Whitestone REIT [WSR] Filings

10-Q 1 wsr-20220331.htm 10-Q wsr-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


			(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


OR


☐			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 Organization)						(I.R.S. Employer Identification No.)


2600 South Gessner,	Suite 500	77063
Houston,	Texas
(Address of Principal Executive Offices)		(Zip Code)

(713) 827-9595

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of Beneficial Interest, par value $0.001 per share	WSR	New York Stock Exchange
Preferred Stock Purchase Rights	N/A	New York Stock Exchange

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 ☐No

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 ☐No

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

☐

Accelerated filer

☒

Non-accelerated filer

☐

Small reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒ No

As of May 5, 2022, there were 49,146,826 common shares of beneficial interest, $0.001 par value per share, outstanding.

PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements.	1
	Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021	1
	Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2022 and 2021	3
	Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, 2022 and 2021	6
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2022 and 2021	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	49
Item 4.	Controls and Procedures.	49

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.

Defaults Upon Senior Securities.

Item 4.

Mine Safety Disclosures.

Item 5.

Item 6.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	March 31, 2022		December 31, 2021
	(unaudited)
ASSETS
Real estate assets, at cost
Property	$	1,200,191	$	1,196,919
Accumulated depreciation	(197,713)		(190,333)
Total real estate assets	1,002,478		1,006,586
Investment in real estate partnership	34,868		34,588
Cash and cash equivalents	11,136		15,721
Restricted cash	120		193
Escrows and acquisition deposits	9,449		11,323
Accrued rents and accounts receivable, net of allowance for doubtful accounts	23,936		22,395
Receivable due from related party	1,011		847
Unamortized lease commissions, legal fees and loan costs	8,458		8,442
Prepaid expenses and other assets(1)	3,545		1,995
Total assets	$	1,095,001	$	1,102,090

LIABILITIES AND EQUITY
Liabilities:
Notes payable	$	643,876	$	642,842
Accounts payable and accrued expenses(2)	31,009		45,777
Payable due to related party	1,207		997
Tenants' security deposits	8,093		8,070
Dividends and distributions payable	5,990		5,366
Total liabilities	690,175		703,052
Commitments and contingencies:	—		—
Equity:
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of March 31, 2022 and December 31, 2021	—		—
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 49,146,223 and 49,144,153 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	48		48
Additional paid-in capital	622,064		623,462
Accumulated deficit	(222,792)		(223,973)
Accumulated other comprehensive loss	(860)		(6,754)
Total Whitestone REIT shareholders' equity	398,460		392,783
Noncontrolling interest in subsidiary	6,366		6,255
Total equity	404,826		399,038
Total liabilities and equity	$	1,095,001	$	1,102,090

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)


	March 31, 2022		December 31, 2021
	(unaudited)
(1) Operating lease right of use assets (net)	$	205	$	222
(2) Operating lease liabilities	$	210	$	231

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands)



	Three Months Ended March 31,
	2022		2021
Revenues
Rental(1)	$	33,808	$	28,695
Management, transaction, and other fees	315		350
Total revenues	34,123		29,045

Operating expenses
Depreciation and amortization	7,910		7,013
Operating and maintenance	5,725		4,839
Real estate taxes	4,367		4,038
General and administrative	3,049		5,634
Total operating expenses	21,051		21,524

Other expenses (income)
Interest expense	6,061		6,132
(Gain) loss on sale or disposal of assets, net	15		(1)
Interest, dividend and other investment income	(14)		(49)
Total other expenses	6,062		6,082

Income before equity investment in real estate partnership and income tax	7,010		1,439

Equity in earnings of real estate partnership	280		89
Provision for income tax	(101)		(87)





Net income	7,189		1,441

Less: Net income attributable to noncontrolling interests	111		26

Net income attributable to Whitestone REIT	$	7,078	$	1,415

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)




	Three Months Ended March 31,
	2022		2021
Basic Earnings Per Share:


Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.14	$	0.03
Diluted Earnings Per Share:


Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.14	$	0.03

Weighted average number of common shares outstanding:
Basic	49,145		42,495
Diluted	50,306		43,331

Consolidated Statements of Comprehensive Income

Net income	$	7,189	$	1,441

Other comprehensive income

Unrealized gain on cash flow hedging activities	5,986		2,221

Comprehensive income	13,175		3,662

Less: Net income attributable to noncontrolling interests	111		26
Less: Comprehensive income attributable to noncontrolling interests	92		41

Comprehensive income attributable to Whitestone REIT	$	12,972	$	3,595

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands)



	Three Months Ended March 31,
	2022		2021
(1) Rental
Rental revenues	$	24,844	$	21,626
Recoveries	9,337		7,598
Bad debt	(373)		(529)
Total rental	$	33,808	$	28,695

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands)


								Accumulated
				Additional				Other		Total		Noncontrolling
	Common Shares			Paid-In		Accumulated		Comprehensive		Shareholders’		Interests			Total
	Shares	Amount		Capital		Deficit		Gain (Loss)		Equity		Units	Dollars		Equity

Balance, December 31, 2021	49,144	$	48	$	623,462	$	(223,973)	$	(6,754)	$	392,783	771	$	6,255	$	399,038
Exchange of noncontrolling interest OP units for common shares	1	—		—		—		—		—		(1)	—		—
Issuance of common shares - ATM Program, net of offering costs	—	—		—		—		—		—		—	—		—
Exchange offer costs	—	—		—		—		—		—		—	—		—
Issuance of shares under dividend reinvestment plan	1	—		15		—		—		15		—	—		15
Repurchase of common shares (1)	—	—		—		—		—		—		—	—		—
Share-based compensation	—	—		(1,413)		—		—		(1,413)		—	—		(1,413)
Distributions - $0.1075 per common share / OP unit	—	—		—		(5,897)		—		(5,897)		—	(92)		(5,989)
Unrealized gain on change in value of cash flow hedge	—	—		—		—		5,894		5,894		—	92		5,986
Net income	—	—		—		7,078		—		7,078		—	111		7,189
Balance, March 31, 2022	49,146	$	48	$	622,064	$	(222,792)	$	(860)	$	398,460	770	$	6,366	$	404,826

See accompanying notes to Consolidated Financial Statements

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands)


								Accumulated
				Additional				Other		Total		Noncontrolling
	Common Shares			Paid-In		Accumulated		Comprehensive		Shareholders’		Interests			Total
	Shares	Amount		Capital		Deficit		Gain (Loss)		Equity		Units	Dollars		Equity

Balance, December 31, 2020	42,391	$	42	$	562,250	$	(215,809)	$	(14,400)	$	332,083	773	$	6,243	$	338,326
Exchange of noncontrolling interest OP units for common shares	—	—		—		—		—		—		—	—		—
Issuance of common shares - ATM Program, net of offering costs	—	—		—		—		—		—		—	—		—
Exchange offer costs	—	—		—		—		—		—		—	—		—
Issuance of shares under dividend reinvestment plan	2	—		15		—		—		15		—	—		15
Repurchase of common shares (1)	(37)	—		(324)		—		—		(324)		—	—		(324)
Share-based compensation	223	1		1,397		—		—		1,398		—	—		1,398
Distributions - $0.1075 per common share / OP unit	—	—		—		(4,622)		—		(4,622)		—	(83)		(4,705)
Unrealized gain on change in value of cash flow hedge	—	—		—		—		2,180		2,180		—	41		2,221
Net income	—	—		—		1,415		—		1,415		—	26		1,441
Balance, March 31, 2021	42,579	$	43	$	563,338	$	(219,016)	$	(12,220)	$	332,145	773	$	6,227	$	338,372

(1) The Company acquired 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.

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:


Net income	$	7,189	$	1,441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,911		7,013
Amortization of deferred loan costs	274		274
(Gain) loss on sale or disposal of assets, net	15		(1)
Bad debt	372		529
Share-based compensation	(1,413)		1,398
Equity in earnings of real estate partnership	(280)		(89)
Changes in operating assets and liabilities:
Escrows and acquisition deposits	1,874		2,352
Accrued rents and accounts receivable	(1,913)		(829)
Receivable due from related party	(164)		(396)
Unamortized lease commissions, legal fees and loan costs	(697)		(844)
Prepaid expenses and other assets	295		611
Accounts payable and accrued expenses	(8,781)		(7,534)
Payable due to related party	210		35
Tenants' security deposits	23		143
Net cash provided by operating activities	4,915		4,103
Cash flows from investing activities:

Additions to real estate	(3,359)		(1,528)


Net cash used in investing activities	(3,359)		(1,528)

Cash flows from financing activities:
Distributions paid to common shareholders	(5,268)		(4,480)
Distributions paid to OP unit holders	(83)		(82)




Repayments of notes payable	(863)		(719)
Repurchase of common shares	—		(324)
Net cash used in financing activities	(6,214)		(5,605)
Net decrease in cash, cash equivalents and restricted cash	(4,658)		(3,030)
Cash, cash equivalents and restricted cash at beginning of period	15,914		25,956
Cash, cash equivalents and restricted cash at end of period (1)	$	11,256	$	22,926

(1) For a reconciliation of cash, cash equivalents and restricted cash, see supplemental disclosures below.

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Three Months Ended March 31,
	2022		2021
Supplemental disclosure of cash flow information:
Cash paid for interest	$	5,772	$	5,936

Non cash investing and financing activities:
Disposal of fully depreciated real estate	$	20	$	3
Financed insurance premiums	$	1,846	$	1,712
Value of shares issued under dividend reinvestment plan	$	15	$	15

Change in fair value of cash flow hedge	$	5,986	$	2,221


	March 31,
	2022		2021
Cash, cash equivalents and restricted cash
Cash and cash equivalents	$	11,136	$	22,820
Restricted cash	120		106
Total cash, cash equivalents and restricted cash	$	11,256	$	22,926

See accompanying notes to Consolidated Financial Statements.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

The use of the words “we,” “us,” “our,” “Company” or “Whitestone” refers to Whitestone REIT and our consolidated subsidiaries, except where the context otherwise requires.

1. INTERIM FINANCIAL STATEMENTS

The consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2021 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of and for the period ended March 31, 2022 have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information on a basis consistent with the annual audited consolidated financial statements and with the instructions to Form 10-Q.

The consolidated financial statements presented herein reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of Whitestone and our subsidiaries as of March 31, 2022 and December 31, 2021, and the results of operations for the three month periods ended March 31, 2022 and 2021, the consolidated statements of changes in equity for the three month periods ended March 31, 2022 and 2021 and cash flows for the three month periods ended March 31, 2022 and 2021. All of these adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and the notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Business. Whitestone was formed as a real estate investment trust (“REIT”) pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, we changed our state of organization from Texas to Maryland pursuant to a merger where we merged directly with and into a Maryland REIT formed for the sole purpose of the reorganization and the conversion of each of the outstanding common shares of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity. We serve as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), which was formed on December 31, 1998 as a Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions. As of March 31, 2022 and December 31, 2021, Whitestone wholly owned 60 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.

As of March 31, 2022, these properties consist of:

Consolidated Operating Portfolio

•53 wholly owned properties that meet our Community Centered Properties® strategy; and

Redevelopment, New Acquisitions Portfolio

•two wholly owned properties, Lakeside Market and Anderson Arbor, that meet our Community Centered Properties® strategy containing approximately 0.2 and 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $52.8 and $28.0 million, respectively.

•five parcels of land held for future development.

As of March 31, 2022, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.

The global health crisis caused by COVID-19 and the related responses intended to control its spread may continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. In light of the changing nature of the COVID-19 pandemic, we are unable to predict the extent that its impact will have on our financial condition, results of operations and cash flows.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation. We are the sole general partner of the Operating Partnership and possess full legal control and authority over the operations of the Operating Partnership. As of March 31, 2022 and December 31, 2021, we owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements include the accounts of the Operating Partnership.

Noncontrolling interest in the accompanying consolidated financial statements represents the share of equity and earnings of the Operating Partnership allocable to holders of partnership interests other than us. Net income or loss is allocated to noncontrolling interests based on the weighted-average percentage ownership of the Operating Partnership during the period. Issuance of additional common shares of beneficial interest in Whitestone (the “common shares”) and units of limited partnership interest in the Operating Partnership that are convertible into cash or, at our option, common shares on a one-for-one basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.

Equity Method. In accordance with ASU 2014-09 (“Topic 606”) and ASC 610, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets,” the Company recognizes its investment in Pillarstone OP under the equity method.

Basis of Accounting. Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred.

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the grant date fair value of common share units included in share-based compensation expense, the estimated allowance for doubtful accounts, the estimated fair value of interest rate swaps and the estimates supporting our impairment analysis for the carrying values of our real estate assets. Actual results could differ from those estimates. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company’s business and markets, including the Company’s operations and the operations of its tenants. The full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements, and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, the impact on our tenants’ businesses and financial condition, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Reclassifications. We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity.

Restricted Cash. We classify all cash pledged as collateral to secure certain obligations and all cash whose use is limited as restricted cash. During 2015, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7 (Debt)), which is collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize such promissory note.

Derivative Instruments and Hedging Activities. We utilize derivative financial instruments, principally interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a cash flow hedges’ change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using Level 2 inputs under ASC 820, “Fair Value Measurements and Disclosures.” Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable. As of March 31, 2022, we consider our cash flow hedges to be highly effective.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Development Properties. Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying charges (interest, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction), are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. For the three months ended March 31, 2022, approximately $99,000 and $75,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended March 31, 2021, approximately $102,000 and $79,000 in interest expense and real estate taxes, respectively, were capitalized.

Share-Based Compensation. From time to time, we grant nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to executive officers and employees under our 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). Awarded shares and units vest when certain performance conditions are met. We recognize compensation expense when achievement of the performance conditions is probable based on management’s most recent estimates using the fair value of the shares as of the grant date. We recognized $(1,329,000) and $1,468,000 in share-based compensation net of forfeitures for the three months ended March 31, 2022 and 2021, respectively. On January 18, 2022, the Board of Trustees terminated James Mastandrea, with cause, from his position as Chief Executive Officer. Mr. Mastandrea was also replaced as Chairman of the Board. Following his termination, the Board of Trustees appointed Dave Holeman, previously our Chief Financial Officer, as Chief Executive Officer. The Company also recently replaced its Chief Operating Officer and Executive Vice President of Acquisitions and Asset Management. As a result of these changes, we recognized a reduction of share-based compensation of $2.2 million during the three months ended March 31, 2022 due to forfeitures. We recognize forfeitures as they occur.

Noncontrolling Interests. Noncontrolling interests are the portion of equity in a subsidiary not attributable to a parent. Accordingly, we have reported noncontrolling interests in equity on the consolidated balance sheets but separate from Whitestone’s equity. On the consolidated statements of operations and comprehensive income, subsidiaries are reported at the consolidated amount, including both the amount attributable to Whitestone and noncontrolling interests. The consolidated statements of changes in equity is included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.

Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of March 31, 2022 and December 31, 2021, we had an allowance for uncollectible accounts of $15.3 million and $14.9 million, respectively. During the three months ending March 31, 2022 and 2021, we recorded an adjustment to rental revenue for bad debt, exclusive of straight-line rent reserve adjustments, in the amount of a $0.4 million decrease to revenue and a $0.5 million decrease to revenue, respectively. The three months ended March 31, 2022 included 77 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight-line rent adjustments of $0.23 million and $0.4 million, respectively, and the three months ended March 31, 2021 included 67 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight-line rent adjustments of $0.5 million and $0.1 million, respectively.

Revenue Recognition. All leases on our properties are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income. Additionally, we have tenants who pay real estate taxes directly to the taxing authority. We exclude these costs paid directly by the tenant to third parties on our behalf from revenue recognized and the associated property operating expense.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly. Revenues are governed by the Management Agreements (as defined in Note 6 (Investment in Real Estate Partnership)). Refer to Note 6 (Investment in Real Estate Partnership) for additional information regarding the Management Agreements with Pillarstone OP. Additionally, we recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.

See our Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion on significant accounting policies.

Recent Accounting Pronouncements. In April 2020, the FASB issued guidance on the application of Topic 842, relating to concessions being made by lessors in response to the COVID-19 pandemic. The guidance notes that it would be acceptable for entities to make an election to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed, even if such enforceable rights and obligations are not explicitly contained in the lease contract. Thus, for concessions relating to the COVID-19 pandemic, an entity would not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract, and would have the option to apply, or not to apply, the general lease modification guidance in Topic 842 as it stands. We have elected this option to account for lease concessions relating to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed. Therefore, such concessions are not accounted for as a lease modification under Topic 842.

3. LEASES

As a Lessor. All leases on our properties are classified as noncancelable operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rents and accounts receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We combine lease and nonlease components in lease contracts, which includes combining base rent, recoveries, and percentage rents into a single line item, Rental, within the consolidated statements of operations and comprehensive income.

A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, contingent rents, and collectability adjustments under Topic 842) under noncancelable operating leases in existence as of March 31, 2022 is as follows (in thousands):


Years Ended December 31,	Minimum Future Rents(1)
2022 (remaining)	$	70,547
2023	85,238
2024	71,462
2025	55,060
2026	40,249
Thereafter	117,717
Total	$	440,273

(1) These amounts do not reflect future rental revenues from the renewal or replacement of existing leases and exclude reimbursements of operating expenses and rental increases that are not fixed.

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As a Lessee. We have office space, automobile, and office machine leases, which qualify as operating leases, with remaining lease terms of one to three years.

The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by our weighted average incremental borrowing rates to calculate the lease liabilities for our operating leases in which we are the lessee (in thousands):


Years Ended December 31,	March 31, 2022
2022 (remaining)	$	86
2023	65
2024	43
2025	28
2026	1
Thereafter	—
Total undiscounted rental payments	223
Less imputed interest	13
Total lease liabilities	$	210

For the three months ended March 31, 2022 and 2021, the total lease costs were $229,000 and $257,000, respectively. The weighted average remaining lease term for our operating leases was 2.9 years at March 31, 2022. We do not include renewal options in the lease term for calculating the lease liability unless we are reasonably certain we will exercise the option or the lessor has the sole ability to exercise the option. The weighted average incremental borrowing rate was 4.5% at March 31, 2022.

4. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET

Accrued rents and accounts receivable, net consists of amounts accrued, billed and due from tenants, allowance for doubtful accounts and other receivables as follows (in thousands):


	March 31, 2022		December 31, 2021

Tenant receivables	$	18,678	$	18,410
Accrued rents and other recoveries	20,119		18,681
Allowance for doubtful accounts	(15,346)		(14,896)
Other receivables	485		200
Total	$	23,936	$	22,395

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WHITESTONE REIT AND SUBSIDIARIES

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5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS

Costs which have been deferred consist of the following (in thousands):


	March 31, 2022		December 31, 2021

Leasing commissions	$	13,948	$	13,341
Deferred legal cost	391		365
Deferred financing cost	3,898		3,898
Total cost	18,237		17,604
Less: leasing commissions accumulated amortization	(6,691)		(6,305)
Less: deferred legal cost accumulated amortization	(257)		(248)
Less: deferred financing cost accumulated amortization	(2,831)		(2,609)
Total cost, net of accumulated amortization	$	8,458	$	8,442

6. INVESTMENT IN REAL ESTATE PARTNERSHIP

On December 8, 2016, we, through our Operating Partnership, entered into a Contribution Agreement (the “Contribution Agreement”) with Pillarstone OP and Pillarstone Capital REIT (“Pillarstone REIT”) pursuant to which we contributed all of the equity interests in four of our wholly-owned subsidiaries that, at the time, owned 14 non-core properties that did not fit our Community Centered Property® strategy (the “Pillarstone Properties”), to Pillarstone OP for aggregate consideration of approximately $84 million, consisting of (1) approximately $18.1 million of Class A units representing limited partnership interests in Pillarstone OP (“Pillarstone OP Units”) and (2) the assumption of approximately $65.9 million of liabilities (collectively, the “Contribution”).

In connection with the Contribution, Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a management agreement with the entities that own the contributed Pillarstone Properties (collectively, the “Management Agreements”). Pursuant to the Management Agreements, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV of such Pillarstone Property, with the exception of Uptown Tower, in which case services to Pillarstone OP are provided in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. The Management Agreements are automatically renewable on a month to month basis; provided that each Management Agreement can be terminated by either party thereto upon not less than thirty days’ prior written notice to the other party. None of the Management Agreements had been terminated as of March 31, 2022.

In connection with the Contribution, on December 8, 2016, the Operating Partnership entered into a Tax Protection Agreement with Pillarstone REIT and Pillarstone OP pursuant to which Pillarstone OP agreed to indemnify the Operating Partnership for certain tax liabilities resulting from its recognition of income or gain prior to December 8, 2021 if such liabilities result from a transaction involving a direct or indirect taxable disposition of all or a portion of the Pillarstone Properties or if Pillarstone OP 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 income tax purposes.

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The table below presents the real estate partnership investment in which the Company holds an ownership interest (in thousands):


		Company’s Investment as of
		March 31, 2022		December 31, 2021
Real estate partnership	Ownership Interest
Pillarstone OP(1)	81.4%	$	34,868	$	34,588
Total real estate partnership(2)(3)		$	34,868	$	34,588

(1) The Company manages these real estate partnership investments and, where applicable, earns acquisition fees, leasing commissions, property management fees, and asset management fees.

(2) Representing eight property interests and 926,798 square feet of GLA, as of March 31, 2022 and December 31, 2021.

(3) On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of Pillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price. As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option of the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP. While we do not believe the overall impact of the Pillarstone Rights Agreement on the value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.

The table below presents the Company’s share of net income from its investment in the real estate partnership which is included in equity in earnings of real estate partnership, net on the Company’s consolidated statements of operations and comprehensive income (in thousands):


	Three Months Ended March 31,
	2022		2021

Pillarstone OP	$	280	$	89

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March 31, 2022

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Summarized financial information for the Company’s investment in real estate partnership is as follows (in thousands):


	March 31, 2022		December 31, 2021

Assets:
Real estate, net	$	48,226	$	48,273
Other assets	8,882		8,790
Total assets	57,108		57,063
Liabilities and equity:
Notes payable	15,129		14,920
Other liabilities	2,659		3,200
Equity	39,320		38,943
Total liabilities and equity	57,108		57,063
Company’s share of equity	32,025		31,718
Cost of investment in excess of the Company’s share of underlying net book value	2,843		2,870
Carrying value of investment in real estate partnership	$	34,868	$	34,588


	Three Months Ended March 31,
	2022		2021

Revenues	$	2,326	$	2,190
Operating expenses	(1,605)		(1,707)
Other expenses	(344)		(348)
Net income	$	377	$	135

The amortization of the basis difference between the cost of investment and the Company's share of underlying net book value for both of the three months periods ended March 31, 2022 and 2021 is $27,000. The Company amortized the difference into equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income.

The Company has evaluated its guarantee to Pillarstone OP pursuant to ASC 460, “Guarantees,” and has determined the guarantee to be a performance guarantee, for which ASC 460 contains initial recognition and measurement requirements, and related disclosure requirements. The Company is obligated in two respects: (i) a noncontingent liability, which represents the Company’s obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering event(s) occur; and (ii) the contingent liability, which represents the Company’s obligation to make future payments if those triggering events occur. The fair value of our loan guarantee to Pillarstone OP is estimated on a Level 3 basis (as provided by ASC 820), using a probability-weighted discounted cash flow analysis based on a discount rate, discounting the loan balance. The Company recognized a noncontingent liability of $462,000 at the inception of the guarantee at fair value which is recorded on the Company’s consolidated balance sheets, net of accumulated amortization. The Company will amortize the guarantee liability into income over seven years. For the three months ended March 31, 2022 and 2021, the amortization of the guarantee liability was approximately $9,000 and $10,000, respectively.

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7. DEBT

Certain subsidiaries of Whitestone are the borrowers under various financing arrangements. These subsidiaries are separate legal entities, and their respective assets and credit are not available to satisfy the debt of Whitestone or any of its other subsidiaries.

Debt consisted of the following as of the dates indicated (in thousands):


Description	March 31, 2022		December 31, 2021
Fixed rate notes
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (1)	$	100,000	$	100,000
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (2)	165,000		165,000
$80.0 million, 3.72% Note, due June 1, 2027	80,000		80,000
$19.0 million 4.15% Note, due December 1, 2024	18,272		18,358
$20.2 million 4.28% Note, due June 6, 2023	17,699		17,808
$14.0 million 4.34% Note, due September 11, 2024	12,910		12,978
$14.3 million 4.34% Note, due September 11, 2024	13,708		13,773
$15.1 million 4.99% Note, due January 6, 2024	13,838		13,907
$2.6 million 5.46% Note, due October 1, 2023	2,275		2,289
$50.0 million, 5.09% Note, due March 22, 2029	50,000		50,000
$50.0 million, 5.17% Note, due March 22, 2029	50,000		50,000
$1.8 million 3.15% Note, due November 28, 2022	1,394		—
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023	119,500		119,500
Total notes payable principal	644,596		643,613
Less deferred financing costs, net of accumulated amortization	(720)		(771)
Total notes payable	$	643,876	$	642,842

(1) Promissory note includes an interest rate swap that fixed the LIBOR portion of Term Loan 3 (as defined below) at 1.73%.

(2) Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of