1)
 
Average
Annualized Base
Rental Revenue
Per Sq. Ft. (2)
Whitestone
 
4,841,660

 
90
%
 
$
82,055

 
$
18.83

 
(1)   
Calculated as the tenant’s actual December 31, 2018 base rent (defined as cash base rents including abatements) multiplied by 12.  Excludes vacant space as of December 31, 2018.  Because annualized base rental revenue is not derived from historical results that were accounted for in accordance with GAAP, historical results differ from the annualized amounts. Total abatements for leases in effect as of December 31, 2018 equaled approximately $152,000 for the month ended December 31, 2018.
 
(2)   
Calculated as annualized base rent divided by GLA leased as of December 31, 2018.  Excludes vacant space as of December 31, 2018.

Our largest property, BLVD Place, a retail community purchased on May 26, 2017 and located in Houston, Texas, accounted for 12.7% of our total revenues for the year ended December 31, 2018. BLVD also accounted for 17.4% of our real estate assets, net of accumulated depreciation, for the year ended December 31, 2018.

As of December 31, 2018, approximately $178.2 million of our total debt of $619.4 million was secured by 9 of our properties with a combined net book value of $279.1 million.

Location of Properties
 
Of our 57 wholly-owned properties, 15 are located in the greater Houston metropolitan statistical area.  These 15 properties represent 29% of our revenue for the year ended December 31, 2018. An additional 27 of our wholly-owned properties are located in the greater Phoenix metropolitan statistical area and represent 42% of our revenue for the year ended December 31, 2018.
 
According to the United States Census Bureau, Houston and Phoenix ranked sixth and twelfth, respectively, in the largest United States metropolitan statistical areas as of December 31, 2018. The following table sets forth information about the unemployment rate in Houston, Phoenix and nationally during the last six months of 2018.

 
 
July
 
Aug.
 
Sept.
 
Oct.
 
Nov.
 
Dec.
 
National (1)
 
3.9
%
 
3.8
%
 
3.7
%
 
3.8
%
 
3.7
%
 
3.9
%
 
Houston (2)
 
4.4
%
 
4.3
%
 
4.1
%
 
3.8
%
 
3.8
%
 
3.9
%
(3) 
Phoenix (2)
 
4.3
%
 
4.5
%
 
4.2
%
 
3.9
%
 
3.9
%
 
4.5
%
(3) 

(1) 
Seasonally adjusted.
(2) 
Not seasonally adjusted.
(3) 
Represents estimate.
 
Source: Bureau of Labor Statistics

20




General Physical and Economic Attributes

The following table sets forth certain information relating to each of our properties owned as of December 31, 2018.
Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2018

 
 
Community Name
 
 
 
Location
 
 
Year Built/
Renovated
 
Gross Leasable
Square Feet
 
Percent
Occupied at
12/31/2018
 
Annualized Base
Rental Revenue 
(in thousands) (1)
 
Average
Base Rental
Revenue Per
Sq. Ft. (2)
 
Average Net Effective Annual Base Rent Per Leased Sq. Ft.(3)
Whitestone Properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ahwatukee Plaza
 
Phoenix
 
1979
 
72,650

 
86
%
 
$
801

 
$
12.82

 
$
12.76

Anthem Marketplace
 
Phoenix
 
2000
 
113,293

 
96
%
 
1,735

 
15.95

 
15.56

Bissonnet Beltway
 
Houston
 
1978
 
29,205

 
80
%
 
335

 
14.34

 
13.78

BLVD Place
 
Houston
 
2014
 
216,944

 
99
%
 
8,277

 
38.54

 
43.30

The Citadel
 
Phoenix
 
2013
 
28,547

 
89
%
 
466

 
18.34

 
16.14

City View Village
 
San Antonio
 
2005
 
17,870

 
100
%
 
488

 
27.31

 
28.60

Davenport Village
 
Austin
 
1999
 
128,934

 
100
%
 
3,334

 
25.86

 
25.74

Desert Canyon
 
Phoenix
 
2000
 
62,533

 
87
%
 
799

 
14.69

 
14.70

Eldorado Plaza
 
Dallas
 
2004
 
221,577

 
98
%
 
3,217

 
14.81

 
15.27

Fountain Hills
 
Phoenix
 
2009
 
111,289

 
85
%
 
1,586

 
16.77

 
16.89

Fountain Square
 
Phoenix
 
1986
 
118,209

 
88
%
 
1,851

 
17.79

 
17.31

Fulton Ranch Towne Center
 
Phoenix
 
2005
 
120,575

 
87
%
 
1,746

 
16.64

 
17.96

Gilbert Tuscany Village
 
Phoenix
 
2009
 
49,415

 
100
%
 
954

 
19.31

 
18.82

Gilbert Tuscany Village Hard Corner
 
Phoenix
 
2009
 
14,603

 
100
%
 
124

 
8.49

 
8.90

Heritage Trace Plaza
 
Dallas
 
2006
 
70,431

 
91
%
 
1,407

 
21.95

 
23.22

Headquarters Village
 
Dallas
 
2009
 
89,134

 
84
%
 
2,148

 
28.69

 
29.49

Keller Place
 
Dallas
 
2001
 
93,541

 
95
%
 
889

 
10.00

 
10.29

Kempwood Plaza
 
Houston
 
1974
 
91,302

 
89
%
 
949

 
11.68

 
12.31

La Mirada
 
Phoenix
 
1997
 
147,209

 
81
%
 
2,515

 
21.09

 
21.95

Lion Square
 
Houston
 
2014
 
117,592

 
98
%
 
1,501

 
13.02

 
12.70

The Marketplace at Central
 
Phoenix
 
2012
 
111,130

 
99
%
 
1,001

 
9.10

 
8.69

Market Street at DC Ranch
 
Phoenix
 
2003
 
242,459

 
92
%
 
4,417

 
19.80

 
19.74

Mercado at Scottsdale Ranch
 
Phoenix
 
1987
 
118,730

 
87
%
 
1,620

 
15.68

 
16.24

Paradise Plaza
 
Phoenix
 
1983
 
125,898

 
87
%
 
1,551

 
14.16

 
13.96

Parkside Village North
 
Austin
 
2005
 
27,045

 
100
%
 
811

 
29.99

 
30.58

Parkside Village South
 
Austin
 
2012
 
90,101

 
100
%
 
2,338

 
25.95

 
26.78

Pima Norte
 
Phoenix
 
2007
 
35,110

 
68
%
 
426

 
17.84

 
18.56

Pinnacle of Scottsdale
 
Phoenix
 
1991
 
113,108

 
100
%
 
2,411

 
21.32

 
21.87

Pinnacle Phase II
 
Phoenix
 
2017
 
27,063

 
100
%
 
648

 
23.94

 
23.69

The Promenade at Fulton Ranch
 
Phoenix
 
2007
 
98,792

 
87
%
 
1,138

 
13.24

 
15.01

Providence
 
Houston
 
1980
 
90,327

 
99
%
 
804

 
8.99

 
9.01

Quinlan Crossing
 
Austin
 
2012
 
109,892

 
98
%
 
2,339

 
21.72

 
23.92

Seville
 
Phoenix
 
1990
 
90,042

 
72
%
 
2,202

 
33.97

 
34.17

Shaver
 
Houston
 
1978
 
21,926

 
94
%
 
292

 
14.17

 
14.07

Shops at Pecos Ranch
 
Phoenix
 
2009
 
78,767

 
80
%
 
1,678

 
26.63

 
26.14

Shops at Starwood
 
Dallas
 
2006
 
55,385

 
92
%
 
1,455

 
28.56

 
29.69

The Shops at Williams Trace
 
Houston
 
1985
 
132,991

 
96
%
 
1,980

 
15.51

 
15.40

South Richey
 
Houston
 
1980
 
69,928

 
97
%
 
715

 
10.54

 
10.72

Spoerlein Commons
 
Chicago
 
1987
 
41,455

 
79
%
 
639

 
19.51

 
19.51

Starwood Phase II
 
Dallas
 
2016
 
35,351

 
72
%
 
866

 
34.02

 
37.17

The Strand at Huebner Oaks
 
San Antonio
 
2000
 
73,920

 
98
%
 
1,464

 
20.21

 
22.06

SugarPark Plaza
 
Houston
 
1974
 
95,032

 
100
%
 
1,126

 
11.85

 
13.80


21



Whitestone REIT and Subsidiaries
Property Details
As of December 31, 2018

 
 
Community Name
 
 
 
Location
 
 
Year Built/
Renovated
 
Gross Leasable
Square Feet
 
Percent
Occupied at
12/31/2018
 
Annualized Base
Rental Revenue 
(in thousands) (1)
 
Average
Base Rental
Revenue Per
Sq. Ft. (2)
 
Average Net Effective Annual Base Rent Per Leased Sq. Ft.(3)
Sunridge
 
Houston
 
1979
 
49,359

 
83
%
 
531

 
12.96

 
12.50

Sunset at Pinnacle Peak
 
Phoenix
 
2000
 
41,530

 
82
%
 
611

 
17.94

 
18.24

Terravita Marketplace
 
Phoenix
 
1997
 
102,733

 
50
%
 
1,142

 
22.23

 
22.35

Town Park
 
Houston
 
1978
 
43,526

 
100
%
 
946

 
21.73

 
21.71

Village Square at Dana Park
 
Phoenix
 
2009
 
323,026

 
87
%
 
6,107

 
21.73

 
21.54

Westchase
 
Houston
 
1978
 
50,332

 
86
%
 
633

 
14.62

 
14.30

Williams Trace Plaza
 
Houston
 
1983
 
129,222

 
94
%
 
1,780

 
14.65

 
15.19

Windsor Park
 
San Antonio
 
2012
 
196,458

 
97
%
 
1,876

 
9.84

 
9.65

Woodlake Plaza
 
Houston
 
1974
 
106,169

 
80
%
 
1,386

 
16.32

 
15.99

Total/Weighted Average - Whitestone Properties
 
 
 
 
 
4,841,660

 
90
%
 
82,055

 
18.83

 
19.35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Land Held for Development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anthem Marketplace
 
Phoenix
 
N/A
 

 

 
$

 
$

 
$

BLVD Phase II-B
 
Houston
 
N/A
 

 

 

 

 

Dana Park Development
 
Phoenix
 
N/A
 

 

 

 

 

Eldorado Plaza Development
 
Dallas
 
N/A
 

 

 

 

 

Fountain Hills
 
Phoenix
 
N/A
 

 

 

 

 

Market Street at DC Ranch
 
Phoenix
 
N/A
 

 

 

 

 

Total/Weighted Average - Land Held For Development (4)
 
 
 
 
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 

 
 
Grand Total/Weighted Average - Whitestone Properties
 
 
 
 
 
4,841,660

 
90
%
 
$
82,055

 
$
18.83

 
$
19.35



(1)   
Calculated as the tenant’s actual December 31, 2018 base rent (defined as cash base rents including abatements) multiplied by 12. Excludes vacant space as of December 31, 2018. Because annualized base rental revenue is not derived from historical results that were accounted for in accordance with generally accepted accounting principles, historical results differ from the annualized amounts. Total abatements for leases in effect as of December 31, 2018 equaled approximately $152,000 for the month ended December 31, 2018.
 
(2)   
Calculated as annualized base rent divided by gross leasable area leased as of December 31, 2018.  Excludes vacant space as of December 31, 2018.

(3) 
Represents (i) the contractual base rent for leases in place as of December 31, 2018, adjusted to a straight-line basis to reflect changes in rental rates throughout the lease term and amortize free rent periods and abatements, but without regard to tenant improvement allowances and leasing commissions, divided by (ii) square footage under commenced leases of December 31, 2018.

(4) 
As of December 31, 2018, these parcels of land were held for development and, therefore, had no gross leasable area.


22



Significant Tenants
 
The following table sets forth information about our 15 largest tenants as of December 31, 2018, based upon consolidated annualized rental revenues at December 31, 2018.

Tenant Name
 
Location
 
Annualized Rental Revenue (in thousands)
 
Percentage of Total Annualized Base Rental Revenues (1)
 
Initial Lease Date
 
Year Expiring
 
 
 
 
 
 
 
 
 
 
 
Safeway Stores Incorporated (2)
 
Austin, Houston and Phoenix
 
$
2,447

 
3.0
%
 
11/14/1982, 5/8/1991, 7/1/2000, 4/1/2014, 4/1/2014 and 10/19/16
 
2020, 2020, 2021, 2022, 2024 and 2034
Whole Foods Market
 
Houston
 
2,042

 
2.5
%
 
9/3/2014
 
2035
Frost Bank
 
Houston
 
1,872

 
2.3
%
 
7/1/2014
 
2024
Newmark Real Estate of Houston LLC
 
Houston
 
1,188

 
1.4
%
 
10/1/2015
 
2026
Walgreens & Co. (3)
 
Houston and Phoenix
 
946

 
1.1
%
 
11/14/1982, 11/2/1987, 8/24/1996 and 11/3/1996
 
2022, 2027, 2049 and 2056
Verizon Wireless (4)
 
Houston and Phoenix
 
875

 
1.1
%
 
8/16/1994, 2/1/2004, 5/10/2004, 1/27/2006 and 5/1/2014
 
2019, 2019, 2022, 2023 and 2024
Bashas' Inc. (5)
 
Phoenix
 
823

 
1.0
%
 
10/9/2004 and 4/1/2009
 
2024 and 2029
Alamo Drafthouse Cinema
 
Austin
 
690

 
0.8
%
 
2/1/2012
 
2027
Dollar Tree (6)
 
Houston and Phoenix
 
677

 
0.8
%
 
3/1/1998, 8/10/1999, 6/29/2001, 11/8/2009, 12/17/2009, and 5/21/2013
 
2020, 2020, 2021, 2022, 2023 and 2027
Wells Fargo & Company (7)
 
Phoenix
 
553

 
0.7
%
 
10/24/1996 and 4/16/1999
 
2022 and 2023
Kroger Co.
 
Dallas
 
483

 
0.6
%
 
12/15/2000
 
2022
Ruth's Chris Steak House Inc.
 
Phoenix
 
466

 
0.6
%
 
1/1/1991
 
2030
Regus Corporation
 
Houston
 
434

 
0.5
%
 
5/23/2014
 
2025
Paul's Ace Hardware
 
Phoenix
 
427

 
0.5
%
 
3/1/2008
 
2023
Ross Dress for Less, Inc. (8)
 
Phoenix and San Antonio
 
362

 
0.4
%
 
2/11/2009 and 6/18/2012
 
2020, 2023
 
 
 
 
$
14,285

 
17.3
%
 
 
 
 

 (1) 
Annualized Base Rental Revenues represents the monthly base rent as of December 31, 2018 for each applicable tenant multiplied by 12.

23



(2) 
As of December 31, 2018, we had six leases with the same tenant occupying space at properties located in Phoenix, Houston and Austin. The annualized rental revenue for the lease that commenced on April 1, 2014, and is scheduled to expire in 2034, was $997,000, which represents approximately 1.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on April 1, 2014, and is scheduled to expire in 2024, was $42,000, which represents less than 0.1% of our annualized base rental revenue. The annualized rental revenue for the lease that commenced on May 8, 1991, and is scheduled to expire in 2021, was $344,000, which represents approximately 0.4% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on July 1, 2000, and is scheduled to expire in 2020, was $321,000, which represents approximately 0.4% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on November 14, 1982, and is scheduled to expire in 2022, was $318,000, which represents approximately 0.4% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on October 19, 2016, and is scheduled to expire in 2020, was $425,000, which represents approximately 0.5% of our total annualized base rental revenue.

(3) 
As of December 31, 2018, we had four leases with the same tenant occupying space at properties located in Phoenix and Houston. The annualized rental revenue for the lease that commenced on November 3, 1996, and is scheduled to expire in 2049, was $279,000, which represents approximately 0.3% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on November 2, 1987, and is scheduled to expire in 2027, was $188,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on November 14, 1982, and is scheduled to expire in 2022, was $181,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on August 24, 1996, and is scheduled to expire in 2056, was $298,000, which represents approximately 0.4% of our total annualized rental revenue.

(4) 
As of December 31, 2018, we had five leases with the same tenant occupying space at properties located in Phoenix and Houston. The annualized rental revenue for the lease that commenced on August 16, 1994, and is scheduled to expire in 2019, was $21,000, which represents less than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on January 27, 2006, and is scheduled to expire in 2023, was $130,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on February 1, 2004, and is scheduled to expire in 2019, was $37,000, which represents less than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on May 1, 2014, and is scheduled to expire in 2024, was $681,000, which represents approximately 0.8% of our total annualized rental revenue. The annualized rental revenue for the lease that commenced on May 10, 2004, and is scheduled to expire in 2022, was $6,000, which represents less than 0.1% of our total annualized base rental revenue.

(5) 
As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in Phoenix. The annualized rental revenue for the lease that commenced on October 9, 2004, and is scheduled to expire in 2024, was $119,000, which represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on April 1, 2009, and is scheduled to expire in 2029, was $704,000, which represents approximately 0.9% of our total annualized base rental revenue.

(6) 
As of December 31, 2018, we had six leases with the same tenant occupying space at properties in Houston and Phoenix. The annualized rental revenue for the lease that commenced on March 1, 1998, and is scheduled to expire in 2022, was $73,000, which represents less than 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on August 10, 1999, and is scheduled to expire in 2020, was $88,000, which represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on December 17, 2009, and is scheduled to expire in 2020, was $110,000, which represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on June 29, 2001, and is scheduled to expire in 2021, was $145,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on May 21, 2013, and is scheduled to expire in 2023, was $111,000, which represents approximately 0.1% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on November 8, 2009, and is scheduled to expire in 2027, was $151,000, which represents approximately 0.2% of our total annualized base rental revenue.

(7) 
As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in Phoenix. The annualized rental revenue for the lease that commenced on October 24, 1996, and is scheduled to expire in 2022, was $131,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on April 16, 1999, and is scheduled to expire in 2023, was $421,000, which represents approximately 0.5% of our total annualized base rental revenue.

(8) 
As of December 31, 2018, we had two leases with the same tenant occupying space at properties located in San Antonio and Phoenix. The annualized rental revenue for the lease that commenced on June 18, 2012, and is scheduled to expire in 2023, was $175,000, which represents approximately 0.2% of our total annualized base rental revenue. The annualized rental revenue for the lease that commenced on February 11, 2009, and is scheduled to expire in 2020, was $187,000, which represents approximately 0.2% of our total annualized base rental revenue.

24



Lease Expirations
 
The following table lists, on an aggregate basis, all of our consolidated scheduled lease expirations over the next 10 years.
 
 
 
 
 
 
 
 
 
Annualized Base Rent
 
 
 
 
GLA
 
as of December 31, 2018
Year
 
Number of
Leases
 
Approximate
Square Feet
 
Percent of
Total
 
Amount
(in thousands)
 
Percent of
Total
2019
 
370

 
633,907

 
13.1
%
 
$
12,998

 
15.8
%
2020
 
219

 
786,854

 
16.3
%
 
13,032

 
15.8
%
2021
 
198

 
512,859

 
10.6
%
 
9,994

 
12.1
%
2022
 
167

 
626,485

 
12.9
%
 
11,220

 
13.6
%
2023
 
154

 
474,322

 
9.8
%
 
9,437

 
11.4
%
2024
 
79

 
477,378

 
9.9
%
 
7,664

 
9.3
%
2025
 
43

 
156,796

 
3.2
%
 
3,614

 
4.4
%
2026
 
26

 
172,237

 
3.6
%
 
3,309

 
4.0
%
2027
 
26

 
173,391

 
3.6
%
 
3,457

 
4.2
%
2028
 
21

 
98,415

 
2.0
%
 
2,131

 
2.6
%
Total
 
1,303

 
4,112,644

 
85.0
%
 
$
76,856

 
93.2
%

Insurance
 
We believe that we have property and liability insurance with reputable, commercially rated companies.  We also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties.  We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future.  Further, we have title insurance relating to our properties in an aggregate amount that we believe to be adequate.
 
Item 3.  Legal Proceedings.
 
We are a participant in various legal proceedings and claims that arise in the ordinary course of our business.  These matters are generally covered by insurance.  While the resolution of these matters cannot be predicted with certainty, we believe that the final outcome of these matters will not have a material effect on our financial position, results of operations or cash flows.
 
Item 4.  Mine Safety Disclosures.

Not applicable.


25



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Common Shares

Our common shares are traded on the NYSE under the ticker symbol “WSR.” As of March 15, 2019, we had 39,766,240 common shares of beneficial interest outstanding held by a total of 1,123 shareholders of record.

On March 15, 2019, the closing price of our common shares reported on the NYSE was $11.88 per share.

Distributions
 
U.S. federal income tax law generally requires that a REIT distribute annually to its shareholders at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates on any taxable income that it does not distribute. We currently, and intend to continue to, accrue distributions quarterly and make distributions in three monthly installments following the end of each quarter. For a discussion of our cash flow as compared to dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

The timing and frequency of our distributions are authorized and declared by our board of trustees in exercise of its business judgment based upon a number of factors, including:

our funds from operations;
our debt service requirements;
our capital expenditure requirements for our properties;
our taxable income, combined with the annual distribution requirements necessary to maintain REIT qualification;
requirements of Maryland law;
our overall financial condition; and
other factors deemed relevant by our board of trustees.

Any distributions we make will be at the discretion of our board of trustees and we cannot provide assurance that our distributions will be made or sustained in the future.

The following table reflects the total distributions we have paid (including the total amount paid and the amount paid per share/unit) in each indicated quarter (in thousands, except per share/unit data):


26



 
 
Common Shares
 
Noncontrolling OP Unit Holders
 
Total
Quarter Paid
 
Distributions Per Common Share
 
Total Amount Paid
 
Distributions Per OP Unit
 
Total Amount Paid
 
Total Amount Paid
2018
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.2850

 
$
11,302

 
$
0.2850

 
$
265

 
$
11,567

Third Quarter
 
0.2850

 
11,294

 
0.2850

 
286

 
11,580

Second Quarter
 
0.2850

 
11,203

 
0.2850

 
295

 
11,498

First Quarter
 
0.2850

 
11,145

 
0.2850

 
309

 
11,454

Total
 
$
1.1400

 
$
44,944

 
$
1.1400

 
$
1,155

 
$
46,099

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.2850

 
$
11,002

 
$
0.2850

 
$
309

 
$
11,311

Third Quarter
 
0.2850

 
10,948

 
0.2850

 
309

 
11,257

Second Quarter
 
0.2850

 
10,093

 
0.2850

 
310

 
10,403

First Quarter
 
0.2850

 
8,429

 
0.2850

 
313

 
8,742

Total
 
$
1.1400

 
$
40,472

 
$
1.1400

 
$
1,241

 
$
41,713


Equity Compensation Plan Information
 
Please refer to Item 12 of this Annual Report on Form 10-K for information concerning securities authorized under our equity incentive plan.

Issuer Purchases of Equity Securities

During the three months ended December 31, 2018, certain of our employees tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under our 2008 Long-Term Equity Incentive Ownership Plan (the “2008 Plan”). The following table summarizes all of these repurchases during the three months ended December 31, 2018.

Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid for Shares
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2018 through October 31, 2018
 

 
$

 
N/A
 
N/A
November 1, 2018 through November 30, 2018
 

 

 
N/A
 
N/A
December 1, 2018 through December 31, 2018
 
21,414

 
12.26

 
N/A
 
N/A
      Total
 
21,414

 
$
12.26

 
 
 
 

(1)    The number of shares purchased represents common shares held by employees who tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares issued under the 2008 Plan. With respect to these shares, the price paid per share is based on the fair market value at the time of tender.


27




Performance Graph

The following graph compares the total shareholder returns of the Company's common shares to the Standard & Poor's 500 Index (“S&P 500 Index”) and to the Morgan Stanley Capital International US REIT Index (“REIT Index”) from December 31, 2013 to December 31, 2018. The graph assumes that the value of the investment in our common shares and in the S&P 500 Index and REIT Index was $100 at December 31, 2013 and that all dividends were reinvested. The closing price of our common shares on December 31, 2013 (on which the graph is based) was $13.37. The past shareholder return shown on the following graph is not necessarily indicative of future performance. The performance graph and related information shall not be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent the Company specifically incorporates it by reference into such filing.

chart.jpg

28



Item 6.  Selected Financial Data.
 
The following table sets forth our selected consolidated financial information and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the notes thereto, both of which appear elsewhere in this Annual Report on Form 10-K.
 
 
Year Ended December 31,
 
 
(in thousands, except per share and per square foot data)
 
 
2018
 
2017
 
2016
 
2015
 
2014
Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
119,863

 
$
125,959

 
$
104,437

 
$
93,416

 
$
72,382

Property expenses
 
37,431

 
42,110

 
34,092

 
31,335

 
25,152

General and administrative
 
23,281

 
23,949

 
23,922

 
20,312

 
15,274

Depreciation and amortization
 
25,679

 
27,240

 
22,457

 
19,761

 
15,725

Equity in earnings of real estate partnership
 
(8,431
)
 

 

 

 

Interest expense
 
25,177

 
23,651

 
19,239

 
14,910

 
10,579

Interest, dividend and other investment income
 
(1,055
)
 
(410
)
 
(429
)
 
(313
)
 
(90
)
Income from continuing operations before loss on disposal of assets and income taxes
 
17,781

 
9,419

 
5,156


7,411

 
5,742

Provision for income taxes
 
(347
)
 
(386
)
 
(289
)
 
(372
)
 
(282
)
Gain on sale of property
 
4,629

 
16

 
3,357

 

 

Profit sharing expense
 

 
(278
)
 
(15
)
 

 

Loss on disposal of assets
 
(82
)
 
(183
)
 
(96
)
 
(185
)
 
(111
)
Income from continuing operations
 
21,981

 
8,588

 
8,113

 
6,854

 
5,349

Income from discontinued operations
 

 

 

 
11

 
510

Gain on sale of properties from discontinued operations
 

 

 

 

 
1,887

Net income
 
21,981

 
8,588

 
8,113

 
6,865

 
7,746

Less: net income attributable to noncontrolling interests
 
550

 
254

 
182

 
116

 
160

Net income attributable to Whitestone REIT
 
$
21,431

 
$
8,334

 
$
7,931

 
$
6,749

 
$
7,586

 

29



 
 
Year Ended December 31,
 
 
(in thousands, except per share data and per square foot and occupancy)
 
 
2018
 
2017
 
2016
 
2015
 
2014
Earnings per share - basic
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares
 
$
0.54

 
$
0.22

 
$
0.26

 
$
0.25

 
$
0.23

Income from discontinued operations attributable to Whitestone REIT
 

 

 

 

 
0.10

Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
0.54

 
$
0.22

 
$
0.26

 
$
0.25

 
$
0.33

Earnings per share - diluted
 
 

 
 

 
 

 
 

 
 

Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares
 
$
0.52

 
$
0.22

 
$
0.26

 
$
0.24

 
$
0.22

Income from discontinued operations attributable to Whitestone REIT
 

 

 

 

 
0.10

Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
0.52

 
$
0.22

 
$
0.26

 
$
0.24

 
$
0.32

Balance Sheet Data:
 
 

 
 

 
 

 
 

 
 

Real estate (net)
 
$
938,938

 
$
1,018,420

 
$
813,052

 
$
745,958

 
$
602,068

Other assets
 
89,934

 
51,748

 
38,327

 
36,127

 
30,137

Total assets
 
$
1,028,872

 
$
1,070,168

 
$
851,379

 
$
782,085

 
$
632,205

Liabilities
 
$
669,722

 
$
711,764

 
$
583,751

 
$
535,094

 
$
418,882

Whitestone REIT shareholders’ equity
 
350,456

 
347,604

 
255,687

 
242,974

 
210,072

Noncontrolling interest in subsidiary
 
8,694

 
10,800

 
11,941

 
4,017

 
3,251

 
 
$
1,028,872


$
1,070,168

 
$
851,379

 
$
782,085

 
$
632,205

Other Data:
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common shares
 
$

 
$
118,412

 
$
30,014

 
$
49,649

 
$
6,458

Acquisitions of and additions to real estate (1)
 
$
11,638

 
$
231,120

 
$
91,785

 
$
163,050

 
$
142,065

Distributions per share (2)
 
$
1.14

 
$
1.13

 
$
1.13

 
$
1.13

 
$
1.13

Funds from operations (3)
 
$
39,398

 
$
35,039

 
$
27,031

 
$
26,696

 
$
21,920

Total occupancy at year end
 
90
%
 
88
%
 
87
%
 
87
%
 
87
%
Average aggregate GLA
 
4,925

 
6,403

 
5,837

 
5,734

 
5,075

Average rent per square foot
 
$
18.81

 
$
16.81

 
$
15.45

 
$
14.62

 
$
13.57

(1)  Including amounts for discontinued operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)  The distributions per share represent total cash payments divided by weighted average common shares.
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)  We believe that Funds From Operations (“FFO”) is an appropriate supplemental measure of operating performance because it helps our investors compare our operating performance relative to other REITs.  The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to common shareholders computed in accordance with GAAP, excluding gains or losses from sales of operating properties and extraordinary items, plus depreciation and amortization of real estate assets, including our share of equity method investments and joint ventures.  We calculate FFO in a manner consistent with the NAREIT definition. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Financial Measures.”
    

30



The following table sets forth a reconciliation of net income to FFO, the nearest GAAP measure, for the periods presented:
 
 
Year Ended December 31,