Whitestone REIT - Quarter Report: 2022 September (Form 10-Q)

wstr20220930_10q.htm

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, 2022

☐	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

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 November 2, 2022, there were 49,386,066 common shares of beneficial interest, $0.001 par value per share, outstanding.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	1
	Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	1
	Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	3
	Consolidated Statements of Changes in Equity (Unaudited) for the Three Months Ended March 31, June 30 and September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	57
Item 4.	Controls and Procedures.	57

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	58
Item 1A.	Risk Factors.	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	59
Item 3.	Defaults Upon Senior Securities.	59
Item 4.	Mine Safety Disclosures.	59
Item 5.	Other Information.	59
Item 6.	Exhibits.	59
	Exhibit Index	60
	Signatures	61

Table of Contents

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, 2022*			*December 31, 2021*
	(unaudited)
*ASSETS*
Real estate assets, at cost
Property	$	1,206,605		$	1,196,919
Accumulated depreciation		(212,084	)		(190,333	)
Total real estate assets		994,521			1,006,586
Investment in real estate partnership		34,891			34,588
Cash and cash equivalents		9,504			15,721
Restricted cash		63			193
Escrows and acquisition deposits		12,329			11,323
Accrued rents and accounts receivable, net of allowance for doubtful accounts		25,183			22,395
Receivable due from related party		1,333			847
Unamortized lease commissions, legal fees and loan costs		12,131			8,442
Prepaid expenses and other assets⁽¹⁾		9,978			1,995
Total assets	$	1,099,933		$	1,102,090

*LIABILITIES AND EQUITY*
Liabilities:
Notes payable	$	637,138		$	642,842
Accounts payable and accrued expenses⁽²⁾		35,797			45,777
Payable due to related party		1,560			997
Tenants' security deposits		8,443			8,070
Dividends and distributions payable		6,004			5,366
Total liabilities		688,942			703,052
Commitments and contingencies:		—			—
Equity:
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, 2021		—			—
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 49,382,809 and 49,144,153 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		49			48
Additional paid-in capital		623,838			623,462
Accumulated deficit		(226,374	)		(223,973	)
Accumulated other comprehensive income (loss)		7,646			(6,754	)
Total Whitestone REIT shareholders' equity		405,159			392,783
Noncontrolling interest in subsidiary		5,832			6,255
Total equity		410,991			399,038
Total liabilities and equity	$	1,099,933		$	1,102,090

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)

	*September 30, 2022*		*December 31, 2021*
	(unaudited)
(1) Operating lease right of use assets (net)	$	145	$	222
(2) Operating lease liabilities	$	150	$	231

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2022*			*2021*			*2022*			*2021*
Revenues
Rental⁽¹⁾	$	35,029		$	32,069		$	103,500		$	90,916
Management, transaction, and other fees		354			375			1,003			1,191
Total revenues		35,383			32,444			104,503			92,107

Operating expenses
Depreciation and amortization		7,889			7,340			23,661			21,458
Operating and maintenance		7,317			5,789			19,253			16,072
Real estate taxes		4,513			4,589			13,867			12,787
General and administrative		4,832			5,672			13,063			16,036
Total operating expenses		24,551			23,390			69,844			66,353

Other expenses (income)
Interest expense		6,816			6,142			19,111			18,417
(Gain) loss on sale or disposal of assets, net		7			48			12			(177	)
Interest, dividend and other investment income		(13	)		(31	)		(43	)		(103	)
Total other expenses		6,810			6,159			19,080			18,137

Income before equity investment in real estate partnership and income tax		4,022			2,895			15,579			7,617

Equity in earnings of real estate partnership		65			151			304			429
Provision for income tax		(112	)		(100	)		(313	)		(274	)
Income from continuing operations		3,975			2,946			15,570			7,772

Gain on sale of property from discontinued operations		—			—			—			1,833
Income from discontinued operations		—			—			—			1,833

Net income		3,975			2,946			15,570			9,605

Less: Net income attributable to noncontrolling interests		60			47			239			165

Net income attributable to Whitestone REIT	$	3,915		$	2,899		$	15,331		$	9,440

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2022*		*2021*		*2022*		*2021*
Basic Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares	$	0.08	$	0.06	$	0.31	$	0.17
Income from discontinued operations attributable to Whitestone REIT		—		—		—		0.04
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.08	$	0.06	$	0.31	$	0.21
Diluted Earnings Per Share:
Income from continuing operations attributable to Whitestone REIT, excluding amounts attributable to unvested restricted shares	$	0.08	$	0.06	$	0.31	$	0.17
Income from discontinued operations attributable to Whitestone REIT		—		—		—		0.04
Net income attributable to common shareholders, excluding amounts attributable to unvested restricted shares	$	0.08	$	0.06	$	0.31	$	0.21

Weighted average number of common shares outstanding:
Basic		49,274		46,883		49,211		44,268
Diluted		50,129		47,825		49,916		45,108

Consolidated Statements of Comprehensive Income

Net income	$	3,975	$	2,946	$	15,570	$	9,605

Other comprehensive income

Unrealized gain on cash flow hedging activities		5,962		1,273		14,623		4,783

Comprehensive income		9,937		4,219		30,193		14,388

Less: Net income attributable to noncontrolling interests		60		47		239		165
Less: Comprehensive income attributable to noncontrolling interests		90		20		223		82

Comprehensive income attributable to Whitestone REIT	$	9,787	$	4,152	$	29,731	$	14,141

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

	*Three Months Ended September 30,*					*Nine Months Ended September 30,*
	*2022*			*2021*		*2022*			*2021*
⁽¹⁾ Rental
Rental revenues	$	25,244		$	23,177	$	75,023		$	67,041
Recoveries		10,152			8,720		29,092			24,375
Bad debt		(367	)		172		(615	)		(500	)
Total rental	$	35,029		$	32,069	$	103,500		$	90,916

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands)

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

Balance, December 31, 2021		49,144		$	48	$	623,462		$	(223,973	)	$	(6,754	)	$	392,783			771		$	6,255		$	399,038
Exchange of noncontrolling interest OP units for common shares		1			—		—			—			—			—			(1	)		—			—
Issuance of shares under dividend reinvestment plan		1			—		15			—			—			15			—			—			15
Repurchase of common shares ⁽¹⁾		—			—		—			—			—			—			—			—			—
Share-based compensation		—			—		(1,413	)		—			—			(1,413	)		—			—			(1,413	)
Distributions - $0.1075 per common share / OP unit		—			—		—			(5,897	)		—			(5,897	)		—			(92	)		(5,989	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			5,894			5,894			—			92			5,986
Net income		—			—		—			7,078			—			7,078			—			111			7,189
Balance, March 31, 2022		49,146		$	48	$	622,064		$	(222,792	)	$	(860	)	$	398,460			770		$	6,366		$	404,826
Exchange of noncontrolling interest OP units for common shares		—			1		7			—			—			8			—			(8	)		—
Issuance of shares under dividend reinvestment plan		2			—		17			—			—			17			—			—			17
Repurchase of common shares ⁽¹⁾		(26	)		—		(278	)		—			—			(278	)		—			—			(278	)
Share-based compensation		119			—		783			—			—			783			—			—			783
Distributions - $0.1200 per common share / OP unit		—			—		—			(5,909	)		—			(5,909	)		—			(94	)		(6,003	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			2,634			2,634			—			41			2,675
Net income		—			—		—			4,338			—			4,338			—			68			4,406
Balance, June 30, 2022		49,241		$	49	$	622,593		$	(224,363	)	$	1,774		$	400,053			770		$	6,373		$	406,426
Exchange of noncontrolling interest OP units for common shares		75			—		608			—			—			608			(75	)		(608	)		—
Issuance of shares under dividend reinvestment plan		2			—		17			—			—			17			—			—			17
Repurchase of common shares ⁽¹⁾		(21	)		—		(249	)		—			—			(249	)		—			—			(249	)
Share-based compensation		86			—		869			—			—			869			—			—			869
Distributions - $0.1200 per common share / OP unit		—			—		—			(5,926	)		—			(5,926	)		—			(83	)		(6,009	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			5,872			5,872			—			90			5,962
Net income		—			—		—			3,915			—			3,915			—			60			3,975
Balance, September 30, 2022		49,383		$	49	$	623,838		$	(226,374	)	$	7,646		$	405,159			695		$	5,832		$	410,991

See accompanying notes to Consolidated Financial Statements

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands)

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

Balance, December 31, 2020		42,391		$	42	$	562,250		$	(215,809	)	$	(14,400	)	$	332,083			773	$	6,243		$	338,326
Issuance of shares under dividend reinvestment plan		2			—		15			—			—			15			—		—			15
Repurchase of common shares ⁽¹⁾		(37	)		—		(324	)		—			—			(324	)		—		—			(324	)
Share-based compensation		223			1		1,397			—			—			1,398			—		—			1,398
Distributions - $0.1058 per common share / OP unit		—			—		—			(4,622	)		—			(4,622	)		—		(83	)		(4,705	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			2,180			2,180			—		41			2,221
Net income		—			—		—			1,415			—			1,415			—		26			1,441
Balance, March 31, 2021		42,579		$	43	$	563,338		$	(219,016	)	$	(12,220	)	$	332,145			773	$	6,227		$	338,372
Issuance of common shares - ATM Program, net of offering costs		3,025			2		25,369			—			—			25,371			—		—			25,371
Exchange offer costs		—			—		(31	)		—			—			(31	)		—		—			(31	)
Issuance of shares under dividend reinvestment plan		1			—		15			—			—			15			—		—			15
Repurchase of common shares ⁽¹⁾		(13	)		—		(104	)		—			—			(104	)		—		—			(104	)
Share-based compensation		101			—		1,177			—			—			1,177			—		—			1,177
Distributions - $0.1075 per common share / OP unit		—			—		—			(4,952	)		—			(4,952	)		—		(83	)		(5,035	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			1,268			1,268			—		21			1,289
Reallocation of ownership between parent and subsidiary		—			—		—			—			(14	)		(14	)		—		14			—
Net income		—			—		—			5,126			—			5,126			—		92			5,218
Balance, June 30, 2021		45,693		$	45	$	589,764		$	(218,842	)	$	(10,966	)	$	360,001			773	$	6,271		$	366,272
Issuance of common shares - ATM Program, net of offering costs		2,991			3		27,961			—			—			27,964			—		—			27,964
Exchange offer costs		—			—		(18	)		—			—			(18	)		—		—			(18	)
Issuance of shares under dividend reinvestment plan		2			—		15			—			—			15			—		—			15
Repurchase of common shares ⁽¹⁾		(28	)		—		(250	)		—			—			(250	)		—		—			(250	)
Share-based compensation		182			—		1,491			—			—			1,491			—		—			1,491
Distributions - $0.1075 per common share / OP unit		—			—		—			(5,334	)		—			(5,334	)		—		(83	)		(5,417	)
Unrealized gain on change in value of cash flow hedge		—			—		—			—			1,253			1,253			—		20			1,273
Reallocation of ownership between parent and subsidiary		—			—		—			—			(13	)		(13	)		—		13			—
Net income		—			—		—			2,899						2,899			—		47			2,946
Balance, September 30, 2021		48,840		$	48	$	618,963		$	(221,277	)	$	(9,726	)	$	388,008			773	$	6,268		$	394,276

⁽¹⁾ The Company acquired common shares held by employees who tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted common shares.

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	*Nine Months Ended September 30,*
	*2022*			*2021*
Cash flows from operating activities:
Net income from continuing operations	$	15,570		$	7,772
Net income from discontinued operations		—			1,833
Net income		15,570			9,605
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,661			21,458
Amortization of deferred loan costs		824			822
(Gain) loss on sale or disposal of assets, net		12			(177	)
Bad debt		615			500
Share-based compensation		239			4,066
Equity in earnings of real estate partnership		(304	)		(429	)
Changes in operating assets and liabilities:
Escrows and acquisition deposits		(1,006	)		(1,163	)
Accrued rents and accounts receivable		(3,403	)		518
Receivable due from related party		(486	)		(316	)
Unamortized lease commissions, legal fees and loan costs		(1,575	)		(2,531	)
Prepaid expenses and other assets		(6,266	)		1,548
Accounts payable and accrued expenses		4,642			(1,572	)
Payable due to related party		563			405
Tenants' security deposits		373			802
Net cash provided by operating activities		33,459			31,703
Cash flows from investing activities:
Acquisitions of real estate		—			(53,364	)
Additions to real estate		(10,118	)		(6,058	)
Net cash used in investing activities		(10,118	)		(59,422	)
Net cash provided by investing activities of discontinued operations		—			1,833
Cash flows from financing activities:
Distributions paid to common shareholders		(17,049	)		(14,063	)
Distributions paid to OP unit holders		(263	)		(248	)
Proceeds from issuance of common shares, net of offering costs		—			53,335
Payments of exchange offer costs		—			(49	)
Net payments of credit facility		(5,000	)		(25,000	)
Repayments of notes payable		(2,705	)		(2,403	)
Payments of loan origination costs		(4,144	)		—
Repurchase of common shares		(527	)		(678	)
Net cash provided by (used in) financing activities		(29,688	)		10,894
Net decrease in cash, cash equivalents and restricted cash		(6,347	)		(14,992	)
Cash, cash equivalents and restricted cash at beginning of period		15,914			25,956
Cash, cash equivalents and restricted cash at end of period ⁽¹⁾	$	9,567		$	10,964

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

See accompanying notes to Consolidated Financial Statements.

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Whitestone REIT and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	*Nine Months Ended September 30,*
	*2022*		*2021*
Supplemental disclosure of cash flow information:
Cash paid for interest	$	18,980	$	17,732
Cash paid for taxes	$	366	$	364
Non cash investing and financing activities:
Disposal of fully depreciated real estate	$	80	$	284
Financed insurance premiums	$	1,846	$	1,712
Value of shares issued under dividend reinvestment plan	$	49	$	45
Value of common shares exchanged for OP units	$	616	$	—
Change in fair value of cash flow hedge	$	14,623	$	4,783

	*September 30,*
	*2022*		*2021*
Cash, cash equivalents and restricted cash
Cash and cash equivalents	$	9,504	$	10,858
Restricted cash		63		106
Total cash, cash equivalents and restricted cash	$	9,567	$	10,964

See accompanying notes to Consolidated Financial Statements.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

1. INTERIM FINANCIAL STATEMENTS

The consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2021 are derived from our audited consolidated financial statements as of that date. The unaudited consolidated financial statements as of and for the period ended September 30, 2022 have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information on a basis consistent with the annual audited consolidated financial statements and with the instructions to Form 10-Q.

The consolidated financial statements presented herein reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of Whitestone and our subsidiaries as of September 30, 2022 and December 31, 2021, and the results of operations for the three and nine month periods ended September 30, 2022 and 2021, the consolidated statements of changes in equity for the three month periods ended March 31, June 30, and September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. All of these adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and the notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Business. Whitestone was formed as a real estate investment trust (“REIT”) pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, we changed our state of organization from Texas to Maryland pursuant to a merger where we merged directly with and into a Maryland REIT formed for the sole purpose of the reorganization and the conversion of each of the outstanding common shares of beneficial interest of the Texas entity into 1.42857 common shares of beneficial interest of the Maryland entity. We serve as the general partner of Whitestone REIT Operating Partnership, L.P. (the “Operating Partnership”), which was formed on December 31, 1998 as a Delaware limited partnership. We currently conduct substantially all of our operations and activities through the Operating Partnership. As the general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions. As of September 30, 2022 and December 31, 2021, Whitestone wholly owned 60 commercial properties in and around Austin, Chicago, Dallas-Fort Worth, Houston, Phoenix and San Antonio.

As of September 30, 2022, these properties consist of:

Consolidated Operating Portfolio

•

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

Redevelopment, New Acquisitions Portfolio

•

five parcels of land held for future development.

As of September 30, 2022, we, through our investment in Pillarstone Capital REIT Operating Partnership LP (“Pillarstone” or “Pillarstone OP”), owned a majority interest in eight properties that do not meet our Community Centered Property® strategy containing approximately 0.9 million square feet of GLA (the “Pillarstone Properties”). We own 81.4% of the total outstanding units of Pillarstone OP, which we account for using the equity method.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

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, 2022 and December 31, 2021, we owned a majority of the partnership interests in the Operating Partnership. Consequently, the accompanying consolidated financial statements include the accounts of the Operating Partnership.

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

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

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

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

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

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September 30, 2022

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

Derivative Instruments and Hedging Activities. We utilize derivative financial instruments, principally interest rate swaps, to manage our exposure to fluctuations in interest rates. We have established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. We recognize our interest rate swaps as cash flow hedges with the effective portion of the changes in fair value recorded in comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Any ineffective portion of a cash flow hedges’ change in fair value is recorded immediately into earnings. Our cash flow hedges are determined using Level 2 inputs under ASC 820, “Fair Value Measurements and Disclosures.” Level 2 inputs represent quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable. As of September 30, 2022, 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, 2022, approximately $ 112,000 and $ 72,000 in interest expense and real estate taxes, respectively, were capitalized and for the nine months ended September 30, 2022, approximately $ 316,000 and $ 222,000 in interest expense and real estate taxes, respectively, were capitalized. For the three months ended September 30, 2021, approximately $ 109,000 and $ 75,000 in interest expense and real estate taxes, respectively, were capitalized, and for the nine months ended September 30, 2021, approximately $ 312,000 and $ 225,000 in interest expense and real estate taxes, respectively, were capitalized.

Share-Based Compensation. From time to time, we grant nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to executive officers and employees under our 2018 Long-Term Equity Incentive Ownership Plan (the “2018 Plan”). Awarded shares and units vest when certain performance conditions are met. We recognize compensation expense when achievement of the performance conditions is probable based on management’s most recent estimates using the fair value of the shares as of the grant date. We recognized $ 943,000 and $ 1,563,000 in share-based compensation net of forfeitures for the three months ended September 30, 2022 and 2021, respectively, and we recognized $ 455,000 and $ 4,275,000 in share-based compensation for the nine months ended September 30, 2022 and 2021, respectively. On January 18, 2022, the Board of Trustees terminated James Mastandrea, with cause, from his position as Chief Executive Officer. Mr. Mastandrea was also replaced as Chairman of the Board. Following his termination, the Board of Trustees appointed Dave Holeman, previously our Chief Financial Officer, as Chief Executive Officer. The Company also recently replaced its Chief Operating Officer and Executive Vice President of Acquisitions and Asset Management. As a result of these changes, we recognized a reduction of share-based compensation of $2.2 million during the three months ended March 31, 2022 due to forfeitures. We recognize forfeitures as they occur.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Accrued Rents and Accounts Receivable. Included in accrued rents and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. We review the collectability of charges under our tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located, including the impact of the COVID-19 pandemic on tenants’ businesses and financial condition. We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected. Our review of collectability under our operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue. As of September 30, 2022 and December 31, 2021, we had an allowance for uncollectible accounts of $15.6 million and $14.9 million, respectively. During the three months ending September 30, 2022 and 2021, we recorded an adjustment to rental revenue for bad debt, exclusive of straight-line rent reserve adjustments, in the amount of a $0.4 million decrease to revenue and a $0.2 million increase to revenue, respectively, and during the nine months ended September 30, 2022 and 2021, we recorded a decrease to rental revenue for bad debt, exclusive of straight-line rent reserve adjustment, in the amount of $0.6 million and $0.5 million, respectively. The three months ended September 30, 2022 included 77 cash basis tenants, resulting in a decrease to rental revenue for straight-line rent adjustments of $0.03 million and an increase to rental revenue for bad debt adjustments of $0.2 million, and the three months ended September 30, 2021 included 63 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight-line rent adjustments of $0.2 million and $0.3 million, respectively. The nine months ended September 30, 2022 included 77 cash basis tenants, resulting in decrease to rental revenue for bad debt and straight line rent adjustment of $0.4 million and $0.4 million, respectively, and the nine months ended September 30, 2021 included 63 cash basis tenants, resulting in decreases to rental revenue for bad debt and straight line rent adjustments of $0.6 million and $0.5 million, respectively.

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

Other property income primarily includes amounts recorded in connection with management fees and lease termination fees. Pillarstone OP paid us management fees for property management, leasing and day-to-day advisory and administrative services. The management agreement with Pillarstone OP was terminated on August 18, 2022. We recognize lease termination fees in the year that the lease is terminated and collection of the fee is probable. Amounts recorded within other property income are accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.

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

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

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued Accounting Standards Update No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which clarified the scope and application of the original guidance. We have elected this option and adopted ASU 2020-04 and ASU 2021-01. We evaluated the potential impact of adopting this guidance and do not expect it to have a material impact on our consolidated financial statements.

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September 30, 2022

(Unaudited)

3. LEASES

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

A summary of minimum future rents to be received (exclusive of renewals, tenant reimbursements, contingent rents, and collectability adjustments under Topic 842) under noncancelable operating leases in existence as of September 30, 2022 is as follows (in thousands):

Years Ended December 31,	Minimum Future Rents⁽¹⁾
2022 (remaining)	$	24,444
2023		93,917
2024		80,285
2025		63,598
2026		48,308
Thereafter		139,948
Total	$	450,500

⁽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.

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, 2022*
2022 (remaining)	$	23
2023		65
2024		43
2025		27
2026		1
Thereafter		—
Total undiscounted rental payments		159
Less imputed interest		9
Total lease liabilities	$	150

For the three months ended September 30, 2022 and 2021, the total lease costs were $ 122,000 and $ 253,000, respectively, and for the nine months ended September 30, 2022 and 2021, the total lease costs were $ 552,000 and $ 778,000, respectively. The weighted average remaining lease term for our operating leases was 2.6 years at September 30, 2022. We do not include renewal options in the lease term for calculating the lease liability unless we are reasonably certain we will exercise the option or the lessor has the sole ability to exercise the option. The weighted average incremental borrowing rate was 4.5% at September 30, 2022.

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September 30, 2022

(Unaudited)

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, 2022*			*December 31, 2021*

Tenant receivables	$	18,867		$	18,410
Accrued rents and other recoveries		21,341			18,681
Allowance for doubtful accounts		(15,627	)		(14,896	)
Other receivables		602			200
Total	$	25,183		$	22,395

5. UNAMORTIZED LEASE COMMISSIONS, LEGAL FEES AND LOAN COSTS

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

	*September 30, 2022*			*December 31, 2021*

Leasing commissions	$	15,377		$	13,341
Deferred legal cost		391			365
Deferred financing cost		4,149			3,898
Total cost		19,917			17,604
Less: leasing commissions accumulated amortization		(7,469	)		(6,305	)
Less: deferred legal cost accumulated amortization		(273	)		(248	)
Less: deferred financing cost accumulated amortization		(44	)		(2,609	)
Total cost, net of accumulated amortization	$	12,131		$	8,442

6. INVESTMENT IN REAL ESTATE PARTNERSHIP

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

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In connection with the Contribution, Whitestone TRS, Inc., a subsidiary of the Company (“Whitestone TRS”), entered into a management agreement with the entities that own the contributed Pillarstone Properties (collectively, the “Management Agreements”). Pursuant to the Management Agreements, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services. The management agreement was terminated on August 18, 2022. Prior to the termination of the Management Agreement, we reported approximately $144,000 in property management fee income on a quarterly basis.

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.

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, 2022*		*December 31, 2021*
Real estate partnership	*Ownership Interest*
Pillarstone OP⁽¹⁾		81.4%	$	34,891	$	34,588
Total real estate partnership⁽²⁾⁽³⁾			$	34,891	$	34,588

⁽¹⁾	Representing eight property interests and 926,798 square feet of GLA, as of September 30, 2022 and December 31, 2021.

⁽²⁾

On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of Pillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price.As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option of the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP. Because the Pillarstone Rights Agreement seeks to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s breach of the Pillarstone OP partnership agreement, breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, and breach of the implied covenant of good faith and fair dealing under the Pillarstone OP partnership agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions.On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption right is not impaired while the underlying dispute is being considered by the Court.While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.

⁽³⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated the value of the investment based on the information available to us at the time of this report.

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September 30, 2022

(Unaudited)

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

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2022*		*2021*		*2022*		*2021*

Pillarstone OP	$	65	$	151	$	304	$	429

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

	*September 30, 2022*		*December 31, 2021*

Assets:
Real estate, net	$	47,880	$	48,273
Other assets		9,680		8,790
Total assets⁽¹⁾		57,560		57,063
Liabilities and equity:
Notes payable		14,757		14,920
Other liabilities		3,653		3,200
Equity		39,150		38,943
Total liabilities and equity⁽²⁾		57,560		57,063
Company’s share of equity		31,888		31,718
Cost of investment in excess of the Company’s share of underlying net book value		3,003		2,870
Carrying value of investment in real estate partnership⁽³⁾	$	34,891	$	34,588

⁽¹⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated total assets and its components based on the information available to us at the time of this report.

⁽²⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated total liabilities and equity and its components based on the information available to us at the time of this report.

⁽³⁾

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(Unaudited)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2022*			*2021*			*2022*			*2021*

Revenues	$	2,288		$	2,379		$	6,892		$	6,843
Operating expenses		(1,895	)		(1,787	)		(5,446	)		(5,184	)
Other expenses		(281	)		(351	)		(974	)		(1,033	)
Net income⁽¹⁾	$	112		$	241		$	472		$	626

⁽¹⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated net income and its components based on the information available to us at the time of this report.

The amortization of the basis difference between the cost of investment and the Company's share of underlying net book value for the three months period ended September 30, 2022 and 2021 is $ 27,000 and $ 45,000, respectively, and for both of the nine months periods ended September 30, 2022 and 2021 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.

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, 2022 and 2021, the amortization of the guarantee liability was approximately $ 9,000 and $ 18,000, respectively, and for both of the nine months ended September 30, 2022 and 2021, the amortization of the guarantee liability is $ 28,000.

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7. DEBT

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

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

Description	*September 30, 2022*			*December 31, 2021*
Fixed rate notes
$100.0 million, 1.73% plus 1.35% to 1.90% Note ⁽¹⁾	$	—		$	100,000
$165.0 million, 2.24% plus 1.35% to 1.90% Note ⁽¹⁾		—			165,000
$265.0 million, 3.18% plus 1.45% to 2.10% Note, due January 31, 2028 ⁽²⁾		265,000			—
$80.0 million, 3.72% Note, due June 1, 2027		80,000			80,000
$19.0 million 4.15% Note, due December 1, 2024		18,103			18,358
$20.2 million 4.28% Note, due June 6, 2023		17,485			17,808
$14.0 million 4.34% Note, due September 11, 2024		12,778			12,978
$14.3 million 4.34% Note, due September 11, 2024		13,585			13,773
$15.1 million 4.99% Note, due January 6, 2024		13,705			13,907
$2.6 million 5.46% Note, due October 1, 2023		2,250			2,289
$50.0 million, 5.09% Note, due March 22, 2029		50,000			50,000
$50.0 million, 5.17% Note, due March 22, 2029		50,000			50,000
$1.8 million 3.15% Note, due November 28, 2022		349			—
Floating rate notes
Unsecured line of credit, SOFR plus 1.50% to 2.10%, due September 16, 2026		114,500			119,500
Total notes payable principal		637,755			643,613
Less deferred financing costs, net of accumulated amortization		(617	)		(771	)
Total notes payable	$	637,138		$	642,842

⁽¹⁾	Loan was fully paid off on September 16, 2022.

⁽²⁾	Promissory note includes an interest rate swap that fixes the SOFR portion of the term loan at an interest rate of 2.16% through October 28, 2022, 2.76% from October 29, 2022 through January 31, 2024, and 3.32% beginning February 1, 2024 through January 31, 2028.

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 discontinuation of LIBOR. The Company is monitoring the developments with respect to the phasing out of LIBOR after 2021 and working 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.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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).

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.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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 September 16, 2022, we, through our Operating Partnership, entered into an unsecured credit facility (the “2022 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Administrative Agent”), Truist Bank, as syndication agent, and BMO Capital Markets Corp., Truist Bank, Capital One, National Association, and U.S. Bank National Association, as co-lead arrangers and joint book runners. The 2022 Facility amended and restated the Company's previous unsecured revolving credit facility, dated January 31, 2019 (the "2019 Facility").

The 2022 Facility is comprised of the following two tranches:

•

$250.0 million unsecured revolving credit facility with a maturity date of September 16, 2026 (the “2022 Revolver”);

•

$265.0 million unsecured term loan with a maturity date of January 31, 2028 (“Term Loan”).

Borrowings under the 2022 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted Term Secured Overnight Financing Rate ("SOFR") plus an applicable margin based upon our then existing leverage. As of September 30, 2022, the interest rate on the 2022 Revolver was 4.62%. Based on our current leverage ratio, the revolver has initial interest rate of SOFR plus 1.60% and a 10 basis point credit spread adjustment. In addition, we entered into interest rate swaps to fix the interest rates on the Term Loan. The Term Loan with the swaps has the following interest rates:

•

2.16% plus 1.55% through October 28, 2022

•

2.80% plus 1.55% from October 29, 2022 through January 31, 2024

•

3.42% plus 1.55% from February 1, 2024 through January 31, 2028

The 2022 Facility also has a pricing provision where the applicable margin can be adjusted by an aggregate 0.02% per annum based on the Company’s performance on certain sustainability performance targets. Base Rate means, for any day, the higher of: (a) the Administrative Agent’s prime commercial rate, (b) the sum of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York for such day, plus (ii) 0.50%, or (c) the sum of (i) Adjusted Term SOFR for a one-month tenor in effect on such day plus (ii) 1.10%. Adjusted Term SOFR means, for any such day, the sum of (i) the SOFR-based term rate for the day two (2) business days prior and (ii) 0.10%.

The 2022 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, 2022, subject to any potential future paydowns or increases in the borrowing base, we have $126.4 million remaining availability under the 2022 Revolver. As of September 30, 2022, $379.5 million was drawn on the 2022 Facility and our unused borrowing capacity was $135.0 million, assuming that we use the proceeds of the 2022 Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base. The Company used $379.5 million of proceeds from the 2022 Facility to repay amounts outstanding under the 2019 Facility.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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 2022 Facility. The 2022 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 2022 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 $449 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 2022 Facility. The 2022 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 2022 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.

As of September 30, 2022, our $157.9 million in secured debt was collateralized by seven properties with a carrying value of $243.5 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, 2022, we were in compliance with all loan covenants.

Scheduled maturities of our outstanding debt as of September 30, 2022 were as follows (in thousands):

Year	*Amount Due*
2022 (remaining)	$	1,104
2023		27,863
2024		63,573
2025		17,143
2026		131,643
Thereafter		396,429
Total	$	637,755

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

8. DERIVATIVES AND HEDGING ACTIVITIES

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

	*September 30, 2022*
Balance Sheet Location	*Estimated Fair Value*
Prepaid expenses and other assets	$	7,764

	*December 31, 2021*
Balance Sheet Location	*Estimated Fair Value*
Accounts payable and accrued expenses	$	(6,860	)

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 our $165 million term loan 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. Effective September 7, 2022, Regions Bank novated $29.4 million of the swap to Bank of Montreal. See Note 7 (Debt) for additional information regarding the 2019 Facility. The swap began 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 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 a $100 million interest rate swap with Bank of Montreal that fixed the LIBOR portion of our $100 million term loan under the 2018 Facility 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 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 September 16, 2022, we, through our Operating Partnership, entered an interest rate swap with Bank of Montreal that fixed the unhedged SOFR portion of Term Loan under the 2022 Facility at 3.32%. The notional amount of the swap begins at $100 million on October 29, 2022, and increases to $265 million on February 1, 2024, maturing on January 31, 2028. Pursuant to the terms of the agreement governing the interest rate swap, Bank of Montreal assigned beginning and ending notionals of $20.7 million and $54.8 million of the swap, respectively, to U.S. Bank, National Association, beginning and ending notionals of $25.4 million and $67.2 million of the swap, respectively, to Truist Bank, beginning and ending notionals of $20.7 million and $54.8 million of the swap, respectively, to Capital One, National Association, and beginning and ending notionals of $5.9 million and $15.7 million of the swap, respectively, to Associated Bank. See Note 7 (Debt) for additional information regarding the 2022 Facility. We designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value recorded in comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The Company does not expect any amount of the existing gains or losses to be reclassified into earnings within the next 12 months.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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

	*Amount Recognized as Comprehensive income*		*Location of Income (Loss) Recognized in Earnings*	*Amount of Income (Loss) Recognized in Earnings (1)*
Three Months Ended September 30, 2022	$	5,962	Interest expense	$	52
Three Months Ended September 30, 2021	$	1,273	Interest expense	$	(1,401	)

Nine Months Ended September 30, 2022	$	14,623	Interest expense	$	(2,276	)
Nine Months Ended September 30, 2021	$	4,783	Interest expense	$	(4,057	)

⁽¹⁾	There was no ineffective portion of our interest rate swaps to recognize in earnings for the three and nine months ended September 30, 2022 and 2021.

9. EARNINGS PER SHARE

Basic earnings per share for our common shareholders is calculated by dividing net income 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, 2022 and 2021, 752,327 and 772,775 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, 2022 and 2021, 752,634 and 772,775 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive.

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
(in thousands, except per share data)	*2022*			*2021*			*2022*			*2021*
Numerator:
Income from continuing operations	$	3,975		$	2,946		$	15,570		$	7,772
Less: Net income attributable to noncontrolling interests		(60	)		(47	)		(239	)		(132	)
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares		3,915			2,899			15,331			7,640
Income from discontinued operations		—			—			—			1,833
Less: Net income attributable to noncontrolling interests		—			—			—			(33	)
Income from discontinued operations attributable to Whitestone REIT		—			—			—			1,800
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	3,915		$	2,899		$	15,331		$	9,440

Denominator:
Weighted average number of common shares - basic		49,274			46,883			49,211			44,268
Effect of dilutive securities:
Unvested restricted shares		855			942			705			840
Weighted average number of common shares - dilutive		50,129			47,825			49,916			45,108

Earnings Per Share:
Basic:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares	$	0.08		$	0.06		$	0.31		$	0.17
Income from discontinued operations attributable to Whitestone REIT		—			—			—			0.04
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.08		$	0.06		$	0.31		$	0.21
Diluted:
Income from continuing operations attributable to Whitestone REIT excluding amounts attributable to unvested restricted shares	$	0.08		$	0.06		$	0.31		$	0.17
Income from discontinued operations attributable to Whitestone REIT		—			—			—			0.04
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.08		$	0.06		$	0.31		$	0.21

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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, 2022 and 2021, we recognized approximately $ 114,000 and $ 99,000 in margin tax provision, respectively, and for the nine months ended September 30, 2022 and 2021, we recognized approximately $ 315,000 and $ 273,000, 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 20, 2022, our universal shelf registration statement on Form S-3 was declared effective by the SEC, which registers the issuance and sale by us of up to $500 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights.

On September 9, 2022, we entered into eleven equity distribution agreements for an at-the-market equity distribution program (the “2022 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. 333-264881). 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 2022 equity distribution agreements or terminate the 2022 equity distribution agreements.

We have in the past, and expect to in the future, enter into at-the-market equity distribution programs providing for the issuance and sale of common shares. 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 of 1933, as amended (the "Securities Act"). For the three and nine months ended September 30, 2022, we did not sell shares under the equity distribution agreements. During the three months ended September 30, 2021, we sold 2,991,168 common shares under the 2019 equity distribution agreements, which provided 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), with net proceeds to us of approximately $28.0 million. In connection with such sales, we paid compensation of approximately $426,000 to the sales agents. During the nine months ended September 30, 2021, we sold 6,016,148 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $53.3 million. In connection with such sales, we paid compensation of approximately $812,000 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, 2022, we owned a 98.6% 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 one OP unit for one 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, 2022 and December 31, 2021, there were 49,956,634 and 49,793,803 OP units outstanding, respectively. We owned 49,261,969 and 49,023,313 OP units as of September 30, 2022 and December 31, 2021, respectively. The balance of the OP units is owned by third parties, including certain members of our board of trustees. Our weighted average share ownership in the Operating Partnership was approximately 98.5% and 98.4% for the three months ended September 30, 2022 and 2021, respectively, and approximately 98.5% and 98.3% for the nine months ended September 30, 2022 and 2021, respectively. During the three months ended September 30, 2022 and 2021, 74,872 and 0 OP units, respectively, were redeemed for an equal number of common shares, and during the nine months ended September 30, 2022 and 2021, 75,825 and 0 OP units, respectively, were redeemed for an equal number of common shares.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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 2021 and the nine months ended September 30, 2022 (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*
2022
Third Quarter	$	0.1200	$	5,901	$	0.1200	$	88	$	5,989
Second Quarter		0.1200		5,880		0.1200		92		5,972
First Quarter		0.1075		5,268		0.1075		83		5,351
Total	$	0.3475	$	17,049	$	0.3475	$	263	$	17,312

2021
Fourth Quarter	$	0.1075	$	5,257	$	0.1075	$	83	$	5,340
Third Quarter		0.1075		4,981		0.1075		83		5,064
Second Quarter		0.1075		4,602		0.1075		83		4,685
First Quarter		0.1058		4,480		0.1058		82		4,562
Total	$	0.4283	$	19,320	$	0.4283	$	331	$	19,651

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.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

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.

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 was 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 January 1, 2021, the remaining unvested 208,210 TSR Units that were granted on December 1, 2018 vested at a 50% achievement into 104,105 common shares.

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 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. On December 31, 2021, the remaining unvested 385,648 TSR Units that were granted on June 30, 2019 and September 30, 2019 vested at 0% attainment into 0 common shares. 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.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

On March 17, 2021, the Compensation Committee approved the grant of an aggregate of 2,490 common share units under the 2018 Plan to certain of our employees. The common share units had a grant date fair value of $10.04 each and vested immediately.

On June 30, 2021, the Compensation Committee approved the grant of an aggregate of 433,200 TSR Units and 433,200 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 $4.17 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2021 grant date to the end of the performance period, December 31, 2023. 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 $7.51 and vest annually in three equal installments. The 433,200 TSR Units granted on June 30, 2021 include 111,465 TSR Units that will be converted into the right to receive cash in the amount of the fair market value of the common shares to the extent that common shares are not available for issuance under the 2018 Plan.

On September 30, 2021, the Compensation Committee approved the grant of an aggregate of 5,500 time-based restricted common share units under the 2018 Plan to certain of our employees. The time-based common share units had a grant date fair value of $9.06 each and vest annually in three equal installments.

On March 28, 2022, the Compensation Committee approved the grant of an aggregate of 162,556 TSR Units and 162,556 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 $13.74 was determined using the Monte Carlo simulation method and is being recognized as share-based compensation expense ratably from the June 30, 2022 grant date to the end of the performance period, December 31, 2024. 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 $9.94 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, 2022 is as follows:

				*Weighted Average*
				*Grant Date*
	*Shares*			*Fair Value*
Non-vested at January 1, 2022		2,716,132		$	8.32
Granted		325,112			11.84
Vested		(205,281	)		7.46
Forfeited		(1,336,518	)		8.30
Non-vested at September 30, 2022		1,499,445			9.22
Available for grant at September 30, 2022		1,226,469

A summary of our non-vested and vested shares activity for the nine months ended September 30, 2022 and years ended December 31, 2021 and 2020 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, 2022		325,112	$	11.84		(205,281	)	$	1,531
Year Ended December 31, 2021		904,215	$	5.99		(1,024,808	)	$	9,757
Year Ended December 31, 2020		1,108,014	$	5.76		(511,621	)	$	5,566

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

Total compensation recognized in earnings for share-based payments was $943,000 and $1,563,000 for the three months ended September 30, 2022 and 2021, respectively, and $455,000 and $4,275,000 for the nine months ended September 30, 2022 and 2021, respectively.

Based on our current financial projections, we expect approximately 100% of the unvested awards, exclusive of 455,000 CIC Units, to vest over the next 33 months. As of September 30, 2022, there was approximately $2.7 million in unrecognized compensation cost related to outstanding non-vested TSR Units, which are expected to vest over a period of 33 months, and approximately $3.0 million in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a period of approximately 33 months beginning on October 1, 2022.

We expect to record approximately $1.4 million in non-cash share-based compensation expense in 2022 and $4.8 million subsequent to 2022. The unrecognized share-based compensation cost is expected to vest over a weighted average period of 27 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. As of September 30, 2022, the TSR Peer Group Ranking called for attainment of 0%, 50%, and 200% for the shares issued in 2020, 2021, and 2022, respectively. 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 13, 2021, five independent trustees and one trustee emeritus were granted a total of 29,825 common shares, which vest immediately and are prorated based on date appointed. The 29,825 common shares granted to our trustees had a grant fair value of $9.32 per share. The fair value of the shares granted during the year ended December 31, 2021 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 1, 2021 we acquired Anderson Arbor, a property that meets our Community Centered Property® strategy, for $28.1 million in cash and net prorations. Anderson Arbor, a 89,746 square foot property, was 89% leased at the time of purchase and is located in Austin, Texas.

On July 8, 2021, we acquired Lakeside Market, a property that meets our Community Centered Property® strategy, for $53.2 million in cash and net prorations. Lakeside Market, a 162,649 square foot property, was 80.5% leased at the time of purchase and is located in Plano, Texas.

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WHITESTONE REIT AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

16. RELATED PARTY TRANSACTIONS

The Contribution. Prior to his employment termination, January 18, 2022, Mr. James C. Mastandrea, the former Chairman and Chief Executive Officer of Whitestone REIT, also served as the Chairman and Chief Executive Officer of Pillarstone REIT and beneficially owns approximately 66.7% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act of 1934, as amended (the “Exchange Act”)). He resigned as a member of the Board of Whitestone REIT on April 18, 2022. Prior to his employment termination, February 9, 2022, Mr. John J. Dee, the Company’s former Chief Operating Officer and Corporate Secretary, also served as the Senior Vice President and Chief Financial Officer of Pillarstone REIT and beneficially owns approximately 20.0% of the outstanding equity in Pillarstone REIT (when calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act). In addition, Mr. Paul T. Lambert, a Trustee of the Company, also serves as a Trustee of Pillarstone REIT.

Pillarstone OP. The Company accounts for its investment in Pillarstone OP under the equity method.

During the ordinary course of business, we had 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 management agreement was terminated on August 18, 2022.

The following table presents the revenue and expenses with Pillarstone OP included in our consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2022 and 2021 (in thousands):

		*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*Location of Revenue (Expense)*	*2022*			*2021*			*2022*			*2021*
Rent	Operating and maintenance	$	(105	)	$	(225	)	$	(471	)	$	(672	)
Property management fee income	Management, transaction, and other fees	$	75		$	142		$	359		$	426

17. COMMITMENTS AND CONTINGENCIES

Litigation between the Company and Pillarstone REIT

On September 16, 2022, Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership, L.P. filed suit against the Company and certain of its subsidiaries (Whitestone TRS, Inc. and Whitestone REIT Operating Partnership, L.P.) along with certain of its executives (Peter Tropoli, Christine Mastandrea, and David Holeman) in the District Court of Harris County, Texas, alleging claims relating to the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership, as well as the termination of Management Agreements between Pillarstone Capital REIT Operating Partnership, L.P. and Whitestone TRS, Inc. The claimants seeks monetary relief in excess of $1,000,000 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.

Former CEO Litigation

On February 23, 2022, the Company’s former CEO, James Mastandrea, filed suit against the Company and certain of its trustees (Nandita Berry, Jeff Jones, Jack Mahaffey, and David Taylor) and officers (David Holeman, Christine Mastandrea, Peter Tropoli) in the District Court of Harris County, Texas, alleging claims relating to the termination of claimant’s employment. Claimant purports to assert claims for breach of contract, breach of fiduciary duties, tortious interference with contract, civil conspiracy, and declaratory judgment. The claimant seeks a maximum of $25 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.

Pillarstone Rights Plan

As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option of the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP.

Because the Pillarstone Rights Agreement seeks to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s breach of the Pillarstone OP partnership agreement, breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, and breach of the implied covenant of good faith and fair dealing under the Pillarstone OP partnership agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions.

On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption right is not impaired while the underlying dispute is being considered by the Court.

While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.

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

On October 31, 2022, we completed the sale of Bissonnet/Beltway, located in Houston, Texas, for $5.4 million. We have not included Bissonnet/Beltway in discontinued operations as it did not meet the definition of discontinued operations.

On November 4, 2022, we had three properties and one pad site under the contract to sell. We expect to complete the sale of these properties by December 1, 2022.

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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 (this “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, 2021. 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.

Forward-Looking Statement

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:

•

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;

•

uncertainties related to the national economy, the real estate industry in general and in our specific markets;

•

legislative or regulatory changes, including changes to laws governing REITs;

•

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

•

inflation and 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;

•

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;

•

geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine;

•

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.

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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, 2021, 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, we 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 multi-cultural 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, 2022, we wholly owned 60 commercial properties consisting of:

Consolidated Operating Portfolio

•

55 wholly owned properties that meet our Community Centered Properties® strategy containing approximately 5.2 million square feet of gross leasable area (“GLA”) and having a total carrying amount (net of accumulated depreciation) of $974.1 million; and

Redevelopment, New Acquisitions Portfolio

•

five parcels of land held for future development that meet our Community Centered Properties® strategy having a total carrying value of $20.4 million.

As of September 30, 2022, we had an aggregate of 1,555 tenants. We have a diversified tenant base with our largest tenant comprising only 2.5% of our annualized rental revenues for the nine months ended September 30, 2022. 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 261 new and renewal leases during the nine months ended September 30, 2022, totaling 703,749 square feet and approximately $81.1 million in total lease value. This compares to 289 new and renewal leases totaling 720,564 square feet and approximately $93.7 million in total lease value during the same period in 2021.

We employed 81 full-time employees as of September 30, 2022. 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, 2022, 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 managed the day to day operations of Pillarstone OP pursuant to a management agreement, which was terminated on August 18, 2022.

COVID-19

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

Inflation

We anticipate that the majority of our leases will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results.

Rising Interest Rates

As of September 30, 2022, $114.5 million, or approximately 18% of our outstanding debt, was subject to floating interest rates of SOFR plus 1.60% and a 10 basis point credit spread adjustment 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 $1.1 million, respectively.

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 $35.4 million and $32.4 million for the three months ended September 30, 2022 and 2021, respectively, and $104.5 and $92.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Rental Income

We expect our rental income to increase year-over-year due to the addition of properties and rent increases on renewal leases. 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. Included in our adjustments to rental revenue for the conversion of 77 tenants to cash basis revenue was a straight-line rent reserve adjustment of $0.03 million and a bad debt adjustment of $0.2 million for the three months ending September 30, 2022, and a bad debt adjustment of $0.4 million and a straight-line rent reserve adjustment of $0.4 million for the nine months ended September 30, 2022.

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Scheduled Lease Expirations

We tend to lease space to smaller businesses that desire shorter term leases. As of September 30, 2022, approximately 18% of our GLA was subject to leases that expire prior to December 31, 2023. Over the last three calendar years, we have renewed expiring leases with respect to approximately 70% 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, and we are carefully evaluating development and redevelopment activities on a case-by-case basis. 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.

On December 1, 2021 we acquired Anderson Arbor, a property that meets our Community Centered Property® strategy, for $28.1 million in cash and net prorations. Anderson Arbor, a 89,746 square foot property, was 89% leased at the time of purchase and is located in Austin, Texas.

On July 8, 2021, we acquired Lakeside Market, a property that meets our Community Centered Property® strategy, for $53.2 million in cash and net prorations. Lakeside Market, a 162,649 square foot property, was 80.5% leased at the time of purchase and is located in Plano, Texas.

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Leasing Activity

As of September 30, 2022, we owned 60 properties with 5,205,242 square feet of GLA and our occupancy rate for all properties was approximately 92% and 90% occupied as of September 30, 2022 and 2021, respectively. The following is a summary of the Company’s leasing activity for the nine months ended September 30, 2022:

	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		146		436,597		4.0	$	1.95	$	20.15	$	18.83		15.3	%
New Leases		37		69,256		5.9		11.30		25.35		24.14		14.8	%
Total		183		505,853		4.2	$	3.23	$	20.86	$	19.56		15.3	%

	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		17		38,879		6.9	$	8.89	$	24.44
New Leases		61		159,017		8.5		17.51		20.82
Total		78		197,896		8.2	$	15.81	$	21.53

⁽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.

Critical Accounting Policies and Estimates

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, 2021, 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, 2022. 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, 2021.

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Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

The following table provides a general comparison of our results of operations and other metrics for the three months ended September 30, 2022 and 2021 (dollars in thousands, except per share and per OP unit amounts):

	Three Months Ended September 30,
	2022			2021
Number of properties owned and operated		60			59
Aggregate GLA (sq. ft.)⁽¹⁾		5,205,242			5,116,220
Ending occupancy rate - operating portfolio ⁽¹⁾		92	%		90	%
Ending occupancy rate		92	%		90	%

Total revenues	$	35,383		$	32,444
Total operating expenses		24,551			23,390
Total other expense		6,810			6,159
Income before equity investment in real estate partnership and income tax		4,022			2,895
Equity (deficit) in earnings of real estate partnership		65			151
Provision for income tax		(112	)		(100	)
Income from continuing operations		3,975			2,946
Gain on sale of property from discontinued operations		—			—
Net income		3,975			2,946
Less: Net income attributable to noncontrolling interests		60			47
Net income attributable to Whitestone REIT	$	3,915		$	2,899

Funds from operations⁽²⁾	$	12,231		$	10,740
Property net operating income⁽³⁾		24,307			23,152
Distributions paid on common shares and OP units		5,989			5,064
Distributions per common share and OP unit	$	0.1200		$	0.1075
Distributions paid as a percentage of funds from operations		49	%		47	%

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

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

⁽³⁾	For an explanation and reconciliation of property net operating income, a non-GAAP metric, 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, 2022 to the three months ended September 30, 2021, Same Store includes properties owned during the entire period from July 1, 2021 to September 30, 2022. 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	2022			2021			Change			% Change
Same Store
Rental revenues ⁽¹⁾	$	23,836		$	22,423		$	1,413			6	%
Recoveries ⁽²⁾		9,550			8,450			1,100			13	%
Bad debt ⁽³⁾		(327	)		183			(510	)		(279	)%
Total rental		33,059			31,056			2,003			6	%
Other revenues		278			231			47			20	%
Same Store Total		33,337			31,287			2,050			7	%

Non-Same Store and Management Fees
Rental revenues ⁽⁴⁾		1,408			754			654			87	%
Recoveries ⁽⁴⁾		602			270			332			123	%
Bad debt ⁽⁴⁾		(40	)		(11	)		(29	)		264	%
Total rental		1,970			1,013			957			94	%
Other revenues ⁽⁴⁾		2			1			1			100	%
Management fees		74			143			(69	)		(48	)%
Non-Same Store and Management Fees Total		2,046			1,157			889			77	%

Total revenue	$	35,383		$	32,444		$	2,939			9	%

⁽¹⁾

The Same Store rental revenues increase of $1,413,000 resulted from an increase of $733,000 from higher average leased square feet from 4,459,582 to 4,558,628, and an increase of $680,000 from higher average rent per leased square foot from $20.32 to $20.92. Same Store rental revenues include straight-line rent write offs for tenants converted to cash basis accounting of an increase of $28,000 and a decrease of $254,000 for the three months ended September 30, 2022 and 2021, respectively.

⁽²⁾

The Same Store recoveries revenue increase of $1,100,000 is primarily attributable to increases in operating and maintenance expenses. Operating expenses generally decreased as a result of cost saving initiatives during the COVID-19 pandemic in 2021 and increased back to normal levels in 2022. Our recovery revenue from tenants generally increases as the related operating and real estate tax expenses increase.

⁽³⁾	During the three months ended September 30, 2022 and 2021, Same Store bad debt includes an adjustment of $247,000 and $24,000, respectively, from cash basis accounting.

⁽⁴⁾	Non-Same Store rental revenue includes Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on December 1, 2021).

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Operating expenses. The primary components of operating expenses for the three months ended September 30, 2022 and 2021 are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
Operating Expenses	2022		2021		Change			% Change
Same Store
Operating and maintenance ⁽¹⁾	$	6,951	$	5,460	$	1,491			27	%
Real estate taxes ⁽²⁾		4,111		4,408		(297	)		(7	)%
Same Store total		11,062		9,868		1,194			12	%

Non-Same Store and affiliated company rents
Operating and maintenance ⁽³⁾		261		104		157			151	%
Real estate taxes ⁽³⁾		402		181		221			122	%
Affiliated company rents ⁽⁴⁾		105		225		(120	)		(53	)%
Non-Same Store and affiliated company rents total		768		510		258			51	%
Depreciation and amortization		7,889		7,340		549			7	%
General and administrative ⁽⁵⁾		4,832		5,672		(840	)		(15	)%
Total operating expenses	$	24,551	$	23,390	$	1,161			5	%

⁽¹⁾

The $1,491,000 Same Store operating and maintenance cost increase included $531,000 in increased labor, $443,000 in increased repair costs, $228,000 in increased utilities costs, $210,000 in increased contract services costs, $79,000 in other costs. Cost saving initiatives implemented by the Company in 2021 in response to the COVID-19 pandemic generally lowered operating and maintenance costs during three months ended September 30, 2021. Operating and maintenance costs were closer to normal levels during the three months ended September 30, 2022.

⁽²⁾	Same Store real estate taxes decrease includes $297,000 in real estate taxes decreases due to reduced property tax rates.

(3)	Non-Same Store rental expenses includes Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on December 1, 2021).

⁽⁴⁾	Affiliated company rents are spaces that we lease from Pillarstone OP. Eight lease agreements were terminated on August 23, 2022, and the two remaining leases are scheduled to expire on January 31, 2023 and February 28, 2023.

⁽⁵⁾

The general and administrative expense decrease is attributable to $389,000 in increased legal expenses and $98,000 in other costs, offset by decreases from $634,000 in payroll costs, $622,000 in share based compensation and $71,000 in professional fees. The increase in legal expenses, and the decrease in payroll and share based compensation during the three months ended September 30, 2022 compared to the prior year period primarily relate to leadership changes and associated litigations.

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Other expenses (income). The primary components of other expenses (income) for the three months ended September 30, 2022 and 2021 are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
Other Expenses (Income)	2022			2021			Change			% Change

Interest expense ⁽¹⁾	$	6,816		$	6,142		$	674			11	%
(Gain) loss on sale or disposal of assets, net		7			48			(41	)		(85	)%
Interest, dividend and other investment income		(13	)		(31	)		18			(58	)%
Total other expense	$	6,810		$	6,159		$	651			11	%

⁽¹⁾	The interest expense increase is attributable to rising interest rates. We expect interest expense to increase in the future due to rising interest rates. $147,000 of the increase in interest is attributable to extinguishment of debt costs for the three months ended September 30, 2022.

Equity in earnings of real estate partnership. Our estimated equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $86,000 from $151,000 for the three months ended September 30, 2021 to $65,000 for the three months ended September 30, 2022. 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):

	Three Months Ended September 30,						Increase			% Increase
	2022			2021			(Decrease)			(Decrease)
Same Store (53 properties, excluding development land)
Property revenues
Rental	$	33,059		$	31,056		$	2,003			6	%
Management, transaction and other fees		278			231			47			20	%
Total property revenues		33,337			31,287			2,050			7	%

Property expenses
Property operation and maintenance		6,951			5,460			1,491			27	%
Real estate taxes		4,111			4,408			(297	)		(7	)%
Total property expenses		11,062			9,868			1,194			12	%

Total property revenues less total property expenses		22,275			21,419			856			4	%

Same Store straight-line rent adjustments		(366	)		(507	)		141			(28	)%
Same Store amortization of above/below market rents		(224	)		(177	)		(47	)		27	%
Same Store lease termination fees		(96	)		(79	)		(17	)		22	%

Same Store NOI⁽¹⁾	$	21,589		$	20,656		$	933			5	%

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

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	Three Months Ended September 30,
PROPERTY NET OPERATING INCOME (“NOI”)	2022			2021
Net income attributable to Whitestone REIT	$	3,915		$	2,899
General and administrative expenses		4,832			5,672
Depreciation and amortization		7,889			7,340
Equity in earnings of real estate partnership⁽¹⁾		(65	)		(151	)
Interest expense		6,816			6,142
Interest, dividend and other investment income		(13	)		(31	)
Provision for income taxes		112			100
Gain on sale of property from discontinued operations		—			—
Management fee, net of related expenses		31			83
Loss on sale or disposal of assets, net		7			48
NOI of real estate partnership (pro rata)⁽¹⁾		723			1,003
Net income attributable to noncontrolling interests		60			47
NOI	$	24,307		$	23,152
Non-Same Store NOI ⁽²⁾		(1,309	)		(730	)
NOI of real estate partnership (pro rata)⁽¹⁾		(723	)		(1,003	)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)		22,275			21,419
Same Store straight-line rent adjustments		(366	)		(507	)
Same Store amortization of above/below market rents		(224	)		(177	)
Same Store lease termination fees		(96	)		(79	)
Same Store NOI ⁽³⁾	$	21,589		$	20,656

⁽¹⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated equity in earnings and pro rata share of NOI of real estate partnership based on the information available to us at the time of this report.

⁽²⁾

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, 2022 to the three months ended September 30, 2021, Non-Same Store includes properties acquired between July 1, 2021 and September 30, 2022 and properties sold between July 1, 2021 and September 30, 2022, but not included in discontinued operations.

⁽³⁾

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, 2022 to the three months ended September 30, 2021, Same Store includes properties owned before July 1, 2021 and not sold before September 30, 2022. 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, 2022 and 2021

The following table provides a general comparison of our results of operations and other metrics for the nine months ended September 30, 2022 and 2021 (dollars in thousands, except per share and per OP unit amounts):

	Nine Months Ended September 30,
	2022			2021
Number of properties owned and operated		60			59
Aggregate GLA (sq. ft.)⁽¹⁾		5,205,242			5,116,220
Ending occupancy rate - operating portfolio ⁽¹⁾		92	%		90	%
Ending occupancy rate		92	%		90	%

Total revenues	$	104,503		$	92,107
Total operating expenses		69,844			66,353
Total other expense		19,080			18,137
Income before equity investment in real estate partnership and income tax		15,579			7,617
Equity in earnings of real estate partnership		304			429
Provision for income tax		(313	)		(274	)
Income from continuing operations		15,570			7,772
Gain on sale of property from discontinued operations		—			1,833
Net income		15,570			9,605
Less: Net income attributable to noncontrolling interests		239			165
Net income attributable to Whitestone REIT	$	15,331		$	9,440

Funds from operations⁽²⁾	$	40,325		$	30,183
Property net operating income⁽³⁾		73,924			66,340
Distributions paid on common shares and OP units		17,312			14,311
Distributions per common share and OP unit	$	0.3475		$	0.3209
Distributions paid as a percentage of funds from operations		43	%		47	%

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

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

⁽³⁾	For an explanation and reconciliation of property net operating income, a non-GAAP metric, 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, 2022 to the nine months ended September 30, 2021, Same Store includes properties owned during the entire period from January 1, 2021 to September 30, 2022. 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	2022			2021			Change			% Change
Same Store
Rental revenues ⁽¹⁾	$	70,893		$	66,287		$	4,606			7	%
Recoveries ⁽²⁾		27,327			24,105			3,222			13	%
Bad debt ⁽³⁾		(594	)		(489	)		(105	)		21	%
Total rental		97,626			89,903			7,723			9	%
Other revenues		635			764			(129	)		(17	)%
Same Store Total		98,261			90,667			7,594			8	%

Non-Same Store and Management Fees
Rental revenues ⁽⁴⁾		4,130			754			3,376			448	%
Recoveries ⁽⁴⁾		1,765			270			1,495			554	%
Bad debt ⁽⁴⁾		(21	)		(11	)		(10	)		91	%
Total rental		5,874			1,013			4,861			480	%
Other revenues ⁽⁴⁾		3			1			2			200	%
Management fees		365			426			(61	)		(14	)%
Non-Same Store and Management Fees Total		6,242			1,440			4,802			333	%

Total revenue	$	104,503		$	92,107		$	12,396			13	%

⁽¹⁾

The Same Store rental revenues increase of $4,606,000 resulted from an increase of $2,143,000 from higher average leased square feet from 4,417,754 to 4,560,769, and an increase of $2,463,000 from higher average rent per leased square foot from $20.01 to $20.73. Same Store rental revenues include straight-line rent write offs for tenants converted to cash basis accounting of $435,000 and $482,000 for the nine months ended September 30, 2022 and 2021, respectively.

⁽²⁾

The Same Store recoveries revenue increase of $3,599,000 is primarily attributable to increases in operating and maintenance expenses. Operating expenses generally decreased as a result of cost saving initiatives during the COVID-19 pandemic in 2021 and increased back to normal levels in 2022. Our recovery revenue from tenants generally increases as the related operating and real estate tax expenses increase.

⁽³⁾	During the nine months ended September 30, 2022 and 2021, Same Store bad debt includes an adjustment of $413,000 and $602,000, respectively, from cash basis accounting.

⁽⁴⁾	Non-Same Store rental revenue includes Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on December 1, 2021).

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Operating expenses. The primary components of operating expenses for the nine months ended September 30, 2022 and 2021 are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
Operating Expenses	2022		2021		Change			% Change
Same Store
Operating and maintenance ⁽¹⁾	$	18,031	$	15,297	$	2,734			18	%
Real estate taxes		12,837		12,606		231			2	%
Same Store total		30,868		27,903		2,965			11	%

Non-Same Store and affiliated company rents
Operating and maintenance ⁽²⁾		751		103		648			629	%
Real estate taxes ⁽²⁾		1,030		181		849			469	%
Affiliated company rents ⁽³⁾		471		672		(201	)		(30	)%
Non-Same Store and affiliated company rents total		2,252		956		1,296			136	%
Depreciation and amortization		23,661		21,458		2,203			10	%
General and administrative ⁽⁴⁾		13,063		16,036		(2,973	)		(19	)%
Total operating expenses	$	69,844	$	66,353	$	3,491			5	%

⁽¹⁾

The $2,734,000 Same Store operating and maintenance cost increase included $907,000 in increased repair costs, $741,000 in increased labor costs, $516,000 in increased contract services costs, $430,000 in increased utilities costs, and $140,000 in increased other costs. Cost saving initiatives implemented by the Company in 2021 in response to the COVID-19 pandemic generally lowered operating and maintenance costs during nine months ended September 30, 2021. Operating and maintenance costs were closer to normal levels during the nine months ended September 30, 2022.

⁽²⁾	Non-Same Store rental expenses includes Lakeside Market (acquired on July 8, 2021) and Anderson Arbor (acquired on December 1, 2021).

⁽³⁾	Affiliated company rents are spaces that we lease from Pillarstone OP. Eight lease agreements were terminated on August 23, 2022, and the two remaining leases are scheduled to expire on January 31, 2023 and February 28, 2023.

⁽⁴⁾

The general and administrative expense decrease is attributable to decreases in share based compensation of $3,826,000 and $2,007,000 in payroll costs, offset by increased legal expenses of $2,303,000 and other G&A expenses of $557,000. The increases in legal and G&A expenses, and the decrease in payroll and share based compensation during the nine months ended September 30, 2022 compared to the prior year period primarily relate to previously disclosed leadership changes and associated litigations

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Other expenses (income). The primary components of other expenses (income) for the nine months ended September 30, 2022 and 2021 are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
Other Expenses (Income)	2022			2021			Change		% Change

Interest expense ⁽¹⁾	$	19,111		$	18,417		$	694		4	%
(Gain) loss on sale or disposal of assets, net		12			(177	)		189		(107	)%
Interest, dividend and other investment income		(43	)		(103	)		60		(58	)%
Total other expense	$	19,080		$	18,137		$	943		5	%

⁽¹⁾	The interest expense increase is attributable to rising interest rates. We expect interest expense to increase in the future due to rising interest rates. $147,000 of the increase in interest is attributable to extinguishment of debt costs for the nine months ended September 30, 2022.

Equity in earnings of real estate partnership. Our estimated equity in earnings of real estate partnership, which is generated from our 81.4% ownership of Pillarstone OP, decreased $125,000 from $429,000 for the nine months ended September 30, 2021 to $304,000 for the nine months ended September 30, 2022. 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
	2022			2021			(Decrease)			(Decrease)
Same Store (53 properties, excluding development land)
Property revenues
Rental	$	97,626		$	89,903		$	7,723			9	%
Management, transaction and other fees		635			764			(129	)		(17	)%
Total property revenues		98,261			90,667			7,594			8	%

Property expenses
Property operation and maintenance		18,031			15,297			2,734			18	%
Real estate taxes		12,837			12,606			231			2	%
Total property expenses		30,868			27,903			2,965			11	%

Total property revenues less total property expenses		67,393			62,764			4,629			7	%

Same Store straight-line rent adjustments		(845	)		(1,201	)		356			(30	)%
Same Store amortization of above/below market rents		(686	)		(618	)		(68	)		11	%
Same Store lease termination fees		(118	)		(306	)		188			(61	)%

Same Store NOI⁽¹⁾	$	65,744		$	60,639		$	5,105			8	%

⁽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”)	2022			2021
Net income attributable to Whitestone REIT	$	15,331		$	9,440
General and administrative expenses		13,063			16,036
Depreciation and amortization		23,661			21,458
Equity in earnings of real estate partnership⁽¹⁾		(304	)		(429	)
Interest expense		19,111			18,417
Interest, dividend and other investment income		(43	)		(103	)
Provision for income taxes		313			274
Gain on sale of property from discontinued operations		—			(1,833	)
Management fee, net of related expenses		112			246
(Gain) loss on sale or disposal of assets, net		12			(177	)
NOI of real estate partnership (pro rata)⁽¹⁾		2,429			2,846
Net income attributable to noncontrolling interests		239			165
NOI	$	73,924		$	66,340
Non-Same Store NOI ⁽²⁾		(4,102	)		(730	)
NOI of real estate partnership (pro rata)⁽¹⁾		(2,429	)		(2,846	)
NOI less Non-Same Store NOI and NOI of real estate partnership (pro rata)		67,393			62,764
Same Store straight-line rent adjustments		(845	)		(1,201	)
Same Store amortization of above/below market rents		(686	)		(618	)
Same Store lease termination fees		(118	)		(306	)
Same Store NOI ⁽³⁾	$	65,744		$	60,639

⁽¹⁾

⁽²⁾

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, 2022 to the nine months ended September 30, 2021, Non-Same Store includes properties acquired between January 1, 2021 and September 30, 2022 and properties sold between January 1, 2021 and September 30, 2022, but not included in discontinued operations.

⁽³⁾

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, 2022 to the nine months ended September 30, 2021, Same Store includes properties owned before January 1, 2021 and not sold before September 30, 2022. 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”) and Normalized FFO

The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income available to Whitestone REIT (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.

Normalized Funds from Operations (“Normalized FFO”) is a non-GAAP measure. We define Normalized FFO as FFO excluding extinguishment of debt costs.

Management uses FFO and Normalized FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income 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 and Normalized FFO as the primary metric for comparing the relative performance of equity REITs.

FFO and Normalized 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 and Normalized 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 and Normalized FFO presented by us is comparable to similarly titled measures of other REITs.

Below are the calculations of FFO and Normalized FFO 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 NORMALIZED FFO	2022		2021		2022		2021
Net income attributable to Whitestone REIT	$	3,915	$	2,899	$	15,331	$	9,440
Adjustments to reconcile to FFO:⁽¹⁾
Depreciation and amortization of real estate		7,846		7,305		23,534		21,353
Depreciation and amortization of real estate assets of real estate partnership (pro rata)⁽²⁾		403		440		1,209		1,254
(Gain) loss on sale or disposal of assets, net		7		48		12		(177	)
Gain on sale of property from discontinued operations		—		—		—		(1,833	)
(Gain) loss on sale or disposal of properties or assets of real estate partnership (pro rata)		—		1		—		(19	)
Net income attributable to noncontrolling interests		60		47		239		165
FFO (NAREIT)		12,231		10,740		40,325		30,183
Adjustments to reconcile to Normalized FFO:
Extinguishment of debt costs		147		—		147		—
Normalized FFO	$	12,378	$	10,740	$	40,472	$	30,183

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

⁽²⁾

We rely on reporting provided to us by our third-party partners for financial information regarding the Company's investment in Pillarstone OP. Because Pillarstone OP financial statements as of September 30, 2022 have not been made available to us, we have estimated depreciation and amortization of real estate assets based on the information available to us at the time of this report.

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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, equity or deficit in earnings of real estate partnership, interest expense, interest, dividend and other investment income, provision for income taxes, gain on sale of property from discontinued operations, management fee (net of related expenses) and gain or loss on sale or disposition of assets, and includes NOI of real estate partnership (pro rata) and net income attributable to noncontrolling interest, 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 the level of capital expenditure and leasing costs necessary to maintain the operating performance of our properties, including general and administrative expenses, depreciation and amortization, equity or deficit in earnings of real estate partnership, interest expense, interest, dividend and other investment income, provision for income taxes, gain on sale of property from discontinued operations, management fee (net of related expenses) and gain or loss on sale or disposition of assets.

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	2022			2021			2022			2021
Net income attributable to Whitestone REIT	$	3,915		$	2,899		$	15,331		$	9,440
General and administrative expenses		4,832			5,672			13,063			16,036
Depreciation and amortization		7,889			7,340			23,661			21,458
Equity in earnings of real estate partnership⁽¹⁾		(65	)		(151	)		(304	)		(429	)
Interest expense		6,816			6,142			19,111			18,417
Interest, dividend and other investment income		(13	)		(31	)		(43	)		(103	)
Provision for income taxes		112			100			313			274
Gain on sale of property from discontinued operations		—			—			—			(1,833	)
Management fee, net of related expenses		31			83			112			246
(Gain) loss on sale or disposal of assets, net		7			48			12			(177	)
NOI of real estate partnership (pro rata)⁽¹⁾		723			1,003			2,429			2,846
Net income attributable to noncontrolling interests		60			47			239			165
NOI	$	24,307		$	23,152		$	73,924		$	66,340

⁽¹⁾

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 $0.1200 per common 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.

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During the nine months ended September 30, 2022, our cash provided by operating activities was $33,459,000 and our total distributions were $17,312,000. Therefore, we had cash flow from operations in excess of distributions of approximately $16,147,000. 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. On February 22, 2022, the Company announced an increase to its quarterly distribution to $0.12 per common share and OP unit, equal to a monthly distribution of $0.04, beginning with the April 2022 distribution. The Board will regularly reassess the dividend in light of economic conditions. As of September 30, 2022, subject to any potential future paydowns in the borrowing base, we have $126.4 million remaining availability under the revolving credit facility.

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. Despite these potential challenges, we believe we have sufficient access to capital for the foreseeable future, but we can provide no assurance that such capital will be available to us on attractive terms or at all.

On May 20, 2022, our universal shelf registration statement on Form S-3 was declared effective by the SEC, which registers the issuance and sale by us of up to $500 million in securities from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights.

We have in the past, and expect to in the future, enter into at-the-market equity distribution programs providing for the issuance and sale of common shares. 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 of 1933, as amended (the "Securities Act"). For the three and nine months ended September 30, 2022, we did not sell shares under the equity distribution agreements. During the three months ended September 30, 2021, we sold 2,991,168 common shares under the 2019 equity distribution agreements, which provided 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), with net proceeds to us of approximately $28.0 million. In connection with such sales, we paid compensation of approximately $426,000 to the sales agents. During the nine months ended September 30, 2021, we sold 6,016,148 common shares under the 2019 equity distribution agreements, with net proceeds to us of approximately $53.3 million. In connection with such sales, we paid compensation of approximately $812,000 to the sales agents.

We have used and anticipate using net proceeds from common shares issued pursuant to 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.

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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 $9,567,000 as of September 30, 2022, as compared to $15,914,000 on December 31, 2021. The decrease of $6,347,000 during the nine months ended September 30, 2022 was primarily the result of the following:

Sources of Cash

•

Cash flow from operations of $33,459,000 for the nine months ended September 30, 2022, compared to $31,703,000 for the nine months ended September 30, 2021;

Uses of Cash

•

Payment of distributions to common shareholders and OP unit holders of $17,312,000 for the nine months ended September 30, 2022, compared to $14,311,000 for the nine months ended September 30, 2021;

•

Additions to real estate of $10,118,000 for the nine months ended September 30, 2022, compared to $6,058,000 for the nine months ended September 30, 2021;

•

Repurchase of common shares of $527,000 for the nine months ended September 30, 2022, compared to $678,000 for the nine months ended September 30, 2021;

•

Payments of notes payable of $2,705,000 for the nine months ended September 30, 2022, compared to $2,403,000 for the nine months ended September 30, 2021;

•

Net payments of credit facility $5,000,000 for the nine months ended September 30, 2022, compared to $25,000,000 for the nine months ended September 30, 2021; and

•

Payment of loan origination costs of $4,144,000 for the nine months ended September 30, 2022, compared to $0 for the nine months ended September 30, 2021.

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

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Debt

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

Description	September 30, 2022			December 31, 2021
Fixed rate notes
$100.0 million, 1.73% plus 1.35% to 1.90% Note ⁽¹⁾	$	—		$	100,000
$165.0 million, 2.24% plus 1.35% to 1.90% Note ⁽¹⁾		—			165,000
$265.0 million, 3.18% plus 1.45% to 2.10% Note, due January 31, 2028 ⁽²⁾		265,000			—
$80.0 million, 3.72% Note, due June 1, 2027		80,000			80,000
$19.0 million 4.15% Note, due December 1, 2024		18,103			18,358
$20.2 million 4.28% Note, due June 6, 2023		17,485			17,808
$14.0 million 4.34% Note, due September 11, 2024		12,778			12,978
$14.3 million 4.34% Note, due September 11, 2024		13,585			13,773
$15.1 million 4.99% Note, due January 6, 2024		13,705			13,907
$2.6 million 5.46% Note, due October 1, 2023		2,250			2,289
$50.0 million, 5.09% Note, due March 22, 2029		50,000			50,000
$50.0 million, 5.17% Note, due March 22, 2029		50,000			50,000
$1.8 million 3.15% Note, due November 28, 2022		349			—
Floating rate notes
Unsecured line of credit, SOFR plus 1.50% to 2.10%, due September 16, 2026		114,500			119,500
Total notes payable principal		637,755			643,613
Less deferred financing costs, net of accumulated amortization		(617	)		(771	)
Total notes payable	$	637,138		$	642,842

⁽¹⁾	Loan was fully paid off on September 16, 2022.

⁽²⁾	Promissory note includes an interest rate swap that fixes the SOFR portion of the term loan at an interest rate of 2.16% through October 28, 2028, 2.76% from October 29, 2022 through January 31, 2024, and 3.32% beginning February 1, 2024 through January 31, 2028.

Scheduled maturities of our outstanding debt as of September 30, 2022 were as follows (in thousands):

Year	Amount Due
2022 (remaining)	$	1,104
2023		27,863
2024		63,573
2025		17,143
2026		131,643
Thereafter		396,429
Total	$	637,755

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On September 16, 2022 we, through our Operating Partnership, entered into an unsecured credit facility (the “2022 Facility”) with the lenders party thereto, Bank of Montreal, as administrative agent (the “Administrative Agent”), Truist Bank, as syndication agent, and BMO Capital Markets Corp., Truist Bank, Capital One, National Association, and U.S. Bank National Association, as co-lead arrangers and joint book runners. The 2022 Facility amended and restated the Company's previous unsecured revolving credit facility, dated January 31, 2019 (the "2019 Facility").

The 2022 Facility is comprised of the following three tranches:

•

$250.0 million unsecured revolving credit facility with a maturity date of September 16, 2026 (the “2022 Revolver”);

•

$265.0 million unsecured term loan with a maturity date of January 31, 2028 (“Term Loan”).

Borrowings under the 2022 Facility accrue interest (at the Operating Partnership's option) at a Base Rate or an Adjusted Term SOFR plus an applicable margin based upon our then existing leverage. As of September 30, 2022, the interest rate on the 2022 Revolver was 4.62%. Based on our current leverage ratio, the revolver has initial interest rate of SOFR plus 1.60% and a 10 basis point credit spread adjustment. In addition, we entered into interest rate swaps to fix the interest rates on the Term Loan. The Term Loan with the swaps has the following interest rates:

•

2.16% plus 1.55% through October 28, 2022

•

2.80% plus 1.55% from October 29, 2022 through January 31, 2024

•

3.42% plus 1.55% from February 1, 2024 through January 31, 2028

The 2022 Facility also has a pricing provision where the applicable margin can be adjusted by an aggregate 0.02% per annum based on the Company’s performance on certain sustainability performance targets. Base Rate means, for any day, the higher of: (a) the Administrative Agent’s prime commercial rate, (b) the sum of (i) the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York for such day, plus (ii) 0.50%, or (c) the sum of (i) Adjusted Term SOFR for a one-month tenor in effect on such day plus (ii) 1.10%. Adjusted Term SOFR means, for any such day, the sum of (i) the SOFR-based term rate for the day two (2) business days prior and (ii) 0.10%.

The 2022 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, 2022, subject to any potential future paydowns or increases in the borrowing base, we have $126.4 millionremaining availability under the 2022 Revolver. As of September 30, 2022, $379.5 million was drawn on the 2022 Facility and our unused borrowing capacity was $135.0 million, assuming that we use the proceeds of the 2022 Facility to acquire properties, or to repay debt on properties, that are eligible to be included in the unsecured borrowing base. The Company used $379.5 million of proceeds from the 2022 Facility to repay amounts outstanding under the 2019 Facility.

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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 2022 Facility. The 2022 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 2022 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

•

We serve as the guarantor for funds borrowed by the Operating Partnership under the 2022 Facility. The 2022 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 2022 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.

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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

•

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.

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, 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, 2022, our $157.9 million in secured debt was collateralized by seven properties with a carrying value of $243.5 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, 2022, 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. 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.

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The following is a summary of the Company's capital expenditures for the three and nine month periods ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Capital expenditures:
Tenant improvements and allowances	$	2,266	$	463	$	6,880	$	1,423
Developments / redevelopments		475		371		1,705		1,107
Leasing commissions and costs		831		632		2,127		2,360
Maintenance capital expenditures		1,206		1,725		2,558		3,528
Total capital expenditures	$	4,778	$	3,191	$	13,270	$	8,418

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Distributions

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

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

•

our funds from operations;

•

our debt service requirements;

•

our capital expenditure requirements for our properties;

•

our taxable income, combined with the annual distribution requirements necessary to maintain REIT qualification;

•

requirements of Maryland law;

•

our overall financial condition; and

•

other factors deemed relevant by our board of trustees.

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

On February 12, 2021, the Company announced an increase to its quarterly distribution to $0.1075 per common share and OP unit, equal to a monthly distribution of $0.035833, beginning with the March 2021 distribution.

On February 22, 2022, the Company announced an increase to its quarterly distribution to $0.12 per common share and OP unit, equal to a monthly distribution of $0.04, beginning with the April 2022 distribution. The Board will continue to regularly reassess the dividend level.

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During the nine months ended September 30, 2022, we paid distributions to our common shareholders and OP unit holders of $17.3 million, compared to $14.3 million in the nine months ended September 30, 2021. Common shareholders and OP unit holders receive monthly distributions. Payments of distributions are declared quarterly and paid monthly. The following table summarizes the cash distributions paid or payable to holders of our common shares and noncontrolling OP units during each quarter of 2021 and the nine months ended September 30, 2022 (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
2022
Third Quarter	$	0.1200	$	5,901	$	0.1200	$	88	$	5,989
Second Quarter		0.1200		5,880		0.1200		92		5,972
First Quarter		0.1075		5,268		0.1075		83		5,351
Total	$	0.3475	$	17,049	$	0.3475	$	263	$	17,312

2021
Fourth Quarter	$	0.1075	$	5,257	$	0.1075	$	83	$	5,340
Third Quarter		0.1075		4,981		0.1075		83		5,064
Second Quarter		0.1075		4,602		0.1075		83		4,685
First Quarter		0.1058		4,480		0.1058		82		4,562
Total	$	0.4283	$	19,320	$	0.4283	$	331	$	19,651

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

As of September 30, 2022, $523.3 million, or approximately 82% 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, 2022 of approximately 4.53% per annum with scheduled maturities ranging from 2022 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 $18.9 million decline or increase, respectively, in the fair value for our fixed rate debt.

Variable Interest Rate Debt

As of September 30, 2022, $114.5 million, or approximately 18% 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 $1.1 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 and inflation, including rising interest rates, 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, 2022, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective.

Changes in 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, 2022 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.

Litigation between the Company and Pillarstone REIT

On September 16, 2022, Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership, L.P. filed suit against the Company and certain of its subsidiaries (Whitestone TRS, Inc. and Whitestone REIT Operating Partnership, L.P.) along with certain of its executives (Peter Tropoli, Christine Mastandrea, and David Holeman) in the District Court of Harris County, Texas, alleging claims relating to the limited partnership agreement between Pillarstone Capital REIT and Whitestone REIT Operating Partnership, as well as the termination of Management Agreements between Pillarstone Capital REIT Operating Partnership, L.P. and Whitestone TRS, Inc. The claimants seeks monetary relief in excess of $1,000,000 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.

Former CEO Litigation

On February 23, 2022, the Company’s former CEO, James Mastandrea, filed suit against the Company and certain of its trustees (Nandita Berry, Jeff Jones, Jack Mahaffey, and David Taylor) and officers (David Holeman, Christine Mastandrea, Peter Tropoli) in the District Court of Harris County, Texas, alleging claims relating to the termination of claimant’s employment. Claimant purports to assert claims for breach of contract, breach of fiduciary duties, tortious interference with contract, civil conspiracy, and declaratory judgment. The claimant seeks a maximum of $25 million in damages and equitable relief. However, the Company denies the claims, has substantial legal and factual defenses against the claims, and intends to vigorously defend against the claims. The Company does not believe a probable loss will be incurred, nor does it anticipate a material adverse effect on its financial position, results of operations, cash flows or liquidity. Therefore, the Company has not recorded a charge as a result of this action.

Pillarstone Rights Plan

On December 26, 2021, the Board of Trustees of Pillarstone REIT adopted a new rights agreement (the “Pillarstone Rights Agreement”), pursuant to which each holder of Pillarstone REIT common stock received one preferred share purchase right (a “Right”) per common share held as of the applicable record date. Each Right entitles the registered holder to purchase from Pillarstone REIT one one-thousandth (a “Unit”) of a series D preferred share of Pillarstone at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights are exercisable upon the occurrence of certain events as described in the Pillarstone Rights Agreement, including the acquisition by certain holders of 5% or more of the common shares of Pillarstone REIT (an “Acquiring Person”). Upon the acquisition of Pillarstone REIT common shares by an Acquiring Person, each holder of a Right (other than an Acquiring Person), will have the right to receive upon exercise a number of Pillarstone REIT common shares having a market value of two times the Purchase Price.

As set forth in the Amended and Restated Limited Partnership Agreement of Pillarstone OP, dated as of December 8, 2016 (the “Pillarstone Partnership Agreement”), we have the contractual right to have our limited partnership interests in Pillarstone redeemed at our discretion. However, upon receipt of a redemption notice, Pillarstone OP has the option of the applicable redemption price in cash, based on the market value of Pillarstone REIT common shares, or in Pillarstone REIT common shares. To the extent we seek to have our partnership units in Pillarstone OP redeemed and Pillarstone OP elects to pay the applicable redemption price in Pillarstone REIT common shares (and such shares represent 5% or more of the outstanding common shares of Pillarstone REIT), the Rights could become exercisable. To the extent the Rights are exercised as a result of our Pillarstone OP units being redeemed for Pillarstone REIT common shares, our ownership interest in Pillarstone REIT would be significantly diluted, which could adversely impact the value of our investment in Pillarstone OP.

Because the Pillarstone Rights Agreement seeks to prevent Whitestone OP from exercising its contractual Redemption Right, on July 12, 2022, Whitestone OP filed suit against Pillarstone REIT in the Court of Chancery of the State of Delaware challenging the Pillarstone Rights Agreement due to Pillarstone REIT’s breach of the Pillarstone OP partnership agreement, breach of its fiduciary duty as general partner of Pillarstone OP to Whitestone OP, and breach of the implied covenant of good faith and fair dealing under the Pillarstone OP partnership agreement. The lawsuit seeks rescission and voiding of the Pillarstone Rights Agreement; a declaration that the Pillarstone Rights Agreement is unenforceable, invalid, and of no force and effect; an order permanently enjoining enforcement of the Pillarstone Rights Agreement; an award of monetary damages; and broad restrictions on Pillarstone REIT’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions.

On September 8, 2022, the Company’s Motion to Preserve the Status Quo was granted by the Court, limiting Pillarstone from engaging in any acts outside the ordinary course of business and otherwise imposing restrictions on Pillarstone to ensure that Whitestone’s right of redemption right is not impaired while the underlying dispute is being considered by the Court.

While we do not believe the overall impact of the Pillarstone Rights Agreement on the carrying value of our investment in Pillarstone OP is material, we cannot reasonably estimate a range of possible loss at this time.

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, 2021.

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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, 2022, 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, 2022.

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, 2022 - July 31, 2022		22,418	$	11.23		N/A		N/A
August 1, 2022 - August 31, 2022		—		—		N/A		N/A
September 1, 2022 - September 30, 2022		—		—		N/A		N/A
Total		22,418	$	11.23

⁽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)

3.2.1

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)

3.2.2

Amendment No. 1 to 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 January 19, 2022

10.1

Third Amended and Restate Credit Agreement, dated as of September 16, 2022, among Whitestone REIT Operating Partnership, L.P., Whitestone REIT, et al., as guarantors, the lenders party thereto, and Bank of Montreal, as Administrative Agent (previously filed and incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on September 19, 2022)

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 o f the Sarbanes-Oxley Act of 2002

32.2**

Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxle y Act of 2002

101

The following financial information of the Registrant for the quarter ended September 30, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and nine month periods ended September 30, 2022 and 2021 (unaudited), (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, June 30 and September 30, 2022 and 2021 (unaudited), (iv) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and 2021 (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 and in Exhibit 101.

________________________

*	Filed herewith.

**	Furnished herewith.

+	Denotes management contract or compensatory plan or arrangement.

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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:	November 4, 2022	/s/ David K. Holeman
		David K. Holeman
		Chief Executive Officer
		(Principal Executive Officer)

Date:	November 4, 2022	/s/ John S. Hogan
		John S. Hogan
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)