Whitestone REIT (WSR) 10-Q 2020 Q3 Quarterly report

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 September 30, 2020

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 October 29, 2020, there were 42,354,265 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 September 30, 2020 (Unaudited) and December 31, 2019	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, June 30 and September 30, 2020 and 2019	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2020 and 2019	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	62
Item 4.	Controls and Procedures.	62

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	64
Item 1A.	Risk Factors.	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	66
Item 3.	Defaults Upon Senior Securities.	66
Item 4.	Mine Safety Disclosures.	66
Item 5.	Other Information.	66
Item 6.	Exhibits.	66
	Exhibit Index	67
	Signatures	68

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Real estate assets, at cost
Property	$	1,104,963	$	1,099,955
Accumulated depreciation	(157,303)		(137,933)
Total real estate assets	947,660		962,022
Investment in real estate partnership	34,849		34,097
Cash and cash equivalents	38,990		15,530
Restricted cash	128		113
Escrows and acquisition deposits	7,866		8,388
Accrued rents and accounts receivable, net of allowance for doubtful accounts	23,604		22,854
Receivable due from related party	1,302		477
Unamortized lease commissions, legal fees and loan costs	8,082		8,960
Prepaid expenses and other assets(1)	2,444		3,819
Total assets	$	1,064,925	$	1,056,260
LIABILITIES AND EQUITY
Liabilities:
Notes payable	$	666,516	$	644,699
Accounts payable and accrued expenses(2)	49,861		39,336
Payable due to related party	845		307
Tenants' security deposits	6,915		6,617
Dividends and distributions payable	4,528		12,203
Total liabilities	728,665		703,162
Commitments and contingencies:	0		0
Equity:
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2020 and December 31, 2019	0		0
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 42,353,309 and 41,492,117 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	42		41
Additional paid-in capital	560,129		554,816
Accumulated deficit	(214,468)		(204,049)
Accumulated other comprehensive loss	(15,707)		(5,491)
Total Whitestone REIT shareholders' equity	329,996		345,317
Noncontrolling interest in subsidiary	6,264		7,781
Total equity	336,260		353,098
Total liabilities and equity	$	1,064,925	$	1,056,260

See accompanying notes to Consolidated Financial Statements.

1

Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)

September 30, 2020	December 31, 2019
(unaudited)

(1) Operating lease right of use assets (net) $ 813  $ 1,328 

(2) Operating lease liabilities $ 819  $ 1,331 

See accompanying notes to Consolidated Financial Statements.

2

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
Rental(1)	$	28,868	$	29,368	$	86,116	$	87,527
Management, transaction, and other fees	1,032		511		1,965		1,624
Total revenues	29,900		29,879		88,081		89,151
Operating expenses
Depreciation and amortization	7,171		6,789		21,112		19,865
Operating and maintenance	5,029		5,118		15,021		14,760
Real estate taxes	4,670		4,410		13,591		12,474
General and administrative	5,860		5,597		15,604		16,514
Total operating expenses	22,730		21,914		65,328		63,613
Other expenses (income)
Interest expense	6,400		6,679		19,561		19,738
Loss on sale or disposal of assets and assets held for sale	18		0		882		115
Interest, dividend and other investment income	(71)		(141)		(206)		(550)
Total other expense	6,347		6,538		20,237		19,303
Income before equity investments in real estate partnerships and income tax	823		1,427		2,516		6,235
Equity in earnings of real estate partnership	196		524		752		1,480
Provision for income tax	(105)		(102)		(288)		(324)
Income from continuing operations	914		1,849		2,980		7,391
Gain on sale of property from discontinued operations	0		0		0		701
Income from discontinued operations	0		0		0		701
Net income	914		1,849		2,980		8,092
Less: Net income attributable to noncontrolling interests	14		42		58		184
Net income attributable to Whitestone REIT	$	900	$	1,807	$	2,922	$	7,908

See accompanying notes to Consolidated Financial Statements.

3

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.18
Income from discontinued operations attributable to Whitestone REIT	0.00		0.00		0.00		0.02
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.20
Diluted Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.17
Income from discontinued operations attributable to Whitestone REIT	0.00		0.00		0.00		0.02
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.19
Weighted average number of common shares outstanding:
Basic	42,346		40,187		42,202		39,942
Diluted	43,440		41,446		43,040		41,084
Consolidated Statements of Comprehensive Income (Loss)
Net income	$	914	$	1,849	$	2,980	$	8,092
Other comprehensive income (loss)
Unrealized gain (loss) on cash flow hedging activities	1,241		(2,235)		(10,395)		(11,740)
Comprehensive income (loss)	2,155		(386)		(7,415)		(3,648)
Less: Net income attributable to noncontrolling interests	14		42		58		184
Less: Comprehensive income (loss) attributable to noncontrolling interests	43		(51)		(203)		(266)
Comprehensive income (loss) attributable to Whitestone REIT	$	2,098	$	(377)	$	(7,270)	$	(3,566)

See accompanying notes to Consolidated Financial Statements.

4

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

Three Months Ended September 30,		Nine Months Ended September 30,
2020	2019	2020	2019

(1) Rental
Rental revenues	$	21,808	$	21,623	$	65,591	$	64,752
Recoveries	8,339		8,240		24,976		23,701
Bad debt	(1,279)		(495)		(4,451)		(926)
Total rental	$	28,868	$	29,368	$	86,116	$	87,527

See accompanying notes to Consolidated Financial Statements.

5

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, 2019	41,492	$	41	$	554,816	$	(204,049)	$	(5,491)	$	345,317	909	$	7,781	$	353,098
Exchange of noncontrolling interest OP units for common shares	5	—		44		—		—		44		(5)	(44)		0
Issuance of common shares - ATM Program, net of offering costs	171	—		2,241		—		—		2,241		—	—		2,241
Exchange offer costs	—	—		(32)		—		—		(32)		—	—		(32)
Issuance of shares under dividend reinvestment plan	4	—		42		—		—		42		—	—		42
Repurchase of common shares (1)	(153)	—		(1,630)		—		—		(1,630)		—	—		(1,630)
Share-based compensation	616	—		1,248		—		—		1,248		—	—		1,248
Distributions - $0.285 per common share / OP unit	—	—		—		(4,449)		—		(4,449)		—	(95)		(4,544)
Unrealized loss on change in value of cash flow hedge	—	—		—		—		(10,721)		(10,721)		—	(231)		(10,952)
Net income	—	—		—		1,612		—		1,612		—	35		1,647
Balance, March 31, 2020	42,135	41		556,729		(206,886)		(16,212)		333,672		904	7,446		341,118
Exchange of noncontrolling interest OP units for common shares	127	1		1,082		—		—		1,083		(127)	(1,083)		0
Exchange offer costs	—	—		(11)		—		—		(11)		—	—		(11)
Issuance of shares under dividend reinvestment plan	2	—		16		—		—		16		—	—		16
Repurchase of common shares (1)	(23)	—		(440)		—		—		(440)		—	—		(440)
Share-based compensation	103	—		1,140		—		—		1,140		—	—		1,140
Distributions - $0.105 per common share / OP unit	—	—		—		(4,446)		—		(4,446)		—	(81)		(4,527)
Unrealized loss on change in value of cash flow hedge	—	—		—		—		(669)		(669)		—	(15)		(684)
Reallocation of ownership between parent and subsidiary	—	—		—		1		(34)		(33)		—	33		0
Net income	—	—		—		410		—		410		—	9		419
Balance, June 30, 2020	42,344	42		558,516		(210,921)		(16,915)		330,722		777	6,309		337,031
Exchange of noncontrolling interest OP units for common shares	1	—		11		—		—		11		(1)	(11)		0
Exchange offer costs	—	—		—		—		—		—		—	—		0
Issuance of shares under dividend reinvestment plan	3	—		16		—		—		16		—	—		16
Repurchase of common shares (1)	(2)	—		(6)		—		—		(6)		—	—		(6)
Share-based compensation	7	—		1,592		—		—		1,592		—	—		1,592
Distributions - $0.105 per common share / OP unit	—	—		—		(4,446)		—		(4,446)		—	(82)		(4,528)
Unrealized gain on change in value of cash flow hedge	—	—		—		—		1,198		1,198		—	43		1,241
Reallocation of ownership between parent and subsidiary	—	—		—		(1)		10		9		—	(9)		0
Net income	—	—		—		900		—		900		—	14		914
Balance, September 30, 2020	42,353	$	42	$	560,129	$	(214,468)	$	(15,707)	$	329,996	776	$	6,264	$	336,260

See accompanying notes to Consolidated Financial Statements.

6

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, 2018	39,778	$	39	$	527,662	$	(181,361)	$	4,116	$	350,456	929	$	8,694	$	359,150
Exchange of noncontrolling interest OP units for common shares	1	—		5		—		—		5		(1)	(5)		0
Stock issuance costs	—	—		(6)		—		—		(6)		—	—		(6)
Issuance of shares under dividend reinvestment plan	3	—		34		—		—		34		—	—		34
Repurchase of common shares (1)	(64)	—		(762)		—		—		(762)		—	—		(762)
Share-based compensation	111	1		1,882		—		—		1,883		—	—		1,883
Distributions - $0.285 per common share / OP unit	—	���		—		(11,351)		—		(11,351)		—	(264)		(11,615)
Unrealized loss on change in value of cash flow hedge	—	—		—		—		(3,390)		(3,390)		—	(80)		(3,470)
Net income	—	—		—		2,774		—		2,774		—	65		2,839
Balance, March 31, 2019	39,829	40		528,815		(189,938)		726		339,643		928	8,410		348,053
Exchange of noncontrolling interest OP units for common shares	—	—		5		—		—		5		—	(5)		0
Issuance of common shares - ATM Program, net of offering costs	305	—		3,716		—		—		3,716		—	—		3,716
Stock issuance costs	—	—		1		—		—		1		—	—		1
Issuance of shares under dividend reinvestment plan	2	—		35		—		—		35		—	—		35
Repurchase of common shares (1)	—	—		(14)		—		—		(14)		—	—		(14)
Share-based compensation	—	—		1,025		—		—		1,025		—	—		1,025
Distributions - $0.285 per common share / OP unit	—	—		—		(11,445)		—		(11,445)		—	(265)		(11,710)
Unrealized loss on change in value of cash flow hedge	—	—		—		—		(5,898)		(5,898)		—	(137)		(6,035)
Net income	—	—		—		3,327		—		3,327		—	77		3,404
Balance, June 30, 2019	40,136	40		533,583		(198,056)		(5,172)		330,395		928	8,080		338,475
Exchange of noncontrolling interest OP units for common shares	3	—		27		—		—		27		(3)	(27)		0
Issuance of common shares - ATM Program, net of offering costs	374	—		4,830		—		—		4,830		—	—		4,830
Issuance of shares under dividend reinvestment plan	3	—		35		—		—		35		—	—		35
Share-based compensation	1	—		1,641		—		—		1,641		—	—		1,641
Distributions - $0.285 per common share / OP unit	—	—		—		(11,575)		—		(11,575)		—	(263)		(11,838)
Unrealized loss on change in value of cash flow hedge	—	—		—		—		(2,184)		(2,184)		—	(51)		(2,235)
Net income	—	—		—		1,807		—		1,807		—	42		1,849
Balance, September 30, 2019	40,517	$	40	$	540,116	$	(207,824)	$	(7,356)	$	324,976	925	$	7,781	$	332,757

(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.

7

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities:
Net income from continuing operations	$	2,980	$	7,391
Net income from discontinued operations	0		701
Net income	2,980		8,092
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,112		19,865
Amortization of deferred loan costs	839		814
Loss on sale or disposal of assets and assets held for sale	882		115
Bad debt	4,451		926
Share-based compensation	3,980		4,548
Equity in earnings of real estate partnership	(752)		(1,480)
Changes in operating assets and liabilities:
Escrows and acquisition deposits	522		48
Accrued rents and accounts receivable	(6,123)		(1,762)
Receivable due from related party	(825)		15
Distributions from real estate partnership	0		1,005
Unamortized lease commissions, legal fees and loan costs	(958)		(202)
Prepaid expenses and other assets	2,145		(6,838)
Accounts payable and accrued expenses	131		5,206
Payable due to related party	538		15
Tenants' security deposits	298		310
Net cash provided by operating activities	29,220		29,976
Cash flows from investing activities:
Additions to real estate	(5,808)		(9,953)
Proceeds from note receivable	922		0
Net cash used in investing activities	(4,886)		(9,953)
Net cash provided by investing activities of discontinued operations	0		701
Cash flows from financing activities:
Distributions paid to common shareholders	(20,771)		(34,047)
Distributions paid to OP unit holders	(430)		(793)
Proceeds from issuance of common shares, net of offering costs	2,241		8,546
Payments of exchange offer costs	(43)		(5)
Proceeds from notes payable	1,734		0
Proceeds from bonds payable	0		100,000
Net proceeds from (payments of) credit facility	30,000		(90,200)
Repayments of notes payable	(11,514)		(7,502)
Payments of loan origination costs	0		(4,088)
Repurchase of common shares	(2,076)		(776)
Net cash used in financing activities	(859)		(28,865)
Net increase (decrease) in cash, cash equivalents and restricted cash	23,475		(8,141)
Cash, cash equivalents and restricted cash at beginning of period	15,643		13,786
Cash, cash equivalents and restricted cash at end of period (1)	$	39,118	$	5,645

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

See accompanying notes to Consolidated Financial Statements.

8

Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended
	September 30,
	2020		2019
Supplemental disclosure of cash flow information:
Cash paid for interest	$	18,790	$	19,176
Cash paid for taxes	$	353	$	396
Non cash investing and financing activities:
Disposal of fully depreciated real estate	$	34	$	203
Financed insurance premiums	$	1,431	$	1,238
Value of shares issued under dividend reinvestment plan	$	74	$	104
Value of common shares exchanged for OP units	$	1,138	$	37
Change in fair value of cash flow hedge	$	(10,395)	$	(11,740)

	September 30,
	2020		2019
Cash, cash equivalents and restricted cash
Cash and cash equivalents	$	38,990	$	5,539
Restricted cash	128		106
Total cash, cash equivalents and restricted cash	$	39,118	$	5,645

See accompanying notes to Consolidated Financial Statements.

9

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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, 2019 are derived from our audited consolidated financial statements as of that date.  The unaudited consolidated financial statements as of and for the period ended September 30, 2020 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 September 30, 2020 and December 31, 2019, and the results of operations for the three and nine month periods ended September 30, 2020 and 2019, the consolidated statements of changes in equity for the three months periods ended March 31, June 30, and September 30, 2020 and 2019 and cash flows for the nine month periods ended September 30, 2020 and 2019.  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, 2019.

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 September 30, 2020 and December 31, 2019, Whitestone wholly-owned 58 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.

As of September 30, 2020, these properties consist of:

Consolidated Operating Portfolio

•52 wholly-owned properties that meet our Community Centered Properties® strategy;

Redevelopment, New Acquisitions Portfolio

•1 wholly-owned property that meets our Community Centered Properties® strategy; and

•5 parcels of land held for future development.

As of September 30, 2020, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in 8 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.

In December 2019, a novel strain of coronavirus ("COVID-19") was reported to have surfaced in China. In March 2020, the World Health Organization declared COVID-19 a pandemic, and the United States declared a national emergency due to the impact of the pandemic. As a result, the U.S. and many local governments implemented measures intended to control the spread of COVID-19, including enhanced screenings, quarantine requirements and travel restrictions. For example, in the first half of 2020, local governments in Texas and Arizona, where all but one of our properties are located, mandated a stay in place order, closed non-essential businesses, and closed other types of service businesses, such as bars and restaurants, though they

10

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

can continue to provide take out and drive through services. As of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona. However, many experts warn that cases in these areas may continue to increase in the coming weeks or months. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise continue to occupy their space. We are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and markets, including how it will impact the businesses of its tenants. The Company has put in place a temporary response team to address tenant concerns in light of the COVID-19 pandemic. The response team is in ongoing communication with the Company’s tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the CARES Act. To date, the Company has received a number of rent relief requests from tenants, most often in the form of rent deferral requests, as a result of the COVID-19 pandemic. The Company is evaluating each tenant rent relief request on an case-by-case basis, considering a number of factors. Not all tenant requests will ultimately result in lease concessions, nor is the Company forgoing its contractual rights under its lease agreements at this time. As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October.

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 September 30, 2020 and December 31, 2019, 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 1-for-1 basis (the “OP units”) changes the percentage of ownership interests of both the noncontrolling interests and Whitestone.

Equity Method. For the years prior to December 31, 2017, Pillarstone OP was accounted for under the profit-sharing method. In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance applicable to sales of real estate or interests therein, specifically FASB Accounting Standards Codification (“ASC”) 360-20, “Real Estate Sales,” Topic 606, “Revenue from Contracts with Customers” and ASC 610, “Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets,” we adopted Topic 606 and ASC 610 as of January 1, 2018, resulting in the derecognition of the underlying assets and liabilities associated with the Contribution (defined below) as of January 1, 2018 and the recognition of the Company’s investment in Pillarstone OP under the equity method. See Note 6 (Investment in Real Estate Partnership) for additional disclosure on Pillarstone OP.

In these financial statements, unless otherwise indicated, we do not include the Pillarstone Properties when we refer to our properties.

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.

11

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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 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 coronavirus (“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 (loss) 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 September 30, 2020, we consider our cash flow hedges to be highly effective.

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 September 30, 2020, approximately $122,000 and $71,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2020, approximately $362,000 and $231,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended September 30, 2019, approximately $127,000 and $77,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2019, approximately $365,000 and $251,000 in interest expense and real estate taxes, respectively, were capitalized. Due to the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis.

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 $1,645,000 and $1,719,000 in share-based compensation for the three months ended September 30, 2020 and 2019, respectively, and we recognized $4,167,000 and $4,770,000 in share-based compensation for the nine months ended September 30, 2020 and 2019, respectively. We recognize forfeitures as they occur.

12

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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 (loss), 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. With the adoption of ASC No. 842, Leases Topic 842, as of January 1, 2019 we recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of September 30, 2020 and December 31, 2019, we had an allowance for uncollectible accounts of $15.5 million and $11.2 million, respectively. During the three months ending September 30, 2020 and 2019, we recorded an adjustment to rental revenue in the amount of $1.3 million and $0.5 million, respectively, and during the nine months ending September 30, 2020 and 2019, we recorded an adjustment to rental revenue in the amount of $4.5 million and $0.9 million, respectively. Included in the adjustment to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis.

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

Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP pays us management fees for property management, leasing and day-to-day advisory and administrative services. Their obligations are satisfied over time. Pillarstone OP is billed monthly and typically pays quarterly. Revenues are governed by the Management Agreements (as defined in Note 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, 2019 for further discussion on significant accounting policies.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-2 which provided the principles for the recognition, measurement, presentation and disclosure of leases. Additional guidance and targeted improvements to Topic 842 were made through the issuance of supplementary ASUs in July 2018, December 2018 and March 2019.

Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. Accordingly, we have accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under Topic 842, (b) whether classification of the operating lease would be different in accordance with Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in Topic 842 at lease commencement. Additionally, as the lessee and lessor we will use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. As a result of the adoption of the new lease accounting guidance, as the lessee, we recognized on January 1, 2019 (a) a lease liability of approximately $1.1 million, which represents the present value of the remaining lease payments of approximately $1.2 million discounted using our incremental borrowing rate of 4.5%, and (b) a right-of-use asset of approximately $1.1 million. The adoption of Topic 842 did not have a material impact to our net income and related per share amounts.

Upon adoption of Topic 842, lessees and lessors are required to apply a modified retrospective transition approach. Reporting entities are permitted to choose one of two methods to recognize and measure leases within the scope of Topic 842:

•Apply Topic 842 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements as well as leases that commenced after that date. Under this method, prior comparative periods presented are adjusted. For leases that commenced prior to the beginning of the earliest comparative period presented, a cumulative-effect adjustment is recognized at that date.

•Apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the leases standard with a cumulative-effect adjustment as of that date. Prior comparative periods would not be adjusted under this method.

We have elected an optional transition method that allows entities to initially apply Topic 842 at January 1, 2019, the date of adoption, and to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As the lessor, we have not assessed unamortized legal costs as part of the package of practical expedients, and we will not make any adjustment to retained earnings at the date of adoption to write off unamortized legal costs. We continued to amortize unamortized legal costs as of December 31, 2018 over the life of the respective leases. We did not have a cumulative-effect adjustment as of the adoption date. Additionally, the optional transition method does allow us to not have to apply the new standard (including disclosure requirements) to comparative periods presented. Those periods can continue to be presented in accordance with prior generally accepted accounting principles.

Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on our election of the package of practical expedients, our existing commercial leases, where we are the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in us recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases or finance leases, as opposed to operating leases. We will

14

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

continue to monitor our leases following the adoption date to ensure that they are classified in accordance with the new lease standards.

We elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, we now present all rentals and reimbursements from tenants as a single line item, Rental, within the consolidated statements of operations and comprehensive income (loss). For the three months ended September 30, 2020, we had rent revenues of $21.8 million and rental recoveries of $8.3 million compared to $21.6 million and $8.2 million, respectively, for the three months ended September 30, 2019. For the nine months ended September 30, 2020, we had rent revenues of $65.6 million and rental recoveries of $25.0 million compared to $64.8 million and $23.7 million, respectively, for the nine months ended September 30, 2019.

We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. Each tenant is included in one of several portfolios and an allowance is calculated using the calculation methodology for the respective portfolio. With the adoption of Topic 842, we will recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Tenant portfolios will be converted to cash basis if collectability is of great concern. Prior to the adoption of Topic 842, we recognized an allowance for doubtful accounts and bad debt expense of the specific rents receivable. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.

3.  LEASES

Effective January 1, 2019, we adopted the new lease accounting guidance in Topic 842. As the lessee and lessor, we have elected the package of practical expedients permitted in Topic 842. See Note 2 (Summary of Significant Accounting Policies) for additional disclosure on Topic 842.

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 (loss).

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 September 30, 2020 is as follows (in thousands):

Years Ended December 31,	Minimum Future Rents(1)
2020 (remaining)	$	21,140
2021	79,101
2022	68,060
2023	56,561
2024	44,593
Thereafter	125,900
Total	$	395,355

(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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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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,	September 30, 2020
2020 (remaining)	$	226
2021	447
2022	85
2023	40
2024	35
2025	23
Total undiscounted rental payments	856
Less imputed interest	37
Total lease liabilities	$	819

For the three months ended September 30, 2020 and 2019, the total lease costs were $253,000 and $245,000, respectively, and for the nine months ended September 30, 2020 and 2019, the total lease costs were $809,000 and $740,000, respectively. The weighted average remaining lease term for our operating leases was 1.9 years at September 30, 2020. 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 September 30, 2020.

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):

	September 30, 2020		December 31, 2019
Tenant receivables	$	22,944	$	16,741
Accrued rents and other recoveries	15,926		16,983
Allowance for doubtful accounts	(15,465)		(11,173)
Other receivables	199		303
Total	$	23,604	$	22,854

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS

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

	September 30, 2020		December 31, 2019
Leasing commissions	$	10,320	$	9,868
Deferred legal cost	374		393
Deferred financing cost	3,898		3,908
Total cost	14,592		14,169
Less: leasing commissions accumulated amortization	(4,807)		(4,200)
Less: deferred legal cost accumulated amortization	(206)		(179)
Less: deferred financing cost accumulated amortization	(1,497)		(830)
Total cost, net of accumulated amortization	$	8,082	$	8,960

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 4 of our wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower,” and together with CP Woodland, Industrial-Office and Whitestone Offices, the “Entities”) that own 14 non-core properties that do 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”), issued at a price of $1.331 per Pillarstone OP Unit; and (2) the assumption of approximately $65.9 million of liabilities, consisting of (a) approximately $15.5 million of our liability under the 2018 Facility (as defined in Note 7 (Debt)); (b) an approximately $16.3 million promissory note of Uptown Tower under the Loan Agreement, dated as of September 26, 2013, between Uptown Tower, as borrower, and U.S. Bank, National Association, as successor to Morgan Stanley Mortgage Capital Holdings LLC, as lender; and (c) an approximately $34.1 million promissory note (the “Industrial-Office Promissory Note”) of Industrial-Office issued under the Loan Agreement, dated as of November 26, 2013 (the “Industrial-Office Loan Agreement”), between Industrial-Office, as borrower, and Jackson National Life Insurance Company, as lender (collectively, the “Contribution”).

In connection with the Contribution, (1) with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a Management Agreement with the Entity that owns such Pillarstone Property and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Pillarstone Property (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Pillarstone Property in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Pillarstone Property and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective Pillarstone Property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Pillarstone Property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP 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 initial term of each Management Agreement expired on December 31, 2017, after which each Management Agreement became 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 September 30, 2020.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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.

As a result of the adoption of Topic 606 and ASC 610, the Company derecognized the underlying assets and liabilities associated with the Contribution as of January 1, 2018 and recognized the Company’s investment in Pillarstone OP under the equity method.

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

		Company’s Investment as of
		September 30, 2020		December 31, 2019
Real estate partnership	Ownership Interest
Pillarstone OP(1)	81.4%	$	34,849	$	34,097
Total real estate partnership(2)		$	34,849	$	34,097

(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 8 property interests and 926,798 square feet of GLA, as of September 30, 2020 and December 31, 2019.

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 (loss) (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Pillarstone OP	$	196	$	524	$	752	$	1,480

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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

	September 30,		December 31,
	2020		2019
Assets:
Real estate, net	$	49,512	$	50,338
Other assets	8,926		6,742
Total assets	58,438		57,080
Liabilities and equity:
Notes payable	15,250		15,434
Other liabilities	4,102		3,575
Equity	39,086		38,071
Total liabilities and equity	58,438		57,080
Company’s share of equity	31,835		31,008
Cost of investment in excess of the Company’s share of underlying net book value	3,014		3,089
Carrying value of investment in real estate partnership	$	34,849	$	34,097

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues	$	2,371	$	3,863	$	7,396	$	11,536
Operating expenses	(1,713)		(2,410)		(5,195)		(7,218)
Other expenses	(391)		(776)		(1,184)		(2,341)
Net income	$	267	$	677	$	1,017	$	1,977

The amortization of the basis difference between the cost of investment and the Company's share of underling net book value for both of the three months periods ended September 30, 2020 and 2019 is $27,000 and for both of the nine months periods ended September 30, 2020 and 2019 is $81,000. The Company amortized the difference into equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).

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 September 30, 2020 and 2019, the amortization of the guarantee liability was $10,000 and $23,000, respectively, and for the nine months ended September 30, 2020 and 2019, the amortization of the guarantee liability was $29,000 and $140,000, respectively.

19

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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	September 30, 2020		December 31, 2019
Fixed rate notes
$10.5 million, 4.85% Note, due September 24, 2020 (1)	$	0	$	9,260
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (2)	100,000		100,000
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (3)	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	18,768		19,000
$20.2 million 4.28% Note, due June 6, 2023	18,323		18,616
$14.0 million 4.34% Note, due September 11, 2024	13,300		13,482
$14.3 million 4.34% Note, due September 11, 2024	14,073		14,243
$15.1 million 4.99% Note, due January 6, 2024	14,228		14,409
$2.6 million 5.46% Note, due October 1, 2023	2,351		2,386
$50.0 million, 5.09% Note, due March 22, 2029	50,000		50,000
$50.0 million, 5.17% Note, due March 22, 2029	50,000		50,000
$1.7 million 1.00% Note, due May 6, 2022	1,734		0
$1.1 million 4.53% Note, due November 28, 2020	270		0
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023	139,500		109,500
Total notes payable principal	667,547		645,896
Less deferred financing costs, net of accumulated amortization	(1,031)		(1,197)
Total notes payable	$	666,516	$	644,699

(1)     Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term through September 24, 2018 and 4.85% beginning September 25, 2018 through September 24, 2020. The promissory note was paid off in September 2020.

(2)    Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at 1.73%.

(3)     Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of 2.24% for the duration of the term through January 31, 2024.

LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company is monitoring the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

20

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

On April 30, 2020, we entered into a loan in the principal amount of $1,733,510 from U.S. Bank National Association, one of the Company’s existing lenders, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 6, 2022 (the “Maturity Date”), accrues interest at 1.00% per annum and may be prepaid in whole or in part without penalty. Principal and interest are payable in 18 monthly installments of $96,864.28, beginning on December 6, 2020, plus a final payment equal to all unpaid principal and accrued interest on the Maturity Date.  Pursuant to the CARES Act, the Company can apply for, and be granted, forgiveness for all or a portion of the PPP Loan and such forgiveness will be determined, subject to limitations and ongoing rulemaking by the U.S. Small Business Administration, based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels.  We intend to use all proceeds from the PPP Loan to retain employees and maintain payroll and make mortgage payments, lease payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.  However, no assurance is provided that we will obtain forgiveness of the PPP Loan in whole or in part. Based on the guidance in FASB ASC 405-20, “Liabilities - Extinguishment of Liabilities,” the PPP loan remains a liability until either (1) it is wholly or partially forgiven and we have been legally released, or (2) it is paid off. If the loan is partially or wholly forgiven and legal release is received, the liability is reduced by the amount forgiven and a gain on extinguishment is recognized.

On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement (the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively, the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50 million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.

The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.

The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.

The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:

•maximum total indebtedness to total asset value ratio of 0.60 to 1.00;

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

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

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

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

21

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.

The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are substantially similar to those contained in the Operating Partnership’s existing credit facility.

Net proceeds from the Private Placement were used to refinance existing indebtedness. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated the 2018 Facility (as defined below).

The 2019 Facility is comprised of the following three tranches:

•$250.0 million unsecured revolving credit facility with a maturity date of 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”).

Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of September 30, 2020, the interest rate on the 2019 Revolver was 1.81%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the 2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to such alternate interest rate.

The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. On March 20, 2020, as a precautionary measure to preserve our financial flexibility in response to potential credit risks posed by the COVID-19 pandemic, the Company drew down approximately $30.0 million under the 2019 Revolver. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million remaining availability under the 2019 Revolver. As of September 30, 2020, $404.5 million was drawn on the 2019 Facility. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in its portfolio and working capital.

22

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

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 (as defined therein).

We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019 Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status.

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.”

Pursuant to the First Amendment, the Company made the following amendments to the 2014 Facility:

•extended the maturity date of the $300 million unsecured revolving credit facility under the 2014 Facility (the “2018 Revolver”) to October 30, 2019 from November 7, 2018;

•converted $100 million of outstanding borrowings under the Revolver to a new $100 million unsecured term loan under the 2014 Facility (“Term Loan 3”) with a maturity date of October 30, 2022;

•extended the maturity date of the first $50 million unsecured term loan under the 2014 Facility (“Term Loan 1”) to October 30, 2020 from February 17, 2017; and

•extended the maturity date of the second $50 million unsecured term loan under the 2014 Facility (“Term Loan 2” and together with Term Loan 1 and Term Loan 3, the “2018 Term Loans”) to January 29, 2021 from November 7, 2019.

23

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Borrowings under the 2018 Facility accrued interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. The applicable margin for Adjusted LIBOR borrowings ranged from 1.40% to 1.95% for the 2018 Revolver and 1.35% to 2.25% for the 2018 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities.

Proceeds from the 2018 Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and re-tenanting of properties in our portfolio and working capital.

As of September 30, 2020, our $161.0 million in secured debt was collateralized by 7 properties with a carrying value of $251.7 million.  Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of September 30, 2020, we were in compliance with all loan covenants.

Scheduled maturities of our outstanding debt as of September 30, 2020 were as follows (in thousands):

Year	Amount Due
2020 (remaining)	$	964
2021	2,762
2022	102,170
2023	167,363
2024	228,573
Thereafter	165,715
Total	$	667,547

8.  DERIVATIVES AND HEDGING ACTIVITIES

The fair value of our interest rate swaps is as follows (in thousands):

	September 30, 2020
Balance Sheet Location	Estimated Fair Value
Accounts payable and accrued expenses		$	(15,995)

	December 31, 2019
Balance Sheet Location	Estimated Fair Value
Prepaid expenses and other assets		$	59
Accounts payable and accrued expenses		$	(5,660)

24

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $65 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $12.9 million of the swap to U.S. Bank, National Association, $11.6 million of the swap to Regions Bank, $15.7 million of the swap to SunTrust Bank, and $5.9 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began on February 7, 2019 and will mature on November 9, 2020. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $115 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $22.7 million of the swap to U.S. Bank, National Association, $20.5 million of the swap to Regions Bank, $27.9 million of the swap to SunTrust Bank, and $10.5 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap will begin on November 9, 2020 and will mature on February 8, 2021. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On January 31, 2019, we, through our Operating Partnership, entered into an interest rate swap of $165 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A under the 2019 Facility at 2.43%. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $32.6 million of the swap to U.S. Bank, National Association, $29.4 million of the swap to Regions Bank, $40.0 million of the swap to SunTrust Bank, and $15.0 million of the swap to Associated Bank. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap will begin on February 8, 2021 and will mature on January 31, 2024. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap with Bank of Montreal that fixed the LIBOR portion of Term Loan B at 1.73%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $35.0 million of the swap to U.S. Bank, National Association, and $15.0 million of the swap to SunTrust Bank. See Note 7 (Debt) for additional information regarding the 2018 Facility. The swap began on November 30, 2015 and will mature on October 28, 2022. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap of $50 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A at 1.75%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. The swap began on February 3, 2017 and will mature on October 30, 2020. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

25

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

On November 19, 2015, we, through our Operating Partnership, entered into an interest rate swap of $50 million with Bank of Montreal that fixed the LIBOR portion of Term Loan A at 1.50%. In the fourth quarter of 2015, pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned $3.8 million of the swap to Regions Bank, $6.5 million of the swap to U.S. Bank, National Association, $14.0 million of the swap to Wells Fargo Bank, National Association, $14.0 million of the swap to Bank of America, N.A., and $5.0 million of the swap to SunTrust Bank. The swap began on December 7, 2015 and will mature on January 29, 2021. We have designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

A summary of our interest rate swap activity is as follows (in thousands):

	Amount Recognized as Comprehensive Income (Loss)		Location of Income (Loss) Recognized in Earnings	Amount of Income (Loss) Recognized in Earnings (1)
Three months ended September 30, 2020	$	1,241	Interest expense	$	(1,217)
Three months ended September 30, 2019	$	(2,235)	Interest expense	$	274
Nine months ended September 30, 2020	$	(10,395)	Interest expense	$	(2,388)
Nine months ended September 30, 2019	$	(11,740)	Interest expense	$	1,091

(1)    There was no ineffective portion of our interest rate swaps to recognize in earnings for the three and nine months ended September 30, 2020 and 2019.

9.  EARNINGS PER SHARE

Basic earnings per share for our common shareholders is calculated by dividing income from continuing operations excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by our weighted average common shares outstanding during the period.  Diluted earnings per share is computed by dividing the net income attributable to common shareholders, excluding the net income attributable to unvested restricted common shares and the net income attributable to noncontrolling interests, by the weighted average number of common shares including any dilutive unvested restricted common shares.

Certain of our performance-based restricted common shares are considered participating securities that require the use of the two-class method for the computation of basic and diluted earnings per share.  During the three months ended September 30, 2020 and 2019, 776,233 and 926,639 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive, and during the nine months ended September 30, 2020 and 2019, 836,148 and 926,986 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.

For the nine months ended September 30, 2019, distributions of $41,000 were made to holders of certain restricted common shares. See Note 12 (Incentive Share Plan) for information related to restricted common shares under the 2018 Plan and the 2008 Plan.

26

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share data)	2020		2019		2020		2019
Numerator:
Net income	$	914	$	1,849	$	2,980	$	7,391
Less: Net income attributable to noncontrolling interests	(14)		(42)		(58)		(168)
Distributions paid on unvested restricted shares	0		0		0		(41)
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares	900		1,807		$	2,922	$	7,182
Income from discontinued operations	0		0		0		701
Less: Net income attributable to noncontrolling interests	0		0		0		(16)
Income from discontinued operations attributable to Whitestone REIT	0		0		0		685
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	900	$	1,807	$	2,922	$	7,867
Denominator:
Weighted average number of common shares - basic	42,346		40,187		42,202		39,942
Effect of dilutive securities:
Unvested restricted shares	1,094		1,259		838		1,142
Weighted average number of common shares - dilutive	43,440		41,446		43,040		41,084
Earnings Per Share:
Basic:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.18
Income from discontinued operations attributable to Whitestone REIT	0.00		0.00		0.00		0.02
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.20
Diluted:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.17
Income from discontinued operations attributable to Whitestone REIT	0.00		0.00		0.00		0.02
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.02	$	0.04	$	0.07	$	0.19

27

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

10. INCOME TAXES

With the exception of our taxable REIT subsidiaries, federal income taxes are generally not provided because we intend to and believe we continue to qualify as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and because we have distributed and intend to continue to distribute all of our taxable income to our shareholders.  As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain income sources and investment restriction requirements.  In addition, REITs are subject to a number of organizational and operational requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.

We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (0.75% for us) to the profit margin, which generally will be determined for us as total revenue less a 30% standard deduction.  Although the Texas Margin Tax is not an income tax, FASB ASC 740, “Income Taxes” applies to the Texas Margin Tax.  For the three months ended September 30, 2020 and 2019, we recognized approximately $105,000 and $101,000 in margin tax provision, respectively, and for the nine months ended September 30, 2020 and 2019, we recognized approximately $285,000 and $324,000 in margin tax provision, respectively.

11.  EQUITY

Common Shares    

Under our declaration of trust, as amended, we have authority to issue up to 400,000,000 common shares of beneficial interest, $0.001 par value per share, and up to 50,000,000 preferred shares of beneficial interest, $0.001 par value per share.

Equity Offerings

On May 31, 2019, we entered into 9 equity distribution agreements for an at-the-market equity distribution program (the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. During the three months ended September 30, 2019, we sold 374,077 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $4.8 million. In connection with such sales, we paid compensation of approximately $74,000 to the sales agents. During the nine months ended September 30, 2019, we sold 679,216 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $8.7 million. In connection with such sales, we paid compensation of approximately $132,000 to the sales agents. In light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares under the 2019 equity distribution agreements until the price of our common shares increases significantly. However, if necessary, we could choose to issue shares at prevailing market prices if our liquidity position so requires. As a result, during the three months ended September 30, 2020, we did not sell shares under the 2019 equity distribution agreements. During the nine months ended September 30, 2020, we sold 170,942 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $2.2 million. In connection with such sales, we paid compensation of approximately $34,000 to the sales agents.

Operating Partnership Units

Substantially all of our business is conducted through our Operating Partnership.  We are the sole general partner of the Operating Partnership.  As of September 30, 2020, we owned a 98.2% interest in the Operating Partnership.

Limited partners in the Operating Partnership holding OP units have the right to redeem their OP units for cash or, at our option, common shares at a ratio of 1 OP unit for 1 common share.  Distributions to OP unit holders are paid at the same rate per unit as distributions per share to holders of Whitestone common shares.  As of September 30, 2020 and December 31, 2019, there were 43,008,051 and 42,279,849 OP units outstanding, respectively.  We owned 42,232,469 and 41,371,277 OP units as of September 30, 2020 and December 31, 2019, respectively. The balance of the OP units is owned by

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

third parties, including certain members of our board of trustees.  Our weighted average share ownership in the Operating Partnership was approximately 98.2% and 97.7% for the three months ended September 30, 2020 and 2019, respectively, and approximately 98.1% and 97.7% for the nine months ended September 30, 2020 and 2019, respectively. During the three months ended September 30, 2020 and 2019, 1,331 and 2,857 OP units, respectively, were redeemed for an equal number of common shares, and during the nine months ended September 30, 2020 and 2019, 132,990 and 3,938 OP units, respectively, were redeemed for an equal number of common shares.

 Distributions

The following table summarizes the cash distributions paid or payable to holders of common shares and to holders of noncontrolling OP units during each quarter of 2019 and the nine months ended September 30, 2020 (in thousands, except per share/per OP unit data):

	Common Shares				Noncontrolling OP Unit Holders				Total
Quarter Paid	Distributions Per Common Share		Amount Paid		Distributions Per OP Unit		Amount Paid		Amount Paid
2020
Third Quarter	$	0.1050	$	4,430	$	0.1050	$	81	$	4,511
Second Quarter	0.1050		4,413		0.1050		91		4,504
First Quarter	0.2850		11,928		0.2850		258		12,186
Total	$	0.4950	$	20,771	$	0.4950	$	430	$	21,201
2019
Fourth Quarter	$	0.2850	$	11,580	$	0.2850	$	262	$	11,842
Third Quarter	0.2850		11,430		0.2850		264		11,694
Second Quarter	0.2850		11,316		0.2850		265		11,581
First Quarter	0.2850		11,301		0.2850		264		11,565
Total	$	1.1400	$	45,627	$	1.1400	$	1,055	$	46,682

On March 24, 2020 we announced that, in further pursuit of ensuring our financial flexibility, our board of trustees (the “Board”) determined to conserve additional liquidity by reducing our distribution in response to the COVID-19 pandemic. The distribution reduction is expected to result in over $30 million of annualized cash savings.

The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.

Shareholders' Rights Plan

On May 14, 2020, the Board authorized a dividend of 1 preferred share purchase right (a “Right”) for each outstanding common share payable on May 26, 2020 (the “Record Date”), to the holders of record of common shares as of 5:00 P.M., New York City time, on the Record Date. In connection with the Rights, the Company and American Stock Transfer & Trust Company, LLC, as rights agent, entered into a Rights Agreement, dated as of May 14, 2020 (the “Rights Agreement”). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series A Preferred Share, par value $0.001 per share (each a “Preferred Share”), of the Company at a purchase price of $30.00 per Unit, subject to adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a 1-for-one basis. The Rights will expire on the earliest of (i) the close of business on May 13, 2021, (ii) the time at which the Rights are

29

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement.

12.  INCENTIVE SHARE PLAN

The Company’s 2008 Long-Term Equity Incentive Ownership Plan (as amended, the “2008 Plan”) expired in July 2018. At the Company’s annual meeting of shareholders on May 11, 2017, our shareholders voted to approve the 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of up to 3,433,831 common shares and OP units pursuant to awards under the 2018 Plan. The 2018 Plan became effective on July 30, 2018, which is the day after the 2008 Plan expired. Pursuant to the 2008 Plan, the maximum aggregate number of common shares that were issuable under the 2008 Plan was increased upon each issuance of common shares by the Company so that at any time the maximum number of shares that were issuable under the 2008 Plan equaled 12.5% of the aggregate number of common shares of the Company and OP units issued and outstanding (other than units issued to or held by the Company).

The Compensation Committee administered the 2008 Plan and administers the 2018 Plan except, in each case, with respect to awards to non-employee trustees, for which the 2008 Plan was and the 2018 Plan is administered by the board of trustees. The Compensation Committee is authorized to grant share options, including both incentive share options and non-qualified share options, as well as share appreciation rights, either with or without a related option. The Compensation Committee is also authorized to grant restricted common shares, restricted common share units, performance awards and other share-based awards. On September 6, 2017, the Compensation Committee approved the grant of an aggregate of 965,000 performance-based restricted common share units under the 2008 Plan which only vest immediately prior to the consummation of a Change in Control (as defined in the 2008 Plan) that occurs on or before September 30, 2024 (the “CIC Units”) to certain of our employees. Continued employment is required through the vesting date. If a Change in Control does not occur on or before September 30, 2024, the CIC Units shall be immediately forfeited. The Company considers a Change in Control on or before September 30, 2024 to be improbable, and no expense has been recognized for the CIC Units. If a Change in Control occurs, any outstanding CIC Units would be expensed immediately on the date of the Change in Control using the grant date fair value. The grant date fair value for each CIC Unit of $13.05 was determined based on the Company’s closing share price on the grant date.     

On March 16, 2018, the Compensation Committee approved the grant of an aggregate of 387,499 time-based restricted common share units under the 2008 Plan, which vest annually in three equal installments, and 4,300 performance-based restricted common share units to certain of our employees.

On December 1, 2018, the Compensation Committee approved the grant of an aggregate of 229,684 performance-based restricted common share units with market-based vesting conditions (“TSR Units”) under the 2018 Plan to certain of our employees.. Vesting is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $14.89 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the December 1, 2018 grant date to the end of the performance period, December 31, 2020. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant.

On June 30, 2019, the Compensation Committee approved the grant of an aggregate of 405,417 TSR Units and 317,184 time-based restricted common share units under the 2018 Plan to certain of our employees. On September 30, 2019, the Compensation Committee approved the grant of 17,069 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR

30

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Unit of $8.22 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2019 grant date to the end of the performance period, December 31, 2021. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $10.63 and $11.69 and vest annually in three equal installments for the June 30, 2019 and September 30, 2019 grants, respectively.

On July 31, 2020, the Compensation Committee approved the grant of an aggregate of 545,000 TSR Units and 530,000 time-based restricted common share units under the 2018 Plan to certain of our employees. Vesting of the TSR Units is contingent upon achieving Total Shareholder Return relative to the peer group defined in the TSR Unit award agreements over a three-year performance period. At the end of the performance period, the number of common shares awarded for each vested TSR Unit will vary from 0% to 200% depending on the Company’s TSR Peer Group Ranking. Continued employment is required through the vesting date. The grant date fair value for each TSR Unit of $5.55 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the July 31, 2020 grant date to the end of the performance period, December 31, 2022. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the expected life of the grant. The time-based restricted common share units have a grant date fair value of $5.83 and vest annually in three equal installments.

A summary of the share-based incentive plan activity as of and for the nine months ended September 30, 2020 is as follows:

	Shares	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2020	2,339,932	$	11.52
Granted	1,075,000	5.69
Vested	(478,607)	11.07
Forfeited	(32,479)	10.80
Non-vested at September 30, 2020	2,903,846	9.45
Available for grant at September 30, 2020	409,344

A summary of our non-vested and vested shares activity for the nine months ended September 30, 2020 and years ended December 31, 2019 and 2018 is presented below:

	Shares Granted			Shares Vested
	Non-Vested Shares Issued	Weighted Average Grant-Date Fair Value		Vested Shares	Total Vest-Date Fair Value
					(in thousands)
Nine Months Ended September 30, 2020	1,075,000	$	5.69	(478,607)	$	5,297
Year Ended December 31, 2019	762,630	$	9.46	(284,964)	$	3,352
Year Ended December 31, 2018	653,472	$	11.07	(560,126)	$	7,978

Total compensation recognized in earnings for share-based payments was $1,645,000 and $1,719,000 for the three months ended September 30, 2020 and 2019, respectively, and $4,167,000 and $4,770,000 for the nine months ended September 30, 2020 and 2019, respectively.

31

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Based on our current financial projections, we expect approximately 100% of the unvested awards, exclusive of 890,000 CIC Units, to vest over the next 34 months. As of September 30, 2020, there was approximately $4.8 million in unrecognized compensation cost related to outstanding non-vested TSR Units, which are expected to vest over a period of 28 months, and approximately $5.5 million in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a period of approximately 34 months beginning on October 1, 2020.

We expect to record approximately $6.0 million in non-cash share-based compensation expense in 2020 and $8.4 million subsequent to 2020. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 24 months. The dilutive impact of the performance-based shares will be included in the denominator of the earnings per share calculation beginning in the period that the performance conditions are expected to be met. The dilutive impact of the TSR Units is based on the Company’s TSR Peer Group Ranking as of the reporting date and weighted according to the number of days outstanding in the period. The TSR Units issued in 2017 vested at 200% attainment based on the TSR Peer Group Ranking, and, as of September 30, 2020, the TSR Peer Group Ranking called for 100% attainment for the shares issued in 2018, 0% attainment for the shares issued in 2019, and 50% attainment for the shares issued in 2020. The dilutive impact of the CIC Units is based on the probability of a Change in Control. Because the Company considers a Change in Control on or before September 30, 2024 to be improbable, no CIC Units are included in the Company’s dilutive shares.

13. GRANTS TO TRUSTEES

On December 12, 2019, each of our 6 independent trustees and 1 trustee emeritus were granted approximately 3,000 common shares, which vest immediately and are prorated based on date appointed. The 19,562 common shares granted to our trustees had a grant fair value of $13.54 per share. On December 12, 2019, 2 of our independent trustees each elected to receive a total of 3,398 common shares with a grant date fair value of $13.54 in lieu of cash for board fees. The fair value of the shares granted during the year ended December 31, 2019 was determined using quoted prices available on the date of grant.

14. SEGMENT INFORMATION

Historically, our management has not differentiated results of operations by property type or location and, therefore, does not present segment information.

15. REAL ESTATE

Property Acquisitions. On December 6, 2019, we acquired Las Colinas Village, a property that meets our Community Centered Property® strategy, for $34.8 million in cash and net prorations. Las Colinas Village, a 104,919 square foot property, was 86% leased at the time of purchase and is located in Irving, Texas.

16.  RELATED PARTY TRANSACTIONS

During the ordinary course of business, we have transactions with Pillarstone OP that include, but are not limited to, rental income, interest expense, general and administrative costs, commissions, management and asset management fees, and property expenses.

The following table presents the revenue and expenses with Pillarstone OP included in our consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (in thousands):

		Three Months Ended September 30,				Nine Months Ended September 30,
	Location of Revenue (Expense)	2020		2019		2020		2019
Rent	Operating and maintenance	$	(225)	$	(213)	$	(701)	$	(628)
Property management fee income	Management, transaction, and other fees	$	145	$	228	$	456	$	693
Interest income	Interest, dividend and other investment income	$	0	$	52	$	0	$	161

32

WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

On December 8, 2016, we received a $15.4 million financed receivable from Pillarstone OP to provide the financing for the ordinary course of business transactions for Pillarstone OP. The financed receivable has an interest rate of 1.4%-1.95% plus Libor and a maturity date of December 31, 2019. The financed receivable was paid off on October 17, 2019.

17.  COMMITMENTS AND CONTINGENCIES

We are subject to various legal proceedings and claims that arise in the ordinary course of business.  These matters are generally covered by insurance.  While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our financial position, results of operations, cash flows or liquidity.

18.  SUBSEQUENT EVENTS

Management has evaluated subsequent events through October 30, 2020, the date the consolidated financial statements were available to be issued, and has determined that there are no subsequent events to be reported.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”), and the consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2019.  For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report.

This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, pending acquisitions and the impact of such acquisitions on our financial condition and results of operations, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters.  These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry.  Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Report.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:

•uncertainties related to the COVID-19 pandemic, including the unknown duration and economic, operational and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by U.S. and local governmental authorities or others in response to the pandemic on our business, employees and tenants, including, among others, (a) changes in tenant demand for our properties, (b) financial challenges confronting major tenants, including as a result of decreased customers’ willingness to frequent, and mandated stay in place orders that have prevented customers from frequenting, some of our tenants’ businesses and the impact of these issues on our ability to collect rent from our tenants; (c) operational changes implemented by us, including remote working arrangements, which may put increased strain on our IT systems and create increased vulnerability to cybersecurity incidents, (d) significant reduction in our liquidity due to the lack of further availability under our 2019 Facility and limited ability to access the capital markets and other sources of financing on attractive terms or at all, and (e) prolonged measures to contain the spread of COVID-19 or the premature easing of government-imposed restrictions implemented to contain the spread of COVID-19;

•adverse economic or real estate developments or conditions in Texas or Arizona, Houston and Phoenix in particular, including as a result of a surge in COVID-19 cases in such areas and the impact on our tenants’ ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments;

•the imposition of federal income taxes if we fail to qualify as a real estate investment trust (“REIT”) in any taxable year or forego an opportunity to ensure REIT status;

•the risk of government investigation of the Paycheck Protection Program loan (the “PPP Loan”);

•uncertainties related to the national economy, the real estate industry in general and in our specific markets, including, but not limited to, the significant volatility and disruption in the global financial markets caused by the COVID-19 pandemic and potential volatility as a result of the upcoming U.S. presidential election;

•legislative or regulatory changes, including changes to laws governing REITs and the impact of the legislation commonly known as the Tax Cuts and Jobs Act;

•increases in interest rates, operating costs or general and administrative expenses;

•availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures;

•decreases in rental rates or increases in vacancy rates;

•litigation risks;

•lease-up risks, including leasing risks arising from exclusivity and consent provisions in leases with significant tenants;

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•our inability to renew tenant leases or obtain new tenant leases upon the expiration of existing leases;

•our inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws;

•the need to fund tenant improvements or other capital expenditures out of operating cash flow; and

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

The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, as previously filed with the Securities and Exchange Commission (“SEC”) and of this Report below.

Overview

We are a fully-integrated real estate company that owns and operates commercial properties in culturally diverse markets in major metropolitan areas. Founded in 1998, we are internally managed with a portfolio of commercial properties in Texas, Arizona and Illinois.

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.

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 September 30, 2020, we wholly-owned 58 commercial properties consisting of:

Consolidated Operating Portfolio

•52 wholly-owned properties that meet our Community Centered Properties® strategy containing approximately 4.9 million square feet of gross leasable area (“GLA”) and having a total carrying amount (net of accumulated depreciation) of $894.0 million;

Redevelopment, New Acquisitions Portfolio

•one wholly-owned property that meets our Community Centered Properties® strategy containing approximately 0.1 million square feet of GLA and having a total carrying amount (net of accumulated depreciation) of $34.7 million; and

•five parcels of land held for future development that meet our Community Centered Properties® strategy having a total carrying value of $19.0 million.

As of September 30, 2020, we had an aggregate of 1,386 tenants.  We have a diversified tenant base with our largest tenant comprising only 2.8% of our annualized rental revenues for the nine months ended September 30, 2020.  Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants.  Our leases include minimum monthly lease payments and generally provide for tenant reimbursements for payment of taxes, insurance and maintenance. We completed 222 new and renewal leases during the nine months ended September 30, 2020, totaling 658,754 square feet and approximately $56.5 million in total lease value.  This compares to 241 new and renewal leases totaling 659,134 square feet and approximately $60.6 million in total lease value during the same period in 2019.

We employed 85 full-time employees as of September 30, 2020.  As an internally managed REIT, we bear our own expenses of operations, including the salaries, benefits and other compensation of our employees, office expenses, legal, accounting and investor relations expenses and other overhead costs.

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Real Estate Partnership

As of September 30, 2020, we, through our investment in Pillarstone OP, owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 926,798 square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method. We also manage the day-to-day operations of Pillarstone OP.

Impact of COVID-19

The following discussion is intended to provide our shareholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our portfolio and tenants are estimates based on information available to us as of October 30, 2020. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition, and that of our tenants, for future periods.

During the first half of 2020, the U.S. and many local governments implemented measures intended to control the spread of COVID-19, including enhanced screenings, quarantine or shelter in place requirements and travel restrictions. For example, local governments in Texas and Arizona, where all but one of our properties are located, mandated a stay in place order, closed non-essential businesses, and closed other types of service businesses, such as bars and restaurants, though they can continue to provide take out and drive through services. As of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona. However, the timing and ultimate impact of any such steps to reopen the economy as a whole and on our and our tenants’ businesses and financial condition remains uncertain. Cases of COVID-19 in these areas continued to rise in the third quarter of 2020 and many experts warn of a potential “second wave” of the outbreak in the coming months. As a result, there can be no assurance that service businesses will remain open in the near term, or that state and local governments will not take additional measures to control a possible resurgence of COVID-19 in Texas and/or Arizona, any of which may adversely impact our or our tenants’ businesses and their ability to pay their rental payments or otherwise continue to occupy their space. We are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties including, but not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Our portfolio and tenants have been impacted by these and other factors as follows:

•As of the date of this Quarterly Report on Form 10-Q, all of our properties are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates.

•Approximately 97% of our tenants (based on annualized base rent (“ABR”)) are open and operating.

•Included in our adjustments to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis.

•As of the date of this Quarterly Report on Form 10-Q, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.

We have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:

•To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million of remaining availability under our revolving credit facility. We have cash, cash equivalents and restricted cash of approximately $39.1 million as of September 30, 2020.

•We have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on an individual basis.

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•Our board of trustees has reduced our quarterly dividend resulting in over $30 million of annualized savings. The board of trustees will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.

•We have put in place a temporary response team to address tenant concerns. The response team is in ongoing communication with our tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the CARES Act and/or under the additional stimulus relief bill that is expected to be passed by the U.S. Congress in the fourth quarter of 2020.

•We are proactively implementing expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability.

•The health and safety of our employees and their families is a top priority. We adapted our operations to protect employees, including by implementing a work from home policy in the first quarter of 2020. All employees returned to work in the second quarter of 2020.

While we believe these steps have been effective to date, we expect there will be additional challenges ahead that may impact either our operations or those of our tenants, which could have an adverse effect on our and our tenants’ businesses and financial performance. We expect to continue to implement proactive measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees and tenants. As a result, we may incur additional expenses in future periods in response to the pandemic, which could adversely affect our results of operations. In addition, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees and tenants.

How We Derive Our Revenue

Substantially all of our revenue is derived from rents received from leases at our properties. We had total revenues of approximately $29.9 million and $29.9 million for the three months ended September 30, 2020 and 2019, respectively, and $88.1 million and $89.2 million for the nine months ended September 30, 2020 and 2019, respectively.

Known Trends in Our Operations; Outlook for Future Results

Rental Income

We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal leases. As a result of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis, and there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term following the end of the pandemic or at all. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Over the past three years, we have seen modest improvement in the overall economy in our markets, which has allowed us to maintain overall occupancy rates, with slight increases in occupancy at certain of our properties, and to recognize modest increases in rental rates. However, as of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on an individual basis. In addition, included in our adjustments to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis. We are unable to predict the impact that the COVID-19 pandemic will have on our rental income in the long term. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our and our tenants’ financial positions and operating results.

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Scheduled Lease Expirations

We tend to lease space to smaller businesses that desire shorter term leases. As of September 30, 2020, approximately 19% of our GLA was subject to leases that expire prior to December 31, 2021.  Over the last three years, we have renewed expiring leases with respect to approximately 95% of our GLA. We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 24 months prior to the expiration date of the existing lease. Inasmuch as our early renewal program and other leasing and marketing efforts target these expiring leases, we work to re-lease most of that space prior to expiration of the leases. In the markets in which we operate, we obtain and analyze market rental rates through review of third-party publications, which provide market and submarket rental rate data and through inquiry of property owners and property management companies as to rental rates being quoted at properties that are located in close proximity to our properties and we believe display similar physical attributes as our nearby properties. We use this data to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental rates, we believe that, in the aggregate, our current leases are at market rates. Market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate and/or the rental rates we are able to negotiate. We continue to monitor our tenants’ operating performances as well as overall economic trends to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our cash flow and ability to make distributions to our shareholders.

Acquisitions

We seek to grow our GLA through the acquisition of additional properties. Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis. We believe that we will continue to have excellent opportunities to acquire quality properties at historically attractive prices once we recommence acquisition activity as the impact of COVID-19 decreases; however, there can be no assurance that our acquisition activity will return to previously anticipated levels in the near term or at all. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe enables us to take advantage of these market opportunities and maintain an active acquisition pipeline.

Property Acquisitions, Dispositions and Development

We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties® strategy.  We may acquire properties in other high-growth cities in the future.

Property Acquisitions. On December 6, 2019, we acquired Las Colinas Village, a property that meets our Community Centered Property® strategy, for $34.8 million in cash and net prorations. Las Colinas Village, a 104,919 square foot property, was 86% leased at the time of purchase and is located in Irving, Texas.

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Leasing Activity

As of September 30, 2020, we owned 58 properties with 4,953,571 square feet of GLA and our occupancy rate for all properties was approximately 89% and 90% occupied as of September 30, 2020 and 2019, respectively. The following is a summary of the Company’s leasing activity for the nine months ended September 30, 2020:

	Number of Leases Signed	GLA Signed	Weighted Average Lease Term (2)	TI and Incentives per Sq. Ft. (3)		Contractual Rent Per Sq. Ft. (4)		Prior Contractual Rent Per Sq. Ft. (5)		Straight-lined Basis Increase (Decrease) Over Prior Rent
Comparable (1)
Renewal Leases	143	474,778	3.9	$	1.31	$	17.70	$	17.08	11.6	%
New Leases	37	83,529	5.1	11.55		22.43		22.98		1.9	%
Total	180	558,307	4.1	$	2.85	$	18.41	$	17.96	9.8	%
	Number of Leases Signed	GLA Signed	Weighted Average Lease Term (2)	TI and Incentives per Sq. Ft. (3)		Contractual Rent Per Sq. Ft. (4)
Non-Comparable
Renewal Leases	2	2,563	4.7	$	30.64	$	46.08
New Leases	40	97,884	4.7	8.82		19.24
Total	42	100,447	4.7	$	9.38	$	19.93

(1)     Comparable leases represent leases signed on spaces for which there was a former tenant within the last twelve months and the new or renewal square footage was within 25% of the expired square footage.

(2)    Weighted average lease term is determined on the basis of square footage.

(3)    Estimated amount per signed leases. Actual cost of construction may vary. Does not include first generation costs for tenant improvements (“TI”) and leasing commission costs needed for new acquisitions or redevelopment of a property to bring to operating standards for its intended use.

(4)    Contractual minimum rent under the new lease for the first month, excluding concessions.

(5)    Contractual minimum rent under the prior lease for the final month.

Capital Expenditures

Due to the impact of the COVID-19 pandemic, we have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on a case-by-case basis.

The following is a summary of the Company's capital expenditures for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Capital expenditures:
Tenant improvements and allowances	$	1,820	$	1,790	$	3,048	$	3,185
Developments / redevelopments	95		728		474		3,576
Leasing commissions and costs	235		625		913		1,993
Maintenance capital expenditures	840		1,205		2,286		3,190
Total capital expenditures	$	2,990	$	4,348	$	6,721	$	11,944

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Critical Accounting Policies

In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates.  A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2019, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  There have been no significant changes to these policies during the nine months ended September 30, 2020.  For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

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Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The comparability of our results of operations for the three months ended September 30, 2020 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the three months ended September 30, 2020 and 2019 (dollars in thousands, except per share and per OP unit amounts):

	Three Months Ended September 30,
	2020			2019
Number of properties owned and operated	58			57
Aggregate GLA (sq. ft.)(1)	4,848,652			4,848,652
Ending occupancy rate - operating portfolio(1)	89		%	90		%
Ending occupancy rate	89		%	90		%
Total revenues	$	29,900		$	29,879
Total operating expenses	22,730			21,914
Total other expense	6,347			6,538
Income from operations before equity investments in real estate partnerships and income tax	823			1,427
Equity in earnings of real estate partnership	196			524
Provision for income taxes	(105)			(102)
Income from continuing operations	914			1,849
Net income	914			1,849
Less: Net income attributable to noncontrolling interests	14			42
Net income attributable to Whitestone REIT	$	900		$	1,807
Funds from operations(2)	$	8,467		$	9,231
Funds from operations core(3)	10,112			10,950
Property net operating income(4)	21,272			22,051
Distributions paid on common shares and OP units	4,511			11,694
Distributions per common share and OP unit	$	0.1050		$	0.2850
Distributions paid as a percentage of funds from operations core	45		%	107		%

(1)     Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.

(2)     For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below.

(3)     For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below.

(4)     For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below.

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We define “Same Store” as properties that have been owned for the entire period being compared. For purposes of comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, Same Store includes properties owned during the entire period from July 1, 2019 to September 30, 2020. We define “Non-Same Store” as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations.

Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
Revenue	2020		2019		Change		% Change
Same Store
Rental revenues (1) (3)	$	21,217	$	21,623	$	(406)	(2)	%
Recoveries(2)	8,010		8,240		(230)		(3)	%
Bad debt(3)	(1,167)		(495)		(672)		136	%
Total rental	28,060		29,368		(1,308)		(4)	%
Other revenues (4)	887		283		604		213	%
Same Store Total	28,947		29,651		(704)		(2)	%
Non-Same Store and Management Fees
Rental revenues	591		—		591		Not meaningful
Recoveries	329		—		329		Not meaningful
Bad debt	(112)		—		(112)		Not meaningful
Total rental (5)	808		—		808		Not meaningful
Management fees	145		228		(83)		(36)	%
Non-Same Store and Management Fees Total	953		228		725		318	%
Total revenue	$	29,900	$	29,879	$	21	—	%

(1)     The Same Store rental revenues decrease of $406,000 resulted from a decrease of $179,000 from the decrease in the average leased square feet to 4,324,332 from 4,360,443, and a decrease of $227,000 from the average rent per leased square foot decreasing from $19.84 to $19.63.

(2)     The Same Store recoveries revenue decrease of $230,000 is primarily attributable to related decreases in Same Store operating expenses of $239,000. Operating expenses generally decreased as a result of cost saving initiatives during the COVID-19 pandemic.

(3)     Included in the average rent per leased square foot decrease mentioned above is a Same Store rental revenue decrease of $117,000 from straight-line rent write offs as a result of converting 12 tenants to cash basis accounting during the three months ended September 30, 2020. Bad debt decreased Same Store total rental revenue by $1,167,000 during the three months ended September 30, 2020, as compared to a reduction of $495,000 during the same period a year ago. The bad debt for the three months ended September 30, 2020 was primarily attributable to increases in allowances against accrued receivables as tenants have deferred or missed payments as a result of the COVID-19 pandemic.

(4)    The increase in Same Store other revenues is primarily comprised of increased lease termination fees.

(5)    Non-Same Store total rental revenue increased due to the addition of Las Colinas Village on December 6, 2019.

As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis. We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained.

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Operating expenses. The primary components of operating expenses for the three months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
Operating Expenses	2020		2019		Change		% Change
Same Store
Operating and maintenance (1)	$	4,649	$	4,888	$	(239)	(5)	%
Real estate taxes	4,437		4,410		27		1	%
Same Store total	9,086		9,298		(212)		(2)	%
Non-Same Store and affiliated company rents
Operating and maintenance (2)	155		16		139		869	%
Real estate taxes (2)	233		—		233		Not meaningful
Affiliated company rents (3)	225		214		11		5	%
Non-Same Store and affiliated company rents total	613		230		383		167	%
Depreciation and amortization	7,171		6,789		382		6	%
General and administrative (4)	5,860		5,597		263		5	%
Total operating expenses	$	22,730	$	21,914	$	816	4	%

(1)    The $239,000 Same Store operating and maintenance cost decrease was primarily comprised of lower repair costs.

(2)    Non-Same Store operating and maintenance and real estate tax expenses for the three months ended September 30, 2020 are due to the addition of Las Colinas Village on December 6, 2019.

(3)    Affiliated company rents are spaces that we lease from Pillarstone OP.

(4)    The general and administrative expense increase is attributable to a $973,000 increase in accrued annual incentive bonuses, offset by decreases of $319,000 in professional fees, $170,000 in payroll costs (exclusive of the annual cash incentive bonus), $95,000 in travel expenses, and $126,000 in other general and administrative expenses. The annual incentive bonus program was approved by the Board of Trustees in July of 2020, and therefore the amount recorded to three months ended September 30, 2020, reflects nine months of the projected payout for the full year.

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Other expenses (income). The primary components of other expenses (income) for the three months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
Other Expenses (Income)	2020		2019		Change		% Change
Interest expense	$	6,400	$	6,679	$	(279)	(4)	%
Loss on sale or disposal of assets and assets held for sale	18		—		18		Not meaningful
Interest, dividend and other investment income	(71)		(141)		70		(50)	%
Total other expense	$	6,347	$	6,538	$	(191)	(3)	%

Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $328,000 from $524,000 for the three months ended September 30, 2019 to $196,000 for the three months ended September 30, 2020. The $328,000 decrease is primarily attributable to lower net income from Pillarstone OP for the three months ended September 30, 2020 as compared to the same period in 2019 resulting from the sale of Corporate Park West, Corporate Park Woodland and Plaza Park on October 8, 2019. Please refer to Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.

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Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):

	Three Months Ended September 30,				Increase		% Increase
	2020		2019		(Decrease)		(Decrease)
Same Store (51 properties, excluding development land)
Property revenues
Rental	$	28,060	$	29,368	$	(1,308)	(4)	%
Management, transaction and other fees	887		283		604		213	%
Total property revenues	28,947		29,651		(704)		(2)	%
Property expenses
Property operation and maintenance	4,649		4,888		(239)		(5)	%
Real estate taxes	4,437		4,410		27		1	%
Total property expenses	9,086		9,298		(212)		(2)	%
Total property revenues less total property expenses	19,861		20,353		(492)		(2)	%
Same Store straight-line rent adjustments	(50)		(178)		128		(72)	%
Same Store amortization of above/below market rents	(148)		(226)		78		(35)	%
Same Store lease termination fees	(727)		(127)		(600)		472	%
Same Store NOI(1)	$	18,936	$	19,822	$	(886)	(4)	%

(1)     See below for a reconciliation of property net operating income to net income.

	Three Months Ended September 30,
PROPERTY NET OPERATING INCOME (“NOI”)	2020		2019
Net income attributable to Whitestone REIT	$	900	$	1,807
General and administrative expenses	5,860		5,597
Depreciation and amortization	7,171		6,789
Equity in earnings of real estate partnership	(196)		(524)
Interest expense	6,400		6,679
Interest, dividend and other investment income	(71)		(141)
Provision for income taxes	105		102
Management fee, net of related expenses	81		(14)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net	18		—
NOI of real estate partnership (pro rata)	990		1,714
Net income attributable to noncontrolling interests	14		42
NOI	$	21,272	$	22,051
Non-Same Store NOI (1)	(421)		16
NOI of real estate partnership (pro rata)	(990)		(1,714)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)	19,861		20,353
Same Store straight-line rent adjustments	(50)		(178)
Same Store amortization of above/below market rents	(148)		(226)
Same Store lease termination fees	(727)		(127)
Same Store NOI (2)	$	18,936	$	19,822

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(1)    We define “Non-Same Store” as properties that have been acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. For purposes of comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, Non-Same Store includes properties acquired between July 1, 2019 and September 30, 2020 and properties sold between July 1, 2019 and September 30, 2020, but not included in discontinued operations.

(2)    We define “Same Store” as properties that have been owned during the entire period being compared. For purposes of comparing the three months ended September 30, 2020 to the three months ended September 30, 2019, Same Store includes properties owned before July 1, 2019 and not sold before September 30, 2020. Straight-line rent adjustments, above/below market rents, and lease termination fees are excluded.

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Comparison of the Nine Months Ended September 30, 2020 and 2019

The comparability of our results of operations for the nine months ended September 30, 2020 to future periods may be significantly impacted by the effects of the COVID-19 pandemic. The following table provides a summary comparison of our results of operations and other metrics for the nine months ended September 30, 2020 and 2019 (dollars in thousands, except per share and per OP unit amounts):

	Nine Months Ended September 30,
	2020			2019
Number of properties owned and operated	58			57
Aggregate GLA (sq. ft.)(1)	4,848,652			4,848,652
Ending occupancy rate - operating portfolio(1)	89		%	90		%
Ending occupancy rate	89		%	90		%
Total revenues	$	88,081		$	89,151
Total operating expenses	65,328			63,613
Total other expense	20,237			19,303
Income from operations before equity investments in real estate partnerships and income tax	2,516			6,235
Equity in earnings of real estate partnership	752			1,480
Provision for income taxes	(288)			(324)
Income from continuing operations	2,980			7,391
Gain on sale of property from discontinued operations	—			701
Net income	2,980			8,092
Less: Net income attributable to noncontrolling interests	58			184
Net income attributable to Whitestone REIT	$	2,922		$	7,908
Funds from operations(2)	$	26,145		$	29,104
Funds from operations core(3)	30,312			33,874
Property net operating income(4)	62,965			67,005
Distributions paid on common shares and OP units	21,201			34,840
Distributions per common share and OP unit	$	0.4950		$	0.8550
Distributions paid as a percentage of funds from operations core	70		%	103		%

(1)     Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.

(2)     For a reconciliation of funds from operations to net income, see “—Reconciliation of Non-GAAP Financial Measures—Funds From Operations (“FFO”)” below.

(3)     For a reconciliation of funds from operations core to net income, see “—Reconciliation of Non-GAAP Financial Measures—FFO Core” below.

(4)     For a reconciliation of property net operating income to net income, see “—Reconciliation of Non-GAAP Financial Measures—Property Net Operating Income (“NOI”)” below.

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We define “Same Store” as properties that have been owned for the entire period being compared. For purposes of comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019, Same Store includes properties owned during the entire period from January 1, 2019 to September 30, 2020. We define “Non-Same Store” as properties acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations.

Revenues. The primary components of revenue are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
Revenue	2020		2019		Change		% Change
Same Store
Rental revenues (1) (3)	$	63,766	$	64,752	$	(986)	(2)	%
Recoveries(2)	24,094		23,701		393		2	%
Bad debt(3)	(4,187)		(926)		(3,261)		352	%
Total rental	83,673		87,527		(3,854)		(4)	%
Other revenues (4)	1,475		931		544		58	%
Same Store Total	85,148		88,458		(3,310)		(4)	%
Non-Same Store and Management Fees
Rental revenues	1,825		—		1,825		Not meaningful
Recoveries	882		—		882		Not meaningful
Bad debt	(264)		—		(264)		Not meaningful
Total rental (5)	2,443		—		2,443		Not meaningful
Other revenues	34		—		34		Not meaningful
Management fees	456		693		(237)		(34)	%
Non-Same Store and Management Fees Total	2,933		693		2,240		323	%
Total revenue	$	88,081	$	89,151	$	(1,070)	(1)	%

(1)     The Same Store rental revenues decrease of $986,000 resulted from a decrease of $431,000 from the decrease in the average leased square feet to 4,353,422 from 4,381,957, and a decrease of $555,000 from the average rent per leased square foot decreasing from $19.70 to $19.53.

(2)     The Same Store recoveries revenue increase of $393,000 is primarily attributable to related increases in Same Store real estate taxes of $498,000 offset by a decrease in Same Store operating and maintenance expenses of $120,000.

(3)     Included in the average rent per leased square foot decrease mentioned above is a Same Store rental revenue decrease of $1,045,000 from straight-line rent write offs during the nine months ended September 30, 2020 as a result of converting 84 tenants to cash basis accounting. Bad debt decreased Same Store total rental revenue by $4,187,000 during the nine months ended September 30, 2020, as compared to a reduction of $926,000 during the same period a year ago. The bad debt for the nine months ended September 30, 2020 was primarily attributable to increases in allowances against accrued receivables as tenants have deferred or missed payments as a result of the COVID-19 pandemic.

(4)    The increase in Same Store other revenues is primarily comprised of increased lease termination fees.

(5)    Non-Same Store total rental revenue increased due to the addition of Las Colinas Village on December 6, 2019.

As of the date of this Quarterly Report on Form 10-Q, as a result of the impact of the COVID-19 pandemic, we have received payments of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis.

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We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained.

Operating expenses. The primary components of operating expenses for the nine months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
Operating Expenses	2020		2019		Change		% Change
Same Store
Operating and maintenance	$	13,895	$	14,015	$	(120)	(1)	%
Real estate taxes	12,972		12,474		498		4	%
Same Store total	26,867		26,489		378		1	%
Non-Same Store and affiliated company rents
Operating and maintenance (1)	425		116		309		266	%
Real estate taxes (1)	619		—		619		Not meaningful
Affiliated company rents (2)	701		629		72		11	%
Non-Same Store and affiliated company rents total	1,745		745		1,000		134	%
Depreciation and amortization	21,112		19,865		1,247		6	%
General and administrative (3)	15,604		16,514		(910)		(6)	%
Total operating expenses	$	65,328	$	63,613	$	1,715	3	%

(1)    Non-Same Store operating and maintenance and real estate tax expenses for the nine months ended September 30, 2020 are due to the addition of Las Colinas Village on December 6, 2019.

(2)    Affiliated company rents are spaces that we lease from Pillarstone OP.

(3)    The general and administrative expense decrease was attributable to $532,000 in decreased share-based compensation expense, $357,000 in decreased travel expenses, $327,000 in decreased professional fees and $250,000 in decreased other general and administrative expenses offset by a $556,000 increase in payroll costs. The increased payroll costs included a $973,000 increase in annual incentive bonuses, offset by a decrease of $417,000 in other payroll costs. Please refer to Note 12 (Incentive Share Plan) for more information regarding share-based compensation expense. Travel has been reduced in response to the COVID-19 pandemic.

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Other expenses (income). The primary components of other expenses (income) for the nine months ended September 30, 2020 and 2019 are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
Other Expenses (Income)	2020		2019		Change		% Change
Interest expense	$	19,561	$	19,738	$	(177)	(1)	%
Loss on sale or disposal of assets and assets held for sale	882		115		767		667	%
Interest, dividend and other investment income	(206)		(550)		344		(63)	%
Total other expense	$	20,237	$	19,303	$	934	5	%

Equity in earnings of real estate partnership. Our equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $728,000 from $1,480,000 for the nine months ended September 30, 2019 to $752,000 for the nine months ended September 30, 2020. The $728,000 decrease is primarily attributable to lower net income from Pillarstone OP for the nine months ended September 30, 2020 as compared to the same period in 2019 resulting from the sale of Corporate Park West, Corporate Park Woodland and Plaza Park on October 8, 2019. Please refer to Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for more information regarding our investment in Pillarstone OP.

Same Store net operating income. The components of Same Store net operating income is detailed in the table below (in thousands):

	Nine Months Ended September 30,				Increase		% Increase
	2020		2019		(Decrease)		(Decrease)
Same Store (51 properties, excluding development land)
Property revenues
Rental	$	83,673	$	87,527	$	(3,854)	(4)	%
Management, transaction and other fees	1,475		931		544		58	%
Total property revenues	85,148		88,458		(3,310)		(4)	%
Property expenses
Property operation and maintenance	13,895		14,015		(120)		(1)	%
Real estate taxes	12,972		12,474		498		4	%
Total property expenses	26,867		26,489		378		1	%
Total property revenues less total property expenses	58,281		61,969		(3,688)		(6)	%
Same Store straight-line rent adjustments	640		(919)		1,559		(170)	%
Same Store amortization of above/below market rents	(589)		(690)		101		(15)	%
Same Store lease termination fees	(1,028)		(401)		(627)		156	%
Same Store NOI(1)	$	57,304	$	59,959	$	(2,655)	(4)	%

(1)     See below for a reconciliation of property net operating income to net income.

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	Nine Months Ended September 30,
PROPERTY NET OPERATING INCOME (“NOI”)	2020		2019
Net income attributable to Whitestone REIT	$	2,922	$	7,908
General and administrative expenses	15,604		16,514
Depreciation and amortization	21,112		19,865
Equity in earnings of real estate partnership	(752)		(1,480)
Interest expense	19,561		19,738
Interest, dividend and other investment income	(206)		(550)
Provision for income taxes	288		324
Gain on sale of property from discontinued operations, net	—		(701)
Management fee, net of related expenses	246		(64)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net	882		115
NOI of real estate partnership (pro rata)	3,250		5,152
Net income attributable to noncontrolling interests	58		184
NOI	$	62,965	$	67,005
Non-Same Store NOI (1)	(1,434)		116
NOI of real estate partnership (pro rata)	(3,250)		(5,152)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)	58,281		61,969
Same Store straight-line rent adjustments	640		(919)
Same Store amortization of above/below market rents	(589)		(690)
Same Store lease termination fees	(1,028)		(401)
Same Store NOI (2)	$	57,304	$	59,959

(1)    We define “Non-Same Store” as properties that have been acquired since the beginning of the period being compared and properties that have been sold, but not classified as discontinued operations. For purposes of comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019, Non-Same Store includes properties acquired between January 1, 2019 and September 30, 2020 and properties sold between January 1, 2019 and September 30, 2020, but not included in discontinued operations.

(2)    We define “Same Store” as properties that have been owned during the entire period being compared. For purposes of comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019, Same Store includes properties owned before January 1, 2019 and not sold before September 30, 2020. Straight-line rent adjustments, above/below market rents, and lease termination fees are excluded.

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Reconciliation of Non-GAAP Financial Measures

Funds From Operations (NAREIT) (“FFO”)

The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains or losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We calculate FFO in a manner consistent with the NAREIT definition and also include adjustments for our unconsolidated real estate partnership.

Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income (loss) alone as the primary measure of our operating performance.

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself.  In addition, securities analysts, investors and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs.  

FFO should not be considered as an alternative to net income or other measurements under GAAP, as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity.  FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Although our calculation of FFO is consistent with that of NAREIT, there can be no assurance that FFO presented by us is comparable to similarly titled measures of other REITs.

Funds From Operations Core (“FFO Core”)

Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include, but are not limited to, legal settlements, proxy contest fees, debt extension costs, non-cash share-based compensation expense, rent support agreement payments received from sellers on acquired assets, management fees from Pillarstone and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of other REITs.

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Below are the calculations of FFO and FFO Core and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
FFO (NAREIT) AND FFO-CORE	2020		2019		2020		2019
Net income attributable to Whitestone REIT	$	900	$	1,807	$	2,922	$	7,908
Adjustments to reconcile to FFO:(1)
Depreciation and amortization of real estate	7,125		6,718		20,943		19,657
Depreciation and amortization of real estate assets of real estate partnership (pro rata)	386		651		1,262		1,921
Loss on disposal or impairment of assets and properties of continuing operations, net	18		—		882		115
Gain on sale of property from discontinued operations, net	—		—		—		(701)
Loss on sale or disposal of properties or assets of real estate partnership (pro rata)(2)	24		13		78		20
Net income attributable to noncontrolling interests	14		42		58		184
FFO (NAREIT)	$	8,467	$	9,231	$	26,145	$	29,104
Share-based compensation expense	$	1,645	$	1,719	$	4,167	$	4,770
FFO Core	$	10,112	$	10,950	$	30,312	$	33,874

(1)    Includes pro-rata share attributable to real estate partnership.

(2)    Included in equity in earnings of real estate partnership on the consolidated statements of operations and comprehensive income (loss).

Property Net Operating Income (“NOI”)

Management believes that NOI is a useful measure of our property operating performance. We define NOI as operating revenues (rental and other revenues) less property and related expenses (property operation and maintenance and real estate taxes). Other REITs may use different methodologies for calculating NOI and, accordingly, our NOI may not be comparable to other REITs. Because NOI excludes general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes, gain or loss on sale or disposition of assets, and our pro rata share of NOI of equity method investments, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not immediately apparent from net income. We use NOI to evaluate our operating performance since NOI allows us to evaluate the impact that factors such as occupancy levels, lease structure, lease rates and tenant base have on our results, margins and returns. In addition, management believes that NOI provides useful information to the investment community about our property and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of property performance in the real estate industry. However, NOI should not be viewed as a measure of our overall financial performance since it does not reflect general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes and gain or loss on sale or disposition of assets, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties.

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Below is the calculation of NOI and the reconciliations to net income, which we believe is the most comparable U.S. GAAP financial measure (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
PROPERTY NET OPERATING INCOME	2020		2019		2020		2019
Net income attributable to Whitestone REIT	$	900	$	1,807	$	2,922	$	7,908
General and administrative expenses	5,860		5,597		15,604		16,514
Depreciation and amortization	7,171		6,789		21,112		19,865
Equity in earnings of real estate partnership	(196)		(524)		(752)		(1,480)
Interest expense	6,400		6,679		19,561		19,738
Interest, dividend and other investment income	(71)		(141)		(206)		(550)
Provision for income taxes	105		102		288		324
Gain on sale of property from discontinued operations, net	—		—		—		(701)
Management fee, net of related expenses	81		(14)		246		(64)
Loss on sale or disposal of assets and assets held for sale of continuing operations, net	18		—		882		115
NOI of real estate partnership (pro rata)	990		1,714		3,250		5,152
Net income attributable to noncontrolling interests	14		42		58		184
NOI	$	21,272	$	22,051	$	62,965	$	67,005

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of distributions to holders of our common shares and OP units, including those required to maintain our REIT status and satisfy our current quarterly distribution target of $0.105 per share and OP unit, recurring expenditures, such as repairs and maintenance of our properties, non-recurring expenditures, such as capital improvements and tenant improvements, debt service requirements, and, potentially, acquisitions of additional properties.

 During the nine months ended September 30, 2020, our cash provided from operating activities was $29,220,000 and our total distributions were $21,201,000.  Therefore, we had cash flow from operation in excess of distributions of approximately $8,019,000. We anticipate that cash flows from operating activities and our borrowing capacity under our unsecured revolving credit facility will provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT for federal income tax purposes.

Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements, development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness, sales of common shares, issuance of OP units, sales of underperforming properties and non-core properties and other financing opportunities, including debt financing. We believe we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million remaining availability under the revolving credit facility. In addition, in light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares, including under the 2019 equity distribution agreements, until the price of our common shares increases significantly.

On May 14, 2020, the Board authorized a dividend of one preferred share purchase right (a “Right”) for each outstanding common share payable on May 26, 2020 (the “Record Date”), to the holders of record of common shares as of 5:00 P.M., New York City time, on the Record Date. In connection with the Rights, the Company and American Stock Transfer & Trust Company, LLC, as rights agent, entered into a Rights Agreement, dated as of May 14, 2020 (the “Rights Agreement”). Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series A Preferred

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Share, par value $0.001 per share (each a “Preferred Share”), of the Company at a purchase price of $30.00 per Unit, subject to adjustment as described in the Rights Agreement. If a person or group of affiliated or associated persons acquires beneficial ownership of 5% or more of our outstanding common shares (20% or more in the case of a passive institutional investor), subject to certain exceptions described in the Rights Agreement, each Right would entitle its holder (other than the acquiring person or group of affiliated or associated persons) to purchase additional common shares at a substantial discount to the public market price. In addition, under certain circumstances, we may exchange the Rights (other than Rights beneficially owned by the acquiring person or group of affiliated or associated persons), in whole or in part, for common shares on a one-for-one basis. The Rights will expire on the earliest of (i) the close of business on May 13, 2021, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, and (iv) the time at which the Rights are exchanged pursuant to the Rights Agreement. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement.

Our ability to access the capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our Company. In light of the dynamics in the capital markets impacted by the COVID-19 pandemic and the economic slowdown, our access to capital may be diminished due to, among other things:

•the potential reduction in the borrowing base under our 2019 Facility due to the potential reduction in real estate values and a reduction in our NOI as a result of our tenants’ inability or unwillingness to pay rent timely or at all and increased vacancy rates due to the risk of tenants closing their businesses and delays in leasing vacant space due to potential lack of demand for retail space;

•the price of our common shares being below our estimates of our net asset value, which would result in any offering of our common shares to be dilutive to our existing shareholders.

Despite these challenges, we believe we have sufficient access to capital for the foreseeable future, but we can provide no assurance that, if the impact of the COVID-19 pandemic continues for an extended period of time significantly worsens, that such capital will be available to us on attractive terms or at all.

We are unable to predict and determine the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows in the long term. We have taken a number of proactive measures to maintain the strength of our business and manage the impact of the COVID-19 pandemic on our operations and liquidity, including the following:

•To ensure adequate liquidity for a sustained period, in March 2020, we drew down $30 million of the availability of the revolving credit facility as a precautionary measure to preserve our financial flexibility. As of September 30, 2020, subject to any potential future paydowns or increases in the borrowing base, we have $13.0 million remaining availability under the revolving credit facility. As of September 30, 2020, we have cash, cash equivalents and restricted cash of approximately $39.1 million.

•We have taken a prudent pause in acquisitions activity and are carefully evaluating development and redevelopment activities on an individual basis.

•Our board of trustees (the “Board”) has reduced our quarterly dividend resulting in over $30 million of annualized savings. The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.

•We have put in place a temporary response team to address tenant concerns. The response team is in ongoing communication with our tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”).

•We are proactively implementing expense reductions at the property level to minimize cost pass-throughs to our tenants and at the corporate level to preserve profitability.

•The health and safety of our employees and their families is a top priority. We adapted our operations to protect employees, including by implementing a work from home policy in the first quarter of 2020. All employees returned to work in the second quarter of 2020.

We believe that we will continue to see significant decreases in our collection of contracted rent from our tenants and may see tenant closures or bankruptcies. If and when economic conditions improve and favorable opportunities arise, we intend to continue acquiring additional properties that meet our Community Centered Property® strategy through equity issuances and debt financing.

On April 30, 2020, the Company entered into a loan in the principal amount of $1,733,510 from U.S. Bank National Association, one of the Company’s existing lenders, pursuant to the Paycheck Protection Program (the “PPP Loan”) of the

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CARES Act. The PPP Loan matures on May 6, 2022 (the “Maturity Date”), accrues interest at 1.00% per annum and may be prepaid in whole or in part without penalty. Principal and interest are payable in 18 monthly installments of $96,864.28, beginning on December 6, 2020, plus a final payment equal to all unpaid principal and accrued interest on the Maturity Date.  Pursuant to the CARES Act, the Company can apply for, and be granted, forgiveness for all or a portion of the PPP Loan and such forgiveness will be determined, subject to limitations and ongoing rulemaking by the U.S. Small Business Administration, based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels.  The Company intends to use all proceeds from the PPP Loan to retain employees and maintain payroll and make mortgage payments, lease payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act.  However, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

On May 15, 2019, our universal shelf registration statement on Form S-3 was declared effective by the SEC, allowing us to offer up to $750 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights.

On May 31, 2019, we entered into nine equity distribution agreements for an at-the-market equity distribution program (the “2019 equity distribution agreements”) providing for the issuance and sale of up to an aggregate of $100 million of the Company’s common shares pursuant to our Registration Statement on Form S-3 (File No. 333-225007). Actual sales will depend on a variety of factors determined by us from time to time, including (among others) market conditions, the trading price of our common shares, capital needs and our determinations of the appropriate sources of funding for us, and were made in transactions that will be deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act. We have no obligation to sell any of our common shares and can at any time suspend offers under the 2019 equity distribution agreements or terminate the 2019 equity distribution agreements. In light of the significant decline in the price of our common shares since the outbreak of COVID-19, we do not currently anticipate selling shares under the 2019 equity distribution agreements until the price of our common shares increases significantly. However, if necessary, we could choose to issue shares at prevailing market prices if our liquidity position so requires. As a result, during the three months ended September 30, 2020, we did not sell shares under the 2019 equity distribution agreements. During the nine months ended September 30, 2020, we sold 170,942 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $2.2 million. In connection with such sales, we paid compensation of approximately $34,000 to the sales agents. During the three months ended September 30, 2019, we sold 374,077 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $4.8 million. In connection with such sales, we paid compensation of approximately $74,000 to the sales agents. During the nine months ended September 30, 2019, we sold 679,216 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $8.7 million. In connection with such sales, we paid compensation of approximately $132,000 to the sales agents.

We have used and anticipate using net proceeds from common shares issued pursuant to the 2019 equity distribution agreements for general corporate purposes, which may include acquisitions of additional properties, the repayment of outstanding indebtedness, capital expenditures, the expansion, redevelopment and/or re-tenanting of properties in our portfolio, working capital and other general purposes.

Our capital structure includes non-recourse mortgage debt that we have assumed or originated on certain properties. We may hedge the future cash flows of certain variable rate debt transactions principally through interest rate swaps with major financial institutions. See Note 8 (Derivatives and Hedging Activities) to the accompanying consolidated financial statements for a description of our current cash flow hedges.

As discussed in Note 2 (Summary of Significant Accounting Policies) to the accompanying consolidated financial statements, pursuant to the terms of our $15.1 million 4.99% Note, due January 6, 2024 (see Note 7 (Debt) to the accompanying consolidated financial statements), which is collateralized by our Anthem Marketplace property, we were required by the lenders thereunder to establish a cash management account controlled by the lenders to collect all amounts generated by our Anthem Marketplace property in order to collateralize such promissory note. Amounts in the cash management account are classified as restricted cash.

Cash, Cash Equivalents and Restricted Cash

We had cash, cash equivalents and restricted cash of approximately $39,118,000 as of September 30, 2020, as compared to $15,643,000 on December 31, 2019.  The increase of $23,475,000 was primarily the result of the following:

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Sources of Cash

•Cash flow from operations of $29,220,000 for the nine months ended September 30, 2020;

•Net proceeds of $30,000,000 from the 2019 Facility;

•Net proceeds of $1,734,000 from notes payable;

•Proceeds from issuance of common shares pursuant to the 2019 equity distribution agreements, net of offering costs of $2,198,000;

Uses of Cash

•Payment of distributions to common shareholders and OP unit holders of $21,201,000;

•Additions to real estate of $5,808,000;

•Repurchase of common shares of $2,076,000; and

•Payments of notes payable of $11,514,000.

 We place all cash in short-term, highly liquid investments that we believe provide appropriate safety of principal.

Debt

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

Description	September 30, 2020		December 31, 2019
Fixed rate notes
$10.5 million, 4.85% Note, due September 24, 2020 (1)	$	—	$	9,260
$100.0 million, 1.73% plus 1.35% to 1.90% Note, due October 30, 2022 (2)	100,000		100,000
$165.0 million, 2.24% plus 1.35% to 1.90% Note, due January 31, 2024 (3)	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	18,768		19,000
$20.2 million 4.28% Note, due June 6, 2023	18,323		18,616
$14.0 million 4.34% Note, due September 11, 2024	13,300		13,482
$14.3 million 4.34% Note, due September 11, 2024	14,073		14,243
$15.1 million 4.99% Note, due January 6, 2024	14,228		14,409
$2.6 million 5.46% Note, due October 1, 2023	2,351		2,386
$50.0 million, 5.09% Note, due March 22, 2029	50,000		50,000
$50.0 million, 5.17% Note, due March 22, 2029	50,000		50,000
$1.7 million 1.00% Note, due May 6, 2022	1,734		—
$1.1 million 4.53% Note, due November 28, 2020	270		—
Floating rate notes
Unsecured line of credit, LIBOR plus 1.40% to 1.90%, due January 31, 2023	139,500		109,500
Total notes payable principal	667,547		645,896
Less deferred financing costs, net of accumulated amortization	(1,031)		(1,197)
Total notes payable	$	666,516	$	644,699

(1)     Promissory note includes an interest rate swap that fixed the interest rate at 3.55% for the duration of the term through September 24, 2018 and 4.85% beginning September 25, 2018 through September 24, 2020. The promissory note was paid off in September 2020.

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(2)    Promissory note includes an interest rate swap that fixed the LIBOR portion at 1.73%.

(3)     Promissory note includes an interest rate swap that fixed the LIBOR portion of the interest rate at an average rate of 2.24% for the duration of the term through January 31, 2024.

Scheduled maturities of our outstanding debt as of September 30, 2020 were as follows (in thousands):

Year	Amount Due
2020 (remaining)	$	964
2021	2,762
2022	102,170
2023	167,363
2024	228,573
Thereafter	165,715
Total	$	667,547

On January 31, 2019, we, through our Operating Partnership, entered into an unsecured credit facility (the “2019 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Agent”), SunTrust Robinson Humphrey, as syndication agent, and BMO Capital Markets Corp., U.S. Bank National Association, SunTrust Robinson Humphrey and Regions Capital Markets, as co-lead arrangers and joint book runners. The 2019 Facility amended and restated the 2018 Facility (as defined below).

The 2019 Facility is comprised of the following three tranches:

•$250.0 million unsecured revolving credit facility with a maturity date of 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”).

Borrowings under the 2019 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted LIBOR plus an applicable margin based upon our then existing leverage. As of September 30, 2020, the interest rate on the 2019 Revolver was 1.81%. The applicable margin for Adjusted LIBOR borrowings ranges from 1.40% to 1.90% for the 2019 Revolver and 1.35% to 1.90% for the 2019 Term Loans. Base Rate means the higher of: (a) the Agent’s prime commercial rate, (b) the sum of (i) the average rate quoted by the Agent by two or more federal funds brokers selected by the Agent for sale to the Agent at face value of federal funds in the secondary market in an amount equal or comparable to the principal amount for which such rate is being determined, plus (ii) 1/2 of 1.00%, and (c) the LIBOR rate for such day plus 1.00%. Adjusted LIBOR means LIBOR divided by one minus the Eurodollar Reserve Percentage. The Eurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of Governors of the Federal Reserve System on eurocurrency liabilities. Pursuant to the 2019 Facility, in the event of certain circumstances that result in the unavailability of LIBOR, including but not limited to LIBOR no longer being a widely recognized benchmark rate for newly originated dollar loans in the U.S. market, the Operating Partnership and the Agent will establish an alternate interest rate to LIBOR giving due consideration to prevailing market conventions and will amend the 2019 Facility to give effect to such alternate interest rate. LIBOR is expected to be discontinued after 2021. A number of our current debt agreements have an interest rate tied to LIBOR. Some of these agreements provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, but not all do so. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

The 2019 Facility includes an accordion feature that will allow the Operating Partnership to increase the borrowing capacity by $200.0 million, upon the satisfaction of certain conditions. As of September 30, 2020, $404.5 million was drawn on

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the 2019 Facility. The Company used $446.2 million of proceeds from the 2019 Facility to repay amounts outstanding under the 2018 Facility and intends to use the remaining proceeds from the 2019 Facility for general corporate purposes, including property acquisitions, 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 (as defined therein).

We serve as the guarantor for funds borrowed by the Operating Partnership under the 2019 Facility. The 2019 Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization or extraordinary items) to fixed charges, and maintenance of a minimum net worth. The 2019 Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status.

On March 22, 2019, we, through our Operating Partnership, entered into a Note Purchase and Guarantee Agreement (the “Note Agreement”) together with certain subsidiary guarantors as initial guarantor parties thereto (the “Subsidiary Guarantors”) and The Prudential Insurance Company of America and the various other purchasers named therein (collectively, the “Purchasers”) providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership, of which (i) $50 million are designated as 5.09% Series A Senior Notes due March 22, 2029 (the “Series A Notes”) and (ii) $50 million are designated as 5.17% Series B Senior Notes due March 22, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Notes”) pursuant to a private placement that closed on March 22, 2019 (the “Private Placement”). Obligations under the Notes are unconditionally guaranteed by the Company and by the Subsidiary Guarantors.

The principal of the Series A Notes will begin to amortize on March 22, 2023 with annual principal payments of approximately $7.1 million. The principal of the Series B Notes will begin to amortize on March 22, 2025 with annual principal payments of $10.0 million. The Notes will pay interest quarterly on the 22nd day of March, June, September and December in each year until maturity.

The Operating Partnership may prepay at any time all, or from time to time part of, the Notes, in an amount not less than $1,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus a make-whole amount. The make-whole amount is equal to the excess, if any, of the discounted value of the remaining scheduled payments with respect to the Notes being prepaid over the aggregate principal amount of such Notes (as described in the Note Agreement). In addition, in connection with a Change of Control (as defined in the Note Purchase Agreement), the Operating Partnership is required to offer to prepay the Notes at 100% of the principal amount plus accrued and unpaid interest thereon.

The Note Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type and substantially similar to the Operating Partnership’s existing senior revolving credit facility, including limitations on liens, incurrence of investments, acquisitions, loans and advances and restrictions on dividends and certain other restricted payments. In addition, the Note Agreement contains certain financial covenants substantially similar to the Operating Partnership’s existing senior revolving credit facility, including the following:

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•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 (as defined therein).

In addition, the Note Agreement contains a financial covenant requiring that maximum unsecured debt not exceed the lesser of (i) an amount equal to 60% of the aggregate unencumbered asset value and (ii) the debt service coverage amount (as described in the Note Agreement). That covenant is substantially similar to the borrowing base concept contained in the Operating Partnership’s existing senior revolving credit facility.

The Note Agreement also contains default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults with other indebtedness and guarantor defaults. The occurrence of an event of default under the Note Agreement could result in the Purchasers accelerating the payment of all obligations under the Notes. The financial and restrictive covenants and default provisions in the Note Agreement are substantially similar to those contained in the Operating Partnership’s existing credit facility.

Net proceeds from the Private Placement will be used to refinance existing indebtedness. The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Notes were sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

As of September 30, 2020, our $161.0 million in secured debt was collateralized by seven properties with a carrying value of $251.7 million.  Our loans contain restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of September 30, 2020, we were in compliance with all loan covenants.

Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding debt.

Capital Expenditures

We continually evaluate our properties’ performance and value. In light of the COVID-19 pandemic, we are continuing to monitor and, if necessary, reduce our capital expenditures to maintain financial flexibility. We may determine it is in our shareholders’ best interest to invest capital in properties that we believe have potential for increasing value. We also may have unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to continue investing in similar properties outside of the markets on which we focus in cities with exceptional demographics to diversify market risk, and we may incur significant capital expenditures or make improvements in connection with any properties we may acquire.

Contractual Obligations

On March 22, 2019, we, through our Operating Partnership, entered into the Note Agreement together with the Purchasers providing for the issuance and sale of $100 million of senior unsecured notes of the Operating Partnership that mature in March 2029, with annual amortization of principal beginning in 2023 on $50 million of the senior unsecured notes in the amount of $7.1 million and in 2025 on $50 million of the senior unsecured notes in the amount of $10.0 million. Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding the Note Agreement.

On January 31, 2019, we, through our Operating Partnership, entered into the 2019 Facility. The 2019 Facility amended and restated our previous unsecured revolving credit facility, dated November 7, 2014, as amended on October 30, 2015 and December 8, 2016. Refer to Note 7 (Debt) to the accompanying consolidated financial statements for additional information regarding the 2019 Facility.

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Distributions

On March 24, 2020 we announced that, in further pursuit of ensuring our financial flexibility, the Board determined to conserve additional liquidity by reducing our distribution in response to the COVID-19 pandemic. The distribution reduction is expected to result in over $30 million of annualized cash savings.

The Board will regularly reassess the dividend, particularly as there is more clarity on the duration and severity of the COVID-19 pandemic and as business conditions improve.

The following table summarizes the cash distributions paid or payable to holders of our common shares and noncontrolling OP units during each quarter of 2019 and the nine months ended September 30, 2020 (in thousands, except per share data):

	Common Shares				Noncontrolling OP Unit Holders				Total
Quarter Paid	Distributions Per Common Share		Amount Paid		Distributions Per OP Unit		Amount Paid		Amount Paid
2020
Third Quarter	$	0.1050	$	4,430	$	0.1050	$	81	$	4,511
Second Quarter	0.1050		4,413		0.1050		91		4,504
First Quarter	0.2850		11,928		$	0.2850	258		12,186
Total	$	0.4950	$	20,771	$	0.4950	$	430	$	21,201
2019
Fourth Quarter	$	0.2850	$	11,580	$	0.2850	$	262	$	11,842
Third Quarter	0.2850		11,430		0.2850		264		11,694
Second Quarter	0.2850		11,316		0.2850		265		11,581
First Quarter	0.2850		11,301		0.2850		264		11,565
Total	$	1.1400	$	45,627	$	1.1400	$	1,055	$	46,682

Taxes

We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 1999.  As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates.  We believe that we are organized and operate in a manner to qualify and be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

Environmental Matters

Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination.

Off-Balance Sheet Arrangements

Guarantees. We may guarantee the debt of a real estate partnership primarily because it allows the real estate partnership to obtain funding at a lower cost than could be obtained otherwise. This results in a higher return for the real estate partnership on its investment, and a higher return on our investment in the real estate partnership. We may receive a fee from the real estate partnership for providing the guarantee. Additionally, when we issue a guarantee, the terms of the real estate partnership’s partnership agreement typically provide that we may receive indemnification from the real estate partnership or have the ability to increase our ownership interest. See Note 6 (Investment in Real Estate Partnership) to the accompanying consolidated financial statements for information related to our guarantee of our real estate partnership’s debt.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Our future income, cash flows and fair value relevant to our financial instruments depend upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable.

All of our financial instruments were entered into for other than trading purposes.

Fixed Interest Rate Debt

As of September 30, 2020, $528.0 million, or approximately 79% of our total outstanding debt, was subject to fixed interest rates, which limit the risk of fluctuating interest rates. Although a change in the market interest rates affects the fair market value of our fixed interest rate debt, it does not impact net income to shareholders or cash flows. Our total outstanding fixed interest rate debt had an average effective interest rate as of September 30, 2020 of approximately 4.1% per annum with scheduled maturities ranging from 2020 to 2029 (see Note 7 (Debt) to the accompanying consolidated financial statements for further detail). Holding other variables constant, a 1% increase or decrease in interest rates would cause a $18.7 million decline or increase, respectively, in the fair value for our fixed rate debt.

Variable Interest Rate Debt

As of September 30, 2020, $139.5 million, or approximately 21% of our outstanding debt, was subject to floating interest rates of LIBOR plus 1.40% to 1.90% and not currently subject to a hedge. The impact of a 1% increase or decrease in interest rates on our non-hedged variable rate debt would result in a decrease or increase of annual net income of approximately $1.4 million, respectively.

Credit Risk

Credit risk may be increased as a result of the COVID-19 pandemic. We expect that the actions taken by the U.S. and international governments to decrease the impact of the COVID-19 pandemic will result in a continued decline in global economic activity generally, and may adversely affect the financial condition of our tenants in particular. Although the full extent of the adverse impacts on our tenants cannot be predicted, in future periods we may experience reductions in on-time payments or closures of tenants’ businesses, which could have a material adverse effect on our results of operations, cash flows and financial condition.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management is responsible for establishing and maintaining adequate disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective.

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Changes in Internal Control Over Financial Reporting

As a result of the COVID-19 pandemic, our employees worked remotely in part of the first quarter of 2020 and part of the second quarter of 2020. This shift to working remotely was implemented quickly and all employees returned to work in the second quarter of 2020. Our remote working arrangements did not had a material effect on our internal control over financial reporting. There have been no significant changes in our internal control over financial reporting during the nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various legal proceedings and claims that arise in the ordinary course of business.  These matters are generally covered by insurance.  While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or liquidity.

Item 1A. Risk Factors.

There has been no material change in our risk factors from those previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the period ended June 30, 2020 other than the following.

The COVID-19 pandemic is expected to, and the future outbreak of other highly infectious or contagious diseases may, materially and adversely impact the businesses of many of our tenants and materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our stockholders.

In March 2020, the World Health Organization declared COVID-19 a pandemic, and the United States declared a national emergency due to the impact of the pandemic. As a result, the U.S. and many local governments implemented measures intended to control the spread of COVID-19, including enhanced screenings, quarantine or shelter in place requirements and travel restrictions. For example, local governments in Texas and Arizona, where all but one of our properties are located, mandated a stay in place order, closed non-essential businesses, and closed other types of service businesses, such as bars and restaurants, though they can continue to provide take out and drive through services. As of the date of this Quarterly Report on Form 10-Q, service businesses are permitted to be open with limited occupancy in Texas and Arizona. However, the timing and ultimate impact of any such steps on the economy as a whole and on our and our tenants’ businesses and financial condition remains uncertain.

A number of our tenants operate service and retail businesses that require in-person interactions with their customers to generate revenues, and the spread of COVID-19 has decreased customers’ willingness to frequent, and mandated stay in place orders have prevented customers from frequenting, some of our tenants’ businesses. Even as such orders are lifted, customer traffic may continue to be adversely impacted. Some tenants may also seek concessions from us for paying lease charges as a result of such mandatory closures or reduced hours. As of the date of this Quarterly Report on Form 10-Q, we have received payment of approximately 90% of contractual base rent and common area maintenance reimbursables billed for the third quarter and October. As is believed to be the case with retail landlords across the U.S., we have received a number of rent relief requests from tenants, most often in the form of rent deferral requests, which we are evaluating on a case-by-case basis. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period. In fact, to date, we have included in our adjustments to rental revenue for the three and nine months ending September 30, 2020, was a bad debt adjustment of $0.7 million and $1.8 million, respectively, and a straight-line rent reserve adjustment of $0.1 million and $1.1 million, respectively, related to credit loss for the conversion of 12 and 84 tenants, respectively, to cash basis revenue as a result of COVID-19 collectability analysis.

Also, some of our tenants have closed or may close and may not re-open even after the aforementioned restrictions are lifted, which could have a material impact on occupancy at our properties which could result in an increase in the number of co-tenancy claims due to falling below required occupancy thresholds and may impact our results. Additionally, a decrease in retail demand could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates, or at all, and we could incur significant re-leasing costs. The current decreased customer traffic or continued decreased traffic in the future could adversely impact our ability to successfully execute our leasing strategy and operational objectives.

Furthermore, in the event of any default by a tenant for non-payment of lease charges or early or limited cessation of operations, we might not be able to fully recover and/or experience delays and additional costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with such parties due to potential moratoriums imposed by various jurisdictions in light of the COVID-19 pandemic on landlord initiated commercial eviction and collection actions. Further, one or more of our tenants may seek the protection of the bankruptcy laws as a result of the prolonged impact of the COVID-19 pandemic which could result in the termination of its lease causing a reduction in our income. Tenant bankruptcies may make it more difficult for us to lease the remainder of the property or properties in which the bankrupt tenant operates and adversely impact our ability to successfully execute our re-leasing strategy.

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The outbreak has triggered a period of global economic slowdown. A sustained downturn in the U.S. economy and reduced consumer spending as well as consumer activity at brick-and-mortar commercial establishments due to the prolonged existence and threat of the COVID-19 pandemic could impose an economic recession in the U.S. which could impact our tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons and therefore decrease the revenue generated by our properties or the value of our properties. Our ability to lease space and negotiate and maintain favorable rents could also be negatively impacted by a prolonged recession in the U.S. economy. Moreover, the demand for leasing space in our properties could substantially decline during a significant downturn in the U.S. economy which could result in a decline in our occupancy percentage and reduction in rental revenues.

In addition, the COVID-19 pandemic has also led to complete or partial shutdowns of manufacturing facilities and distribution centers in many countries, which could result in temporary or long-term disruptions in our tenants’ supply chains from suppliers, or otherwise delay the delivery of inventory or other goods necessary for our tenants’ operations.

Our tenants may also be negatively impacted if the outbreak of COVID-19 occurs within their workforce or otherwise disrupts their management. Further, certain of our tenants may not be eligible for or may not be successful in securing stimulus funds under the CARES Act. Many aspects of the CARES Act have expired or are expected to expire in the fourth quarter of 2020. While the U.S. Congress is currently negotiating an additional stimulus relief bill, there can be no assurance that any such bill, if passed, will include relief available to us or our tenants.

As a result of these and other factors, some of our tenants have been unable to and others may become unable to operate their businesses and make rental payments to us on a timely basis or otherwise under their leases. Because substantially all of our income is derived from rentals of commercial real property, our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our shareholders would be adversely affected if a significant number of tenants are unable to meet their obligations or their revenues decline.

In addition, the COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our shareholders due to, among other factors:

•during the first quarter of 2020, we drew down $30 million of the availability of our revolving credit facility as a precautionary measure to preserve our financial flexibility, after which we have $13.0 million remaining availability. Difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants’ abilities to fund their business operations and meet their obligations to us;

•in the second quarter of 2020, we reduced our quarterly dividends, and the financial impact of the COVID-19 pandemic could continue to negatively impact our ability to pay dividends to our stockholders;

•the financial impacts could negatively impact our future compliance with financial covenants of our 2019 Credit Facility and other debt agreements and could result in a default and potentially an acceleration of indebtedness, which non-compliance could also negatively impact our ability to make additional borrowings under our 2019 Credit Facility or otherwise pay dividends to our shareholders; the worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our adversely impacted properties could result in the recognition of substantial impairment charges imposed on our assets;

•the credit quality of our tenants could be negatively impacted and we may significantly decrease our revenues;

•a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties, or to sell properties as part of our capital recycling strategy;

•as a result of remote working arrangements we implemented in response to the COVID-19 pandemic in the first and second quarters of 2020, we may have been subject to increased risk of an information or cyber-security incident, fraud, a failure to maintain the uninterrupted operation of our information systems due to, among other things, an increase in remote work; and

•the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.

The extent to which the COVID-19 pandemic, or a future pandemic, impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope,

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severity and duration of such pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic, but a prolonged outbreak as well as related mitigation efforts could continue to have a material impact on our revenues and could materially and adversely affect our business, results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)    During the period covered by this Quarterly Report on Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

(b)    Not applicable.

(c)    During the three months ended September 30, 2020, 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 the 2018 Plan. The following table summarizes all of these repurchases during the three months ended September 30, 2020.

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		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
July 1, 2020 through July 31, 2020	—	$	—	N/A	N/A
August 1, 2020 through August 31, 2020	—	—		N/A	N/A
September 1, 2020 through September 30, 2020	1,173	6.00		N/A	N/A
Total	1,173	$	6.00

(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 2018 Plan. With respect to these shares, the price paid per share is based on the fair market value at the time of tender.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits listed on the accompanying Exhibit Index are filed, furnished and incorporated by reference (as stated therein) as part of this Report.

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EXHIBIT INDEX

Exhibit No. Description

3.1.1 Articles of Amendment and Restatement of Whitestone REIT (previously filed as and incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on July 31, 2008)

3.1.2 Articles Supplementary (previously filed as and incorporated by reference to Exhibit 3(i).1 to the Registrant's Current Report on Form 8-K, filed on December 6, 2006)

3.1.3 Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on August 24, 2010)

3.1.4 Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K, filed on August 24, 2010)

3.1.5 Articles Supplementary (previously filed as and incorporated by reference to Exhibit 3.3 to the Registrant's Current Report on Form 8-K, filed on August 24, 2010)

3.1.6 Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1.1 to the Registrant's Current Report on Form 8-K, filed on June 27, 2012)

3.1.7 Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1.2 to the Registrant's Current Report on Form 8-K, filed on June 27, 2012)

3.1.8 Articles of Amendment (previously filed as and incorporated by reference to Exhibit 3.1.8 to the Registrant’s Annual Report on Form 10-K, filed on March 2, 2020)

3.1.9 Articles Supplementary for Series A Preferred Shares (previously filed and incorporated by reference to Exhibit 3.1. to the Registrant’s Current Report on Form 8-K filed on May 15, 2020)

3.2 Amended and Restated Bylaws of Whitestone REIT (previously filed as and incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on March 24,2020)

10.1* Form of Restricted Common Share Unit Award Agreement (Time-Vested)

10.2* Form of Restricted Common Share Unit Award Agreement (Performance-Vested)

31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1** Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2** Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 The following financial information of the Registrant for the quarter ended September 30, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019 (unaudited), (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, June 30, and September 30, 2020 and 2019 (unaudited), (iv) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited).

104 Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

 ________________________

*       Filed herewith.

**     Furnished herewith.    

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WHITESTONE REIT
Date:	October 30, 2020	/s/ James C. Mastandrea
		James C. Mastandrea
		Chief Executive Officer
		(Principal Executive Officer)

Date:	October 30, 2020	/s/ David K. Holeman
		David K. Holeman
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

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