XNYS:WSR Whitestone REIT Class B Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:WSR Fair Value Estimate
Premium
XNYS:WSR Consider Buying
Premium
XNYS:WSR Consider Selling
Premium
XNYS:WSR Fair Value Uncertainty
Premium
XNYS:WSR Economic Moat
Premium
XNYS:WSR Stewardship
Premium
 

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

FORM 10-Q
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 000-50256
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
Houston, Texas
 
77063
(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)

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.  ýYes     ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
ýYes    ¨No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨                                                                                      Accelerated filer ý
Non-accelerated filer (Do not check if a smaller reporting company) ¨              Smaller reporting company ¨

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

The issuer had the following numbers of shares outstanding, as of the latest practicable date:

Class
 
Outstanding as of August 2, 2012
Common Shares, $0.001 par value
 
12,007,302 Shares




PART I - FINANCIAL INFORMATION


PART II - OTHER INFORMATION





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Whitestone REIT and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 
 
June 30, 2012
 
December 31, 2011
 
 
(unaudited)
 
 
ASSETS
Real estate assets, at cost
 
 
 
 
Property
 
$
304,517

 
$
292,360

Accumulated depreciation
 
(48,999
)
 
(45,472
)
Total real estate assets
 
255,518

 
246,888

Cash and cash equivalents
 
3,863

 
5,695

Marketable securities
 
2,786

 
5,131

Escrows and acquisition deposits
 
3,767

 
4,996

Accrued rents and accounts receivable, net of allowance for doubtful accounts
 
6,727

 
6,053

Unamortized lease commissions and loan costs
 
4,495

 
3,755

Prepaid expenses and other assets
 
1,481

 
975

Total assets
 
$
278,637

 
$
273,493

LIABILITIES AND EQUITY
Liabilities:
 
 
 
 
Notes payable
 
$
140,051

 
$
127,890

Accounts payable and accrued expenses
 
7,034

 
9,017

Tenants' security deposits
 
2,393

 
2,232

Dividends and distributions payable
 
3,655

 
3,647

Total liabilities
 
153,133

 
142,786

Commitments and contingencies:
 

 

Equity:
 
 
 
 
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding at June 30, 2012 and December 31, 2011, respectively
 

 

Class A common shares, $0.001 par value per share; 50,000,000 shares authorized; 0 and 2,603,292 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
 

 
2

Class B common shares, $0.001 par value per share; 350,000,000 shares authorized; 12,024,821 and 8,834,563 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
 
10

 
8

Additional paid-in capital
 
164,231

 
158,127

Accumulated other comprehensive loss
 
(497
)
 
(1,119
)
Accumulated deficit
 
(46,639
)
 
(41,060
)
Total Whitestone REIT shareholders' equity
 
117,105

 
115,958

Noncontrolling interest in subsidiary
 
8,399

 
14,749

Total equity
 
125,504

 
130,707

Total liabilities and equity
 
$
278,637

 
$
273,493



See accompanying notes to Consolidated Financial Statements

1


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Property revenues
 
 
 
 
 
 
 
 
Rental revenues
 
$
8,523

 
$
6,705

 
$
16,651

 
$
13,376

Other revenues
 
2,464

 
1,365

 
4,762

 
2,780

Total property revenues
 
10,987

 
8,070

 
21,413

 
16,156

 
 
 
 
 
 
 
 
 
Property expenses
 
 
 
 
 
 
 
 
Property operation and maintenance
 
2,759

 
1,998

 
5,111

 
3,952

Real estate taxes
 
1,503

 
1,108

 
2,813

 
2,128

Total property expenses
 
4,262

 
3,106

 
7,924

 
6,080

 
 
 
 
 
 
 
 
 
Other expenses (income)
 
 
 
 
 
 
 
 
General and administrative
 
1,863

 
1,778

 
3,504

 
3,242

Depreciation and amortization
 
2,663

 
1,976

 
5,207

 
3,965

Interest expense
 
1,734

 
1,445

 
3,446

 
2,847

Interest, dividend and other investment income
 
(83
)
 
(55
)
 
(153
)
 
(115
)
Total other expense
 
6,177

 
5,144

 
12,004

 
9,939

 
 
 
 
 
 
 
 
 
Income (loss) before loss on disposal of assets and income taxes
 
548

 
(180
)
 
1,485

 
137

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
(70
)
 
(58
)
 
(135
)
 
(111
)
Loss on sale or disposal of assets
 
(16
)
 

 
(28
)
 
(18
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
462

 
(238
)
 
1,322

 
8

 
 
 
 
 
 
 
 
 
Less: Net income (loss) attributable to noncontrolling interests
 
31

 
(42
)
 
98

 
1

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Whitestone REIT
 
$
431

 
$
(196
)
 
$
1,224

 
$
7












See accompanying notes to Consolidated Financial Statements

2


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share data)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Basic and Diluted Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
(0.02
)
 
$
0.10

 
$

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
11,746

 
8,520

 
11,685

 
7,008

Diluted
 
11,754

 
8,520

 
11,696

 
7,008

 
 
 
 
 
 
 
 
 
Distributions declared per common share / OP unit
 
$
0.2850

 
$
0.2850

 
$
0.5700

 
$
0.5700

 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
462

 
$
(238
)
 
$
1,322

 
$
8

 
 
 
 
 
 
 
 
 
Other comprehensive gain (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale marketable securities
 
33

 
(209
)
 
799

 
(209
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
495

 
(447
)
 
2,121

 
(201
)
 
 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests
 
30

 
(78
)
 
157

 
(41
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Whitestone REIT
 
$
465

 
$
(369
)
 
$
1,964

 
$
(160
)



See accompanying notes to Consolidated Financial Statements

3


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(in thousands)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional
 
 
 
Other
 
Total
 
Noncontrolling
 
 
 
 
Common Shares
 
Common Shares
 
Paid-In
 
Accumulated
 
Comprehensive
 
Shareholders'
 
interests
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Equity
 
Units
 
Dollars
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 
2,603

 
$
2

 
8,835

 
$
8

 
$
158,127

 
$
(41,060
)
 
$
(1,119
)
 
$
115,958

 
1,361

 
$
14,749

 
$
130,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange of noncontrolling interest OP units and Class A common shares for Class B common shares
 
(2,605
)
 
(2
)
 
3,180

 
2

 
6,224

 

 
(118
)
 
6,106

 
(575
)
 
(6,106
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange offer costs
 

 

 

 

 
(334
)
 

 

 
(334
)
 

 

 
(334
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend reinvestment plan
 

 

 
3

 

 
45

 

 

 
45

 

 

 
45

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 
2

 

 
7

 

 
169

 

 

 
169

 

 

 
169

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions
 

 

 

 

 

 
(6,803
)
 

 
(6,803
)
 

 
(401
)
 
(7,204
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on change in fair value of available-for-sale marketable securities
 

 

 

 

 

 

 
740

 
740

 

 
59

 
799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 

 
1,224

 

 
1,224

 

 
98

 
1,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance June 30, 2012
 

 
$

 
12,025

 
$
10

 
$
164,231

 
$
(46,639
)
 
$
(497
)
 
$
117,105

 
786

 
$
8,399

 
$
125,504




See accompanying notes to Consolidated Financial Statements


4


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2012
 
2011
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
1,322

 
$
8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
4,573

 
3,736

Amortization of deferred loan costs
 
634

 
229

Gain on sale of marketable securities
 
(32
)
 
(38
)
Loss on sale or disposal of assets
 
28

 
18

Bad debt expense
 
358

 
214

Share-based compensation
 
266

 
155

Changes in operating assets and liabilities:
 
 
 
 
Escrows and acquisition deposits
 
1,229

 
1,986

Accrued rents and accounts receivable
 
(1,064
)
 
(544
)
Unamortized lease commissions
 
(600
)
 
(402
)
Prepaid expenses and other assets
 
298

 
495

Accounts payable and accrued expenses
 
(1,917
)
 
(1,758
)
Tenants' security deposits
 
161

 
49

Net cash provided by operating activities
 
5,256

 
4,148

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Acquisitions of real estate
 
(6,400
)
 
(8,650
)
Additions to real estate
 
(6,465
)
 
(2,066
)
Investments in marketable securities
 
(750
)
 
(10,461
)
Proceeds from sales of marketable securities
 
3,926

 
909

Net cash used in investing activities
 
(9,689
)
 
(20,268
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Distributions paid to common shareholders
 
(6,684
)
 
(3,737
)
Distributions paid to OP unit holders
 
(559
)
 
(1,030
)
Proceeds from issuance of common shares
 

 
60,066

Payments of exchange offer costs
 
(306
)
 

Proceeds from notes payable
 
13,156

 
2,905

Repayments of notes payable
 
(1,819
)
 
(1,540
)
Payments of loan origination costs
 
(1,187
)
 
(359
)
Net cash provided by financing activities
 
2,601

 
56,305

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(1,832
)
 
40,185

Cash and cash equivalents at beginning of period
 
5,695

 
17,591

Cash and cash equivalents at end of period
 
$
3,863

 
$
57,776


See accompanying notes to Consolidated Financial Statements

5


Whitestone REIT and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
Six Months Ended June 30,
 
 
2012
 
2011
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
3,375

 
$
2,838

Cash paid for taxes
 
$
225

 
$
215

Non cash investing and financing activities:
 
 
 
 
Disposal of fully depreciated real estate
 
$
523

 
$
21

Financed insurance premiums
 
780

 
649

Value of shares issued under dividend reinvestment plan
 
45

 

Accrued offering costs
 
28

 
305

Value of Class B shares exchanged for OP units
 
6,224

 

Change in fair value of available-for-sale securities
 
799

 
(209
)


































See accompanying notes to Consolidated Financial Statements


6

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(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, 2011 are derived from our audited consolidated financial statements as of that date.  The unaudited financial statements as of June 30, 2012 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 June 30, 2012, and the results of operations for the three and six month periods ended June 30, 2012 and 2011, the consolidated statements of changes in equity for the six month period ended June 30, 2012 and cash flows for the six month periods ended June 30, 2012 and 2011.  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, 2011.
 
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, Whitestone changed its state of organization from Texas to Maryland.  Whitestone serves 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.  Whitestone currently conducts substantially all of its operations and activities through the Operating Partnership.  As the general partner of the Operating Partnership, Whitestone has the exclusive authority to manage and conduct the business of the Operating Partnership, subject to certain customary exceptions.  As of June 30, 2012 and December 31, 2011, Whitestone owned and operated 46 and 45 commercial properties, respectively in and around Houston, Dallas, San Antonio, Chicago and Phoenix.


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 June 30, 2012 and December 31, 2011, 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.  All significant inter-company balances have been eliminated. 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.  Issuances of additional common shares of beneficial interest, par value $0.001 per share, 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 ownership interests of both the noncontrolling interests and Whitestone.
  
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 assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts and estimates supporting our impairment analysis for the carrying values of our real estate assets.  Actual results could differ from those estimates.
 

7

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

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.
 
Marketable Securities. We classify our existing marketable equity securities as available-for-sale in accordance with the Financial Accounting Standards Board's ("FASB") Investments-Debt and Equity Securities guidance. These securities are carried at fair value with unrealized gains and losses reported in equity as a component of accumulated other comprehensive income or loss. The fair value of the marketable securities is determined using Level 1 inputs under FASB Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures." Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date. Gains and losses on securities sold are based on the specific identification method, and are reported as a component of interest, dividend and other investment income. We recognized gains on the sale of marketable securities of approximately $31,000 and $0 for the three months ended June 30, 2012 and 2011, respectively, and $32,000 and $38,000 for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, our investment in available-for-sale marketable securities was approximately $2,786,000, which includes an aggregate unrealized loss of approximately $530,000.

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, primarily interest, real estate taxes and loan acquisition costs, 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 June 30, 2012, approximately $44,000 and $31,000 in interest expense and real estate taxes, respectively, were capitalized, and for the six months ended June 30, 2012, approximately $88,000 and $63,000 in interest expense and real estate taxes, respectively, were capitalized. No interest expense or real estate taxes were capitalized during the three or six months ended June 30, 2011.

Share-Based Compensation.   From time to time, we award 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 2008 Long-Term Equity Incentive Ownership Plan (the “2008 Plan”).  The vast majority of the 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 $188,000 and $77,000 in share-based compensation for the three months ended June 30, 2012 and 2011, respectively, and we recognized $266,000 and $155,000 in share-based compensation for the six months ended June 30, 2012 and 2011, respectively.

Noncontrolling Interests.  Noncontrolling interests is the portion of equity in a subsidiary not attributable to a parent.  The ownership interests not held by the parent are considered noncontrolling interests.  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, subsidiaries are reported at the consolidated amount, including both the amount attributable to Whitestone and noncontrolling interests.  Consolidated statements of changes in equity are included for quarterly financial statements, including beginning balances, activity for the period and ending balances for shareholders' equity, noncontrolling interests and total equity.
 
See our Annual Report on Form 10-K for the year ended December 31, 2011 for further discussion on significant accounting policies.
 
Recent Accounting Pronouncements.  There are no new unimplemented accounting pronouncements that are expected to have a material impact on our results of operations, financial position or cash flows.







8

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

3. MARKETABLE SECURITIES

All of our marketable securities were classified as available-for-sale securities as of June 30, 2012 and December 31, 2011. Available-for-sale securities consisted of the following (in thousands):
 
 
June 30, 2012
 
 
Amortized Cost
 
Gains in Accumulated Other Comprehensive Income
 
Losses in Accumulated Other Comprehensive Income
 
Estimated Fair Value
Real estate common stock
 
$
3,316

 
$
1

 
$
(531
)
 
$
2,786

Total available-for-sale securities
 
$
3,316

 
$
1

 
$
(531
)
 
$
2,786

 
 
December 31, 2011
 
 
Amortized Cost
 
Gains in Accumulated Other Comprehensive Income
 
Losses in Accumulated Other Comprehensive Income
 
Estimated Fair Value
Exchange-traded fund
 
$
301

 
$

 
$
(37
)
 
$
264

Real estate sector mutual funds
 
351

 

 
(55
)
 
296

Real estate common stock
 
5,808

 

 
(1,237
)
 
4,571

Total available-for-sale securities
 
$
6,460

 
$

 
$
(1,329
)
 
$
5,131


During the three and six months ended June 30, 2012, available-for-sale securities were sold for total proceeds of $1,312,000 and $3,926,000, respectively. The gross realized gains and losses on these sales during the three months ended June 30, 2012 totaled $34,000 and $3,000, respectively, and the gross realized gains and losses on the sales during the six months ended June 30, 2012 totaled $74,000 and $42,000, respectively. During the three and six months ended June 30, 2011, available-for-sale securities were sold for total proceeds of $1,000 and $909,000, respectively. No gross realized gains or losses on these sales were recognized during the three months ended June 30, 2011, and the gross realized gains and losses on the sales during the six months ended June 30, 2011 totaled $39,000 and $1,000, respectively.

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):

 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
 
Tenant receivables
 
$
3,362

 
$
1,914

Accrued rents and other recoveries
 
4,989

 
5,505

Allowance for doubtful accounts
 
(1,624
)
 
(1,366
)
Total
 
$
6,727

 
$
6,053








9

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

5. UNAMORTIZED LEASING COMMISSIONS AND LOAN COSTS

Costs which have been deferred consist of the following (in thousands):
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
 
Leasing commissions
 
$
5,193

 
$
5,326

Deferred financing cost
 
4,315

 
2,916

Total cost
 
9,508

 
8,242

Less: leasing commissions accumulated amortization
 
(2,760
)
 
(2,861
)
Less: deferred financing cost accumulated amortization
 
(2,253
)
 
(1,626
)
Total cost, net of accumulated amortization
 
$
4,495

 
$
3,755


6. DEBT

Debt consisted of the following as of the dates indicated (in thousands):
Description
 
June 30, 2012
 
December 31, 2011
Fixed rate notes
 
 
 
 
$1.4 million 5.00% Note, due 2012
 
$
1,352

 
$
1,318

$14.1 million 5.695% Note, due 2013
 
13,993

 
14,110

$3.0 million 6.00% Note, due 2021 (1)
 
2,961

 
2,978

$10.0 million 6.04% Note, due 2014
 
9,235

 
9,326

$1.5 million 6.50% Note, due 2014
 
1,458

 
1,471

$11.2 million 6.52% Note, due 2015
 
10,688

 
10,763

$21.4 million 6.53% Notes, due 2013
 
19,200

 
19,524

$24.5 million 6.56% Note, due 2013
 
23,370

 
23,597

$9.9 million 6.63% Notes, due 2014
 
9,075

 
9,221

$0.7 million 2.97% Note, due 2012
 
367

 
23

Floating rate notes
 
 
 
 

Unsecured line of credit, LIBOR plus 2.75% to 3.75%, due 2015
 
24,200

 
11,000

$26.9 million, LIBOR plus 2.86%, due 2013
 
24,152

 
24,559

 
 
$
140,051

 
$
127,890



(1) 
The 6.00% interest rate is fixed through March 30, 2016. On March 31, 2016 the interest rate will reset to the rate of interest for a five year balloon note with a thirty year amortization as published by the Federal Home Loan Bank.

As of June 30, 2012, our $115 million in secured debt was collateralized by 26 properties with a carrying value of $145.6 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 certain rents and leases associated with those properties.  As of June 30, 2012, we were in compliance with all loan covenants.

Our $125 million unsecured revolving credit facility (the “Credit Facility”), which is available to us for acquisitions of properties and and working capital, is our primary source of additional credit. As of June 30, 2012, $24.2 million was drawn on the Credit Facility, and our borrowing capacity was $100.8 million, assuming use of the proceeds to acquire properties, or repayment of debt on properties, that are eligible to be included in the unsecured borrowing base. The Credit Facility bears interest at LIBOR plus 2.75% to 3.75%, and matures on February 27, 2015. As of June 30, 2012, the interest rate was 3.00%.


10

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

We are the guarantor for funds borrowed by the Operating Partnership under the Credit Facility. The Credit 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 and extraordinary items) to fixed charges, minimum property net operating income to total indebtedness and maintenance of net worth. The Credit Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, material misrepresentation of representations and warranties, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status. As of June 30, 2012, we were in compliance with all covenants.

Scheduled maturities of our debt as of June 30, 2012 were as follows (in thousands):
 
 
Amount Due
Year
 
(in thousands)
 
 
 
2012
 
$
3,207

2013
 
80,326

2014
 
19,191

2015
 
34,515

2016
 
48

Thereafter
 
2,764

Total
 
$
140,051


We will have approximately $14 million of debt maturing in June 2013 and approximately $67 million maturing in October and November 2013. The majority of this debt is with insurance companies and was entered into in late 2008. We have begun renewal discussion with our current lenders and expect to renew this debt with our current lenders or new lenders at rates and terms similar or better than our current rates and terms. We also have availability under our Credit Facility should we be unable to obtain similar or better financing from our current lenders or new lenders.

7.  EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share for our common shareholders is calculated by dividing income (loss) from continuing operations excluding amounts attributable to unvested restricted shares and the net income (loss) attributable to non-controlling interests by our weighted-average common shares outstanding during the period.  Diluted earnings (loss) per share is computed by dividing the net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares and the net income (loss) attributable to non-controlling interests by the weighted-average number of common shares including any dilutive unvested restricted shares.
 
Certain of our performance-based restricted common shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share.   During the three months ended June 30, 2012 and 2011, 882,051 and 1,814,569 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive, and during the six months ended June 30, 2012 and 2011, 937,066 and 1,814,569 OP units, respectively, were excluded from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the three and six months ended June 30, 2011, diluted weighted average common shares do not include the impact of approximately 13,000 and 16,000 unvested restricted shares, respectively, because the effect of these items on diluted earnings per share would be anti-dilutive.
 
For the three months ended June 30, 2012 and 2011, distributions of $50,000 and $53,000, respectively, were made to holders of certain restricted common shares, $48,000 and $49,000 of which were charged against earnings. For the six months ended June 30, 2012 and 2011, distributions of $103,000 and $108,000, respectively, were made to holders of certain restricted common shares, $97,000 and $98,000 of which were charged against earnings. See Note 12 for information related to restricted common shares under the 2008 Plan.
 


11

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
(in thousands, except per share data)
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
462

 
$
(238
)
 
$
1,322

 
$
8

Less: Net (income) loss attributable to noncontrolling interests
 
(31
)
 
42

 
(98
)
 
(1
)
Distributions paid on unvested restricted shares
 
(2
)
 
(4
)
 
(6
)
 
(10
)
Undistributed earnings attributable to unvested restricted shares
 

 

 

 

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
429

 
$
(200
)
 
$
1,218

 
$
(3
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average number of common shares - basic
 
11,746

 
8,520

 
11,685

 
7,008

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Unvested restricted shares
 
8

 

 
11

 

Weighted average number of common shares - dilutive
 
11,754

 
8,520

 
11,696

 
7,008

 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
(0.02
)
 
$
0.10

 
$

Diluted:
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
0.04

 
$
(0.02
)
 
$
0.10

 
$


8. INCOME TAXES
 
Federal income taxes are not provided because we intend to continue to and believe we qualify as a REIT under the provisions of the Internal Revenue Code (the "Code") and because we have distributed and intend to continue to distribute all of our taxable income to our shareholders.  Our shareholders include their proportionate taxable income in their individual tax returns.  As a REIT, we must distribute at least 90% of our real estate investment trust 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.
 
During 2010, we discovered that we may have inadvertently violated the “5% asset test,” as set forth in Section 856(c)(4)(B)(iii)(I) of the Code, for the quarter ended March 31, 2009 as a result of utilizing a certain cash management arrangement with a commercial bank. If our investment in a commercial paper investment sweep account through such cash management agreement is not treated as cash, and is instead treated as a security of a single issuer for purposes of the “5% asset test,” then we failed the “5% asset test” for the first quarter of our 2009 taxable year. We believe, however, that if we failed the “5% asset test,” our failure would be considered due to reasonable cause and not willful neglect and, therefore, we would not be disqualified as a REIT for our 2009 taxable year. We would be, however, subject to certain reporting requirements and a tax equal to the greater of $50,000 or 35% of the net income from the commercial paper investment account during the period in which we failed to satisfy the “5% asset test.” The amount of such tax is $50,000, and we paid such tax on April 27, 2010.     
    
If the IRS were to assert that we failed the “5% asset test” for the first quarter of our 2009 taxable year and that such failure was not due to reasonable cause, and the courts were to sustain that position, our status as a REIT would terminate as of December 31, 2008. We would not be eligible to again elect REIT status until our 2014 taxable year. Consequently, we would

12

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

be subject to federal income tax on our taxable income at regular corporate rates without the benefit of the dividends-paid deduction, and our cash available for distributions to shareholders would be reduced.

Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue. 

We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (1% for us) to the profit margin, which generally will be determined for us as total revenue less a 30% standard deduction.  Although House Bill 3 states that the Texas Margin Tax is not an income tax, SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) which is codified in FASB ASC 740, "Income Taxes" (“ASC 740”) applies to the Texas Margin Tax.  For the three months ended June 30, 2012 and 2011, we recognized $65,000 and $58,000 in margin tax provision, respectively, and for the six months ended June 30, 2012 and 2011, we recognized $123,000 and $110,000, respectively.

9.  RELATED PARTY TRANSACTIONS
 
Executive Relocation. On July 9, 2010, upon the unanimous recommendation of our Compensation Committee of our board of trustees, we entered into an arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland, Ohio. Mr. Mastandrea listed the residence in the second half of 2007 and has had no offers. In the meantime, Mr. Mastandrea has continued to pay for security, taxes, insurance and maintenance expenses related to the residence. In May 2010, we engaged a professional relocation firm to market the home and assist in moving the Mastandrea family to Houston. Since the engagement of the relocation firm, no offers on the home have been received. On August 9, 2012, upon the unanimous recommendation of our Compensation Committee to our board of trustees, the arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland Ohio was amended. The following summarizes the amended arrangement:

Reimbursement of Mr. Mastandrea of the amount, if any, by which the sales price for the sale of the Residence is less than $2,450,000 (the “Sales Price Shortfall”) upon sale of the Residence (the “Shortfall Reimbursement”);

Payment to Mr. Mastandrea of an amount equal to the amount of any Shortfall Reimbursement divided by the net difference of one (1) minus the maximum U.S. federal income tax rate in effect at the time of the sale of the Residence, less the Shortfall Reimbursement (the “Tax Payment”);

Payment of the sum of the Shortfall Reimbursement and Tax Payment (the “Lump Sum Payment”) as follows: (1) Cash within five (5) business days after the sale of the Residence (the “Cash Payment”); and (2) Company common shares, with the number of common shares being equal to the Lump Sum Payment, minus the Cash Payment, divided by the last sale price of the common shares on the New York Stock Exchange on the day of the sale of the Residence, with the proportion of the Lump Sum Payment to be paid in cash and common shares being determined upon agreement between Mr. Mastandrea and the Compensation Committee at the time of the sale of the Residence;

Payment of housing expenses in Houston, Texas for a period of one (1) year following the sale of the Residence; and

Payment of out of pocket moving costs including packing, temporary storage, transportation and moving supplies.

10.  EQUITY
 
Reclassification of Common Shares

On June 27, 2012, we filed with the State Department of Assessments and Taxation of Maryland amendments to our declaration of trust that (i) reclassified each issued and unissued Class A common share of beneficial interest, par value $0.001 per share (the "Class A common shares") into one Class B common share of beneficial interest, par value $0.001 per share (the "Class B common shares") and (ii) changed the designation of all of the Class B common shares to “common shares.” The amendment setting forth the reclassification of the Class A common shares into Class B common shares was approved by our shareholders at the 2012 annual meeting of shareholders held on May 22, 2012. The amendment approving the redesignation of the Class B common shares to common shares was approved by our board of trustees and did not require shareholder approval.
    
Common Shares    

13

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)


Following the reclassification of our common shares on June 27, 2012, as described above, 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.
  


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 June 30, 2012, we owned a 93.8% interest in the Operating Partnership.
 
Limited partners in the Operating Partnership holding OP units have the right to convert their OP units into 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 Whitestone common shares.  As of June 30, 2012 and December 31, 2011, there were 12,690,199 and 12,677,969 OP units outstanding, respectively.  We owned 11,904,008 and 11,317,042 OP units as of June 30, 2012 and December 31, 2011, respectively. The balance of the OP units is owned by third parties, including certain of our trustees.  Our weighted-average share ownership in the Operating Partnership was approximately 93.0% and 83.4% for the three months ended June 30, 2012 and 2011, respectively, and 92.6% and 80.1% for the six months ended June 30, 2012 and June 30, 2011, respectively.

 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 during 2011 and the six months ended June 30, 2012 (in thousands, except per share data):

 
 
Class A Common Shareholders (1)
 
Class B Common Shareholders (1)
 
Noncontrolling OP Unit Holders
 
Total
Quarter Paid
 
Distributions Per Common Share
 
Total Amount Paid
 
Distributions Per Common Share
 
Total Amount Paid
 
Distributions Per OP Unit
 
Total Amount Paid
 
Total Amount Paid
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter
 
$
0.2850

 
$
477

 
$
0.2850

 
$
2,885

 
$
0.2850

 
$
258

 
$
3,620

First Quarter
 
0.2850

 
562

 
0.2850

 
2,760

 
0.2850

 
301

 
3,623

Total
 
$
0.5700

 
$
1,039

 
$
0.5700

 
$
5,645

 
$
0.5700

 
$
559

 
$
7,243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
$
0.2850

 
$
807

 
$
0.2850

 
$
2,386

 
$
0.2850

 
$
430

 
$
3,623

Third Quarter
 
0.2850

 
974

 
0.2850

 
2,141

 
0.2850

 
514

 
3,629

Second Quarter
 
0.2850

 
989

 
0.2850

 
1,132

 
0.2850

 
515

 
2,636

First Quarter
 
0.2850

 
989

 
0.2850

 
627

 
0.2850

 
515

 
2,131

Total
 
$
1.1400

 
$
3,759

 
$
1.1400

 
$
6,286

 
$
1.1400

 
$
1,974

 
$
12,019


(1) 
Effective June 27, 2012, each outstanding Class A common share was reclassified into one Class B common share, and the Class B common shares were redesignated as "common shares."

New York Stock Exchange ("NYSE") Listing

On June 29, 2012, we transferred the listing of our common shares to the NYSE under our existing ticker symbol "WSR." As a result of the transfer, we voluntarily delisted our common shares from the NYSE MKT LLC (“NYSE MKT”)

14

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

effective June 28, 2012.
    


Exchange Offers

On September 2, 2011, we commenced an offer to exchange Class B common shares on a one-for-one basis for (i) up to 867,789 outstanding Class A common shares; and (ii) up to 453,642 outstanding OP units (the “First Exchange Offer”). The First Exchange Offer expired on October 3, 2011, and 867,789 Class A common shares and 453,642 OP units were accepted for exchange.

On December 9, 2011, we commenced a second offer to exchange Class B common shares on a one-for-one basis for (i) up to 867,789 outstanding Class A common shares; and (ii) up to 453,642 outstanding OP units (the “Second Exchange Offer”). The Second Exchange Offer expired on January 11, 2012, and 867,789 Class A common shares and 453,580 OP units were accepted for exchange.

On May 10, 2012, we commenced a third offer to exchange Class B common shares on a one-for-one basis for (i) up to 867,789 outstanding Class A common shares; and (ii) up to 453,642 outstanding OP units (the “Third Exchange Offer”). The Third Exchange Offer expired on June 8, 2012, and 426,986 Class A common shares and 121,156 OP units were accepted for exchange.

11.  COMMITMENTS AND CONTINGENCIES
 
We are subject to various legal proceedings and claims that arise in the ordinary course of business.  These matters are generally covered by insurance.  While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.
 
Executive Relocation.  On July 9, 2010, upon the unanimous recommendation of our Compensation Committee of our board of trustees, we entered into an arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland, Ohio. Mr. Mastandrea listed the residence in the second half of 2007 and has had no offers. In the meantime, Mr. Mastandrea has continued to pay for security, taxes, insurance and maintenance expenses related to the residence. In May 2010, we engaged a professional relocation firm to market the home and assist in moving the Mastandrea family to Houston. Since the engagement of the relocation firm, no offers on the home have been received. On August 9, 2012, upon the unanimous recommendation of our Compensation Committee to our board of trustees, the arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland Ohio was amended. See Note 9 above for a description of the amendment to the arrangement with Mr. Mastandrea.

12.  INCENTIVE SHARE PLAN
 
On July 29, 2008, our shareholders approved the 2008 Plan. On December 22, 2010, our board of trustees amended the 2008 Plan to allow for awards in or related to Class B common shares pursuant to the 2008 Plan. On June 27, 2012, our Class B common shares were redesignated as "common shares." The 2008 Plan, as amended, provides that awards may be made with respect to common shares of Whitestone or OP units, which may be converted into cash or, at our option, common shares of Whitestone. The maximum aggregate number of common shares that may be issued under the 2008 Plan is increased upon each issuance of common shares by Whitestone so that at any time the maximum number of shares that may be issued under the 2008 Plan shall equal 12.5% of the aggregate number of common shares of Whitestone and OP units issued and outstanding (other than shares and/or units issued to or held by Whitestone).

The Compensation Committee of our board of trustees administers the 2008 Plan, except with respect to awards to non-employee trustees, for which the 2008 Plan is administered by our 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. 
 


15

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)





A summary of the share-based incentive plan activity as of and for the six months ended June 30, 2012 is as follows:

 
 
Shares
 
Weighted-Average
Grant Date
Fair Value (1)
Non-vested at January 1, 2012
 
504,023

 
$
12.48

Granted
 
57,915

 
12.79

Vested
 
(13,853
)
 
13.89

Forfeited
 
(8,007
)
 
11.18

Non-vested as of June 30, 2012
 
540,078

 
$
12.50

Available for grant at June 30, 2012
 
1,195,730

 
 

(1) 
The fair value of the common shares granted before trading of the common shares commenced on the NYSE MKT on August 25, 2010 were determined based on observable market transactions occurring near the date of the grants. The fair value of the common shares granted subsequent to August 25, 2010 were determined using Level 1 inputs under FASB ASC 820. Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date.

A summary of our nonvested and vested shares activity for the six months ended June 30, 2012 and years ended December 31, 2011, 2010 and 2009 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)
Six months ended June 30, 2012
 
57,915

 
$
12.79

 
(13,853
)
 
$
192

Year ended December 31, 2011
 

 

 
(5,169
)
 
80

Year ended December 31, 2010
 
31,858

 
14.09

 
(55,699
)
 
695

Year ended December 31, 2009
 
600,731

 
12.37

 

 

    
Total compensation recognized in earnings for share-based payments was $188,000 and $77,000 for the three months ended June 30, 2012 and 2011, respectively, and $266,000 and $155,000 for the six months ended June 30, 2012 and 2011, respectively. Total compensation recognized in earnings for share-based payments includes achievement of the first performance-based target and anticipated vesting of certain restricted shares with time-based vesting.  With our current asset base, management does not expect to achieve the next performance-based target.  Should we increase our asset base, we may achieve the next performance-based target.  As of June 30, 2012, there was no unrecognized compensation cost related to outstanding nonvested performance-based shares based on management's current estimates. As of June 30, 2012, there was approximately $88,000 in unrecognized compensation cost related to outstanding nonvested time-based shares which are expected to be recognized over a weighted-average period of approximately one year. The fair value of the shares granted during the six months ended June 30, 2012 was determined using Level 1 inputs. Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date.

13. GRANTS TO TRUSTEES
On May 22, 2012, each of our four independent trustees was granted 1,500 common shares, which vested immediately. The 6,000 common shares granted to our four independent trustees had a grant date fair value of $13.03 per

16

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

share. On June 25, 2012, two of our independent trustees elected to receive a total of 915 common shares with a grant date fair value of $13.39 in lieu of cash for board fees. The fair value of the shares granted during the six months ended June 30, 2012 was determined using Level 1 inputs. Level 1 inputs represent quoted prices available in an active market for identical investments as of the reporting date.

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 May 29, 2012, we acquired the Shops at Pinnacle Peak, a property that meets our Community Centered Property strategy, for approximately $6.4 million in cash and net prorations. The 41,530 square foot center was 76% leased at the time of purchase and is located in North Scottsdale, Arizona.     

On December 28, 2011, we acquired the Shops at Starwood, a property that meets our Community Centered Property strategy, for approximately $15.7 million in cash and net prorations. The Class A center, which was 98% occupied at the time of purchase, contains 55,385 square feet of gross leasable area, and is located in Frisco, Texas, a northern suburb of Dallas. The Shops at Starwood has a complementary tenant mix of restaurants, fashion boutiques, salons and second-level office space.

On December 28, 2011, we acquired Starwood Phase III, a 2.73 acre parcel of undeveloped land adjacent to the Shops at Starwood for approximately $1.9 million, including a non-recourse loan we assumed for $1.4 million that is secured by the land, and cash of $0.5 million. The Phase III development site fronts the Dallas North Tollway within the Tollway Overlay District, which grants the highest allowed density of any zoning district.

On December 28, 2011, we acquired Pinnacle of Scottsdale Phase II ("Pinnacle Phase II"), a 4.45 acre parcel of developed land adjacent to Pinnacle for approximately $1.0 million in cash and net prorations. Pinnacle Phase II has approximately 400 linear feet of frontage on Scottsdale Road and the potential for additional retail and office development.

On December 22, 2011, we acquired Phase I of Pinnacle of Scottsdale ("Pinnacle"), a property that meets our Community Centered Property strategy, for approximately $28.8 million, including a non-recourse loan we assumed for $14.1 million that is secured by the property, and cash of $14.7 million. Pinnacle is a 100% occupied Class A Community Center with 113,108 square feet of gross leasable area in North Scottsdale, Arizona. The tenant mix at Pinnacle includes Safeway®, Ace® Hardware, Shell® Oil, Hornacek’s House of Golf, Jade Palace, Jalapeno Inferno, SubwayTM, Stag Tobacconist, Starbucks© Coffee, Pinnacle Peak Dentistry, and a variety of other convenience service providers.

On August 16, 2011, we acquired Ahwatukee Plaza Shopping Center, a property that meets our Community Centered Property strategy, for approximately $9.3 million in cash and net prorations. The center contains 72,650 square feet of gross leasable area, located in the Ahwatukee Foothills neighborhood in south Phoenix, Arizona.

On August 8, 2011, we acquired Terravita Marketplace, a property that meets our Community Centered Property strategy, containing 102,733 square feet of gross leasable area, including of 51,434 square feet leased to two tenants pursuant to ground leases, located in Scottsdale, Arizona for approximately $16.1 million in cash and net prorations. Terravita Marketplace is adjacent to the gated golf course residential community of Terravita, which was developed by DelWebb Corporation/Pulte, with homes ranging in price from $250,000 to $1 million.

On June 28, 2011, we acquired Gilbert Tuscany Village, a property that meets our Community Centered Property strategy, containing 49,415 square feet of gross leasable area, located in Gilbert, Arizona for approximately $5.0 million in cash and net prorations. Gilbert Tuscany Village is surrounded by densely populated, high-end residential developments and is located approximately one mile from Banner Gateway Medical Center, a 60-acre medical complex that is partnering with MD Anderson to add a new 120,000 square foot cancer outpatient center.

On April 13, 2011, we acquired Desert Canyon Shopping Center, a property that meets our Community Centered

17

WHITESTONE REIT AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

Property strategy, for approximately $3.65 million in cash and net prorations. The center contains 62,533 square feet of gross leasable area, including 12,960 square feet leased to two tenants pursuant to ground leases, and is located in Mcdowell Mountain Ranch in northern Scottsdale, Arizona. Situated at a prime intersection at East McDowell Mountain Ranch Road and 105th Street, Desert Canyon is the nearest retail and office space to McDowell Mountain Elementary and Junior High Schools. Located adjacent to the Sonora Mountain Desert Preserve, a lighted trail and jogging path wind directly into the Desert Canyon site and provide access from the surrounding upscale residential neighborhoods.

Property Dispositions. On July 22, 2011, we sold Greens Road Plaza, located in Houston, Texas, for $1.8 million in cash and net prorations. We have reinvested the proceeds from the sale of the 20,607 square foot property located in northeast Houston in Community Centered Properties in our target markets. As a result of the transaction, we recorded a gain on sale of property of $0.4 million for the year ended December 31, 2011.

16. SUBSEQUENT EVENTS

On July 13, 2012, we filed    a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), allowing us to offer up to $350,000,000 in securities, from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights. The registration statement was declared effective by the SEC on July 25, 2012.

On August 6, 2012, upon the unanimous recommendation of our Compensation Committee of our board of trustees, we amended our arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland, Ohio. See Note 9 above for a description of the amendment to the arrangement with Mr. Mastandrea.

On August 8, 2012, we acquired Paradise Plaza, a property that meets our Community Centered Property strategy, for approximately $16.3 million, including a non-recourse loan we assumed for $9.1 million that is secured by the property, and cash of $7.2 million. Paradise Plaza is a 100% occupied Community Center with 125,898 square feet of gross leasable area in Paradise Valley, Arizona. The mortgage loan we assumed has five years of term remaining and bears interest at 3.5% in year one and 4.7% in subsequent years.


18


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

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this quarterly report on Form 10-Q (the “Report”), and the consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011.  For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report.

This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, 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 to not 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 taxes if we fail to qualify as a 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 in Texas, Arizona or Illinois;
increases in interest rates and operating costs;
inability to obtain necessary outside financing;
decreases in rental rates or increases in vacancy rates;
litigation risks;
lease-up risks;
inability to renew tenants or obtain new tenants upon the expiration of existing leases;
inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws; and
the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.
 
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2011, as previously filed with the SEC and of this Report below.
 
Overview

We are a fully integrated real estate company that owns and operates Community Centered Properties in culturally diverse markets in major metropolitan areas.  We define Community Centered Properties as visibly located properties in established or developing culturally diverse neighborhoods in our target markets.  Founded in 1998, we are internally managed with a portfolio of commercial properties in Texas, Arizona and Illinois.

In October 2006, our current management team joined the Company and adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties.  We 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 business center or retail community that serves a neighboring five-mile radius around our property.  We employ and develop a diverse group of associates who understand the needs of our multicultural communities and tenants.


19


As of June 30, 2012, we owned and operated 46 commercial properties consisting of:

Operating Portfolio
twenty-three retail centers containing approximately 1.6 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $153.0 million;
seven office centers containing approximately 0.6 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $43.8 million; and
eleven office/flex centers containing approximately 1.2 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $40.4 million.
Redevelopment, New Acquisitions Portfolio
three retail Community Centered Properties containing approximately 0.2 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $15.3 million; and
two parcels of land held for future development having a total carrying value of $3.0 million.
As of June 30, 2012, we had a total of 963 tenants.  We have a diversified tenant base with our largest tenant comprising only 1.4% of our annualized rental revenues for the six months ended June 30, 2012.  Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants.  Our leases generally include minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance.  We completed 182 new and renewal leases during the six months ended June 30, 2012, totaling approximately 349,000 square feet and approximately $16.3 million in total lease value.  This compares to 157 new and renewal leases totaling approximately 484,000 square feet and approximately $19.8 million in total lease value during the same period in 2011.

We employed 56 full-time employees as of June 30, 2012.  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.

How We Derive Our Revenue
 
Substantially all of our revenue is derived from rents received from leases at our properties. We had rental income and tenant reimbursements of approximately $11.0 million and $8.1 million for the three months ended June 30, 2012 and 2011, respectively, and $21.4 million and $16.2 million for the six months ended June 30, 2012 and 2011, respectively.

Known Trends in Our Operations; Outlook for Future Results
 
Rental Income
 
We expect our rental income to increase year-over-year due to the addition of properties. 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. Negative trends in one or more of these factors could adversely affect our rental income in future periods. We expect modest continued improvement in the economic conditions in our markets to provide slight increases in occupancy at certain of our properties.
 
Scheduled Lease Expirations
 
We tend to lease space to smaller businesses that desire shorter term leases. As of June 30, 2012, approximately 27% of our gross leasable area was subject to leases that expire prior to December 31, 2013.  Over the last two years, we have renewed leases covering approximately 75% of our square footage expiring as a result of lease maturities. We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 18 months prior to the expiration date of the existing lease.  In the markets in which we operate, we obtain and analyze market rental rates by reviewing third-party publications, which provide market and submarket rental rate data, and by inquiring of property owners and property management companies as to rental rates being quoted at properties located in close proximity to our properties and which we believe display similar physical attributes as our nearby properties. We use this data to negotiate

20


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.  During the year ended December 31, 2011, our revenue rate per square foot for new and renewal comparable spaces increased 1% when compared to the expiring revenue rate per square foot for the previous leases in the same spaces.  As such, we expect to renew our leases expiring in the near term at rates which are at, or near, their current rates. Market conditions, including new supply of properties, and macroeconomic conditions in Houston 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 pay dividends to our shareholders.
 
Acquisitions
 
We expect to actively seek acquisitions in the foreseeable future. We believe that over the next few years we will continue to have excellent opportunities to acquire quality properties at historically attractive prices. We have extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe will enable us to take advantage of these market opportunities and maintain an active acquisition pipeline.
 
Property Acquisitions
 
We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties strategy.  We define Community Centered Properties as visibly located properties in established or developing, culturally diverse neighborhoods in our target markets, primarily in and around Phoenix, Chicago, Dallas, San Antonio and Houston.  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, medical, educational and financial services.  Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property.

On May 29, 2012, we acquired the Shops at Pinnacle Peak, a property that meets our Community Centered Property strategy, for approximately $6.4 million in cash and net prorations. The 41,530 square foot center was 76% leased at the time of purchase and is located in North Scottsdale, Arizona.    

On December 28, 2011, we acquired the Shops at Starwood, a property that meets our Community Centered Property strategy, for approximately $15.7 million in cash and net prorations. The Class A center, which was 98% occupied at the time of purchase, contains 55,385 square feet of gross leasable area and is located in Frisco, Texas, a northern suburb of Dallas. The Shops at Starwood has a complementary tenant mix of restaurants, fashion boutiques, salons and second-level office space.

On December 28, 2011, we acquired Starwood Phase III, a 2.73 acre parcel of undeveloped land adjacent to the Shops at Starwood for approximately $1.9 million, including a non-recourse loan we assumed for $1.4 million that is secured by the land, and cash of $0.5 million. The Phase III development site fronts the Dallas North Tollway within the Tollway Overlay District, which grants the highest allowed density of any zoning district.

On December 28, 2011, we acquired Pinnacle of Scottsdale Phase II ("Pinnacle Phase II"), a 4.45 acre parcel of developed land adjacent to Pinnacle for approximately $1.0 million in cash and net prorations. Pinnacle Phase II has approximately 400 linear feet of frontage on Scottsdale Road and the potential for additional retail and office development.

On December 22, 2011, we acquired Phase I of Pinnacle of Scottsdale ("Pinnacle"), a property that meets our Community Centered Property strategy, for approximately $28.8 million, including a non-recourse loan we assumed for $14.1 million that is secured by the property, and cash of $14.7 million. Pinnacle is a 100% occupied Class A Community Center with 113,108 square feet of gross leasable area in North Scottsdale, Arizona. The tenant mix at Pinnacle includes Safeway®, Ace® Hardware, Shell® Oil, Hornacek’s House of Golf, Jade Palace, Jalapeno Inferno, SubwayTM, Stag Tobacconist, Starbucks© Coffee, Pinnacle Peak Dentistry, and a variety of other convenience service providers.

On August 16, 2011, we acquired Ahwatukee Plaza Shopping Center, a property that meets our Community Centered Property strategy, for approximately $9.3 million in cash and net prorations. The center contains 72,650 square feet of gross leasable area, located in the Ahwatukee Foothills neighborhood in south Phoenix, Arizona.

On August 8, 2011, we acquired Terravita Marketplace, a property that meets our Community Centered Property

21


strategy, containing 102,733 square feet of gross leasable area, including 51,434 square feet leased to two tenants pursuant to ground leases, for approximately $16.1 million in cash and net prorations. Terravita Marketplace is located in North Scottsdale, Arizona and adjacent to the gated golf course residential community of Terravita, which was developed by DelWebb Corporation/Pulte, with homes ranging in price from $250,000 to $1 million.

On June 28, 2011, we acquired Gilbert Tuscany Village, a property that meets our Community Centered Property strategy, containing 49,415 square feet of gross leasable area, located in Gilbert, Arizona for approximately $5.0 million in cash and net prorations. Gilbert Tuscany Village is surrounded by densely populated, high-end residential developments and is located approximately one mile from Banner Gateway Medical Center, a 60-acre medical complex that is partnering with MD Anderson to add a new 120,000 square foot cancer outpatient center.

On April 13, 2011, we acquired Desert Canyon Shopping Center, a property that meets our Community Centered Property strategy, for approximately $3.65 million in cash and net prorations. The center contains 62,533 square feet of gross leasable area, including 12,960 square feet leased to two tenants pursuant to ground leases, and is located in Mcdowell Mountain Ranch in northern Scottsdale, Arizona. Situated at a prime intersection at East McDowell Mountain Ranch Road and 105th Street, Desert Canyon is the nearest retail and office space to McDowell Mountain Elementary and Junior High Schools. Located adjacent to the Sonora Mountain Desert Preserve, a lighted trail and jogging path wind directly into the Desert Canyon site and provide access from the surrounding upscale residential neighborhoods.
    
Property Dispositions

On July 22, 2011, we sold Greens Road Plaza, located in Houston, Texas, for $1.8 million in cash and net prorations. We have reinvested the proceeds from the sale of the 20,607 square foot property located in northeast Houston in Community Centered Properties in our target markets. As a result of the transaction, we recorded a gain on sale of property of $0.4 million for the year ended December 31, 2011.

Critical Accounting Policies

In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates.  A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2011, under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.  There have been no significant changes to these policies during the six months ended June 30, 2012.  For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 of the accompanying consolidated financial statements.


22


Results of Operations

Comparison of the Three Months Ended June 30, 2012 and 2011
 
The following table provides a summary comparison of our results of operations for the three months ended June 30, 2012 and 2011 (dollars in thousands, except per share and OP unit amounts):

 
 
Three Months Ended June 30,
 
 
2012
 
2011
Number of properties owned and operated
 
46

 
40

Aggregate gross leasable area (sq. ft.)(1)
 
3,636,838

 
3,273,968

Ending occupancy rate - operating portfolio(2)
 
87
%
 
84
%
Ending occupancy rate - all properties
 
87
%
 
81
%
 
 
 
 
 
Total property revenues
 
$
10,987

 
$
8,070

Total property expenses
 
4,262

 
3,106

Total other expenses
 
6,177

 
5,144

Provision for income taxes
 
70

 
58

Loss on disposal of assets
 
16

 

Net income
 
462

 
(238
)
Less:  Net income attributable to noncontrolling interests
 
31

 
(42
)
Net income attributable to Whitestone REIT
 
$
431

 
$
(196
)
 
 
 
 
 
Funds from operations (3)
 
$
2,732

 
$
1,589

Property net operating income (4)
 
6,725

 
4,964

Distributions paid on common shares and OP units
 
3,620

 
2,636

Per common share and OP unit
 
$
0.2850

 
$
0.2850

Distributions paid as a % of funds from operations
 
133
%
 
166
%

(1)  
During the first quarter of 2012, we concluded that approximately 2,029 square feet at our Lion Square location was no longer leasable, therefore, such area is no longer included in the gross leasable area as of March 31, 2012.
(2)  
Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties which are undergoing significant redevelopment or re-tenanting.
(3)  
For a reconciliation of funds from operations to net income, see "Funds From Operations" below.
(4)  
For a reconciliation of property net operating income to net income, see "Property Net Operating Income" below.

Property revenues. We had rental income and tenant reimbursements of approximately $10,987,000 for the three months ended June 30, 2012 as compared to $8,070,000 for the three months ended June 30, 2011, an increase of $2,917,000, or 36%. The three months ended June 30, 2012 included $2,477,000 in increased revenues from New Store operations. We define "New Stores" as properties acquired since the beginning of the the period being compared. For purposes of comparing the three months ended June 30, 2012 to the three months ended June 30, 2011, New Stores include properties acquired between April 1, 2011 and June 30, 2012. Same Store revenues increased $440,000 for the three months ended June 30, 2012 as compared to the same period in the prior year. We define "Same Stores" as properties that were owned at the beginning of the period being compared. For purposes of comparing the three months ended June 30, 2012 to the three months ended June 30, 2011, Same Stores include properties owned before April 1, 2011. Same Store average occupancy increased from 82.0% for the three months ended June 30, 2011 to 85.0% for the three months ended June 30, 2012, increasing Same Store revenue $240,000. The Same Store revenue rate per average leased square foot increased $0.30 for the three months ended June 30, 2012 to $12.56 per average leased square foot as compared to the revenue rate per average leased square foot of $12.26 for the three months ended June 30, 2011, resulting in an increase of Same Store revenues of $200,000.

23


Property expenses.  Our property expenses were approximately $4,262,000 for the three months ended June 30, 2012 as compared to $3,106,000 for the three months ended June 30, 2011, an increase of $1,156,000, or 37%.  The primary components of total property expenses are detailed in the table below (in thousands):
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2012
 
2011
 
Change
 
% Change
Real estate taxes
 
$
1,503

 
$
1,108

 
$
395

 
36
%
Utilities
 
713

 
586

 
127

 
22
%
Contract services
 
671

 
563

 
108

 
19
%
Repairs and maintenance
 
482

 
260

 
222

 
85
%
Bad debt
 
226

 
145

 
81

 
56
%
Labor and other
 
667

 
444

 
223

 
50
%
Total property expenses
 
$
4,262

 
$
3,106

 
$
1,156

 
37
%

Real estate taxes.  Real estate taxes increased $395,000, or 36%, during the three months ended June 30, 2012 as compared to the same period in 2011. Real estate taxes for New Store properties were approximately $254,000 for the three months ended June 30, 2012. Same Store real estate taxes increased approximately $141,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The primary reasons for the increases in Same Store taxes were increases in 2011 property values of several of our Houston properties that were under dispute with the taxing authority. Approximately $100,000 of the increase related to 2011 valuations, which will not repeat in future periods. We actively work to keep our valuations and resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases and we strive to have these charges to our tenants be as low as possible.

Utilities. Utilities expenses increased $127,000, or 22%, during the three months ended June 30, 2012 as compared to the same period in 2011. Utilities expenses for New Store properties were approximately $86,000 for the three months ended June 30, 2012. Same Store utilities expenses increased approximately $41,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The majority of the Same Store increase was attributable to a new drainage utility fee with respect to our Houston properties charged by the City of Houston, which took effect July 1, 2011.
 
Contract services.  Contract services increased $108,000, or 19%, during the three months ended June 30, 2012 as compared to the same period in 2011. The increase in contract services expenses included $64,000 in contract expenses increases for New Store properties for the three months ended June 30, 2012. Same Store contract service expenses increased approximately $44,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The majority of the Same Store increase was attributable to a payment of previously disputed charges for janitorial services provided to one of our office buildings in Dallas, Texas. We expect the janitorial charges to return to 2011 levels for the remainder of 2012.
  
Repairs and maintenance. Repairs and maintenance expenses increased $222,000, or 85%, during the three months ended June 30, 2012 as compared to the same period in 2011. Repairs and maintenance expenses for the three months ended June 30, 2012 included approximately $123,000 in increases for New Store properties. Same Store repairs and maintenance expenses increased approximately $99,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The increase in Same Store repair expenses was primarily attributable to roof and parking lot repairs.
 
Bad debt.  Bad debt expenses increased $81,000, or 56%, during the three months ended June 30, 2012 as compared to the same period in 2011. Bad debt expenses for the three months ended June 30, 2012 included approximately $31,000 in increases for New Store properties. Same Store bad debt increased approximately $50,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The Same Store increase in bad debt expenses was primarily attributable to outstanding rent and fees owed by several tenants in our Texas market. We are currently evaluating collection options ranging from downsizing the tenants to possible lockouts. We vigorously pursue past due accounts, but expect collection of rents to continue to be challenging for the foreseeable future.
 
Labor and other.  Labor and other expenses increased $223,000, or 50%, during the three months ended June 30, 2012 as compared to the same period in 2011. Labor and other expenses for the three months ended June 30, 2012 included approximately $72,000 in increased cost for New Store properties. Same Store labor and other expenses increased approximately $151,000 during the three months ended June 30, 2012 as compared to the same period in 2011. The increase in Same Store labor and other cost was primarily attributable to increased insurance rates and labor allocated for repairs and maintenance.

24


Same Store and New Store net operating income. The components of Same Store, New Store and total property net operating income are detailed in the table below (in thousands):
 
 
Three Months Ended June 30,
 
 
Same Store
 
New Store
 
Total
 
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Property revenues
 
$
8,383