UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~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 001-15409

PILLARSTONE CAPITAL REIT

(Exact name of registrant as specified in its charter)

Maryland		39-6594066
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

~~2600~~19407 ~~South~~Park ~~Gessner~~Row, Suite ~~555~~140

Houston, Texas ~~77063~~77084

(Address of principal executive offices)

(~~832~~281) ~~810~~747-~~0100~~9997

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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 (Section 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	☒	Smaller 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 ~~ore~~ or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The Registrant had 657,084 Common Shares, par value $0.01 per share, outstanding as of ~~August~~July 1221, ~~2022~~2025.

Table of Contents

FORM 10-Q

INDEX

PART I. Financial Information
Item 1. Financial Statements	~~Item 1. Financial Statements~~	1
		Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
		Condensed Consolidated Statements of Operations (Unaudited) - For the Three and Six Months Ended June 30, 2022 and 2021	4
Item 3. Quantitative and Qualitative Disclosures about Market Risk		45
		Condensed Consolidated Statements of Changes in Equity (Deficit) (Unaudited) - For the Three Months Ended March 31 and June 30, 2022 and 2021	6
Item 4. Controls and Procedures		45
		Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Six Months Ended June 30, 2022 and 2021	7
Part II. Other Information
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 1. Legal Proceedings		48
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52
	Item 4. Controls and Procedures		25
Item 3. Defaults upon Senior Securities		52
Part II. Other Information
Item 4. Mine Safety Disclosures		54
	Item 1. Legal Proceedings		26
Item 5. Other Information		54
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 6. Exhibits		55
	Item 3. Defaults upon Senior Securities		26
Signatures		56
	Item 4. Mine Safety Disclosures		26
	Item 5. Other Information		26
	Item 6. Exhibits		27
	Signatures		28

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Pillarstone Capital REIT and Subsidiaries ~~CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)~~

	June 30, 2022			December 31, 2021
	(unaudited)
ASSETS (a)
Real estate assets, at cost
Property	$	57,401		$	57,027
Accumulated depreciation		(9,318	)		(8,754	)
Total real estate assets		48,083			48,273
Cash and cash equivalents		4,796			5,206
Escrows and utility deposits		1,692			1,243
Accrued rents and accounts receivable, net of allowance for doubtful accounts		1,268			1,260
Receivable due from related party		1,404			1,011
Unamortized lease commissions and deferred legal cost, net		402			464
Prepaid expenses and other assets		257			126
Total assets	$	57,902		$	57,583
LIABILITIES AND EQUITY (b)
Liabilities:
Notes payable	$	14,927		$	14,920
Accounts payable and accrued expenses		1,489			1,691
Payable due to related party		1,175			846
Convertible notes payable - related parties		198			198
Accrued interest payable		194			185
Tenants' security deposits		802			827
Total liabilities		18,785			18,667
Commitments and contingencies:		—			—
Shareholders' Equity:
Preferred A Shares - $0.01 par value,1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and outstanding at June 30, 2022 and December 31, 2021, $10.00 per share liquidation preference		3			3
Preferred C Shares - $0.01 par value, 300,000 authorized: 231,944 Class C cumulative convertible shares issued and outstanding at June 30, 2022 and December 31, 2021, $10.00 per share liquidation preference		2			2
Common Shares - $0.01 par value, 400,000,000 authorized: 695,214 shares issued and 657,084 outstanding at June 30, 2022 and December 31, 2021		7			7
Additional paid-in capital		28,493			28,493
Accumulated deficit		(23,974	)		(23,882	)
Treasury stock, at cost, 38,130 shares		(801	)		(801	)
Total Pillarstone Capital REIT shareholders' equity		3,730			3,822
Noncontrolling interest in subsidiary		35,387			35,094
Total equity		39,117			38,916
Total liabilities and equity	$	57,902		$	57,583

Consolidated Balance Sheets

~~The~~(in ~~accompanying~~thousands, ~~notes~~except ~~are~~share anand ~~integral~~per ~~part~~share ~~of the condensed consolidated financial statements.~~data)

	September 30, 2022			December 31, 2021
	(unaudited)
*ASSETS* *^(a)*
Real estate assets, at cost
Property	$	57,281		$	57,027
Accumulated depreciation		(9,797	)		(8,754	)
Total real estate assets		47,484			48,273
Cash and cash equivalents		5,302			5,206
Escrows and utility deposits		1,928			1,243
Accrued rents and accounts receivable, net of allowance for doubtful accounts		950			1,260
Receivable due from related party		264			1,011
Unamortized lease commissions and deferred legal cost, net		368			464
Prepaid expenses and other assets		133			126
Total assets	$	56,429		$	57,583

*LIABILITIES AND EQUITY^(b)***
Liabilities:
Notes payable	$	14,757		$	14,920
Accounts payable and accrued expenses		2,472			1,691
Payable due to related party		-			846
Convertible notes payable		198			198
Accrued interest payable		136			185
Tenants' security deposits		779			827
Total liabilities		18,342			18,667

Commitments and contingencies:		-			-

Equity:
Preferred A Shares - $0.01 par value, 1,518,000 authorized: 256,636 Class A cumulative convertible shares issued and outstanding at September 30, 2022 and December 31, 2021, $10.00 per share liquidation preference		3			3
Preferred C Shares - $0.01 par value, 300,000 authorized: 231,944 Class C cumulative convertible shares issued and outstanding at September 30, 2022 and December 31, 2021, $10.00 per share liquidation preference		2			2
Common Shares - $0.01 par value, 400,000,000 authorized: 695,214 shares issued and 657,084 outstanding at September 30, 2022 and December 31, 2021		7			7
Additional paid-in capital		28,493			28,493
Accumulated deficit		(23,328	)		(23,882	)
Treasury stock, at cost, 38,130 shares		(801	)		(801	)
Total Pillarstone Capital REIT shareholders' equity		4,376			3,822
Noncontrolling interest in subsidiary		33,711			35,094
Total equity		38,087			38,916
Total liabilities and equity	$	56,429		$	57,583

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

Pillarstone Capital REIT and Subsidiaries

~~CONDENSED~~Consolidated ~~CONSOLIDATED~~Balance ~~BALANCE~~Sheets ~~SHEETS~~ - Continued

(in thousands)

	June 30, 2022			December 31, 2021
	September 30, 2022			December 31, 2021
	(unaudited)
(a) Assets of condensed consolidated Variable Interest Entity included in the total assets above:
(a) Assets of consolidated Variable Interest Entity included in the total assets above:
Real estate assets, at cost
Property	$	57,~~388~~278		$	57,023
Accumulated depreciation		(9,~~315~~794	)		(8,751	)
Total real estate assets		4847,~~073~~484			48,272
Cash and cash equivalents		45,~~645~~079			4,900
Escrows and utility deposits		1,~~692~~928			1,243
Accrued rents and accounts receivable, net of allowance for doubtful accounts		~~1,113~~952			1,104
Receivable due from related party		~~1,404~~263			1,011
Unamortized lease commissions and deferred legal cost, net		~~402~~368			464
Prepaid expenses and other assets		~~213~~129			33
Total assets	$	5756,~~542~~203		$	57,027
(b) Liabilities of condensed consolidated Variable Interest Entity included in the total liabilities above:
(b) Liabilities of consolidated Variable Interest Entity included in the total liabilities above:
Notes payable	$	14,~~927~~757		$	14,920
Accounts payable and accrued expenses		1,~~238~~794			1,483
Payable due to related party		~~1,153~~-			827
Accrued interest payable		64-			64
Tenants' security deposits		~~802~~779			827
Total liabilities	$	1817,~~184~~330		$	18,121

The accompanying notes are an integral part of the ~~condensed~~ consolidated financial statements.

3 2

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Pillarstone Capital REIT and Subsidiaries

~~CONDENSED~~Consolidated ~~CONSOLIDATED~~Statements ~~STATEMENTS~~of ~~OF OPERATIONS~~Operations

(unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenues
Rental (1)	$	2,261		$	2,259		$	4,571		$	4,439
Rental	$	1,989		$	2,371		$	6,560		$	6,810
Transaction and other fees		1715			1310			3348			2333
Total revenues		2,~~278~~004			2,~~272~~381			46,~~604~~608			46,~~462~~843
Operating expenses
Depreciation and amortization		~~506~~514			~~502~~541			~~990~~1,504			~~999~~1,540
Operating and maintenance		~~852~~808			~~736~~759			12,~~623~~431			12,~~454~~213
Real estate taxes		~~413~~445			~~393~~430			~~741~~1,186			~~802~~1,232
General and administrative		~~185~~770			~~176~~167			~~372~~1,142			~~383~~550
Management fees		~~143~~139			~~145~~143			~~283~~422			~~284~~427
Total operating expenses		2,~~099~~676			12,~~952~~040			46,~~009~~685			35,~~922~~962
Other expenses (income)
Interest expense, net		~~202~~199			~~204~~200			~~399~~598			~~407~~607
Other income		—			(24)			—			(24)
Loss on disposal of assets		8			1			8			1
Total other expenses		202			180			399			383
Other income		(21	)		-			(21	)		(24	)
Income (loss) before income taxes		(23	)		140			196			157
Total other expenses		186			201			585			584
Provision for income tax benefit		12			5			5			12
Income (loss) before income taxes		(858	)		140			(662	)		297
Net income (loss)		(11	)		145			201			169
Provision for income taxes		(172	)		-			(167	)		12
Less: Noncontrolling interest in subsidiary		64			205			293			314
Net income (loss)		(1,030	)		140			(829	)		309
Net loss attributable to Common Shareholders	$	(75	)	$	(60	)	$	(92	)	$	(145	)
Less: Noncontrolling interest in subsidiary		(1,676	)		196			(1,383	)		510
Loss Per Share:
Net income (loss) attributable to Common Shareholders	$	646		$	(56	)	$	554		$	(201	)
Basic loss per Common Share:
Net income (loss) per Common Share:
Net loss available to Common Shareholders	$	(0.11	)	$	(0.10	)	$	(0.14	)	$	(0.24	)
Basic	$	1.31		$	(0.13	)	$	1.12		$	(0.46	)
Diluted loss per Common Share:
Diluted	$	0.21		$	(0.13	)	$	0.18		$	(0.46	)
Net loss available to Common Shareholders	$	(0.11	)	$	(0.10	)	$	(0.14	)	$	(0.24	)
Weighted average number of Common Shares outstanding:
Basic:		657,084			595,000			657,084			595,000
Diluted:		657,084			595,000			657,084			595,000

The accompanying notes are an integral part of the ~~condensed~~ consolidated financial statements.

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Pillarstone Capital REIT and Subsidiaries

~~CONDENSED~~Consolidated ~~CONSOLIDATED~~Statements ~~STATEMENTS~~of OFChanges ~~OPERATIONS~~in -Equity ~~Continued~~

(unaudited)

(in thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	Class A Preferred Shares			Class C Preferred Shares		Common Shares			Additional Paid-in Capital			Accumulated Deficit			Treasury Stock, at Cost			Total Shareholders' Equity			Noncontrolling Interest			Total Equity
	2022			2021		2022			2021
Balance at December 31, 2021	$	3		$	2	$	7		$	28,493		$	(23,882	)	$	(801	)	$	3,822		$	35,094		$	38,916
(1) Rental
Net income (loss)		-			-		-			-			(17	)		-			(17	)		229			212
Rental revenues	$	1,987		$	2,037	$	4,005		$	4,079
Balance at March 31, 2022		3			2		7			28,493			(23,899	)		(801	)		3,805			35,323			39,128
Recoveries		298			211		605			389
Net income (loss)		-			-		-			-			(75	)		-			(75	)		64			(11	)
Bad debt		(24	)		11		(39	)		(29	)
Balance at June 30, 2022		3			2		7			28,493			(23,974	)		(801	)		3,730			35,387			39,117
Total rental	$	2,261		$	2,259	$	4,571		$	4,439
Net income (loss)		-			-		-			-			646			-			646			(1,676	)		(1,030	)
Balance at September 30, 2022	$	3		$	2	$	7		$	28,493		$	(23,328	)	$	(801	)	$	4,376		$	33,711		$	38,087
Balance at December 31, 2020	$	3		$	2	$	6		$	28,494		$	(23,623	)	$	(801	)	$	4,081		$	34,361		$	38,442
Share-based compensation		-			-		-			15			-			-			15			-			15
Net income (loss)		-			-		-			-			(85	)		-			(85	)		109			24
Balance at March 31, 2021		3			2		6			28,509			(23,708	)		(801	)		4,011			34,470			38,481
Share-based compensation		-			-		-			2			-			-			2			-			2
Net income (loss)		-			-		-			-			(60	)		-			(60	)		205			145
Balance at June 30, 2021		3			2		6			28,511			(23,768	)		(801	)		3,953			34,675			38,628
Repurchase of common shares		-			-		-			(10	)		-			-			(10	)		-			(10	)
Share-based compensation		-			-		-			9			-			-			9			-			9
Net income (loss)		-			-		-			-			(56	)		-			(56	)		196			140
Balance at September 30, 2021	$	3		$	2	$	6		$	28,510		$	(23,824	)	$	(801	)	$	3,896		$	34,871		$	38,767

The accompanying notes are an integral part of the ~~condensed~~ consolidated financial statements.

5 4

Table of Contents

Pillarstone Capital REIT and Subsidiaries

~~CONDENSED~~Consolidated ~~CONSOLIDATED~~Statements ~~STATEMENTS~~of OFCash ~~CHANGES IN EQUITY (DEFICIT)~~Flows

(unaudited)

(in thousands)

	Class A Preferred Shares			Class C Preferred Shares			Common Shares		Additional Paid-in Capital		Accumulated Deficit			Cost of Shares Held in Treasury			Total Shareholders' Equity (Deficit)			Noncontrolling Interest		Total Equity
	Nine Months Ended September 30,
Balance, December 31, 2021	$	3		$	2		$	7	$	28,493	$	(23,882	)	$	(801	)	$	3,822		$	35,094	$	38,916
	2022			2021
Net income (loss)		—			—			—		—		(17	)		—			(17	)		229		212
Cash flows from operating activities:
Balance, March 31, 2022		3			2			7		28,493		(23,899	)		(801	)		3,805			35,323		39,128
Net income (loss)	$	(829	)	$	309
Net income (loss)		—			—			—		—		(75)			—			(75	)		64		(11	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Balance, June 30, 2022	$	3		$	2		$	7	$	28,493	$	(23,974	)	$	(801)		$	3,730		$	35,387	$	39,117
Depreciation and amortization		1,504			1,540
Amortization of deferred loan costs		21			14
Bad debt		121			48
Loss on disposal of assets		8			1
Share-based compensation		-			16
Deferred tax expense (benefit)		148			(48	)
Changes in operating assets and liabilities:
Accrued rents and accounts receivable		189			93
Receivable due from related party		747			(403	)
Escrows and utility deposits		(685	)		(159	)
Unamortized lease commissions and deferred legal cost		(38	)		(131	)
Prepaid expenses and other assets		447			(26	)
Accounts payable and accrued expenses		584			(459	)
Payable due to related party		(846	)		315
Tenants' security deposits		(48	)		(16	)
Net cash from operating activities		1,323			1,094
Cash flows from investing activities:
Additions to real estate		(1,406	)		(839	)
Insurance proceeds received for capital loss		817			-
Net cash from investing activities		(589	)		(839	)
Cash flows from financing activities:
Repayments of notes payable		(638	)		(218	)
Net cash from financing activities		(638	)		(218	)
Net change in cash and cash equivalents		96			37
Cash and cash equivalents at beginning of period		5,206			5,109
Cash and cash equivalents at end of period	$	5,302		$	5,146
Supplemental disclosure of cash flow information:
Cash paid for interest	$	627		$	595
Cash paid for taxes		44			51
Non cash investing activities:
Disposal of fully depreciated real estate		326			233
Financed insurance premium		454			-

	Class A Preferred Shares		Class C Preferred Shares		Common Shares		Additional Paid-in Capital		Accumulated Deficit			Cost of Shares Held in Treasury			Total Shareholders' Equity (Deficit)			Noncontrolling Interest		Total Equity
Balance, December 31, 2020	$	3	$	2	$	6	$	28,494	$	(23,623	)	$	(801	)	$	4,081		$	34,361	$	38,442
Share-based compensation		—		—		—		15		—			—			15			—		15
Net income (loss)		—		—		—		—		(85	)		—			(85	)		109		24
Balance, March 31, 2021		3		2		6		28,509		(23,708)			(801)			4,011			34,470		38,481
Share-based compensation		—		—		—		2		—			—			2			—		2
Net income (loss)		—		—		—		—		(60)			—			(60)			205		145
Balance, June 30, 2021	$	3	$	2	$	6	$	28,511	$	(23,768)		$	(801)		$	3,953		$	34,675	$	38,628

The accompanying notes are an integral part of the consolidated financial statements.

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~ 5

Table of Contents

Pillarstone Capital REIT ~~and Subsidiaries~~

~~CONDENSED~~Notes ~~CONSOLIDATED~~to ~~STATEMENTS~~Consolidated OFFinancial ~~CASH FLOWS~~Statements

(unaudited)

~~(in~~1. ~~thousands)~~Organization and Summary of Significant Accounting Policies

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	201		$	169
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		990			999
Amortization of deferred loan costs		14			14
Bad debt		39			29
Share-based compensation		—			17
Changes in operating assets and liabilities:
Accrued rents and accounts receivable		(47	)		85
Receivable due from related party		(393	)		(355	)
Escrows and utility deposits		(449	)		130
Unamortized lease commissions and deferred legal cost		(37	)		(88	)
Prepaid expenses and other assets		179			(105	)
Accounts payable and accrued expenses		(193	)		(914	)
Payable due to related party		329			311
Tenants' security deposits		(25	)		7
Net cash provided by operating activities		608			299
Cash flows from investing activities:
Additions to real estate		(700	)		(504	)
Net cash used in investing activities		(700	)		(504	)
Cash flows from financing activities:
Repayments of notes payable		(318	)		(146	)
Net cash used in financing activities		(318	)		(146	)
Net change in cash and cash equivalents		(410	)		(351	)
Cash and cash equivalents at beginning of period		5,206			5,109
Cash and cash equivalents at end of period	$	4,796		$	4,758
Supplemental disclosure of cash flow information:
Cash paid for interest	$	388		$	396
Cash paid for taxes	$	44		$	51
Non cash investing activities:
Disposal of fully depreciated real estate	$	326		$	137
Financed insurance premium	$	311		$	—

Pillarstone Capital REIT (the “Company,” “Pillarstone,” “we,” “our,” or “us”) is a Maryland real estate investment trust ("REIT") engaged in investing in, owning and operating commercial properties. We own 18.6% of Pillarstone Capital REIT Operating Partnership LP (“Pillarstone OP”) and serve as its general partner. Substantially all of our operations and activities are conducted for the benefit of and through Pillarstone OP. As the general partner of Pillarstone OP, we have the exclusive power to manage and conduct the business of Pillarstone OP, subject to certain customary exceptions. Pillarstone OP owns two office buildings in the Dallas metropolitan area and six office/warehouse and retail locations in the Houston metropolitan area having approximately 927 thousand square feet of gross leasable area.

~~The~~On December ~~accompanying~~8, ~~notes~~2016, ~~are~~we and Pillarstone OP, entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT, both of which were related parties to Pillarstone and Pillarstone OP. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries (the “Subsidiaries”): Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company; Whitestone Industrial-Office, LLC, a Texas limited liability company; Whitestone Offices, LLC, a Texas limited liability company; and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”) that owned 14 real estate assets (the “Real Estate Assets” and, together with the Subsidiaries (the “Property”), 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 (“OP Units”), issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by Pillarstone OP. Pursuant to the Contribution Agreement, Pillarstone became the general partner of Pillarstone OP with an ~~integral~~equity ~~part~~ownership interest in Pillarstone OP totaling approximately 18.6% valued at $4.1 million as of the ~~condensed~~date ~~consolidated~~of ~~financial~~the ~~statements~~Contribution Agreement.

Pursuant to the Contribution Agreement, Pillarstone agreed to file with the SEC on or prior to June 8, 2018, a shelf registration statement to register for sale under the Securities Act of 1933, as amended, the issuance of the common shares in the Company that may be issued upon redemption of the OP Units issued pursuant to the Contribution Agreement and the offer and resale of such common shares by the holders thereof. In addition, pursuant to the Contribution Agreement, in the event of a Change of Control (as defined therein), Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit. Pillarstone and Whitestone agreed to extend the filing of the shelf registration statement to the date that the Company closes a public equity offering.

In connection with the Contribution Agreement, (1) with respect to each Real Estate Asset (other than the Real Property Asset owned by Uptown Tower), Whitestone TRS, Inc. (“Whitestone TRS”), a subsidiary of Whitestone, entered into a Management Agreement with Pillarstone OP who owns such Real Estate Asset and (2) with respect to Uptown Tower, Whitestone TRS entered into a Management Agreement with Pillarstone OP (collectively, the “Management Agreements”). Pursuant to the Management Agreements with respect to each Real Estate Asset (other than Uptown Tower), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Real Estate Asset in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Real Estate Asset and (y) a monthly asset management fee equal to 0.125% of gross asset value ("GAV") (as defined in each Management Agreement as, generally, the purchase price of the respective Real Estate Asset based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such Real Estate Asset. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. These activities were conducted by Whitestone TRS and Whitestone REIT using their own employees, processes, and systems and in some cases, third-party providers for services they sub-contracted to perform.

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As a result of the Contribution Agreement, Whitestone OP owns approximately 81.4% and Pillarstone owns approximately 18.6% of the outstanding equity in Pillarstone OP, which is fully consolidated on Pillarstone's financial statements.

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Liquidity and Financial Resources.

On July 19, 2022, we received written notice that Whitestone TRS, Inc. confirmed termination of the management agreements for our Real Estate Assets. We had previously communicated to Whitestone our plan to internalize the management of the Real Estate Assets, but we had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it “confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from” July 19, 2022. The management agreements provided that “Unless otherwise terminated pursuant to the provisions hereof, the term of this Agreement shall automatically renew on a month to month basis at the end of the term unless either of the Parties has notified the other in writing not less than thirty (30) days prior to the expiration of the term, as the same may be extended.”

Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe. The management agreements provided for Whitestone TRS to provide such services, or in certain cases contracting with other providers to perform such services, as:

●

providing management, leasing, and maintenance personnel to operate the Real Estate Assets;

●

maintaining the Real Estate Assets;

●

maintaining connected utility services at the Real Estate Assets;

●

invoice and collect the monthly rent from the tenants; default and pursue collection for delinquent tenants;

●

pay monthly invoices to vendors, including loan payments to lenders;

●

maintain monthly accounting records and provide monthly operating statements for each Real Estate Asset;

●

perform an annual audit of the financial statements, prepare workpapers for the annual audit, and assist the auditors to complete the annual audit;

●

assist in the preparation of the annual tax returns for Pillarstone, Pillarstone OP and the owners of the Real Estate Assets; and

●

assist in the preparation of the Pillarstone SEC financial reports and other filings.

During this 30-day notice period, Whitestone did not provide the operation and financial database of our information, nor did Whitestone cooperate to provide for an orderly transition of its contracted responsibilities. The services under the management agreements were extensive and material to the operation of Pillarstone’s business and our accounting and financial reporting. The management functions, as operated by Whitestone, were deeply co-mingled with Whitestone’s management functions for its own business and have been difficult, expensive and time-consuming to separate. As a result, Pillarstone was materially and adversely affected by Whitestone’s abrupt termination of the management agreements, incomplete and inadequate delivery of books and records and other materials required to be delivered under the Management Agreements, and the failure to provide for an appropriate transition. We had no way to continue our accounting and financial reporting responsibilities as a public company. Further, for several months following the abrupt termination of services by Whitestone, we were unable to systematically invoice our tenants and pursue collection of delinquent accounts as an independent, internally managed company. In addition, several vendor service contracts were tied to Whitestone and the pricing of services was based on the combination of Pillarstone and Whitestone. The transition caused us to obtain separate services, which caused disruption to our business and higher costs. In other cases, Whitestone obligated us to long-term contracts for essential services that we cannot easily replace.

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On July 12, 2022, we were named as a defendant in a lawsuit by Whitestone OP in a lawsuit styled Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT , C.A. No. 2022-0607-LWW, in the Court of Chancery of the State of Delaware. The suit challenges our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

~~Notes~~Based toupon ~~Condensed~~various ~~Consolidated~~issues, ~~Financial~~including ~~Statements~~ those discussed in this report, we filed a lawsuit on September 16, 2022, in district court in Harris County, Texas, against Whitestone and related parties alleging, among other things, breach of the Pillarstone OP Amended and Restated Agreement of Limited Partnership and fiduciary duty and breach of the management agreements.

~~(unaudited)~~ On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo in the Delaware lawsuit requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevents Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argues that Whitestone’s material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

1Representatives of our board of trustees attempted to initiate discussions to settle these matters in August 2022 with representatives of Whitestone’s board of trustees to avoid a prolonged, expensive legal fight. ~~SUMMARY~~However, OFWhitestone ~~SIGNIFICANT~~was ~~ACCOUNTING~~not ~~POLICIES~~open to settling these matters at that time or the other various times since August 2022 we attempted to initiate discussions to resolve these matters.

~~Basis~~Whitestone ofindicated ~~Accounting. Pillarstone~~to ~~Capital~~us ~~REIT's~~its ~~(the~~intent ~~“Company,”~~to “cause Whitestone OP to exercise its redemption right and stated publicly that it intends to monetize its investment in Pillarstone OP. We believed that if Whitestone were to be permitted to exercise its redemption right for cash amounts,” “we,” may “not have the cash available to pay such amounts and may be required to sell one or more of our Real Estate Assets to satisfy this obligation,” orwhich may “cause us”) ~~financial~~to ~~records~~sell ~~are~~some ~~maintained~~or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. We have stated that a redemption request would not trigger the ~~accrual~~Rights ~~basis~~Agreement, and our board of ~~accounting~~trustees ~~whereby~~has ~~revenues~~the ~~are~~sole ~~recognized~~discretion ~~when~~to ~~earned~~interpret the Rights Agreement. However, Whitestone OP indicated that the Rights Agreement caused them to not exercise their redemption rights and ~~expenses~~claimed ~~are~~damages ~~recorded~~based ~~when~~on ~~incurred~~the alleged decline in the value of the Real Estate Assets following their failure to exercise the redemption rights.

~~Use~~Based ofon ~~estimates. In~~Whitestone’s ~~order~~performance tounder ~~conform~~the ~~with~~management ~~generally~~agreements ~~accepted~~and ~~accounting~~their ~~principles~~public instatements ~~the~~regarding ~~United~~their ~~States~~intentions ~~("U.S.~~for ~~GAAP"),~~their ~~management,~~interest in ~~preparation~~Pillarstone, ofwe ~~our~~did ~~condensed~~not ~~consolidated~~believe ~~financial~~that ~~statements,~~Whitestone’s isactions ~~required~~in toconnection ~~make~~with ~~estimates~~the ~~and~~exercise ~~assumptions~~of ~~that~~the ~~affect~~redemption ~~the~~rights ~~reported~~would ~~amounts~~respect the rights of ~~assets~~the ~~and~~holders ~~liabilities~~of ~~and~~our ~~disclosure~~common ofshares. ~~contingent~~The ~~assets~~Pillarstone OP Amended and ~~liabilities~~Restated asAgreement of ~~June~~ ~~30,~~Limited ~~2022~~Partnership ~~and December~~expressly ~~31,~~provides ~~2021,~~that ~~and~~in the ~~reported~~event ~~amounts~~ of ~~revenues~~a ~~and~~conflict ~~expenses~~between ~~for~~ the ~~three~~ ~~and~~interests ~~six~~of ~~months~~the ~~ended June~~limited ~~30,~~partners ~~2022~~(Whitestone ~~and~~OP ~~2021.~~as ~~Actual~~the ~~results~~sole ~~could~~limited ~~differ~~partner) ~~from~~and ~~those~~our ~~estimates.~~shareholders, ~~Significant estimates that~~ we ~~use~~shall ~~include~~act in the ~~estimated~~interests ~~fair value~~ of ~~properties~~our ~~acquired~~shareholders, ~~allowance~~and ~~for~~we ~~doubtful~~shall ~~accounts,~~not ~~impairment,~~be ~~the~~liable ~~estimated~~for ~~useful~~monetary ~~lives~~or ~~for~~other ~~depreciable~~losses ~~and~~sustained, ~~amortizable~~liabilities ~~assets~~incurred ~~and~~or ~~costs,~~benefits ~~and~~not ~~deferred~~derived ~~taxes~~by ~~and~~ the ~~related~~limited ~~valuation~~partners ~~allowance~~in ~~for~~connection ~~deferred taxes~~therewith.

~~Cash~~Our ~~and~~executive ~~cash~~management ~~equivalents.~~team Weworked ~~consider~~to ~~all~~restore ~~highly~~normal ~~liquid~~operations ~~investments~~and ~~purchased~~leasing ~~with~~activities anquickly ~~original~~after ~~maturity~~Whitestone ofREIT’s ~~three~~unanticipated ~~months~~termination orof ~~less~~their tomanagerial ~~be cash equivalents~~services. ~~Cash~~ ~~and~~Many ~~cash equivalents as~~ of ~~June~~ ~~30,~~our ~~2022~~actions ~~and December~~were ~~31,~~affected ~~2021~~by ~~consisted of demand deposits at~~ a ~~commercial~~lack ~~bank~~of ~~and~~usable ainformation ~~brokerage~~being ~~account.~~made Weavailable ~~maintain~~to ~~our~~us ~~cash~~on ina ~~bank~~timely ~~accounts that are federally insured~~basis.

~~Acquired Properties and Acquired Lease Intangibles.~~ We ~~allocate~~discovered ~~the~~significant ~~purchase~~deferred ~~price~~maintenance ~~of the acquired properties to land, building~~ and ~~improvements,~~neglect ~~identifiable~~of ~~intangible~~our assets ~~and~~had tooccurred ~~the~~under ~~acquired~~Whitestone ~~liabilities~~REIT’s ~~based on their respective fair values at the time of purchase~~management. ~~Identifiable~~Our ~~intangibles~~efforts ~~include amounts allocated~~ to ~~acquired~~address ~~out-of-market~~these ~~leases,~~matters ~~the~~have ~~value of~~ in~~-place~~ ~~leases~~some ~~and~~cases ~~customer~~been ~~relationship~~stymied ~~value,~~by ifWhitestone ~~any.~~REIT’s Welitigation ~~determine~~against ~~fair~~us ~~value~~in ~~based~~Delaware onwhere ~~estimated~~the ~~cash~~court ~~flow~~has ~~projections~~limited ~~that~~our ~~utilize~~ability ~~appropriate~~to ~~discount~~incur ~~and~~expenses ~~capitalization~~above ~~rates~~low ~~and~~threshold ~~available~~amounts ~~market~~for ~~information.~~the ~~Estimates~~types of ~~future~~expenses ~~cash flows are based on~~ a ~~number~~company ~~of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management~~ in our ~~analysis~~industry ofcould ~~determining~~expect ~~the~~to ~~as-if-vacant~~incur ~~property~~in ~~value include an estimate of carrying costs during~~ the ~~expected~~ordinary ~~lease-up~~course ~~periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates~~ of ~~lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions~~business. ~~Management~~Our ~~also estimates costs to execute similar leases including leasing commissions, tenant improvements,~~ legal and ~~other~~professional ~~related~~fees ~~expenses.~~have ~~Intangibles~~increased ~~related~~substantially ~~to out-of-market leases and in-place lease value are recorded~~ as ~~acquired~~we ~~lease~~address ~~intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over~~ the ~~remaining~~internalization ~~terms~~ of ~~the~~management ~~underlying~~and ~~leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over~~ the ~~remaining~~litigation ~~term~~matters ofdiscussed ~~such~~in ~~debt~~this report.

Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and buildings. Tenant improvements are depreciated using the straight-line method over the life of the improvement or remaining term of the lease, whichever is shorter.

Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. Management has determined that there has been no impairment in the carrying value of our real estate assets as of June 30, 2022.

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~~Pillarstone~~On July ~~Capital~~17, ~~REIT~~ 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the Delaware court to award damages of approximately $51,200,600 and post-judgement interest of $6,820,000 in the filing of its post-trial opening brief on August 28, 2023. On January 25, 2024, the Delaware court issued its opinion and determined that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages. We disagree with the Delaware court’s ruling and are considering our options for appeal, subject to a final order being entered in the case, the outcome of various proceedings in the jointly administered bankruptcy cases described below and the decision of the plan agent in the bankruptcy cases to pursue an appeal.

~~Notes~~The Delaware court declared the Rights Agreement unenforceable against Whitestone, permitted Whitestone OP to ~~Condensed~~tender ~~Consolidated~~a ~~Financial~~notice ~~Statements~~ of redemption for its OP Units and determined that the Pillarstone OP limited partnership agreement should be followed whereby we would decide whether to assume Pillarstone OP’s redemption obligation and determine what value to attribute to Pillarstone OP’s assets. The Delaware court declared that any further relief must await future proceedings.

~~(unaudited)~~ On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units.

~~Accrued~~On September ~~Rents~~16, ~~and~~2022, ~~Accounts~~we ~~Receivable. Included~~filed ina ~~accrued~~lawsuit ~~rent~~styled ~~and~~Pillarstone ~~accounts~~Capital ~~receivable~~REIT ~~are base rents, tenant reimbursements~~ and ~~receivables~~Pillarstone ~~attributable~~Capital toREIT ~~recording~~Operating ~~rents~~Partnership onLP ~~a straight-line basis~~v. WeWhitestone ~~review the collectability of charges under our tenant operating leases on a regular basis~~TRS, ~~taking into consideration changes in factors such as the tenant’s payment history~~Inc., ~~the~~Whitestone ~~financial condition of the tenant~~REIT, ~~business~~Whitestone ~~conditions~~REIT inOperating ~~the industry in which the tenant operates and economic conditions in the area where the property is located~~Partnership, ~~including the impact of the COVID-19 pandemic on tenants' businesses and financial condition~~L. ~~We recognize an adjustment to rental revenue if we deem it probable that the receivable will not be collected~~P. ~~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 June 30~~, ~~2022~~Cause ~~and December 31, 2021, we had an allowance for uncollectible accounts of approximately $577,000 and $538,000, respectively~~No. ~~For the three and six months ended June 30,~~ 2022-59478, ~~we recorded an adjustment to rental revenue~~ in the ~~amount~~District ofCourt, ~~approximately~~Harris ~~$24~~County,~~000~~ ~~and $39~~Texas,~~000,~~ ~~respectively. For~~189th ~~the three~~Judicial ~~months~~District ~~ended June 30~~alleging, ~~2022,~~among ~~there~~other ~~was~~things, nobreach ~~bad~~of ~~debt~~the ~~adjustment~~Pillarstone ~~related~~OP tolimited apartnership ~~potential~~agreement ~~credit~~and ~~loss from our COVID-19 collectibility analysis. For~~ the ~~six~~management ~~months~~agreements ~~ended June 30, 2022 there was approximately $40,000 related to a credit loss~~ for the ~~conversion~~Real ofEstate ~~two~~Assets ~~tenants~~by tothe ~~cash~~Whitestone ~~basis~~defendants ~~revenue~~and asbreach ~~a result~~ of ~~our~~fiduciary ~~COVID-19~~duties ~~collecitibility~~relating ~~analysis. For~~to ~~the three~~Pillarstone ~~and~~OP ~~six~~by ~~months~~Whitestone ~~ended June~~OP ~~30,~~going ~~2021,~~outside ~~we recorded an adjustment to rental revenue in~~ the ~~amount~~role of ~~approximately~~limited ~~$(11,000)~~partner and ~~$29,000,~~harming ~~respectively. Included~~us inand ~~our~~Pillarstone ~~adjustments~~OP. toA ~~rental~~portion ~~revenue~~of ~~for~~ the ~~three~~claims ~~and~~in ~~six~~this ~~months~~case ~~ended June~~were ~~30,~~also ~~2021~~brought ~~was~~as aan ~~bad~~adversary ~~debt~~proceeding ~~adjustment~~by ofWhitestone ~~$10,913~~Uptown ~~and $51~~Tower,~~174,~~ ~~respectively,~~LLC ~~related~~in ~~to a potential credit loss for~~ the ~~conversion~~Uptown ofTower ~~three~~bankruptcy ~~tenants~~case todescribed ~~cash~~in ~~basis~~“—Uptown ~~revenue~~Tower” ~~as a result of our COVID-19 collectibility analysis~~below.

~~Unamortized~~On March ~~Lease~~4, ~~Commissions~~2024, ~~and~~bankruptcy ~~Deferred~~cases ~~Legal~~were ~~Cost. Leasing~~filed ~~commissions~~for us and ~~deferred~~Pillarstone ~~legal~~OP, ~~cost~~as ~~are~~well ~~amortized~~as ~~using~~Whitestone ~~the~~CP ~~straight~~Woodland Ph. 2, LLC, Whitestone Industrial-~~line~~Office, ~~method~~LLC ~~over~~and Whitestone Offices, LLC, the ~~terms~~subsidiaries ofowning our Real Estate Assets other than Uptown Tower. The bankruptcy cases were consolidated into the ~~related~~jointly ~~lease~~administered ~~agreements~~cases styled In re: Whitestone Industrial-Office, LLC, et. ~~Costs~~ ~~allocated~~al., toCase inNo. 24-~~place~~30653-mvl-11, ~~leases~~in ~~whose~~the ~~terms~~United ~~differ~~States ~~from~~Bankruptcy ~~market~~Court ~~terms~~for ~~related~~the toNorthern ~~acquired~~District ~~properties~~of ~~are~~Texas, ~~amortized~~Dallas ~~over~~Division, the ~~remaining~~same ~~life~~court ofas the ~~respective~~Whitestone ~~leases~~Uptown Tower, LLC bankruptcy case described under “—Uptown Tower” below.

~~Prepaid~~The ~~expenses~~joint plan of liquidation in the bankruptcy case providing for the sale of the Real Estate Assets other than Uptown Tower and ~~Other~~treatment ~~assets~~of claims was confirmed in November 2024. ~~Prepaid~~Those ~~expenses~~Real Estate Assets were sold between October 2024 and July ~~other~~2025. The ~~assets~~plan provided for a plan agent, and Frances A. Smith was appointed plan agent in the jointly administered bankruptcy cases. The plan agent was appointed for the purposes of administering all claims in the bankruptcy cases and making distributions to holders of allowed claims and equity interests under the plan of liquidation. The plan agent’s administration of the claims may include, ~~escrows~~without ~~established~~limitation, and pursuant to ~~certain~~her ~~mortgage~~reasonable ~~financing~~business ~~arrangements~~judgment, ~~for~~investigating, ~~real~~prosecuting, ~~estate~~objecting ~~taxes~~to, resolving, reconciling, compromising, litigating, administering, and ~~insurance~~making distributions on account of, the claims.

~~Noncontrolling~~The ~~Interests.~~plan ~~Noncontrolling~~agent ~~interests~~is ~~are~~not ~~the~~a ~~portion~~trustee ofand ~~equity~~does not participate in athe ~~subsidiary~~management ~~not~~or ~~attributable~~operations toof athe ~~parent.~~debtors’ ~~Accordingly~~businesses, weassets ~~have~~or ~~reported~~financial ~~noncontrolling~~affairs ~~interest~~or ~~in equity on~~ the ~~condensed~~review ~~consolidated~~and ~~balance~~approval ~~sheets~~of ~~but~~the ~~separate~~day-to-day ~~from~~operational ~~Pillarstone’s~~expenses ~~equity. On~~of the ~~condensed~~debtors’ ~~consolidated~~business ~~statements of operations~~post-confirmation, ~~subsidiaries~~unless ~~are~~the ~~reported~~bankruptcy atcourt ~~the~~determines ~~consolidated~~cause ~~amount,~~exists ~~including~~for ~~both~~ the ~~amount~~plan ~~attributable~~agent to ~~Pillarstone~~do ~~and~~so ~~noncontrolling~~after ~~interest~~notice and hearing.

~~Revenue~~The ~~recognition.~~plan ~~All~~agent ~~leases~~has onthe ~~our~~sole ~~properties are classified as noncancelable operating leases,~~ and ~~the~~exclusive ~~related~~authority ~~rental~~to ~~income~~administer ~~is recognized on a straight-line basis over~~ the ~~terms~~claims, ofincluding the ~~related~~determination ~~leases. For~~to ~~the~~compromise ~~three months ended June 30, 2022, we did not have~~ a ~~straight-line~~claim ~~rent~~involving ~~reserve~~Whitestone ~~adjustment. For the six months ended June 30~~OP, ~~2022,~~any wedebtor ~~had~~or atheir ~~straight-line~~affiliates ~~rent~~or ~~reserve adjustment of $1~~professionals,~~000~~ ~~for~~subject ~~the conversion of one tenant~~ to ~~cash~~notice ~~basis~~and ashearing and a ~~result~~party’s ~~of our COVID~~good-19faith ~~collectibility~~objection ~~analysis. For~~and the ~~three~~ ~~and~~bankruptcy ~~six~~court’s ~~months~~final ~~ended June~~adjudication ~~30, 2021 we had a straight-line rent reserve adjustment~~ of ~~$1,000 for~~ the ~~conversion of one tenant to cash basis as a result of our COVID-19 collectibility analysis~~matter. ~~Differences~~ ~~between~~The ~~rental~~plan ~~income~~agent ~~earned~~also ~~and~~has ~~amounts due per~~ the ~~respective~~authority ~~lease agreements are capitalized or charged, as applicable,~~ to ~~accrued~~make ~~rents~~demand ~~and~~on ~~accounts~~the ~~receivable.~~debtors ~~Recoveries from tenants~~ for ~~taxes,~~funds ~~insurance,~~necessary ~~and~~to ~~other~~satisfy ~~operating~~allowed ~~expenses~~claims ~~are~~asserted ~~recognized~~against asa ~~revenues~~debtor infrom ~~the~~that ~~period~~debtor’s ~~the~~funds ~~corresponding~~(even ~~costs~~if ~~are~~held ~~incurred. We~~by ~~combine~~Pillarstone ~~lease and nonlease components in lease contracts~~OP), which may ~~includes~~include ~~combining~~sales ~~base rent and recoveries into a single line item, Rental, within the condensed consolidated statements of operations~~proceeds. ~~We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured.~~

Stock-based compensation. The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation - Stock Compensation," which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC No.718 generally requires that these transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.

Income taxes. Because we have not elected to be taxed as a REIT for federal income tax purposes, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in provision for income taxes in the condensed consolidated statements of operations and has not been separately stated due to its insignificance.

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~~Pillarstone~~The ~~Capital~~plan ~~REIT~~ agent is entitled to receive compensation as a flat fee the amount of $10,000.00 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650.00 per hour for each additional hour of services.

~~Notes~~Whitestone Uptown Tower, LLC, Pillarstone OP’s subsidiary that owned the Uptown Tower office building, was the borrower under a loan agreement. The Uptown Tower office building was subject to ~~Condensed~~a ~~Consolidated~~mortgage ~~Financial~~under ~~Statements~~ the loan agreement. The mortgage debt was guaranteed by Whitestone OP. This mortgage was an obligation of Whitestone Uptown Tower, LLC, a subsidiary included in our consolidated financial statements. Neither Pillarstone Capital REIT nor Pillarstone OP had any obligation or guarantee of this indebtedness nor did any of our other properties collateralize this indebtedness.

~~(unaudited)~~ As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for the mortgage loan.

~~The~~In July ~~Company~~2023, ~~evaluates~~Rialto ~~potential~~Capital ~~uncertain~~Advisors, ~~tax~~LLC, ~~positions~~the onspecial anservicer ~~annual~~for ~~basis~~the inmortgage ~~conjunction~~loan, ~~with~~implemented a cash sweep and began to seize the ~~board~~funds offrom ~~trustees~~the ~~and~~operations ~~its~~of ~~tax~~the ~~accountants.~~Uptown ~~Authoritative~~Tower ~~literature~~property ~~provides~~under athe ~~two-step~~cash ~~approach~~management agreement relating to ~~recognize~~the ~~and~~mortgage ~~measure~~loan. ~~tax~~Prior ~~benefits~~to ~~when~~Rialto ~~realization~~Capital ofAdvisors, LLC’s seizing the ~~benefits~~funds isfrom ~~uncertain.~~those ~~The~~operations, ~~first~~those ~~step~~funds ishad tobeen ~~determine~~used ~~whether~~for the ~~benefit~~operation ~~meets~~and maintenance of the ~~more-likely-than-not~~Uptown ~~condition~~Tower property, with excess funds used for ~~recognition~~the operations of Pillarstone OP and the ~~second~~General ~~step~~Partner. isWe todid ~~determine~~not ~~the~~have ~~amount~~an toalternate besource ~~recognized~~of ~~based~~funds onfor the ~~cumulative~~operation ~~probability~~of ~~that~~Uptown ~~exceeds 50%~~Tower.

~~As of~~On ~~June~~August 303, ~~2022~~2023, we ~~had~~received a ~~net~~notice ~~operating~~of ~~loss~~the ~~carry-forward~~default of ~~approximately~~the ~~$139,000,~~mortgage ~~and~~loan asfrom ~~of June~~counsel ~~30,~~for ~~2022~~the lender and ~~December~~ ~~31,~~Rialto ~~2021~~Capital Advisors, weLLC. ~~had~~The ~~net~~default ~~deferred~~notice ~~tax~~asserted ~~liabilities~~non-monetary defaults resulting from Whitestone’s failure to comply with the loan agreement in connection with the Contribution Agreement in 2016. The default notice also alleged a non-monetary default caused by Whitestone’s termination of ~~approximately~~its ~~$11,000~~management ~~and~~agreement ~~$36,000,~~for ~~respectively~~Uptown Tower in August 2022.

~~Concentration~~In ofthe ~~Risk. Substantially~~default ~~all~~notice, ofthe ~~our~~lender ~~revenues~~and ~~are~~special ~~obtained~~servicer ~~from~~noted ~~office~~that ~~and~~the ~~warehouse~~borrower, ~~locations~~prior into the ~~Dallas~~Contribution Agreement and ~~Houston~~while ~~metropolitan~~it ~~areas.~~was Wecontrolled ~~maintain~~by ~~cash~~Whitestone ~~accounts~~OP, inrepresented, ~~major~~warranted, Uand covenanted that “[F]following the Transfer, Sponsor [Whitestone REIT] through its ownership of Guarantor [Whitestone OP] [.S . ~~financial institutions~~.] ~~The~~shall ~~terms~~continue ofto ~~these~~Control ~~deposits~~Borrower ~~are~~[Whitestone onUptown ~~demand~~Tower, LLC], and shall continue to ~~minimize~~control ~~risk~~the day-to-day operation of the Property.” The ~~balances~~lender ofand ~~these~~special ~~accounts~~servicer ~~sometimes~~contend ~~exceed~~that this representation was false because Pillarstone OP and the ~~federally~~borrower ~~insured~~are ~~limits~~controlled by the general partner (Pillarstone Capital REIT, ~~although~~the nosole ~~losses~~general ~~have~~partner ~~been~~of ~~incurred~~Pillarstone inOP) ~~connection~~and ~~with~~not ~~these~~Whitestone ~~deposits~~REIT.

~~Recent~~As ~~accounting pronouncements. In April 2020,~~ the ~~Financial~~2016 ~~Accounting~~alleged ~~Standards~~defaults ~~Board~~occurred ~~("FASB")~~while ~~issued~~Whitestone ~~guidance~~was onin ~~the~~control ~~application~~ of ~~Topic~~all ~~842,~~loan ~~relating~~parties toand ~~concessions~~we ~~being~~believe ~~made~~Whitestone bycaused ~~lessors in response to~~ the ~~COVID-19~~2022 ~~pandemic.~~default ~~The~~through ~~guidance~~its ~~notes~~unilateral ~~that~~termination ~~it would be acceptable for entities to make an election to account for lease concessions relating to the effects~~ of the ~~COVID-19~~management ~~pandemic~~agreement ~~consistent with how those concessions would be accounted~~ for ~~under~~Uptown ~~Topic 842 as though enforceable rights and obligations for those concessions existed~~Tower, ~~even~~we ~~if such enforceable rights and obligations~~ are not ~~explicitly contained~~ in ~~the~~a ~~lease~~position ~~contract. Thus, for concessions relating~~ to ~~COVID-19,~~agree anwith ~~entity~~or ~~would~~dispute ~~not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in~~ the ~~contract,~~determination ~~and~~of ~~would have~~ the ~~option~~alleged todefaults ~~apply,~~ or ~~not~~Whitestone toOP’s ~~apply,~~liability ~~the~~under ~~general~~its ~~lease~~guaranty, ~~modification~~or ~~guidance~~any infurther ~~Topic~~effect ~~842~~they may ~~as it stands. We~~ have ~~elected~~on ~~this option to account for lease concessions relating to~~ the ~~effects~~borrower ofor the ~~COVID-19~~Uptown ~~pandemic~~Tower ~~consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed~~property. ~~Therefore, such concessions are not accounted for as a lease modification under Topic 842.~~

2.The ~~ACCRUED~~borrower ~~RENTS~~had ~~AND~~requested ~~ACCOUNTS~~disbursements ~~RECEIVABLE~~of capital and operating expenditures from Rialto Capital Advisors, ~~NET~~LLC under the terms of the loan agreement in August 2023 and September 2023, but Rialto Capital Advisors, LLC did not release the funds and indicated that it did not intend to release funds or reverse the cash sweep to permit the funding of the operations and leasing of Uptown Tower.

~~Accrued~~The ~~rents~~mortgage ~~and~~loan ~~accounts~~matured ~~receivable~~on October 1, ~~net~~2023. ~~consists~~The registrant and the borrower had been working to extend the maturity date and to find new financing or a buyer for the Uptown Tower property. When Whitestone learned of ~~amounts~~our ~~accrued~~negotiations with Rialto Capital Advisors, ~~billed~~LLC to attempt to resolve this issue and ~~due~~believing ~~from~~we ~~tenants~~were intending to abandon the building, ~~allowance~~it filed a motion with the Delaware Court of Chancery asking the court for ~~doubtful~~an ~~accounts~~order ~~and~~declaring ~~other~~that ~~receivables~~we asshall ~~follows~~not (ina) ~~thousands~~stop managing the Uptown Tower, (b): “hand the keys” to Uptown Tower to the lender, or (c) otherwise abandon the Uptown Tower, which the court granted on a temporary basis on September 22, 2023. On October 19, 2023, Whitestone objected to a proposed sale of the Uptown Tower property under the Status Quo Order issued by the court in the previously disclosed lawsuit Whitestone OP instituted against us in the Delaware Court of Chancery.

	June 30, 2022			December 31, 2021
Tenant receivables	$	815		$	733
Accrued rents and other recoveries		1,030			1,065
Allowance for doubtful accounts		(577	)		(538	)
Total	$	1,268		$	1,260

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, if applicable, 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 condensed consolidated statements of operations.

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~~Pillarstone~~On October ~~Capital~~24, ~~REIT~~ 2023, the lender delivered a notice of foreclosure sale to the borrower providing notice that, among other things, as of the maturity date, the borrower failed to repay all amounts due under the note, and making a demand on (1) the borrower and all persons and entities obligated on the promissory note evidencing the mortgage loan (except to the extent that the obligation is expressly limited by written contract or applicable law) for payment in full of the entire indebtedness, and on (2) the borrower for payment of rents and proceeds of any rents to which the lender is entitled under the mortgage loan documents and Texas Property Code chapter 64, Assignment of Rents to Lienholder. The notice of foreclosure sale also included a notice regarding the planned foreclosure sale of Uptown Tower on December 5, 2023.

~~Notes~~On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The filing of the petition constituted an event of default under the mortgage loan. Prior to ~~Condensed~~the ~~Consolidated~~filing ~~Financial~~of ~~Statements~~ the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

~~(unaudited)~~ On January 3, 2024, Rialto Capital Advisors, LLC provided a preliminary estimate of the payoff amounts for the Uptown Loan as of December 4, 2023. The estimated total amount due was listed as approximately $21.5 million, which included an outstanding principal balance of approximately $14.4 million, note interest of approximately $242,000 and default interest of approximately $6.6 million. In addition, Rialto was also holding approximately $2.6 million of trapped cash, escrows and reserves under the mortgage loan, which the borrower needed to operate the Uptown Tower property and pay its obligations, including then-upcoming property taxes. On January 31, 2024, the lender sued Whitestone OP to enforce Whitestone OP’s guaranty of the mortgage loan.

In June 2024, Whitestone Uptown Tower, LLC and Whitestone OP each settled with the lender. Whitestone Uptown Tower entered into a loan agreement with American Bank, N.A. ~~summary~~for ofa ~~minimum~~loan ~~future~~amount ~~rents~~of up to be$1,500,000, ~~received~~secured ~~(exclusive~~by Uptown Tower and all of ~~renewals,~~the ~~tenant~~other ~~reimbursements,~~assets ~~contingent~~of ~~rents~~Whitestone Uptown Tower. Whitestone Uptown Tower paid approximately $1.1 million to the prior lender, and ~~collectability~~the ~~adjustments~~prior ~~under~~lender ~~Topic~~retained ~~842)~~approximately ~~under~~$2.2 ~~noncancelable~~million ~~operating~~of ~~leases~~trapped incash ~~existence~~and asescrows ~~of June~~from ~~30,~~the ~~2022~~cash issweep asand ~~follows~~the (approximately $13.6 million mistakenly sent to it by Whitestone OP in ~~thousands):~~ satisfaction of the prior mortgage loan.

Years Ended December 31,	Minimum Future Rents(1)
2022 (remaining)	$	3,559
2023		5,276
2024		3,186
2025		1,558
2026		917
Thereafter		299
Total	$	14,795

The plan of reorganization in the bankruptcy case, providing for the sale of Uptown Tower and treatment of claims, was confirmed in July 2024. We sold Uptown Tower in July 2025 for a purchase price of $20 million, or $17.3 million after deductions, closing costs and commissions and paid off the American Bank, N.A. indebtedness. We are holding approximately $13.6 million of the sale proceeds representing funds Whitestone OP mistakenly paid to the prior mortgage lender for Uptown Tower when it attempted to pay off the mortgage loan without informing us and without authority to do so on Whitestone Uptown Tower, LLC’s behalf. We are currently disputing the treatment and timing of repayment of the $13.6 million to Whitestone OP in the Whitestone Uptown Tower bankruptcy case.

~~(1)~~This ~~These~~litigation ~~amounts~~has dobeen ~~not~~and ~~reflect~~is ~~future~~expected ~~rental~~to ~~revenues~~continue ~~from~~to be expensive, lengthy, and disruptive to normal business operations. Moreover, the ~~renewal~~results orof ~~replacement~~these proceedings are difficult to predict. The registrant believes that the allegations in the Delaware lawsuit are without merit and intends to continue to vigorously defend against them. In addition, we intend to vigorously pursue the Texas action to seek damages from Whitestone due to its violations of ~~existing~~the ~~leases~~management agreements and ~~exclude~~fiduciary ~~reimbursements~~duties and to protect our shareholders from the further harms that Whitestone has indicated it intends to inflict on us and our shareholders. However, the outcomes of ~~operating~~these ~~expenses~~lawsuits, including the timing of the final disposition of the lawsuits, is unpredictable and ~~rental~~could ~~increases~~result in substantial costs to us. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that ~~are~~could ~~not~~have ~~fixed~~a material adverse effect on the registrant’s business, results of operations or financial condition.

As a Lessee. On June 8, 2021, Pillarstone's lease became month to month with Whitestone for the premises located at 2600 S. Gessner Road, Suite 555 Houston, Texas 77063. The rentable area of the premises is approximately 678 square feet. Total rent expense for the three and six months ended June 30, 2022 was $5,670 and $11,340, respectively. Total rent expense for the three and six months ended June 30, 2021 was $10,051 and $17,611, respectively.

4. UNAMORTIZED LEASE COMMISSIONS AND DEFERRED LEGAL COST, NET

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

	June 30, 2022			December 31, 2021
Leasing commissions	$	1,349		$	1,364
Deferred legal cost		12			12
Total cost		1,361			1,376
Less: leasing commissions accumulated amortization		(947	)		(901	)
Less: deferred legal cost accumulated amortization		(12	)		(11	)
Total cost, net of accumulated amortization	$	402		$	464

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~~Pillarstone~~Following ~~Capital~~the ~~REIT~~ period covered by this report, we sold Real Estate Assets under the Whitestone Uptown Tower, LLC plan of reorganization and the plan of liquidation for the other Pillarstone entities.

~~Notes~~In October to2024, ~~Condensed~~we ~~Consolidated~~sold ~~Financial~~9101 ~~Statements~~ LBJ Freeway for a purchase price of $5,753,000, or approximately $5.1 million after deductions, closing costs and commissions.

~~(unaudited)~~ In October 2024, we sold Interstate 10 Warehouse for a purchase price of $8,400,000, or approximately $8.1 million after deductions, closing costs and commissions.

5In February 2025, we sold Corporate Park Woodland II for a purchase price of $1,650,000, or approximately $1.56 ~~VARIABLE~~million ~~INTEREST~~after ~~ENTITY~~deductions, closing costs and commissions.

OnIn ~~December~~July 82025, ~~2016,~~we ~~Pillarstone~~sold and Pillarstone OP, entered into a Contribution Agreement (the “Contribution Agreement”) with Whitestone REIT Operating Partnership, L.P. (“Whitestone OP”), a subsidiary and the operating partnership of Whitestone REIT (“Whitestone”), both of which are related parties to Pillarstone and Pillarstone OP. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries (the “Subsidiaries”): Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company; Whitestone Industrial-Office, LLC, a Texas limited liability company; Whitestone Offices, LLC, a Texas limited liability company; and Whitestone Uptown Tower, ~~LLC,~~for a ~~Delaware~~purchase ~~limited~~price ~~liability company (“Uptown Tower”) that owned 14 real estate assets (the “Real Estate Assets” and, together with the Subsidiaries, the “Property”) for aggregate consideration~~ of ~~approximately~~ $~~84 million~~20,000,000, ~~consisting~~or ~~of (1)~~ approximately ~~$18.1 million of~~ ~~Class A units representing limited partnership interests in Pillarstone OP (“OP Units”), issued at a price of~~ $117.~~331 per~~3 ~~OP Unit; and (2) the assumption of approximately $65.9~~ million of ~~liabilities~~after ~~by Pillarstone OP. Pursuant to the Contribution Agreement~~deductions, ~~Pillarstone~~closing ~~became~~costs ~~the~~and ~~general partner of Pillarstone OP with an equity ownership interest in Pillarstone OP totaling approximately an 18~~commissions.~~6% interest valued at $4.1 million as of the date of the Contribution Agreement.~~

In ~~connection with the Contribution Agreement, on~~ ~~December~~July 82025, 2016, the Company, as the general partner of Pillarstone OP, entered into an Amended and Restated Agreement of Limited Partnership of Pillarstone OP (as amended and restated, the “Amended and Restated Agreement of Limited Partnership”). Pursuant to the Amended and Restated Agreement of Limited Partnership, subject to certain protective rights of the limited partners described below, the general partner has full, exclusive and complete responsibility and discretion in ~~the management and control of Pillarstone OP, including the ability to cause Pillarstone OP to enter into certain major transactions including~~ a ~~merger~~series of ~~Pillarstone~~related ~~OP or a sale of substantially all of the assets of Pillarstone OP. The limited partners have no power to remove the general partner without the general partner's consent. In addition~~transactions, ~~pursuant~~we to the Amended and Restated Agreement of Limited Partnership, the general partner may not conduct any business without the consent of a majority of the limited partners other than in connection with certain actions described therein. The Company is deemed to exercise significant influence over Pillarstone OP as it has the power to direct the activities that most significantly impact Pillarstone OP's economic performance and the Company's right to receive benefits based on its ownership percentage in Pillarstone OP. Accordingly, the Company accounts for Pillarstone OP as a Variable Interest Entity.sold:

~~The~~• ~~Amended~~Corporate ~~and~~Park ~~Restated~~Northwest ~~Agreement~~for ofa ~~Limited~~purchase ~~Partnership~~price ~~designates two classes~~ of ~~units of limited partnership interest in Pillarstone OP: the OP Units and LTIP units. In general~~$8, ~~LTIP units are similar to the OP Units and will receive the same quarterly per-unit profit distributions as the OP Units. The rights~~500, ~~privileges~~000, ~~and~~or ~~obligations~~approximately ~~related to each series of LTIP units will be established at the time the LTIP units are issued~~$7.8 Asmillion ~~profits~~after ~~interests~~deductions, ~~LTIP~~closing ~~units~~costs initially will not have full parity, on a per-unit basis, with OP Units with respect to liquidating distributions. Upon the occurrence of specified events, LTIP units can over time achieve full parity with the OP Units and therefore accrete to an economic value for the holder equivalent to OP Units. If such parity is achieved, vested LTIP units may be converted on a one-for-one basis into OP Units, which in turn are redeemable by the holder for cash or, at the Company’s election, exchangeable for Common Shares on a one-for-one basis.commissions;

•

Holly Hall Industrial Park for a for a purchase price of $7,650,000, or approximately $7.2 million after deductions, closing costs and commissions;

•

Holly Knight for a purchase price of $4,750,000, or approximately $4.5 million after deductions, closing costs and commissions; and

•

Westgate Service Center for a purchase price of $9,100,000, or approximately $8.6 million after deductions, closing costs and commissions.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. In addition to the events described above, we have incurred significant losses since the year ended December 31, 2020 and have an accumulated deficit of approximately $23.3 million as of September 30, 2022 and need to raise substantial amounts of additional funds to meet our obligations and afford us time to implement our business plan and resume profitable operations.

We worked diligently to restore normal operations and leasing activities following Whitestone’s unanticipated termination of its managerial services. Many of Pillarstone’s actions were affected by a lack of usable information being made available to us by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP owns 81.4% of Pillarstone OP as a non-controlling limited partner. We believe the management functions as operated by Whitestone were deeply integrated with Whitestone’s management functions for its own business and have been difficult, expensive, and time-consuming to separate, causing material adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity and prospects. As a result, Whitestone did significant damage to us by its intentional actions. In addition, our litigation with Whitestone has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition.

We were dependent on cash generated by our ownership of the eight Real Estate Assets to meet our liquidity needs. Historically, we have financed our long-term capital needs, including acquisitions, as follows:

●

borrowings from new loans;

●

additional equity issuances of our common and preferred shares and operating partnership units; and

●

proceeds from the sales of our Real Estate Assets.

Our ability to access the capital markets will be dependent on a number of factors, including general market conditions and market perceptions about our Company. There can be no assurance that we will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern, if at all. The consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.

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~~Pillarstone~~At September ~~Capital~~31, ~~REIT~~ 2022, the reported net equity in Whitestone Uptown Tower, LLC was $4.9 million.

~~Notes~~In addition to ~~Condensed~~the ~~Consolidated~~mortgage ~~Financial~~loan, ~~Statements~~ we have approximately $198,000 of convertible notes payable and corresponding accrued interest of approximately $128,000. The convertible notes payable can be converted by the noteholders into common shares at the rate of $1.331 per common share at any time. At maturity or when the Company chooses to call the convertible notes payable, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into common shares at $1.331 per common share. The commencement of our bankruptcy case constituted an event of default under the notes, pursuant to which all principal and accrued interest became automatically and immediately due and payable. Any repayment of the convertible notes will be determined under our plan of liquidation and bankruptcy court proceedings.

Basis of presentation. These consolidated financial statements present the Company’s consolidated financial condition and results of operations including those of a wholly owned subsidiary, operations of which were discontinued in 2002, and variable interest entities (~~unaudited~~“VIEs”) for which we are the primary beneficiary.

~~The~~Noncontrolling ~~carrying~~interest ~~amounts~~in ~~and~~the ~~classification~~accompanying ofconsolidated ~~certain~~financial ~~assets~~statements ~~and~~represents ~~liabilities~~the ~~for~~share ~~Pillarstone~~of OPequity inand ~~our~~earnings ~~condensed consolidated balance sheets as~~ of ~~June~~ ~~30,~~Pillarstone ~~2022~~OP ~~and December~~allocable ~~31,~~to ~~2021~~holders ~~consists~~ of ~~the~~partnership ~~following~~interests ~~(in~~other ~~thousands):~~than us.

	June 30, 2022			December 31, 2021
	(unaudited)
Real estate assets, at cost
Property	$	57,388		$	57,023
Accumulated depreciation		(9,315	)		(8,751	)
Total real estate assets		48,073			48,272
Cash and cash equivalents		4,645			4,900
Escrows and utility deposits		1,692			1,243
Accrued rents and accounts receivable, net of allowance for doubtful accounts		1,113			1,104
Receivable due from related party (1)		1,404			1,011
Unamortized lease commissions and deferred legal cost, net		402			464
Prepaid expenses and other assets		213			33
Total assets	$	57,542		$	57,027
Liabilities
Notes payable	$	14,927		$	14,920
Accounts payable and accrued expenses		1,238			1,483
Payable due to related party		1,153			827
Accrued interest payable		64			64
Tenants' security deposits		802			827
Total liabilities	$	18,184		$	18,121

Interim financial statements. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all disclosures required U.S. GAAP. The unaudited consolidated financial statements include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. These interim financial statements should be read together with the consolidated financial statements and notes thereto included in our audited financial statements for the year ended December 31, 2021.

~~(1)~~Use ~~Excludes~~of ~~approximately $0~~estimates.03 The ~~million~~preparation of financial statements in ~~accounts~~conformity ~~receivable~~with ~~due~~U.S. ~~from~~GAAP ~~Pillarstone~~requires management to make estimates and assumptions that ~~was~~affect ~~eliminated~~the inreported ~~consolidation~~amount asof assets and liabilities and disclosure of ~~June~~contingent 30assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the estimated fair value of properties acquired, ~~2022~~allowance for doubtful accounts, impairment, the estimated useful lives for depreciable and ~~December~~amortizable 31assets and costs, ~~2021~~and deferred taxes and the related valuation allowance for deferred taxes.

6Revenue recognition. ~~REAL~~All ~~ESTATE~~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. 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 non-lease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated, and collection of the fee is reasonably assured.

AsCash ~~of June~~and ~~30,~~cash ~~2022,~~equivalents. ~~Pillarstone~~We OPconsider ~~owned~~all ~~eight~~highly ~~Real~~liquid ~~Estate~~investments ~~Assets~~purchased inwith ~~the~~an ~~Dallas~~original ~~and~~maturity ~~Houston areas comprised~~ of ~~approximately~~three ~~0.9 million~~months ~~square~~or ~~feet~~less ofto ~~gross~~be ~~leasable~~cash ~~area~~equivalents.

7Real estate. Land, ~~DEBT~~buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost.

~~Mortgages~~Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for improvements and ~~other~~buildings. ~~notes~~Tenant ~~payable~~improvements ~~consist~~are depreciated using the straight-line method over the life of the ~~following~~improvement ~~(in~~or ~~thousands):~~remaining term of the lease, whichever is shorter.

Description	June 30, 2022			December 31, 2021
Fixed rate notes
$16.5 million 4.97% Note, due September 26, 2023	$	14,814		$	14,968
$0.3 million 3.15% Note, due December 28, 2022		147			—
Total notes payable principal		14,961			14,968
Less deferred financing costs, net of accumulated amortization		(34	)		(48	)
Total notes payable	$	14,927		$	14,920

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~~Pillarstone~~Impairment. ~~Capital~~We ~~REIT~~ review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. There was no impairment of our Real Estate Assets during the periods presented.

~~Notes~~Accrued Rents and Accounts Receivable. Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to ~~Condensed~~recording ~~Consolidated~~rents ~~Financial~~on ~~Statements~~ 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. 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.

~~(unaudited)~~ Unamortized Lease Commissions and Deferred Legal Cost. Leasing commissions and deferred legal cost are amortized using the straight-line method over the terms of the related lease agreements. Costs allocated to in-place leases whose terms differ from market terms related to acquired properties are amortized over the remaining life of the respective leases.

~~Our~~Prepaid ~~mortgage~~expenses ~~debt was collateralized by one operating property as of June 30, 2022~~ and ~~December~~ ~~31,~~other ~~2021 with a net book value of $21~~assets.~~3 million.~~ ~~Our~~Prepaid ~~loan~~expenses ~~contains restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt~~ and isother ~~secured~~assets byinclude aescrows ~~deed~~established ofpursuant ~~trust~~to oncertain ~~our~~mortgage ~~property~~financing ~~and~~arrangements ~~the~~for ~~assignment~~real ofestate ~~certain~~taxes ~~rents~~ and ~~leases associated with the~~ property. ~~Our loan is subject to customary covenants~~improvements. During the period ending June 30, 2022, we also entered into an additional loan related to our commercial property insurance policy. As of June 30, 2022, we were in compliance with all loan covenants.

~~Scheduled~~Stock-based ~~maturities~~compensation. We account for employee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of ~~notes~~the ~~payable~~equity instrument generally on the date of grant and is recognized over the requisite service period. Forfeitures are recognized as they occur. The Company uses the Black-Scholes option pricing model to estimate the fair value of ~~June~~ 30option awards. The Black-Scholes option pricing model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock, ~~2022~~the ~~were~~risk-free asinterest ~~follows~~rate (at the date of grant, the expected vesting term of the grant, expected dividends, and an assumption related to forfeitures of such grants. Changes in ~~thousands):~~these subjective input assumptions can materially affect the estimated fair value of the option awards.

Year	Amount Due
2022 (remaining)	$	302
2023		14,659
Total	$	14,961

Income taxes. We have not elected to be taxed as a REIT for federal income tax purposes. As such, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in the provision for income taxes in the consolidated statements of operations and has not been separately stated due to its insignificance.

8We file tax returns federally and in the state of Texas. ~~CONVERTIBLE~~Our ~~NOTES~~returns ~~PAYABLE~~for -periods ~~RELATED~~prior ~~PARTIES~~to 2018 are no longer subject to examination by tax authorities in these jurisdictions. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the “more likely than not” recognition criteria, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. We record income tax related interest and penalties, if any, as a component in the provision for income tax expense.

~~On November~~Earnings ~~20,~~(loss) ~~2015, five trustees~~per ~~on our board of trustees loaned~~share ~~$197,780~~– toBasic ~~the~~earnings ~~Company~~(loss) ~~in exchange for convertible notes payable. The convertible notes payable accrue interest at 10%~~ per ~~annum~~share ~~and~~amounts ~~originally~~are ~~matured~~calculated ~~on November 20,~~by ~~2018.~~dividing Inincome ~~2019,~~(loss) ~~our~~available ~~board of trustees approved an extension of the maturity date~~ to ~~November~~ ~~20,~~common ~~2021.~~shareholders Inby ~~2021,~~ the ~~noteholders~~weighted ~~agreed~~average tonumber ~~extend~~of ~~the~~common ~~maturity~~shares ~~date to November 30, 2022~~outstanding. ~~The~~Diluted ~~convertible~~earnings ~~notes~~(loss) ~~payable can be converted by the noteholders into Common Shares at the rate of $1.331~~ per ~~Common~~share ~~Share~~amounts atare ~~any~~calculated ~~time.~~by Atdividing ~~maturity~~income or(loss) ~~when~~available ~~the Company chooses~~ to ~~call~~common ~~the~~shareholders ~~convertible~~by ~~notes payable,~~ the ~~noteholders~~weighted ~~have~~average ~~the~~number ~~option~~of tocommon ~~receive~~shares ~~cash~~and ~~plus~~common ~~accrued~~stock ~~interest~~equivalents oroutstanding ~~convert~~which ~~the~~are ~~convertible~~not ~~notes~~antidilutive. ~~payable into~~ Common ~~Shares~~stock atequivalents ~~$1.331~~represent ~~per~~shares ~~Common~~issuable ~~Share.~~upon ~~Accrued~~the ~~interest~~assumed onconversion ~~these~~of ~~related~~outstanding convertible notes ~~was~~and ~~approximately~~preferred ~~$131,000~~shares asand ~~of June~~the ~~30,~~assumed ~~2022~~exercise ~~compared with approximately $121,000 as~~ of ~~December~~ ~~31,~~outstanding ~~2021~~options.

9. EARNINGS (LOSS) PER SHARE

The Company applies the guidance of ASC 260, "Earnings Per Share," for all periods presented herein. Net earnings (loss) per weighted average Common Share outstanding, basic and diluted, is computed based on the weighted average number of Common Shares outstanding for the period. The following table shows the weighted average number of Common Shares outstanding and reconciles the numerator and denominator of earnings per Common Share calculations for the three and six month periods ended June 30, 2022 and 2021.

For the three and six month periods ended June 30, 2022 and 2021, Class A Preferred Shares and Class C Preferred Shares were not included in net loss per weighted average number of Common Share outstanding-diluted, because the effect of the conversion would be anti-dilutive.

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~~Pillarstone~~Fair ~~Capital~~Value ~~REIT~~ Measurements. We measure the fair value of financial instruments based on assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets or on other “observable” market inputs, and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

~~Notes~~Our financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts and notes payable. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to ~~Condensed~~their ~~Consolidated~~short-term ~~Financial~~nature. The ~~Statements~~ fair value of our long-term debt instrument, consisting of a fixed rate secured note, approximated its carrying amounts due to the near-term maturity of the instrument.

~~(unaudited)~~ Concentration of Risk. Substantially all of our revenues are obtained from office and warehouse locations in the Dallas and Houston metropolitan areas.

~~During~~We ~~the~~maintain ~~three~~cash ~~and~~accounts ~~six~~in ~~month~~major ~~periods~~U.S. ~~ended June~~financial ~~30,~~institutions. ~~2022~~The ~~and~~terms ~~2021, the Company had $197,780~~ of ~~convertible~~these ~~notes~~deposits ~~payable~~are ason ~~discussed~~demand into ~~Note~~minimize 8risk. The ~~convertible~~balances ~~notes payable were not included in the computation~~ of ~~diluted~~these ~~loss~~accounts ~~per~~sometimes ~~share~~exceed ~~for~~ the ~~three~~ ~~and~~federally ~~six~~insured ~~months ended June 30~~limits, ~~2022~~although ~~and~~no ~~2021~~losses ~~because~~have ~~the~~been ~~effect~~incurred ~~of the conversion would be anti-dilutive. For the three and six month periods ended June 30, 2022 and 2021, Restricted Common Shares awarded pursuant to the 2016 plan (defined~~ in ~~Note~~connection 11with ~~below)~~these ~~were not included in net loss per weighted average number of Common Share outstanding-dilutive, because the effect of the conversion would be anti-dilutive~~deposits.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except share and per share data)	2022			2021			2022			2021
Numerator:
Net loss attributable to common shareholders	$	(75	)	$	(60	)	$	(92	)	$	(145	)
Denominator:
Weighted average number of common shares - basic		657,084			595,000			657,084			595,000
Weighted average number of common shares - dilutive		657,084			595,000			657,084			595,000
Loss Per Share:
Basic loss per common share:
Net loss available to common shareholders	$	(0.11	)	$	(0.10	)	$	(0.14	)	$	(0.24	)
Diluted loss per common share:
Net loss available to common shareholders	$	(0.11	)	$	(0.10	)	$	(0.14	)	$	(0.24	)

Segment information. Our management historically has not differentiated by property types and therefore does not present segment information.

10Recent accounting pronouncements. ~~RELATED~~In April ~~PARTY~~2020, ~~TRANSACTIONS~~the Financial Accounting Standards Board ("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 COVID-19, 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. We did not make any significant concessions in response to COVID-19 during the three or nine months ended September 30, 2022 or 2021.

On December 8, 2016, the Company entered into the Contribution Agreement with Whitestone OP, a related party, resulting in the contribution of an equity ownership interest in Pillarstone OP by the Company valued at $4,121,312 and representing approximately 182.~~6% of~~ the outstanding equity in Pillarstone OP. The terms of the Contribution Agreement were determined through arm's-length negotiations and were recommended to the board of trustees by a special committee of the board of trustees consisting solely of disinterested trustees of the Company and approved by the full board.Revenues

~~Pursuant~~Our torevenues ~~the~~are ~~Contribution~~disaggregated Agreement, the Company agreed to file with the Securities and Exchange Commission (the "SEC") on or prior to June 8, 2018, a shelf registration statement to register for sale under the Securities Act of 1933, as amended, the issuance of the common shares in the Company that may be issued upon redemption of the OP Units issued pursuant to the Contribution Agreement and the offer and resale of such common shares by the holders thereof. In addition, pursuant to the Contribution Agreement, in the event of a Change of Control (as defined therein) of Whitestone, Pillarstone OP shall have the right, but not the obligation, to repurchase the OP Units issued thereunder from Whitestone OP at their initial issue price of $1.331 per OP Unit. Pillarstone and Whitestone agreed to extend the filing of the shelf registration statement to the date that the Company closes a public equity offering.below:

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

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

Rental revenues	$	1,995		$	2,136		$	6,000		$	6,215
Recoveries		76			254			681			643
Bad debt		(82	)		(19	)		(121	)		(48	)
Total rental		1,989			2,371			6,560			6,810
Transaction and other fees		15			10			48			33
Total revenues	$	2,004		$	2,381		$	6,608		$	6,843

In connection with the Contribution Agreement, on December 8, 2016, the Company entered into a Management Agreement (collectively, the “Management Agreements”) with Whitestone TRS, Inc., a subsidiary of Whitestone (“Whitestone TRS"). Pursuant to the Management Agreements with respect to each property, other than Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such properties in exchange for (1) a monthly property management fee equal to 5.0% of the monthly revenues of each property and (2) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services in exchange for (1) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (2) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. On July 19, 2022, Pillarstone received written notice that Whitestone TRS confirmed termination of the Management Agreements for the Pillarstone OP Real Estate Assets even though neither Pillarstone and Pillarstone OP had made any efforts to terminate the Management Agreements. See Note 12-Subesequent Events for additional information.

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~~Pillarstone~~3. ~~Capital~~Accrued ~~REIT~~ Rents and Accounts Receivable, Net

~~Notes~~Accrued torents ~~Condensed~~and ~~Consolidated~~accounts ~~Financial~~receivable, ~~Statements~~ net consists of amounts accrued, billed and due from tenants, allowance for doubtful accounts and other receivables as follows (in thousands):

(unaudited)

	September 30, 2022			December 31, 2021
Tenant receivables	$	755		$	733
Accrued rents and other recoveries		854			1,065
Allowance for doubtful accounts		(659	)		(538	)
Total	$	950		$	1,260

The following ~~table~~ presents ~~the~~activity ~~revenue and expenses with Whitestone included~~ in ~~our~~the ~~condensed~~allowance ~~consolidated statement of operations~~ for ~~the three~~doubtful ~~and six months ended June 30, 2022 and 2021 (in thousands)~~accounts:

			Three Months Ended June 30,								Six Months Ended June 30,
	Balance at beginning of period				Adjustments to rental revenue				Net Charge- offs				Balance at end of period
	Location of Revenue (Expense)		2022				2021				2022				2021
Three months ended September 30, 2021	$	429			$	19			$	-			$	448
Rent	Rental		$	174			$	226			$	366			$	451
Three months ended September 30, 2022		577				82				-				659
Property management fees	Management fees			(99	)			(100	)			(194	)			(194	)
Nine months ended September 30, 2021	$	398			$	48			$	2			$	448
Asset management fees	Management fees			(45	)			(45	)			(90	)			(90	)
Nine months ended September 30, 2022		538				121				-				659
Rent expense	Office expenses			(6	)			(10	)			(11	)			(18	)

~~Receivables~~4. ~~due from and payables due to related parties consisted of the following as of June 30, 2022 and December 31, 2021 (in thousands):~~Leases

	Location of Receivable (Payable)	June 30, 2022			December 31, 2021
Tenant receivables and other receivables	Receivable due from related party	$	1,404		$	1,011
Accrued interest due to related party	Accrued interest payable		(131	)		(121	)
Other payables due to related party	Payable due to related party		(1,175	)		(846	)

As a Lessor. At September 30, 2022, minimum lease payments owed to us for each of the five succeeding years under noncancelable operating leases, are as follows (in thousands):

11. INCENTIVE EQUITY PLAN

Years Ended December 31,	Minimum Future Rents⁽¹⁾
2022 (remaining)	$	2,143,291
2023		7,412,149
2024		5,161,795
2025		3,355,027
2026		2,280,450
2027		1,428,247
Thereafter		260,457
Total	$	22,041,416

At(1) These amounts do not reflect future rental revenues from the ~~2016~~renewal ~~Annual~~or ~~Meeting~~replacement of ~~Shareholders,~~existing ~~our~~leases ~~shareholders~~and ~~approved~~exclude ~~the~~reimbursements ~~2016~~of ~~Equity~~operating ~~Plan~~expenses ~~("2016~~and ~~Plan")~~rental increases that are not fixed.

~~The~~As ~~2016~~a ~~Plan~~Lessee. ~~provides~~In ~~that~~periods ~~awards~~before ~~may~~August be2022, ~~made~~we inleased ~~Common~~office ~~Shares~~space ofunder ~~the~~leases ~~Company~~from orWhitestone ~~units~~REIT inOperating ~~the Company’s operating partnership~~Partnership, ~~which may be converted into Common Shares~~L.P. ~~Subject~~(“Whitestone ~~to adjustment as provided by the terms of the 2016 Plan~~OP”), ~~the~~a ~~maximum~~subsidiary ~~aggregate number of Common Shares with respect to which awards may be granted under the 2016 Plan will be increased based on future issuances of Common Shares~~ and ~~units of~~ the operating partnership, ~~including~~of ~~issuances~~Whitestone ~~pursuant~~REIT ~~to the 2016 Plan~~(“Whitestone”), soboth ~~that at any time the maximum number~~ of ~~shares~~which ~~that may~~are berelated ~~issued~~parties ~~under~~to ~~the~~Pillarstone ~~2016 Plan shall equal 12.5% of the aggregate number of Common Shares~~ and ~~units~~Pillarstone ~~of the operating partnership issued and outstanding (other than treasury shares and/or units issued to or held by the Company)~~OP.

~~The~~Total ~~Management,~~rent ~~Organization~~expense ~~and~~for ~~Compensation Committee (~~the ~~“Committee”)~~three ~~administers~~and ~~the~~nine ~~2016~~months ~~Plan~~ended September 30, ~~except~~2022 ~~with~~was ~~respect~~$0 toand ~~awards~~$11 ~~to non-employee trustees~~thousand, ~~for which the 2016 plan is administered by the board of trustees~~respectively. ~~Subject~~Total torent ~~the~~expense ~~terms~~for of the ~~2016~~three ~~Plan, the Committee is authorized to select participants, determine the type~~ and ~~number~~nine ofmonths ~~awards~~ended September ~~to be granted~~30, ~~determine~~2021 ~~and~~was ~~later amend~~ (~~subject to certain limitations~~$6) ~~the~~thousand ~~terms~~ and ~~conditions~~$11 ~~of any award~~thousand, ~~interpret and specify the rules and regulations relating to the 2016 Plan, and make all other determinations which may be necessary or desirable for the administration of the 2016 Plan~~respectively. ~~The 2016 Plan includes the types of awards for grants and types of financial performance measures.~~

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~~Pillarstone~~5. ~~Capital~~Unamortized ~~REIT~~ Lease Commissions and Deferred Legal Cost, Net

~~Notes~~Costs towhich ~~Condensed~~have ~~Consolidated~~been ~~Financial~~deferred ~~Statements~~ consist of the following (in thousands):

(unaudited)

	September 30, 2022			December 31, 2021
Leasing commissions	$	2,104		$	1,364
Deferred legal cost		12			12
Total cost		2,116			1,376
Less: leasing commissions accumulated amortization		(1,736	)		(901	)
Less: deferred legal cost accumulated amortization		(12	)		(11	)
Total cost, net of accumulated amortization	$	368		$	464

AsA summary of ~~the~~expected ~~six~~future ~~months~~amortization ~~ended June~~of ~~30,~~deferred ~~2022,~~costs ~~the~~is ~~following~~as ~~shares~~follows ~~are~~(in ~~available for grant~~thousands):

Description	Shares
Years Ended December 31,	Leasing Commissions
Available for grant at June 30, 2022		2,086,655
2022 (remaining)	$	73
2023		118
2024		82
2025		51
2026		34
2027		9
Thereafter		1
Total	$	368

~~For the three and six months ended June 30, 2022, the Company did not recognize any stock-based compensation expense for trustee compensation or employee stock-based compensation~~6.. ~~For~~Variable ~~the~~Interest three and six months ended June 30, 2021, the Company recognized approximately $2,000 and $17,000 in employee stock-based compensation, respectively. For the three and six months ended June 30, 2021, the Company did not recognize any stock-based compensation expense for trustee compensation.Entity

12Pillarstone became the general partner of Pillarstone OP with an equity ownership interest in Pillarstone OP totaling approximately 18.6% ~~SUBSEQUENT~~pursuant ~~EVENTS~~to the Contribution Agreement. Pursuant to the terms of the Contribution Agreement, Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly owned subsidiaries that owned 14 real estate assets at that time. In connection with the Contribution Agreement, the Company, as the general partner of Pillarstone OP, entered into an Amended and Restated Agreement of Limited Partnership. Pursuant to the Amended and Restated Agreement of Limited Partnership, subject to certain protective rights of the limited partners described below, the general partner has full, exclusive and complete responsibility and discretion in the management and control of Pillarstone OP, including the ability to cause Pillarstone OP to enter into certain major transactions including a merger of Pillarstone OP or a sale of substantially all of the assets of Pillarstone OP. The limited partners have no power to remove the general partner without the general partner's consent. In addition, pursuant to the Amended and Restated Agreement of Limited Partnership, the general partner may not conduct any business without the consent of a majority of the limited partners other than in connection with certain actions described therein. The Company is deemed to exercise significant influence over Pillarstone OP as it has the power to direct the activities that most significantly impact Pillarstone OP's economic performance and the Company's right to receive benefits based on its ownership percentage in Pillarstone OP. Accordingly, the Company accounts for Pillarstone OP as a Variable Interest Entity.

~~During~~The ~~the~~Amended ~~first~~and ~~quarter~~Restated Agreement of ~~2022,~~Limited ~~based~~Partnership ondesignates atwo ~~legal~~classes ~~review~~ of ~~the~~units ~~Pillarstone~~of OPlimited ~~operating~~ partnership ~~agreement~~interest ~~dated December~~in ~~8, 2016, between~~ Pillarstone, asOP: ~~general~~the ~~partner,~~OP Units and ~~Whitestone~~LTIP ~~OP,~~units. asIn ~~limited partner~~general, ~~Pillarstone~~LTIP ~~determined~~units ~~that~~are ~~its~~similar ~~operating~~to ~~and~~the ~~administrative expenses should be reimbursed by Pillarstone~~ OP onUnits ~~a historical~~ and ~~on-going~~will ~~basis.~~receive ~~Accordingly,~~the ~~Pillarstone~~same ~~notified~~quarterly ~~Whitestone~~per-unit ~~OP,~~profit ~~which~~distributions ~~manages~~as ~~Pillarstone~~the OP's ~~properties~~Units. ~~and~~The ~~provides~~rights, ~~the~~privileges, ~~accounting function for both Pillarstone~~ and ~~Pillarstone~~obligations ~~OP,~~related to ~~transfer~~each ~~cash~~series of ~~$1,819,729~~LTIP ~~from~~units ~~Pillarstone~~will OPbe toestablished ~~Pillarstone~~at asthe ~~reimbursement~~time ~~for~~the ~~Pillarstone's~~LTIP ~~operating~~units ~~and~~are ~~administrative~~issued. ~~expenses~~As ~~for~~profits ~~the~~interests, ~~years~~LTIP ~~ended~~units ~~2017~~initially ~~through~~will ~~2021.~~not ~~In April~~have ~~2022~~full parity, ~~Whitestone~~on ~~and~~a ~~Whitestone~~per-unit OPbasis, ~~contested~~with ~~the~~OP ~~expense~~Units ~~reimbursement.~~with ~~Pillarstone~~respect ~~and~~to ~~Pillarstone~~liquidating OPdistributions. ~~recorded~~Upon the ~~expense~~occurrence ~~reimbursement~~ of $1specified events,~~819,729~~ ~~with~~LTIP aunits ~~reserve~~can ofover ~~$1,819,729~~time onachieve ~~each~~full ~~company’s~~parity ~~separate~~with ~~books~~the ~~and~~OP ~~records~~Units inand ~~the~~therefore ~~first~~accrete ~~quarter~~to ~~2022~~an ~~although~~economic ~~these~~value ~~amounts~~for ~~are~~the ~~eliminated~~holder inequivalent ~~the~~to ~~consolidated~~OP ~~financial~~Units. ~~statements~~If ~~herein.~~such ~~The~~parity ~~reserve~~is ~~was~~achieved, ~~recorded~~vested ~~due~~LTIP tounits may ~~Whitestone~~be ~~and~~converted ~~Whitestone~~on ~~OP's~~a ~~contesting~~one-for-one ~~the~~basis ~~expense~~into ~~reimbursement.~~OP ~~Pillarstone~~Units, ~~intends~~which toin ~~pursue~~turn ~~the~~are ~~collection~~redeemable ofby the ~~expense~~holder ~~reimbursement~~for ~~from~~cash ~~Pillarstone~~or, OPat ~~based on~~ the ~~provisions~~Company’s ofelection, ~~the~~exchangeable ~~Amended~~for ~~and~~Common ~~Restated~~Shares ~~Agreement~~on ofa ~~Limited~~one-for-one ~~Partnership~~basis.

After Pillarstone notified Whitestone of the $1,819,729 expense reimbursement required from Pillarstone OP, Whitestone and Whitestone OP made a claim to Pillarstone and Pillarstone OP to be reimbursed for construction and lease commission expenditures of $1,425,972 paid by Whitestone OP on behalf of Pillarstone OP during 2017 and 2018. Pillarstone requested additional information for the $1,425,972 expenditures to determine if any of the items claimed should have been prorated between Pillarstone OP and Whitestone OP when the December 8, 2016 transaction occurred for Pillarstone OP’s acquisition of the Real Estate Assets. Whitestone OP is an 81.4% limited partner of Pillarstone OP and Pillarstone is the general partner owning the remaining 18.6% of Pillarstone OP. The $1,425,972 expenditures were recorded on Pillarstone OP in 2017 and 2018 as an increase in the Whitestone OP limited partner investment account and as assets of Pillarstone OP that have been depreciated and amortized to expense over their useful lives. The amount due Whitestone OP for these expenditures, if any, has not been determined. If Pillarstone OP reimburses any amounts to Whitestone OP, the payment would reduce the Whitestone OP limited partner investment account.

In April 2022, Pillarstone determined the expense reimbursement of $176,593 was due from Pillarstone OP for Pillarstone's operating and administrative expenses for the first quarter of 2022. Pillarstone OP transferred $117,186 to Pillarstone in May 2022. The difference of $59,407 between the expense reimbursement $176,593 and the cash transferred $117,186 are Pillarstone expenses contested by Whitestone and Whitestone OP. Pillarstone and Pillarstone OP recorded the expense reimbursement of $176,593 with an allowance of $59,407 on each company’s separate books and records in the first quarter 2022 although these amounts are eliminated in the consolidated financial statements herein. Pillarstone intends to pursue reimbursement of the contested expenses based on the provisions of the Amended and Restated Agreement of Limited Partnership.

In July 2022, Pillarstone determined the expense reimbursement of $94,550 was due from Pillarstone OP for Pillarstone’s operating and administrative expenses for the second quarter of 2022 of which Whitestone and Whitestone OP contested expenses of $61,724. Pillarstone and Pillarstone OP recorded the expense reimbursement of $94,550 with an allowance of $61,724 on each company’s separate books and records in the second quarter 2022 although these amounts are eliminated in the consolidated financial statements herein. Pillarstone OP will transfer $32,826 of uncontested expenses to Pillarstone in the third quarter of 2022 and Pillarstone intends to pursue reimbursement of the contested expenses based on the provisions of the Amended and Restated Agreement of Limited Partnership.

On July 12, 2022, Pillarstone was named as a defendant in a lawsuit filed in the Court of Chancery of the State of Delaware by Whitestone OP. The suit challenges Pillarstone’s rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between Pillarstone and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that Pillarstone’s adoption of the Rights Agreement breached the Amended and Restated Agreement of Limited Partnership, and that Pillarstone breached its fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership. On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo requesting broad restrictions on Pillarstone’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. Pillarstone believes that these allegations are without merit, intends to vigorously defend against them, and is considering its rights and potential courses of action with respect to the lawsuit. However, an unfavorable outcome of this lawsuit is unpredictable and could result in substantial costs to Pillarstone.

On July 19, 2022, Pillarstone received written notice that Whitestone TRS confirmed termination of the management agreements for the Pillarstone OP’s Real Estate Assets. Whitestone TRS is a subsidiary of Whitestone REIT, which owns Whitestone OP, the holder of 81.4% of the total outstanding Class A units representing limited partnership interests in Pillarstone OP. Substantially all of Pillarstone’s business is conducted through Pillarstone OP. Pillarstone is the sole general partner of Pillarstone OP and owns 18.6% of the outstanding equity in Pillarstone OP. Pursuant to the management agreements with respect to each Real Estate Asset (other than the Uptown Tower Real Estate Asset), Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such Real Estate Asset in exchange for (x) a monthly property management fee equal to 5.0% of the monthly revenues of such Real Estate Asset and (y) a monthly asset management fee equal to 0.125% of GAV (as defined in each management agreement as, generally, the purchase price of the respective Real Estate Asset based upon the purchase price allocations determined pursuant to the contribution agreement pursuant to which Pillarstone OP acquired the equity interests of the entities that owned the Real Estate Assets) of such Real Estate Asset. Pursuant to the management agreement with respect to the Uptown Tower Real Estate Asset, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to Pillarstone OP in exchange for (x) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (y) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower. Pillarstone had previously communicated to Whitestone REIT its plan to internalize the management of the Real Estate Assets, but Pillarstone had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it “confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from” July 19, 2022. Following the transition of management from Whitestone TRS, Pillarstone intends to internalize the management of its Real Estate Assets and to continue to pursue its business without the management services provided by Whitestone TRS under the management agreements.

On July 21, 2022, before receiving Whitestone OP’s filed Motion to Preserve the Status Quo requesting broad restrictions on Plllarstone’s ability to conduct its business (see above), Pillarstone’s board of trustees increased the size of the board from five to six trustees and appointed Bradford Johnson as Pillarstone’s President and Chief Executive Officer and to the board to serve as a Class I trustee with a term expiring at Pillarstone’s annual meeting of shareholders to be held in 2025. Mr. Johnson replaces James C. Mastandrea as President and Chief Executive Officer. Mr. Mastandrea, who had been Pillarstone’s Chairman, President and Chief Executive Officer since 2003, ended his term as President and Chief Executive Officer and continues to serve in his role as Chairman and trustee of Pillarstone. In addition, the board appointed Daniel P. Kovacevic as Pillarstone’s Chief Financial Officer. Mr. Kovacevic replaces John J. Dee as Chief Financial Officer. Mr. Dee, who had been Pillarstone’s Senior Vice President, Chief Financial Officer, Secretary and a trustee since 2003, ended his term as Chief Financial Officer and continues to serve in his role as a trustee of Pillarstone. The board also appointed William J. Carter as Pillarstone’s Chief Operating Officer. Pillarstone is proceeding to internalize management and become a self-directed, self-managed real estate company.

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The carrying amounts and classification of certain assets and liabilities for Pillarstone OP in our consolidated balance sheets consists of the following (in thousands):

	September 30, 2022			December 31, 2021
	(unaudited)
Real estate assets, at cost
Property	$	57,278		$	57,023
Accumulated depreciation		(9,794	)		(8,751	)
Total real estate assets		47,484			48,272
Cash and cash equivalents		5,079			4,900
Escrows and utility deposits		1,928			1,243
Accrued rents and accounts receivable, net of allowance for doubtful accounts		952			1,104
Receivable due from related party		263			1,011
Unamortized lease commissions and deferred legal cost, net		368			464
Prepaid expenses and other assets		129			33
Total assets	$	56,203		$	57,027


Liabilities
Notes payable	$	14,757		$	14,920
Accounts payable and accrued expenses		1,794			1,483
Payable due to related party		-			827
Accrued interest payable		-			64
Tenants' security deposits		779			827
Total liabilities	$	17,330		$	18,121

Debt

Mortgages and other notes payable consist of the following (in thousands):

	September 30, 2022			December 31, 2021
Fixed rate notes
Mortgage debt, 4.97% rate, due October 1, 2023	$	14,713		$	14,968
Financed insurance premium, 5.59% rate, due December 19, 2022		74			-
Total notes payable principal		14,787			14,968
Less deferred financing costs, net of accumulated amortization		(30	)		(48	)
Total notes payable	$	14,757		$	14,920

The mortgage debt is an obligation of Whitestone Uptown Tower, LLC as borrower and is collateralized by the Uptown Tower property. The mortgage debt is guaranteed by Whitestone OP. This mortgage is an obligation of Whitestone Uptown Tower, LLC, a subsidiary included in these consolidated financial statements. Neither Pillarstone nor Pillarstone OP has any obligation or guarantee of this indebtedness nor do any other of our properties collateralize this indebtedness. The mortgage debt contains restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt and is secured by a deed of trust on our property and the assignment of certain rents and leases associated with the property. The loan is also subject to customary covenants.

On August 3, 2023, we received a notice of default and demand for payment of the mortgage debt. In the letter, the lender and specialty servicer stated that the December 8, 2016 transaction with Whitestone OP pursuant to the Contribution Agreement resulted in a change in control which did not meet the terms of the consent letter obtained at the time of the transaction. As such, the lender and specialty servicer consider that terms of the mortgage debt were breached effective December 8, 2016 and that an event of default has occurred since that date resulting in accrued interest at the default rate totaling approximately $6.5 million.

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At September 30, 2022, the reported net equity in Whitestone Uptown Tower, LLC was $4.9 million.

As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for mortgage loan.

Whitestone Uptown Tower, LLC, Pillarstone OP’s subsidiary that owns the Uptown Tower office building, is the borrower under a loan agreement. The Uptown Tower office building is subject to a mortgage under the loan agreement. Whitestone OP is the guarantor of this mortgage loan This mortgage is an obligation of Whitestone Uptown Tower, LLC, a subsidiary included in our consolidated financial statements. Neither Pillarstone Capital REIT nor Pillarstone OP has any obligation or guarantee of this indebtedness nor do any of our other properties collateralize this indebtedness.

As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for mortgage loan.

In July 2023, Rialto Capital Advisors, LLC, the special servicer for the mortgage loan, implemented a cash sweep and began to seize the funds from the operations of the Uptown Tower property under the cash management agreement relating to the mortgage loan. Prior to Rialto Capital Advisors, LLC’s seizing the funds from those operations, those funds had been used for the operation and maintenance of the Uptown Tower property, with excess funds used for the operations of Pillarstone OP and the General Partner. We do not have an alternate source of funds for the operation of Uptown Tower. However, when Whitestone learned of our negotiations with the special servicer to attempt to resolve this issue and believing we were intending to abandon the building, it filed a motion with the Delaware Court of Chancery asking the court for an order declaring that we shall not (a) stop managing the Uptown Tower, (b) “hand the keys” to Uptown Tower to the lender, or (c) otherwise abandon the Uptown Tower, which the court granted on a temporary basis on September 22, 2023. As of December 31, 2023, Rialto Capital Advisors, LLC held approximately $969 thousand under the cash sweep. The borrower had requested disbursements of capital and operating expenditures from the special servicer under the terms of the loan agreement in August 2023 and September 2023, but Rialto Capital Advisors, LLC did not release the funds and indicated that it did not intend to release funds or reverse the cash sweep to permit the funding of the operations and leasing of Uptown Tower.

On August 3, 2023, we received a notice of the default of the mortgage loan from counsel for the lender and Rialto Capital Advisors, LLC. The default notice asserted non-monetary defaults resulting from Whitestone’s failure to comply with the loan agreement in connection with the Contribution Agreement in 2016. The default notice also alleged a non-monetary default caused by Whitestone’s termination of its management agreement for Uptown Tower in August 2022.

In the default notice, the lender and special servicer noted that the borrower, prior to the Contribution Agreement and while it was controlled by Whitestone OP, represented, warranted, and covenanted that “[F]following the Transfer, Sponsor [Whitestone REIT] through its ownership of Guarantor [Whitestone OP] [. . .] shall continue to Control Borrower [Whitestone Uptown Tower, LLC], and shall continue to control the day-to-day operation of the Property.” The lender and special servicer contend that this representation was false because Pillarstone OP and the borrower are controlled by the general partner (Pillarstone Capital REIT, the sole general partner of Pillarstone OP) and not Whitestone REIT.

As the 2016 alleged defaults occurred while Whitestone was in control of all loan parties and we believe Whitestone caused the 2022 default through its unilateral termination of the management agreement for Uptown Tower, we are not in a position to agree with or dispute the determination of the alleged defaults or Whitestone OP’s liability under its guaranty, or any further effect they may have on the borrower or the Uptown Tower property.

The mortgage loan matured on October 1, 2023. The registrant and the borrower had been working to extend the maturity date and to find new financing or a buyer for the Uptown Tower property. However, on October 19, 2023, Whitestone objected to a proposed sale of the Uptown Tower property under the Status Quo Order issued by the court in the previously disclosed lawsuit Whitestone OP instituted against us in the Delaware Court of Chancery.

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On October 24, 2023, the lender delivered a notice of foreclosure sale to the borrower providing notice that, among other things, as of the maturity date, the borrower failed to repay all amounts due under the note, and making a demand on (1) the borrower and all persons and entities obligated on the promissory note evidencing the mortgage loan (except to the extent that the obligation is expressly limited by written contract or applicable law) for payment in full of the entire indebtedness, and on (2) the borrower for payment of rents and proceeds of any rents to which the lender is entitled under the mortgage loan documents and Texas Property Code chapter 64, Assignment of Rents to Lienholder. The notice of foreclosure sale also included a notice regarding the planned foreclosure sale of Uptown Tower on December 5, 2023.

On January 3, 2024, Rialto Capital Advisors, LLC provided a preliminary estimate of the payoff amounts for the Uptown Loan as of December 4, 2023. The estimated total amount due was listed as approximately $21.5 million, which included an outstanding principal balance of approximately $14.4 million, note interest of approximately $242,000 and default interest of approximately $6.6 million. In addition, Rialto was also holding approximately $2.6 million of trapped cash, escrows and reserves under the mortgage loan, which the borrower needed to operate the Uptown Tower property and pay its obligations, including then-upcoming property taxes.

On December 1, 2023, Whitestone Uptown Tower, LLC, an indirect subsidiary of the registrant, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with Whitestone REIT to address these matters with representatives of Whitestone REIT’s board of trustees to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC.

Scheduled maturities of notes payable as of September 30, 2022 were as follows (in thousands):

Years Ended December 31,	Amount Due
2022 (remaining)	$	74
2023		14,713
Total	$	14,787

8.	Convertible Notes Payable

On November 20, 2015, five trustees on our board of trustees, one of whom is no longer affiliated with the Company, loaned $198 thousand to the Company in exchange for convertible notes payable. The convertible notes payable accrue interest at 10% per annum and originally matured on November 20, 2018. The convertible notes payable can be converted by the noteholders into common shares at the rate of $1.331 per common share at any time. At maturity or when the Company chooses to call the convertible notes payable, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into common shares at $1.331 per common share. Accrued interest on these related convertible notes was approximately $128 thousand as of September 30, 2022 and $121 thousand as of December 31, 2021.

9.	Shareholders’ Equity

Operating partnership units. Substantially all of our business is conducted through Pillarstone OP, and we are the sole general partner. We own an 18.6% interest in Pillarstone OP. At any time, limited partners in Pillarstone OP holding OP Units have the right to convert their OP Units for cash, or at our option, common shares of Pillarstone. As of September 30, 2022, there were 16,688,167 OP Units outstanding.

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Pillarstone equity. We have authority to issue up to 450,000,000 shares of beneficial interest, $0.01 par value per share, of which 400,000,000 are classified as common shares of beneficial interest, $0.01 par value per share and 50,000,000 are classified as preferred shares of beneficial interest, $0.01 par value per share. Of the 50,000,000 preferred shares of beneficial interest, 1,518,000 shares are designated as Class A Cumulative Preferred Shares ("Class A Preferred Shares") and 300,000 shares are designated as Preferred Class C Convertible Preferred shares ("Class C Preferred Shares").

On December 26, 2021, the board authorized a dividend of one preferred share purchase right (a “Right”) for each outstanding common share of the Company, payable on December 27, 2021. The description and terms of the Rights are set forth in a rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agent”).

Each Right entitles the registered holder to purchase from the Company one one-thousandth (a “Unit”) of a Series D Preferred Share, par value $0.01 per share, of the Company at a purchase price (“Purchase Price”) of $7.00 per Unit, subject to adjustment. The Rights initially trade with the common shares and will generally only become exercisable on the 10th business day after a person or entity has become the owner of 5% or more of the common shares (20% or more with respect to certain passive institutional investors) or the commencement of a tender or exchange offer which would result in any person becoming an owner of 5% or more of the common shares, except in certain situations specified in the Rights Agreement (such person an “Acquiring Person”), with proper provision (i) to provide each holder of certain units of Pillarstone OP with the number of Rights as would be issued to the applicable holder as if the holder had exercised its applicable redemption rights relating to such units immediately prior to the distribution date under the Rights Agreement, and the Company had elected to satisfy the redemption rights by paying the holder in shares in accordance with Pillarstone OP’s partnership agreement, and (ii) to provide each holder (other than the Company) of Class C Convertible Preferred Shares of beneficial interest, $0.01 par value per share, of the Company with the number of Rights, evidenced by Rights Certificates, as would be issued to such holder as if such holder had converted all of its Class C Preferred Shares into common shares immediately prior to the distribution date.

If any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right (other than Rights beneficially owned by an Acquiring Person, affiliates and associates of an Acquiring Person and certain transferees thereof, which Rights will thereupon become null and void) will thereafter have the right to receive upon exercise of a Right that number of common shares having a market value of two times the Purchase Price. If, after any person or group of affiliated or associated persons has become an Acquiring Person, the Company is acquired in a merger, consolidation or combination or 50% or more of its consolidated assets, cash flow or earning power are transferred, proper provisions will be made so that each holder of a Right (other than Rights beneficially owned by an Acquiring Person, affiliates and associates of an Acquiring Person and certain transferees thereof, which Rights will have become null and void) will thereafter have the right to receive upon the exercise of a Right that number of common shares of the person (or its parent) with whom the Company has engaged in the foregoing transaction having a market value of two times the Purchase Price. At any time after any person or group of affiliated or associated persons becomes an Acquiring Person and prior to the earlier of one of the events described in the previous paragraph or the acquisition by an Acquiring Person of 50% or more of the outstanding common shares, the Board may exchange the Rights (other than Rights owned by an Acquiring Person, affiliates and associates of an Acquiring Person and certain transferees thereof, which Rights will have become null and void), in whole or in part, for common shares at an exchange ratio of one common share per Right.

The Rights will expire on the earliest of (i) the close of business on December 27, 2024, (ii) the time at which the Rights are redeemed pursuant to the Rights Agreement, (iii) the closing of any merger or other acquisition transaction involving the Company that has been approved by the Board, at which time the Rights are terminated, (iv) the business day immediately following the Company’s 2022 annual meeting of shareholders (including any adjournment thereof) if the Rights Agreement shall not have been approved, on or before such date, by the affirmative vote of the holders of a majority of the voting power present, in person or by proxy, and entitled to vote at a meeting of the Company’s shareholders duly held in accordance with the Articles of Amendment and Restatement of the Declaration of Trust of the Company, the Company’s bylaws and Maryland law, and (v) the time at which the Rights are exchanged pursuant to the Rights Agreement. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement.

Preferred shares. The Company has outstanding 256,636 Class A Preferred Shares of which 95,226 Class A Preferred Shares were issued to the public. The Class A Preferred Shares bear a liquidation value of $10.00 per share. We have the right to redeem the Class A Preferred Shares.

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Effective June 30, 2003, we issued 696,078 Class A Preferred Shares valued at approximately $2.4 million to James C. Mastandrea, our Chairman and previous Chief Executive Officer and President, and John J. Dee, our previous Chief Financial Officer and Senior Vice President, pursuant to separate restricted share agreements. Under each restricted share agreement, the restricted shares vest upon the later of the following dates:

●

the date our gross assets exceed $50 million, or

●

50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005 and the remaining 25% of the shares on March 4, 2006.

None of the restricted shares have vested. While the Company's gross assets exceed $50 million, when considering its 18.6% ownership of Pillarstone OP, its effective ownership of gross assets is less than $50 million.

In conjunction with a one-time incentive exchange offer for Class A Preferred shareholders, Messrs. Mastandrea and Dee exchanged 534,668 of these restricted Class A Preferred Shares into 163,116 restricted common shares. The restrictions described above are also applicable to their common shares. The 161,410 restricted Class A Preferred Shares continuing to be held by Messrs. Mastandrea and Dee can each be converted into 0.305 restricted common shares.

Holders of the remaining 95,226 Class A Preferred Shares did not participate in the one-time exchange offer above and, as a result, these Class A Preferred Shares are convertible into 0.046 common shares, subject to certain formulas.

Effective September 29, 2006, Pillarstone filed articles supplementary to its Declaration of Trust, as amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland designating 300,000 Class C Preferred Shares. The Class C Preferred Shares have voting rights equal to the number of common shares into which they are convertible. Each Class C Preferred Share is convertible into common shares by dividing the sum of $10.00 and any accrued but unpaid dividends on the Class C Preferred Shares by the conversion price of $1.00. The Class C Preferred Shares have a liquidation preference of $10.00 per share, plus any accrued but unpaid dividends, and can be redeemed by the board of trustees at any time, with notice, at the same price per share.

Restricted Common Shares. The following table summarizes the activity of our unvested restricted common shares:

	Unvested Restricted Common Shares
			Weighted-Average
	Number of		Grant-Date
	Shares		Fair Value

Unvested at December 31, 2020		168,449	$	11.44
Vested		-		—
Unvested at December 31, 2021		168,449	$	11.44
Vested		-		—
Unvested at September 30, 2022		168,449	$	11.44

In the above table, 163,116 restricted shares vest upon meeting performance goals as discussed under “Preferred Shares.” Since the grant date, we have determined that meeting these performance goals is not probable, and no compensation expense has been recognized related to this grant. The grant date fair value of $1.8 million would be recognized at the point we deem it probable that we would meet the performance goals. The balance of 5,333 restricted shares had grant date fair values totaling $79 thousand, which was recognized in prior periods though the restrictions remain on the shares.

During the quarter ended September 30, 2021, the Company acquired common shares held by an employee who tendered owned common shares to satisfy the tax withholding on the lapse of certain restrictions on restricted shares.

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10.

Stock-Based Compensation

At the 2016 Annual Meeting of Shareholders, our shareholders approved the 2016 Equity Plan ("2016 Plan"). The 2016 Plan provides that awards may be made in Common Shares of the Company or units in the Company’s operating partnership, which may be converted into Common Shares. Subject to adjustment as provided by the terms of the 2016 Plan, the maximum aggregate number of Common Shares with respect to which awards may be granted under the 2016 Plan will be increased based on future issuances of Common Shares and units of the operating partnership, including issuances pursuant to the 2016 Plan, so that at any time the maximum number of shares that may be issued under the 2016 Plan shall equal 12.5% of the aggregate number of Common Shares and units of the operating partnership issued and outstanding (other than treasury shares and/or units issued to or held by the Company). There were 2,086,655 shares available for grant under the 2016 Plan at September 30, 2022.

The Company did not recognize any stock-based compensation expense for trustee compensation or employee stock-based compensation in the three and nine months ended September 30, 2022.

For the three and nine months ended September 30, 2021, the Company recognized $9 thousand and $26 thousand for employee stock-based compensation, respectively. These awards were subsequently forfeited in 2021. The Company did not recognize any stock-based compensation expense for trustee compensation in the three and nine months ended September 30, 2022.

Options. The Company has a single option award outstanding for 667 shares of our Common Stock for $33.75. This award is fully vested and remains effective until 90 days after the term ends of the individual trustee. The awards have no intrinsic value as they were out-of-the-money at September 30, 2022. No compensation expense was recognized for these awards in the nine months ended September 30, 2022 or 2021 as the awards became fully vested in previous years.

11.

Earnings (Loss) per Share

The following is the computation of earnings (loss) per basic and diluted share:

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share and per share data)	2022		2021			2022		2021

Numerator:
Net earnings (loss) attributable to common shareholders	$	646	$	(56	)	$	554	$	(201	)
Add: After tax effect of convertible notes interest		4		-			12		-
Net earnings (loss) attributable for dilutive securities	$	650	$	(56	)	$	566	$	(201	)

Denominator:
Weighted average number of common shares - basic		493,968		441,525			493,968		435,133
Dilutive effect of:
Shares issuable upon conversion of convertible notes payable		250,656		-			250,656		-
Shares issuable upon conversion of 95,226 Class A Preferred Shares		4,380		-			4,380		-
Shares issuable upon conversion of 231,944 Class C Preferred Shares		2,319,440		-			2,319,440		-
Weighted average number of common shares - dilutive		3,068,444		441,525			3,068,444		435,133

Basic earnings (loss) per common share:
Net earnings (loss) available to common shareholders	$	1.31	$	(0.13	)	$	1.12	$	(0.46	)
Diluted earnings (loss) per common share:
Net earnings (loss) available to common shareholders	$	0.21	$	(0.13	)	$	0.18	$	(0.46	)

In periods when we incur a net loss, the computation of diluted loss per share excludes shares issuable upon conversion of the Company’s Class A Preferred Shares, Class C Preferred Shares and convertible notes payable because the effect of the conversions would be anti-dilutive. Similarly, outstanding options and restricted Common Shares were not included computation of diluted earnings per share for each of the periods above because they would be anti-dilutive.

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12.

Income Taxes

Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The income tax impacts of discrete items are recognized in the period these occur.

Our effective tax rate for the three months ended September 30, 2022 and September 30, 2021 was 20% and 0%, respectively. Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 25% and 4%, respectively. The primary difference from the federal statutory rate of 21% in each period is related to state taxes and permanent differences for non-deductible expenses.

13.

Related Party Transactions

Managerial Agreements. From December 8, 2016 through August 18, 2022, we contracted with Whitestone TRS for managerial services. Pursuant to the Management Agreements with respect to each property, other than Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such properties in exchange for (1) a monthly property management fee equal to 5.0% of the monthly revenues of each property and (2) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services in exchange for (1) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (2) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.

On July 19, 2022, Pillarstone received written notice that Whitestone TRS confirmed termination of the Management Agreements for the Pillarstone OP Real Estate Assets. Pillarstone had previously communicated to Whitestone its plan to internalize the management of the Real Estate Assets, but Pillarstone had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it “confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from” July 19, 2022.

On August 18, 2022, Whitestone TRS ceased all managerial services without providing any transition services. Pillarstone has worked since that time to internalize the management of its Real Estate Assets and to continue to pursue its business without the management services provided by Whitestone TRS.

Expense Reimbursements. Under the Amended and Restated Agreement of Limited Partnership dated December 8, 2016, Pillarstone OP is responsible for administrative and operating costs and expenses incurred by the Company as General Partner of Pillarstone OP, including, without limitation, all expenses relating to the General Partner’s (i) continued existence and subsidiary operations, (ii) offerings and registration of securities, (iii) preparation and filing of any periodic or other reports and communications required under federal, state or local laws and regulations, (iv) compliance with laws, rules and regulations promulgated by any regulatory body, and (v) operating or administrative costs incurred in the ordinary course of business on behalf of the Partnership; provided, however, that such costs and expenses shall not include any administrative or operating costs of the General Partner attributable to assets owned by the General Partner directly and not through Pillarstone OP or its Subsidiaries.

Indemnification provisions within the Amended and Restated Agreement of Limited Partnership also provide for reimbursement of all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys fees and other legal fees and expenses), judgments, fines, settlements and other amounts, arising from or in connection with any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, relating to Pillarstone OP or the General Partner or the operation of, or the ownership of property.

These reimbursement provisions provide the Company with critical sources of cash and liquidity to maintain our operations. Following Whitestone’s abrupt termination of managerial services to Pillarstone OP, we have incurred significant costs to internalize management, and to select and implement an enterprise-wide system of our own. We have also incurred substantial legal costs in our litigation with Whitestone.

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The Company has no assets, activities or operations other than those related to Pillarstone OP. Hence, all of our costs and expenses are reimbursable under the applicable provisions of the Amended and Restated Agreement of Limited Partnership.

We determined that Whitestone, as operational manager until August 2022 was not making appropriate reimbursement of the Company’s operating and administrative expenses from Pillarstone OP. During the first quarter of 2022, we recorded $1.8 million as reimbursement of expenses for the years ended 2017 through 2021. We recorded reimbursements from Pillarstone OP totaling $216 thousand and $487 thousand during the three and nine months ended September 30, 2022, respectively, for operating and administrative expenses incurred in 2022.

The reimbursements initially reported in our Quarterly Reports on Forms 10-Q for the periods ended March 31, 2022 and June 30, 2022 were offset by reserves totaling $1.8 million because the amounts were disputed by Whitestone. As the manager responsible for all day-to-day operations, Whitestone maintained financial records and access to all cash balances of the Company. The reserves were necessary then in recognition that significant efforts, including litigation, may have been necessary to collect these amounts.

Following Whitestone’s termination of managerial services in August 2022, we internalized management of the Company. This includes maintenance of the Company’s financial records and direct access to all cash balances of the Company. Based on this and our rights to the full reimbursement as provided by the Amended and Restated Agreement of Limited Partnership, we reversed the reserves in August 2022.

Whitestone has notified us that they will contest some or all of these reimbursements. We intend to vigorously defend these reimbursements as they are permitted under provisions of the Amended and Restated Agreement of Limited Partnership dated December 8, 2016.

For financial reporting purposes, Pillarstone REIT and Pillarstone OP report on a consolidated basis, therefore, the reimbursement of our expenses does not change net income but only the allocations between controlling and noncontrolling interests.

Whitestone Claim for Expenses. After we notified Whitestone of the $1.8 million reimbursement required from Pillarstone OP, Whitestone and Whitestone OP made a claim to Pillarstone and Pillarstone OP to be reimbursed for construction and lease commission expenditures of $1.4 million paid by Whitestone OP on behalf of Pillarstone OP during 2017 and 2018. Pillarstone requested additional information for the $1.4 million expenditures to determine if any of the items claimed should have been prorated between Pillarstone OP and Whitestone OP in our transaction with Whitestone and Whitestone OP on December 8, 2016 for the initial acquisition of the Real Estate Assets. These expenditures were recorded on Pillarstone OP in 2017 and 2018 as an increase in the Whitestone OP limited partner investment account and as assets of Pillarstone OP that have been depreciated and amortized to expense over their useful lives. The amount due Whitestone OP for these expenditures, if any, has not been determined. If Pillarstone OP reimburses any amounts to Whitestone OP, the payment would reduce the Whitestone OP limited partner investment account.

Summary. The following table presents the revenue and expenses with related parties included in our consolidated statement of operations (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
	Location of Revenue (Expense)	2022			2021			2022			2021
Rent revenue from Whitestone	Rental	$	95		$	225		$	461		$	676
Property management fees to Whitestone	Management fees		(51	)		(97	)		(245	)		(291	)
Asset management fees to Whitestone	Management fees		(24	)		(45	)		(114	)		(135	)
Rent expense to Whitestone	Office expenses		-			6			(11	)		(11	)
Interest expense on convertible notes to active trustees	Interest expense, net		(4	)		(4	)		(11	)		(11	)

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Receivables due from and payables due to related parties consisted of the following (in thousands):

	Location of Receivable (Payable)	September 30, 2022			December 31, 2021
Tenant receivables and other receivables	Receivable due from related party	$	264		$	1,011
Convertible notes payable	Convertible notes payable - related parties		(150	)		(150	)
Accrued interest on convertible notes	Accrued interest payable		(103	)		(92	)
Other payables due to related party	Payable due to related party		-			(846	)

14.

Commitments and Contingencies

The Company is involved with on-going lawsuits filed by Whitestone OP as discussed in Notes 1 and 15 to these consolidated financial statements. The Company is vigorously defending itself in these matters. It is reasonably possible that such litigation could result in large monetary awards, especially if compensatory and/or punitive damages are awarded. Such damages may include a partial or complete loss of the value of interest in Pillarstone OP. Management, with the consultation of the Company’s legal counsel, is not able to conclude whether these lawsuits will be resolved without a material adverse effect on our financial position, earnings, or cash flows.

15.

Subsequent Events

In April 2023, the Company financed approximately $508 thousand of the premium for the renewal of its insurance coverages. The financed premium is being paid in eight monthly installments beginning in April 2023 and bears interest at 6.94% per annum.

On July 12, 2022, we were named as a defendant in a lawsuit by Whitestone OP in a lawsuit styled Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW, in the Court of Chancery of the State of Delaware. The suit challenges our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

Based upon various issues, including those discussed in this report, we filed a lawsuit on September 16, 2022, in district court in Harris County, Texas, against Whitestone and related parties alleging, among other things, breach of the Pillarstone OP Amended and Restated Agreement of Limited Partnership and fiduciary duty and breach of the management agreements.

On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo in the Delaware lawsuit requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevents Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argues that Whitestone’s material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

Representatives of our board of trustees attempted to initiate discussions to settle these matters in August 2022 with representatives of Whitestone’s board of trustees to avoid a prolonged, expensive legal fight. However, Whitestone was not open to settling these matters at that time or the other various times since August 2022 we attempted to initiate discussions to resolve these matters.

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Whitestone indicated to us its intent to cause Whitestone OP to exercise its redemption right and stated publicly that it intends to monetize its investment in Pillarstone OP. We believed that if Whitestone were to be permitted to exercise its redemption right for cash amounts, we may not have the cash available to pay such amounts and may be required to sell one or more of our Real Estate Assets to satisfy this obligation, which may cause us to sell some or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. We have stated that a redemption request would not trigger the Rights Agreement, and our board of trustees has the sole discretion to interpret the Rights Agreement. However, Whitestone OP indicated that the Rights Agreement caused them to not exercise their redemption rights and claimed damages based on the alleged decline in the value of the Real Estate Assets following their failure to exercise the redemption rights.

Based on Whitestone’s performance under the management agreements and their public statements regarding their intentions for their interest in Pillarstone, we did not believe that Whitestone’s actions in connection with the exercise of the redemption rights would respect the rights of the holders of our common shares. The Pillarstone OP Amended and Restated Agreement of Limited Partnership expressly provides that in the event of a conflict between the interests of the limited partners (Whitestone OP as the sole limited partner) and our shareholders, we shall act in the interests of our shareholders, and we shall not be liable for monetary or other losses sustained, liabilities incurred or benefits not derived by the limited partners in connection therewith.

Our executive management team worked to restore normal operations and leasing activities quickly after Whitestone REIT’s unanticipated termination of their managerial services. Many of our actions were affected by a lack of usable information being made available to us on a timely basis.

We discovered significant deferred maintenance and neglect of our assets had occurred under Whitestone REIT’s management. Our efforts to address these matters have in some cases been stymied by Whitestone REIT’s litigation against us in Delaware where the court has limited our ability to incur expenses above low threshold amounts for the types of expenses a company in our industry could expect to incur in the ordinary course of business. Our legal and professional fees have increased substantially as we address the internalization of management and the litigation matters discussed in this report.

On July 17, 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the Delaware court to award damages of approximately $51,200,600 and post-judgement interest of $6,820,000 in the filing of its post-trial opening brief on August 28, 2023. On January 25, 2024, the Delaware court issued its opinion and determined that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages. We disagree with the Delaware court’s ruling and are considering our options for appeal, subject to a final order being entered in the case, the outcome of various proceedings in the jointly administered bankruptcy cases described below and the decision of the plan agent in the bankruptcy cases to pursue an appeal.

The Delaware court declared the Rights Agreement unenforceable against Whitestone, permitted Whitestone OP to tender a notice of redemption for its OP Units and determined that the Pillarstone OP limited partnership agreement should be followed whereby we would decide whether to assume Pillarstone OP’s redemption obligation and determine what value to attribute to Pillarstone OP’s assets. The Delaware court declared that any further relief must await future proceedings.

On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units.

On September 16, 2022, we filed a lawsuit styled Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP v. Whitestone TRS, Inc., Whitestone REIT, Whitestone REIT Operating Partnership, L.P., Cause No. 2022-59478, in the District Court, Harris County, Texas, 189th Judicial District alleging, among other things, breach of the Pillarstone OP limited partnership agreement and the management agreements for the Real Estate Assets by the Whitestone defendants and breach of fiduciary duties relating to Pillarstone OP by Whitestone OP going outside the role of limited partner and harming us and Pillarstone OP. A portion of the claims in this case were also brought as an adversary proceeding by Whitestone Uptown Tower, LLC in the Uptown Tower bankruptcy case described in “—Uptown Tower” below.

On March 4, 2024, bankruptcy cases were filed for us and Pillarstone OP, as well as Whitestone CP Woodland Ph. 2, LLC, Whitestone Industrial-Office, LLC and Whitestone Offices, LLC, the subsidiaries owning our Real Estate Assets other than Uptown Tower. The bankruptcy cases were consolidated into the jointly administered cases styled In re: Whitestone Industrial-Office, LLC, et. al., Case No. 24-30653-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, the same court as the Whitestone Uptown Tower, LLC bankruptcy case described under “—Uptown Tower” below.

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The joint plan of liquidation in the bankruptcy case providing for the sale of the Real Estate Assets other than Uptown Tower and treatment of claims was confirmed in November 2024. Those Real Estate Assets were sold between October 2024 and July 2025. The plan provided for a plan agent, and Frances A. Smith was appointed plan agent in the jointly administered bankruptcy cases. The plan agent was appointed for the purposes of administering all claims in the bankruptcy cases and making distributions to holders of allowed claims and equity interests under the plan of liquidation. The plan agent’s administration of the claims may include, without limitation, and pursuant to her reasonable business judgment, investigating, prosecuting, objecting to, resolving, reconciling, compromising, litigating, administering, and making distributions on account of, the claims.

The plan agent is not a trustee and does not participate in the management or operations of the debtors’ businesses, assets or financial affairs or the review and approval of the day-to-day operational expenses of the debtors’ business post-confirmation, unless the bankruptcy court determines cause exists for the plan agent to do so after notice and hearing.

The plan agent has the sole and exclusive authority to administer the claims, including the determination to compromise a claim involving Whitestone OP, any debtor or their affiliates or professionals, subject to notice and hearing and a party’s good-faith objection and the bankruptcy court’s final adjudication of the matter. The plan agent also has the authority to make demand on the debtors for funds necessary to satisfy allowed claims asserted against a debtor from that debtor’s funds (even if held by Pillarstone OP), which may include sales proceeds.

The plan agent is entitled to receive compensation as a flat fee the amount of $10,000.00 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650.00 per hour for each additional hour of services.

Whitestone Uptown Tower, LLC, Pillarstone OP’s subsidiary that owned the Uptown Tower office building, was the borrower under a loan agreement. The Uptown Tower office building was subject to a mortgage under the loan agreement. The mortgage debt was guaranteed by Whitestone OP. This mortgage was an obligation of Whitestone Uptown Tower, LLC, a subsidiary included in our consolidated financial statements. Neither Pillarstone Capital REIT nor Pillarstone OP had any obligation or guarantee of this indebtedness nor did any of our other properties collateralize this indebtedness.

As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for mortgage loan.

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The borrower had requested disbursements of capital and operating expenditures from Rialto Capital Advisors, LLC under the terms of the loan agreement in August 2023 and September 2023, but Rialto Capital Advisors, LLC did not release the funds and indicated that it did not intend to release funds or reverse the cash sweep to permit the funding of the operations and leasing of Uptown Tower.

The mortgage loan matured on October 1, 2023. The registrant and the borrower had been working to extend the maturity date and to find new financing or a buyer for the Uptown Tower property. When Whitestone learned of our negotiations with Rialto Capital Advisors, LLC to attempt to resolve this issue and believing we were intending to abandon the building, it filed a motion with the Delaware Court of Chancery asking the court for an order declaring that we shall not (a) stop managing the Uptown Tower, (b) “hand the keys” to Uptown Tower to the lender, or (c) otherwise abandon the Uptown Tower, which the court granted on a temporary basis on September 22, 2023. On October 19, 2023, Whitestone objected to a proposed sale of the Uptown Tower property under the Status Quo Order issued by the court in the previously disclosed lawsuit Whitestone OP instituted against us in the Delaware Court of Chancery.

On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

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In June 2024, Whitestone Uptown Tower, LLC and Whitestone OP each settled with the lender. Whitestone Uptown Tower entered into a loan agreement with American Bank, N.A. for a loan amount of up to $1,500,000, secured by Uptown Tower and all of the other assets of Whitestone Uptown Tower. Whitestone Uptown Tower paid approximately $1.1 million to the prior lender, and the prior lender retained approximately $2.2 million of trapped cash and escrows from the cash sweep and the approximately $13.6 million mistakenly sent to it by Whitestone OP in satisfaction of the prior mortgage loan.

This litigation has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. The registrant believes that the allegations in the Delaware lawsuit are without merit and intends to continue to vigorously defend against them. In addition, we intend to vigorously pursue the Texas action to seek damages from Whitestone due to its violations of the management agreements and fiduciary duties and to protect our shareholders from the further harms that Whitestone has indicated it intends to inflict on us and our shareholders. However, the outcomes of these lawsuits, including the timing of the final disposition of the lawsuits, are unpredictable and could result in substantial costs to us. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on the registrant’s business, results of operations or financial condition.

Following the period covered by this report, we sold Real Estate Assets under the Whitestone Uptown Tower, LLC plan of reorganization and the plan of liquidation for the other Pillarstone entities.

In October 2024, we sold 9101 LBJ Freeway for a purchase price of $5,753,000, or approximately $5.1 million after deductions, closing costs and commissions.

In October 2024, we sold Interstate 10 Warehouse for a purchase price of $8,400,000, or approximately $8.1 million after deductions, closing costs and commissions.

In February 2025, we sold Corporate Park Woodland II for a purchase price of $1,650,000, or approximately $1.56 million after deductions, closing costs and commissions.

In July 2025, we sold Uptown Tower for a purchase price of $20,000,000, or approximately $17.3 million after deductions, closing costs and commissions.

In July 2025, in a series of related transactions, we sold:

•

Corporate Park Northwest for a purchase price of $8,500,000, or approximately $7.8 million after deductions, closing costs and commissions;

•

Holly Hall Industrial Park for a for a purchase price of $7,650,000, or approximately $7.2 million after deductions, closing costs and commissions;

•

Holly Knight for a purchase price of $4,750,000, or approximately $4.5 million after deductions, closing costs and commissions; and

•

Westgate Service Center for a purchase price of $9,100,000, or approximately $8.6 million after deductions, closing costs and commissions.

* * * * *

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Pillarstone Capital REIT and its consolidated subsidiaries.

Forward-Looking Statements

The following discussion should be read in conjunction with our unaudited ~~condensed~~ consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

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

• ~~uncertainties~~our ~~related~~ability to ~~the~~continue ~~COVID-19~~as pandemic, including the unknown duration and economic, operational and financial impacts of the COVID-19 pandemic and the actions taken or contemplated by U.S. and local governmental authorities or others in response to the pandemic on our business, employees and tenants, including, among others, (a) ~~changes~~going ~~in tenant demand for our properties; (b) financial challenges confronting tenants~~concern, ~~including~~which asmay arequire ~~result~~us ~~of decreased customers’ willingness~~ to ~~visit~~manage ~~our~~costs ~~tenants' businesses,~~ and ~~potential~~expenses ~~renewed mandated shelter in place orders that may prevent customers from visiting some of our tenants’ businesses~~ and ~~the impact of these issues on our ability~~ to ~~collect~~obtain ~~rent from our tenants; (c) limited ability to access the capital markets and other sources of~~ financing ~~on attractive terms~~ or atsell ~~all,~~assets ~~and~~to ~~(d)~~obtain ~~prolonged~~funds ~~measures~~ to ~~contain~~implement ~~the~~our ~~spread~~business ~~of COVID-19~~plan;

• ~~legislative~~our orability ~~regulatory~~to ~~changes,~~successfully ~~including~~consummate the ~~impact~~sale of ~~the~~our ~~legislation~~properties ~~commonly~~and ~~known~~obtain asan ~~the~~adequate ~~Tax~~price ~~Cuts~~in ~~and~~our ~~Jobs~~bankruptcy ~~Act~~proceedings;

• ~~adverse~~our ~~economic~~ability orto ~~real~~successfully ~~estate~~complete ~~developments~~our orand ~~conditions~~our insubsidiaries’ ~~Texas,~~plans ~~including as a result~~ of aliquidation ~~surge~~and inreorganization ~~COVID-19~~under ~~cases~~Chapter in11 ~~such areas~~ and ~~the~~emerge ~~impact~~from ~~on our tenants' ability to pay their rent, which could result in bad debt allowances or straight-line rent reserve adjustments~~bankruptcy;

•

the effects of the bankruptcy cases on us and on the interests of various constituents;

•

bankruptcy court rulings in our and our subsidiaries’ bankruptcy cases and the outcome of the bankruptcy cases in general;

•

the effects of our ongoing litigation with Whitestone REIT, Whitestone REIT Operating Partnership, L.P., and Whitestone TRS, Inc., including proceedings in the bankruptcy cases;

•

our ability to internalize management of our assets and business, including the rebuilding of our accounting and financial reporting system;

•

changes in national and local economic conditions, the real estate industry, and the commercial real estate markets in which we operate (including supply and demand changes), particularly in Dallas and Houston, including the impact of high unemployment, volatility in the public equity and debt markets, and international economic and other conditions;

•

the impact of a public health crisis and the governmental and third-party response to such a crisis, which may affect our key personnel, our tenants, and the costs of operating our assets;

•

changes in the needs of our tenants brought about by the desire for co-working arrangements, trends toward utilizing less office space per employee, and the effect of employees working remotely;

•

sociopolitical unrest such as political instability, civil unrest, armed hostilities, or political activism, which may result in a disruption of day-to-day building operations;

•

increases in interest rates and operating costs;

~~• availability and terms of capital and financing, both to fund our operations and to refinance our indebtedness as it matures, in each case, on terms favorable to the Company;~~ 31

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•

availability and terms of capital and financing, both to fund our operations and to refinance any indebtedness as it matures, in each case, on terms favorable to us;

•

decreases in rental rates or increases in vacancy rates;

• litigation risks, including ~~risks~~the ~~relating~~restrictions toon our operations by the ~~lawsuit~~Status ~~discussed~~Quo ~~under~~Order issued by court in the ~~heading~~lawsuit ~~"Lawsuit~~in ~~and~~which ~~Termination~~we are a defendant in the Court of ~~Management~~Chancery ~~Agreements"~~of isthe ~~below~~State of Delaware;

•

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

• ~~the~~volatility ~~impact~~in ofinterest ~~public~~rates ~~health crises~~ and ~~pandemics,~~insurance ~~such as the COVID-19 outbreak~~rates;

•

inflation and continuing increases in the inflation rate;

•

the risks associated with real estate developments (such as zoning approval, receipt of required permits, construction delays, cost overruns, and leasing risk);

•

changes in senior management, changes in the Board of Trustees, and the loss of key personnel;

•

the potential liability for uninsured losses, condemnation, or environmental issues;

•

the potential liability for a failure to meet regulatory requirements;

•

any failure to comply with debt covenants under credit agreements;

•

potential changes to state, local, or federal regulations applicable to our business;

•

cybersecurity attacks, loss of confidential information and other business disruptions;

•

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

• ~~our~~any ~~inability~~adverse tochange ~~generate~~in ~~sufficient~~the ~~cash~~financial ~~flows~~condition ~~due~~of toone ~~market conditions, competition, uninsured losses, changes in tax~~ or ~~other~~more ~~applicable~~of ~~laws~~our tenants; and

• ~~risks~~our ~~related~~inability to ~~our~~generate ~~internalization~~sufficient ofcash ~~the~~flows ~~management~~due ~~discussed~~to ~~under~~market ~~the~~conditions, ~~heading~~competition, ~~"Lawsuit~~uninsured ~~and~~losses, ~~Termination~~changes ofin ~~Management~~tax ~~Agreements"~~or ~~below~~other applicable laws.

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In addition, an investment in the Company involves numerous risks that potential investors should consider carefully, including, without limitation:

•

our cash resources are limited;

•

we have a history of losses;

•

we have not raised funds through a public equity offering;

•

our trustees control a significant percentage of our voting shares;

•

shareholders could experience possible future dilution through the issuance of additional shares;

• we are dependent on a small number of key senior professionals ~~who are part-time employees~~; and

•

we currently do not plan to distribute dividends to the holders of our shares.

Overview

The Company is a Maryland real estate investment trust ("REIT") engaged in investing in, owning and operating commercial properties. ~~Future~~We ~~real~~own ~~estate~~approximately ~~opportunities~~18.6% ~~may~~of ~~include~~Pillarstone ~~(i)~~Capital ~~acquisition~~REIT ~~and~~Operating ~~development~~Partnership ofLP ~~retail,~~(the ~~office,~~“Operating ~~office~~Partnership” ~~warehouse,~~or ~~industrial,~~“Pillarstone ~~multifamily,~~OP”) ~~hotel~~ and ~~other~~serve ~~commercial~~as ~~properties,~~its ~~(ii)~~general ~~acquisition~~partner. ofSubstantially orall ~~merger~~of ~~with~~our aoperations ~~REIT~~and oractivities ~~real~~are ~~estate~~conducted ~~operating~~for ~~company,~~the ~~(iii)~~benefit ~~sales~~ of ~~existing~~and ~~properties, (iv)~~through ~~redevelopment~~Pillarstone ofOP. ~~existing~~As ~~properties,~~the ~~and~~general ~~(v)~~partner ~~joint~~of ~~venture~~Pillarstone ~~investments.~~OP, ~~Substantially~~we ~~all~~have ofthe ~~our~~exclusive ~~business~~power isto ~~conducted~~manage ~~through~~and ~~our~~conduct ~~operating~~the ~~partnership~~business of Pillarstone OP., Wesubject ~~are~~to ~~the~~certain ~~sole~~customary ~~general~~exceptions. ~~partner of~~ Pillarstone OP. Asowns oftwo ~~June~~office ~~30,~~buildings ~~2022,~~in wethe ~~owned~~Dallas ~~approximately~~metropolitan ~~18.6%~~area ofand ~~the~~six ~~outstanding~~warehouse ~~equity~~locations in ~~Pillarstone~~the OPHouston ~~and~~metropolitan wearea ~~fully~~having ~~consolidate~~approximately it927 onthousand ~~our~~square ~~condensed~~feet ~~consolidated~~of ~~financial~~gross ~~statements~~leasable area.

AsFuture real estate opportunities may include (i) acquisition and development of ~~June~~retail, 30office, ~~2022~~office warehouse, ~~the~~industrial, ~~Company~~multifamily, ishotel aand ~~smaller~~other ~~reporting~~commercial ~~company~~properties, ~~current~~(ii) inacquisition ~~its~~of ~~quarterly~~or ~~and~~merger ~~annual~~with ~~financial~~a ~~statement~~REIT ~~filings~~or ~~with~~real ~~the~~estate ~~SEC~~operating company, ~~that~~(iii) ~~may~~sales ~~make~~of ~~future~~existing ~~real~~properties, ~~estate~~(iv) redevelopment of existing properties, and (v) joint venture investments. There can be no assurance that we will be able to close additional transactions. Even if our management is successful in closing additional transactions, investors may not value the transactions or the Company in the same manner as we do, and investors may not value the transactions as they would value other transactions or alternatives. Failure to obtain additional sources of capital will materially and adversely affect the Company’s ability to continue operations, as well as its liquidity and financial results.

~~Brief History~~ 32

Pillarstone was formed on March 15, 1994 as a Maryland REIT. The Company operated as a traditional REIT by buying, selling, owning and operating commercial and residential properties through December 31, 1999. In 2000, the Company purchased a software technology company, resulting in the Company not meeting the qualifications to be a REIT under the Code. In 2002, the Company discontinued the operations of the technology segment, and from 2003 through 2006, pursued a value-added business plan primarily focused on acquiring well located, under-performing multifamily residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. From 2006 until December 2016, the Company continued its existence as a corporate shell current in its SEC filings.

On December 8, 2016, Pillarstone and Pillarstone OP entered into the Contribution Agreement with Whitestone OP, a subsidiary and the operating partnership of Whitestone, both of which are related parties to Pillarstone and Pillarstone OP, pursuant to which Whitestone OP contributed to Pillarstone OP all of the equity interests in four of its wholly-owned subsidiaries: Whitestone CP Woodland Ph. 2, LLC, a Delaware limited liability company (“CP Woodland”); Whitestone Industrial-Office, LLC, a Texas limited liability company (“Industrial-Office”); Whitestone Offices, LLC, a Texas limited liability company (“Whitestone Offices”); and Whitestone Uptown Tower, LLC, a Delaware limited liability company (“Uptown Tower”) that owned 14 real estate assets (the "Real Estate Assets") 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 issued at a price of $1.331 per OP Unit; and (2) the assumption of approximately $65.9 million of liabilities by Pillarstone OP (collectively, the “Acquisition”). Whitestone OP is the 81.4% limited partner of Pillarstone OP.

In connection with the Contribution Agreement, on December 8, 2016, Pillarstone entered into management agreements with Whitestone TRS, Inc., a subsidiary of Whitestone (“Whitestone TRS"). Pursuant to the management agreements with respect to each property, other than Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services to such properties in exchange for (1) a monthly property management fee equal to 5.0% of the monthly revenues of each property and (2) a monthly asset management fee equal to 0.125% of GAV (as defined in each Management Agreement as, generally, the purchase price of the respective property based upon the purchase price allocations determined pursuant to the Contribution Agreement, excluding all indebtedness, liabilities or claims of any nature) of such property. Pursuant to the Management Agreement with respect to Uptown Tower, Whitestone TRS agreed to provide certain property management, leasing and day-to-day advisory and administrative services in exchange for (1) a monthly property management fee equal to 3.0% of the monthly revenues of Uptown Tower and (2) a monthly asset management fee equal to 0.125% of GAV of Uptown Tower.

Lawsuit and Termination of Management Agreements

On July 12, 2022, after the quarterly period ended June 30, 2022, Pillarstone was named as a defendant in a lawsuit filed in the Court of Chancery of the State of Delaware by Whitestone OP. The suit challenges Pillarstone’s rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between Pillarstone and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that Pillarstone’s adoption of the Rights Agreement breached the Amended and Restated Agreement of Limited Partnership, and that Pillarstone breached its fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership. On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo requesting broad restrictions on Pillarstone’s ability to conduct its business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. Pillarstone believes that these allegations are without merit, intends to vigorously defend against them, and is considering its rights and potential claims for affirmative relief with respect to the lawsuit. However, an unfavorable outcome of this lawsuit is unpredictable and could result in substantial costs to Pillarstone.

On July 19, 2022, Pillarstone received written notice that Whitestone TRS confirmed termination of the management agreements for the Real Estate Assets. Pillarstone had previously communicated to Whitestone its plan to internalize the management of the Real Estate Assets, but Pillarstone had not made efforts to terminate the management agreements. However, Whitestone TRS stated in its notice letter that while it had not received written notice of the termination of the management agreements, it “confirms receipt of your intent to terminate, and hereby confirms termination of the Agreements effective 30 days from” July 19, 2022. Following the transition of management from Whitestone TRS, Pillarstone intends to internalize the management of its Real Estate Assets and to continue to pursue its business without the management services provided by Whitestone TRS under the management agreements.

Prior to receiving the termination notice, Pillarstone had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe. The management agreements provided for Whitestone TRS to provide such services, or in certain cases contracting with other providers to perform such services, as:

● providing management, leasing, and maintenance personnel to operate the Real Estate Assets;

● maintaining the Real Estate Assets;

● maintaining connected utility services at the Real Estate Assets;

● invoice and collect the monthly rent from the tenants; default and pursue collection for delinquent tenants;

● pay monthly invoices to vendors, including loan payments to lenders;

● maintain monthly accounting records and provide monthly operating statements for each Real Estate Asset;

● perform an annual audit of the financial statements, prepare workpapers for the annual audit, and assist the auditors to complete the annual audit;

● assist in the preparation of the annual tax returns for Pillarstone, Pillarstone OP and the owners of the Real Estate Assets; and

● assist in the preparation of the Pillarstone SEC financial reports and other filings.

The services under the management agreements are extensive and material to the operation of Pillarstone’s business and financial reporting. Pillarstone believes the management functions as operated by Whitestone were deeply integrated with Whitestone’s management functions for its own business and may be difficult, expensive, and time-consuming to separate. If the timeframe to internalize the management functions based on the termination notice is too short, and if Whitestone does not cooperate with an orderly transfer of the management of the Real Estate Assets, Pillarstone’s business, income, cash flow, results of operations, financial condition, liquidity, and prospects could be materially and adversely affected.

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~~Impact of COVID-19~~History

~~The~~Pillarstone ~~ongoing~~was ~~COVID-19~~formed ~~pandemic~~on ~~has~~March in15, ~~the~~1994 ~~past~~as ~~and~~a ~~may~~Maryland ~~continue~~REIT. toWe ~~materially~~operated as a traditional REIT by buying, selling, owning and ~~adversely~~operating ~~impact~~commercial and ~~disrupt~~residential ~~our~~properties ~~business~~through December 31, ~~financial~~1999. ~~condition~~In 2000, ~~results~~we ofpurchased ~~operations~~a ~~and~~software ~~cash~~technology ~~flows~~company, resulting in our not meeting the qualifications to be a REIT under the Code. ~~Any~~In ~~future~~2002, ~~outbreak~~we discontinued the operations of ~~any~~the ~~COVID~~technology segment, and from 2003 through 2006, pursued a value-19added ~~variants~~business orplan ~~any~~primarily ~~other~~focused ~~highly~~on ~~infectious~~acquiring orwell ~~contagious~~located, ~~disease~~under-performing ~~could~~multifamily ~~have~~residential properties, including affordable housing communities, and repositioning them through renovation, leasing, improved management and branding. From 2006 until December 2016, we continued our existence as a ~~similar~~corporate ~~impact~~shell current in our SEC filings.

~~The~~On ~~impact~~December of8, ~~COVID-19~~2016, ~~including~~Pillarstone ~~any~~and ~~resurgences,~~Pillarstone ~~future~~OP ~~pandemics~~entered orinto ~~other~~the ~~health~~Contribution ~~crises~~Agreement ~~may~~with ~~adversely~~Whitestone ~~affect~~OP, ~~our~~a ~~business~~subsidiary and the operating partnership of Whitestone REIT, ~~financial~~both ~~condition~~of which were related parties to us and Pillarstone OP, ~~results~~pursuant to which Whitestone OP contributed to Pillarstone OP all of ~~operations~~the equity interests in four of its wholly-owned subsidiaries that owned 14 real estate assets (the "Real Estate Assets") for aggregate consideration of approximately $84 million, ~~cash~~consisting ~~flows~~of ~~and~~(1) ~~market~~approximately ~~value~~$18.1 ~~These~~million ~~type~~ of ~~health~~Class ~~crises~~A ~~may~~units ~~impact~~representing ~~our~~limited ~~business~~partnership interests in Pillarstone OP issued at a price of $1.331 per OP Unit; and (2) the ~~following~~assumption ~~ways:~~of approximately $65.9 million of liabilities by Pillarstone OP (collectively, the “Acquisition”). Whitestone OP is the 81.4% limited partner of Pillarstone OP.

•In ~~closures~~connection ~~of,~~with orthe ~~other~~Contribution ~~operational~~Agreement, ~~issues~~on atDecember 8, ~~our~~2016, ~~properties~~we ~~resulting~~entered ~~from~~into ~~government~~management oragreements ~~tenant~~with ~~action;~~Whitestone •TRS, ~~reduced~~Inc., ~~economic~~a ~~activity~~subsidiary ~~impacting~~of ~~our~~Whitestone ~~tenants'~~(“Whitestone ~~ability~~TRS"). Pursuant to ~~meet~~the ~~their~~management ~~rental~~agreements ~~and~~with ~~other~~respect ~~obligations~~ to useach inproperty, ~~full~~other orthan atUptown ~~all;~~Tower, •Whitestone ~~the~~TRS ~~ability~~agreed ofto ~~our~~provide ~~tenants~~certain ~~who~~property ~~have~~management, ~~been~~leasing ~~granted~~and ~~rent~~day-to-day ~~deferrals~~advisory and administrative services to ~~timely~~such ~~pay~~properties ~~deferred~~in ~~rent;~~exchange •for an(1) ~~inability~~a monthly property management fee equal to ~~renew~~5.0% ~~leases~~of orthe ~~lease~~monthly ~~vacant~~revenues ~~space~~of oneach ~~favorable~~property ~~terms~~and or(2) ata ~~all;~~monthly •asset ~~tenant~~management ~~bankruptcies;~~fee •equal ~~liquidity~~to ~~issues~~0.125% ~~resulting~~of ~~from~~GAV ~~reduced~~(as ~~cash~~defined ~~flows~~in ~~from~~each ~~operations;~~Management •Agreement ~~negative~~as, ~~impacts~~generally, tothe purchase price of the ~~credit~~respective ~~and/or~~property ~~capital~~based ~~markets~~upon ~~making~~the itpurchase ~~difficult~~price toallocations ~~access~~determined ~~capital~~pursuant onto ~~favorable~~the ~~terms~~Contribution orAgreement, atexcluding all; •indebtedness, ~~impairment~~liabilities inor ~~value~~claims of ~~our~~any ~~properties;~~nature) •of asuch ~~general~~property. ~~decline~~Pursuant into ~~business~~the ~~activity~~Management ~~and~~Agreement ~~demand~~with ~~for~~respect ~~real~~to ~~estate~~Uptown ~~transactions~~Tower, ~~adversely~~Whitestone ~~affecting~~TRS ~~our~~agreed ~~portfolio~~to ofprovide ~~properties~~certain ~~and~~property ~~our~~management, ~~ability~~leasing and day-to-day ~~service~~advisory ~~our~~and ~~indebtedness;~~administrative •services ~~supply~~in ~~chain~~exchange ~~disruptions~~for ~~adversely~~(1) ~~affecting~~a ~~our~~monthly ~~tenants'~~property ~~operations;~~management ~~and~~fee •equal ~~impacts~~to on3.0% of the ~~health~~monthly revenues of ~~our~~Uptown ~~personnel~~Tower and (2) a ~~disruption~~monthly inasset ~~the~~management ~~continuity~~fee equal to 0.125% of ~~our~~GAV ~~business~~of Uptown Tower.

~~Because~~On ~~substantially~~July ~~all~~19, of2022, ~~our~~we ~~income~~received iswritten ~~derived~~notice ~~from~~that ~~rentals~~Whitestone TRS confirmed termination of ~~commercial~~the ~~real~~management ~~property,~~agreements for the Real Estate Assets. We had previously communicated to Whitestone our ~~business,~~plan ~~income,~~to ~~cash~~internalize ~~flow,~~the ~~results~~management of ~~operations,~~the ~~financial~~Real ~~condition,~~Estate ~~liquidity~~Assets, ~~prospects~~but ~~and~~we ~~ability~~had not made efforts to ~~service~~terminate ~~our~~the ~~debt~~management ~~obligation~~agreements. ~~would~~However, beWhitestone ~~adversely~~TRS ~~affected~~stated ifin aits ~~significant~~notice ~~number~~letter that while it had not received written notice of ~~tenants~~the ~~are~~termination ~~unable~~of the management agreements, it “confirms receipt of your intent to ~~meet~~terminate, ~~their~~and ~~obligations~~hereby orconfirms ~~their~~termination ~~revenues~~of ~~decline~~the Agreements effective 30 days from” July 19, 2022. The ~~extent~~management toagreements ~~which~~provided that “Unless otherwise terminated pursuant to the ~~COVID-19~~provisions ~~pandemic~~hereof, orthe term of this Agreement shall automatically renew on a ~~future~~month ~~pandemic,~~to ~~impacts~~month ~~our~~basis ~~operations~~at ~~and~~the ~~those~~end of ~~our~~the ~~tenants~~term ~~will~~unless ~~depend~~either onof ~~future~~the ~~developments,~~Parties ~~which~~has ~~are~~notified ~~highly~~the ~~uncertain~~other ~~and~~in ~~cannot~~writing benot ~~predicted~~less ~~with~~than ~~confidence~~thirty (30) days prior to the expiration of the term, as the same may be extended.”

~~Results~~Prior to receiving the termination notice, we had anticipated an orderly transition of ~~Operations~~the management of the Real Estate Assets over an appropriate timeframe. The management agreements provided for Whitestone TRS to provide such services, or in certain cases contracting with other providers to perform such services, as:

~~The~~• ~~following~~providing ismanagement, aleasing, ~~discussion~~and ofmaintenance ~~our~~personnel ~~results~~to ofoperate ~~operations for~~ the ~~three~~Real ~~and~~Estate ~~six months ended June 30, 2022 and 2021 and our financial condition, including:~~Assets;

• ~~Explanation~~maintaining ~~of changes in~~ the ~~results~~Real ofEstate ~~operations in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021.~~Assets;

• ~~Our~~maintaining ~~critical~~connected ~~accounting~~utility ~~policies~~services ~~and~~at ~~estimates that require our subjective judgment and are important to~~ the ~~presentation~~Real ofEstate ~~our financial condition and results of operations.~~Assets;

• ~~Our~~invoice ~~primary sources~~ and ~~uses~~collect ~~of cash for~~ the ~~six~~monthly ~~month~~rent ~~periods~~from ~~ended~~the ~~June~~tenants; ~~30,~~default ~~2022~~ and ~~2021,~~pursue ~~and~~collection ~~how we intend to generate cash~~ for ~~long-term~~delinquent ~~capital needs.~~tenants;

• ~~Our~~pay ~~current~~monthly ~~income~~invoices ~~tax~~to ~~status.~~vendors, including loan payments to lenders;

~~The~~• ~~following~~maintain ~~discussion~~monthly ~~and~~accounting ~~analysis~~records ~~should~~and beprovide ~~read~~monthly inoperating ~~conjunction with the condensed consolidated financial~~ statements ~~and~~for ~~notes~~each ~~thereto~~Real ~~appearing~~Estate ~~elsewhere in this Quarterly Report.~~Asset;

~~Comparison~~• perform an annual audit of the ~~Six~~financial ~~Month~~statements, ~~Periods~~prepare ~~Ended~~workpapers ~~June~~for ~~30,~~the ~~2022~~annual audit, and ~~2021~~assist the auditors to complete the annual audit;

~~Leasing~~• ~~Activity~~assist in the preparation of the annual tax returns for Pillarstone, Pillarstone OP and the owners of the Real Estate Assets; and

~~For~~• ~~the~~assist ~~six~~in ~~month~~the ~~period~~preparation ~~ended June 30, 2022, we executed 32 leases for a total lease value~~ of ~~$1.7 million compared~~the toPillarstone ~~46 leases~~SEC ~~for~~financial areports ~~total~~and ~~lease~~other ~~value of $3~~filings.~~2 million for the six month period ended June 30, 2021.~~

2033

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~~Results~~We worked diligently to restore normal operations and leasing activities following Whitestone’s unanticipated termination of ~~Operations~~its managerial services. Many of Pillarstone’s actions were affected by a lack of usable information being made available to us by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP owns 81.4% of Pillarstone OP as a non-controlling limited partner.

This 30-day notice period was insufficient because Whitestone did not provide the operation and financial database of our information, nor did Whitestone cooperate to provide for an orderly transition of its contracted responsibilities. The ~~following~~services ~~provides~~under athe ~~general~~management ~~comparison~~agreements were extensive and material to the operation of Pillarstone’s business and our ~~results~~accounting and financial reporting. The management functions, as operated by Whitestone, were deeply co-mingled with Whitestone’s management functions for its own business and have been difficult, expensive and time-consuming to separate. As a result, Pillarstone was materially and adversely affected by Whitestone’s abrupt termination of ~~operations~~the management agreements, incomplete and inadequate delivery of books and records and other materials required to be delivered under the Management Agreements, and the failure to provide for an appropriate transition. We had no way to continue our accounting and financial reporting responsibilities as a public company. Further, for several months following the ~~six~~abrupt ~~month~~termination ~~periods~~of ~~ended~~services ~~June~~by 30Whitestone, ~~2022~~we were unable to systematically invoice our tenants and ~~2021~~pursue ~~(dollars~~collection inof ~~thousands):~~delinquent accounts as an independent, internally managed company. In addition, several vendor service contracts were tied to Whitestone and the pricing of services was based on the combination of Pillarstone and Whitestone. The transition caused us to obtain separate services, which caused disruption to our business and higher costs. In other cases, Whitestone obligated us to long-term contracts for essential services that we cannot easily replace.

	Six Months Ended June 30,
	2022			2021
Number of properties		8			8
Aggregate GLA (sq. ft.)		926,798			926,798
Ending occupancy rate		56	%		61	%
Total revenues	$	4,604		$	4,462
Total operating expenses		4,009			3,922
Total other expenses		399			383
Provision for income tax expense (benefit)		(5	)		(12	)
Net income		201			169
Less: Non-controlling interest in subsidiary		293			314
Net loss available to Common Shareholders	$	(92	)	$	(145)

Specifically, Whitestone:

~~Revenues~~• ~~from~~removed ~~Operations~~our access to all operations, accounting, and financial reporting systems intentionally causing harm to landlord-tenant relations at all of our properties. They immediately ceased daily accounting responsibilities and exported our general ledger history into disparate and unorganized Microsoft Excel files;

We• ~~had~~copied ~~total~~more ~~revenues~~than ~~for the six month periods ended June 30~~27,000 ~~2022~~files ~~and~~into ~~2021~~poorly ~~of approximately~~organized ~~$4,604,000~~ and ~~$4,462,000,~~incomplete ~~respectively,~~electronic ~~for~~folders ancontaining ~~increase~~Adobe ~~of approximately $142~~PDF,~~000,~~ orMicrosoft ~~3%.~~Excel ~~The~~and ~~difference~~other ~~was~~file ~~comprised~~formats ofnot aeasily ~~decrease of approximately $74~~available,~~000~~ inand ~~rental revenues, an increase of $216,000~~ in ~~expense~~some ~~reimbursements,~~situations annot ~~increase~~readable ofby ~~$10,000~~industry instandard ~~other revenue~~software, ~~and an increase of $10,000 in bad debt, which is classified~~ as asource ~~part~~documents ofor ~~revenue.~~historical ~~The~~filings ~~majority of the overall increase was due to higher reimbursements from common area maintenance~~ and ~~unbilled~~accounting ~~recoveries from the prior year.~~records;

~~Expenses~~• ~~from~~ceased ~~Operations~~daily managerial responsibilities without documentation of key processes and communicating the status of incomplete items;

~~Our~~• ~~operating~~neglected ~~expenses~~routine ~~were~~proper ~~approximately~~maintenance ~~$4,009,000 for the six months ended June 30, 2022 compared to approximately $3,922,000 for the six months ended June 30, 2021, an increase~~ of approximately $87,000, or 2%. The overall increase was primarily due to increases in miscellaneous repairs, contract services, and electricity usage at our properties, offset by a decrease in real estate taxes for the ~~six~~Real ~~months~~Estate ~~ended~~Assets ~~June~~while ~~30,~~under ~~2022,~~their ~~compared~~management; ~~to the six months ended June 30, 2021. The primary components of operating expenses are detailed in the table below (in thousands):~~and

	Six Months Ended June 30,
	2022		2021		Change			% Change
Depreciation and amortization	$	990	$	999	$	(9	)		(1	)%
Operating and maintenance		1,623		1,454		169			12	%
Real estate taxes		741		802		(61	)		(8	)%
General and administrative		372		383		(11	)		(3	)%
Management fees		283		284		(1	)		0	%
Total operating expenses	$	4,009	$	3,922	$	87			2	%

•

left the Real Estate Assets with numerous tenant life and health safety concerns requiring our immediate attention to correct; specifically, infestations, long ignored roof leaks causing property and mold damage, and electrical, water and security systems neglect.

~~Comparison~~Within ofdays after the ~~Three~~termination ~~Month~~of ~~Periods~~the ~~Ended June~~management 30agreements by Whitestone, ~~2022~~we internalized management and ~~2021~~began to manage our Real Estate Assets and our business without an external management company. Our board of trustees immediately hired an experienced executive management team with prior experience working with our property portfolio and our leadership team quickly began:

~~Leasing~~• ~~Activity~~recruiting and engaging consultants and employees for maintenance and leasing of our Real Estate Assets;

~~For~~• evaluating the ~~three~~life ~~month~~safety ~~period~~and ~~ended~~deferred ~~June~~maintenance ~~30,~~issues ~~2022,~~that wearose ~~executed~~and ~~15 leases~~were ~~for~~inadequately aaddressed, ~~total~~if ~~lease~~at ~~value of $700~~all,~~000~~ ~~compared~~by toWhitestone 23during ~~leases~~the ~~for~~term ~~a total lease value~~ of ~~$1.9 million for~~ the ~~three~~management ~~month period ended June 30, 2021.~~agreements;

21 • communicating with tenants and vendors regarding the change in management. The abrupt termination of the management agreements caused some confusion among tenants and vendors regarding payment issues and responsibility to take actions. We learned that many tenants were not pleased with the services they received from Whitestone during the term of the management agreements and have tried to assure the tenants that the internalization of management will lead to improvements for them. In addition, we began transitioning vendor relationships from entangled transactions with Whitestone properties arising from arrangements and contracts Whitestone entered into during the term of the management agreements. For example, on August 19, 2022, Whitestone dropped our properties from their insurance, and we have obtained a separate insurance and risk management package; and

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•

evaluating the redevelopment plans available to us that were developed but left dormant during the term of the management agreements. Whitestone has neglected to provide us with all of the redevelopment plans for our property portfolio.

In addition, the internalization process has involved selecting an enterprise resource planning, or ERP, system of our own. Our newly assembled leadership team quickly engaged consultants (a) to assist us in implementing the newly selected ERP system, (b) to analyze, reconcile and transform historical data obtained from Whitestone into a usable format for our new system and (c) to design procedures for regular accounting closes and preparation of accurate and reliable financial statements for our shareholders and other stakeholders. While this process has been underway, we have been directing the maintenance and operations of the Real Estate Assets and taking steps available to us to address the significant deferred maintenance and neglect of our assets which occurred while under Whitestone’s management.

As a result of Whitestone’s unwillingness to have a collaborative and planned transition, we were unable to timely file our annual and quarterly reports with the SEC. We are continuing to rebuild our accounting and financial reporting system and intend as soon as possible to resume timely filing of our current, quarterly and annual reports under the Exchange Act and to file any delinquent reports. We cannot provide assurance at this time as to if or when we will be able to complete such filings.

Lawsuit, Termination of Management Agreements and Bankruptcy Proceedings

On July 12, 2022, we were named as a defendant in a lawsuit filed in the Court of Chancery of the State of Delaware by Whitestone OP. The suit challenges our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

Based upon various issues, including those discussed in this report, we filed a lawsuit on September 16, 2022, in district court in Harris County, Texas, against Whitestone and related parties alleging, among other things, breach of the Pillarstone OP Amended and Restated Agreement of Limited Partnership and fiduciary duty and breach of the management agreements.

On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevents Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argues that Whitestone’s material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

Representatives of our board of trustees attempted to initiate discussions to settle these matters in August 2022 with representatives of Whitestone’s board of trustees to avoid a prolonged, expensive legal fight. However, Whitestone was not open to settling these matters at that time or the other various times since August 2022 we attempted to initiate discussions to resolve these matters.

Whitestone indicated to us its intent to cause Whitestone OP to exercise its redemption right and stated publicly that it intends to monetize its investment in Pillarstone OP. We believed that if Whitestone were to be permitted to exercise its redemption right for cash amounts, we may not have the cash available to pay such amounts and may be required to sell one or more of our Real Estate Assets to satisfy this obligation, which may cause us to sell some or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. We have stated that a redemption request would not trigger the Rights Agreement, and our board of trustees has the sole discretion to interpret the Rights Agreement. However, Whitestone OP indicated that the Rights Agreement caused them to not exercise their redemption rights and claimed damages based on the alleged decline in the value of the Real Estate Assets following their failure to exercise the redemption rights.

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Based on Whitestone’s performance under the management agreements and their public statements regarding their intentions for their interest in Pillarstone, we did not believe that Whitestone’s actions in connection with the exercise of the redemption rights would respect the rights of the holders of our common shares. The Pillarstone OP Amended and Restated Agreement of Limited Partnership expressly provides that in the event of a conflict between the interests of the limited partners (Whitestone OP as the sole limited partner) and our shareholders, we shall act in the interests of our shareholders, and we shall not be liable for monetary or other losses sustained, liabilities incurred or benefits not derived by the limited partners in connection therewith.

On July 17, 2023 and July 18, 2023, trial was held in the Delaware lawsuit. Post-trial argument in the lawsuit was held on October 18, 2023. Whitestone has asked the Delaware court to award damages of approximately $51,200,600 and post-judgement interest of $6,820,000 in the filing of its post-trial opening brief on August 28, 2023. On January 25, 2024, the Delaware court issued its opinion and determined that we breached the implied covenant of good faith and fair dealing without resolving the breach of contract or breach of fiduciary duty claims. Although Whitestone asked for monetary damages of $51,200,600 plus interest, the Delaware court declined to award damages. We disagree with the Delaware court’s ruling and are considering our options for appeal, subject to a final order being entered in the case, the outcome of various proceedings in the jointly administered bankruptcy cases described below and the decision of the plan agent in the bankruptcy cases to pursue an appeal.

On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units.

On March 4, 2024, bankruptcy cases were filed for us and Pillarstone OP, as well as Whitestone CP Woodland Ph. 2, LLC, Whitestone Industrial-Office, LLC and Whitestone Offices, LLC, the subsidiaries owning our Real Estate Assets other than Uptown Tower. The bankruptcy cases were consolidated into the jointly administered cases styled In re: Whitestone Industrial-Office, LLC, et. al., Case No. 24-30653-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, the same court as the Whitestone Uptown Tower, LLC bankruptcy case described under “—Uptown Tower” below.

The joint plan of liquidation in the bankruptcy case providing for the sale of the Real Estate Assets other than Uptown Tower and treatment of claims was confirmed in November 2024. Those Real Estate Assets were sold between October 2024 and July 2025. The plan provided for a plan agent, and Frances A. Smith was appointed plan agent in the jointly administered bankruptcy cases. The plan agent was appointed for the purposes of administering all claims in the bankruptcy cases and making distributions to holders of allowed claims and equity interests under the plan of liquidation. The plan agent’s administration of the claims may include, without limitation, and pursuant to her reasonable business judgment, investigating, prosecuting, objecting to, resolving, reconciling, compromising, litigating, administering, and making distributions on account of, the claims.

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The plan agent is not a trustee and does not participate in the management or operations of the debtors’ businesses, assets or financial affairs or the review and approval of the day-to-day operational expenses of the debtors’ business post-confirmation, unless the bankruptcy court determines cause exists for the plan agent to do so after notice and hearing.

The plan agent is entitled to receive compensation as a flat fee the amount of $10,000.00 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650.00 per hour for each additional hour of services.

We believe that the allegations in the Delaware lawsuit are without merit and intends to continue to vigorously defend against them. In addition, we intend to vigorously pursue the Texas action to seek damages from Whitestone due to its violations of the management agreements and fiduciary duties and to protect our shareholders from the further harms that Whitestone has indicated it intends to inflict on us and our shareholders. However, the outcomes of these lawsuits, including the timing of the final disposition of the lawsuits, are unpredictable, subject to the outcome of proceedings in the bankruptcy cases and the determination of the plan agent to pursue and defend claims, and could result in substantial costs to us. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on the registrant’s business, results of operations or financial condition.

Following the period covered by this report, we have sold all of our Real Estate Assets. We are considering our strategic plans based on the outcome of the proceedings in the bankruptcy cases.

Results of Operations

The following ~~provides~~discussion ~~a general comparison~~ of our results of operations ~~for~~should ~~the~~be ~~three~~read ~~month~~in ~~periods~~conjunction ~~ended~~with ~~June~~the ~~30,~~consolidated ~~2022~~financial statements and ~~2021~~notes ~~(dollars~~thereto appearing elsewhere in ~~thousands):~~this Quarterly Report.

	Three Months Ended June 30,
	2022			2021
Number of properties		8			8
Aggregate GLA (sq. ft.)		926,798			926,798
Ending occupancy rate		56	%		61	%
Total revenues	$	2,278		$	2,272
Total operating expenses		2,099			1,952
Total other expenses		202			180
Provision for income tax expense (benefit)		(12	)		(5	)
Net income		(11)			145
Less: Non-controlling interest in subsidiary		64			205
Net loss available to Common Shareholders	$	(75	)	$	(60	)

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

~~Revenues~~The ~~from~~following ~~Operations~~provides a comparison of our results of operations (dollars in thousands):

We had total revenues for the three month periods ended June 30, 2022 and 2021 of approximately $2,278,000 and $2,272,000, respectively, for an increase of approximately $6,000. The difference was comprised of a decrease of approximately $50,000 in rental revenues, an increase of $87,000 in expense reimbursements, an increase of $4,000 in other revenue, and an increase of $35,000 in bad debt, which is classified as a part of revenue. The majority of the overall increase was due to higher reimbursements from common area maintenance and unbilled recoveries from the prior year.

	Three Months Ended September 30,
	2022			2021
Number of properties		8			8
Aggregate GLA (sq. ft.)		926,798			926,798
Ending occupancy rate		54	%		59	%

Total revenues	$	2,004		$	2,381
Total operating expenses		2,676			2,040
Total other expenses		186			201
Provision for income tax expense (benefit)		172			-
Net income (loss)		(1,030	)		140
Less: Non-controlling interest in subsidiary		(1,676	)		196
Net income (loss) attributable to Common Shareholders	$	646		$	(56	)

~~Expenses from Operations~~ 37

~~Our~~ Table ~~operating expenses were approximately $2,099,000 for the three months ended June 30, 2022 compared to approximately $1,952,000 for the three months ended June 30, 2021, an increase~~ of approximately $147,000, or 8%. The overall increase was primarily due to increases in miscellaneous repairs, contract services, and electricity usage at our properties for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The primary components of operating expenses are detailed in the table below (in thousands):Contents

	Three Months Ended June 30,
	2022		2021		Change			% Change
Depreciation and amortization	$	506	$	502	$	4			1	%
Operating and maintenance		852		736		116			16	%
Real estate taxes		413		393		20			5	%
General and administrative		185		176		9			5	%
Management fees		143		145		(2	)		(1	)%
Total operating expenses	$	2,099	$	1,952	$	147			8	%

Revenues. Total revenues for the three months ended September 30, 2022 were $2.0 million as compared with $2.4 million for the same period of 2021. The decrease of $377 thousand or 16% was principally caused by a decline in occupancy rates from 58% at December 31, 2021 to 54% at September 30, 2022. T This decline was most notable at our two office buildings in the Dallas metropolitan areas. Leasing activity was adversely affected by Whitestone’s efforts in early-2022. In response, we began soliciting leasing assistance from independent brokers. Whitestone’s unexpected termination of their managerial services in August 2022 further impaired our leasing activities.

In addition, in July 2022, Whitestone terminated leases with us for approximately 30,000 square feet at four Real Estate Assets that it maintained as it acted as manager of the Real Estate Assets. This impact was particularly notable at our Uptown Tower property where Whitestone leased approximately 1,800 square feet of office space and an additional 15,822 square feet for its Cubexec executive office business. Whitestone’s lease terminations also included 8,231 square feet of space at the LBJ building for its Cubexec executive office business. As Whitestone vacated the terminated leased properties, it removed critical items needed for the Cubexec customers while requesting that we take over its agreements with those customers. We have subsequently restored the executive office offering at Uptown Tower and LBJ and worked to restore normal operations across our portfolio since Whitestone’s abrupt termination of leases and management services. We also believe that Whitestone used other portions of our Holly Hall and Corporate Park Northwest properties for their storage and for other Whitestone purposes without paying rent or maintaining those areas in suitable condition for third party tenants, also impacting our occupancy before and after the termination of Whitestone’s management services.

Expenses. Our operating expenses were $2.7 million for the three months ended September 30, 2022 compared to $2.0 million for the same period of 2021, an increase of $636 thousand or 31%. The overall increase was primarily due to legal expenses incurred for the lawsuits with Whitestone and contract accounting services as we began internalizing management after Whitestone’s unexpected termination of managerial services. The primary components of operating expenses are detailed in the table below (in thousands):

	Three Months Ended September 30,
	2022		2021		Change			% Change
Depreciation and amortization	$	514	$	541	$	(27	)		-5	%
Operating and maintenance		808		759		49			6	%
Real estate taxes		445		430		15			3	%
General and administrative		770		167		603			361	%
Management fees		139		143		(4	)		-3	%
Total operating expenses	$	2,676	$	2,040	$	636			31	%

Other expenses principally include interest expense on our indebtedness. We made scheduled payments of principal and interest on our mortgage for Uptown Tower. We recognized a loss on disposal of fixed assets of $8 thousand in the 2022 period as compared with $1 thousand in the 2021 period, which is included in other expenses. We expect our operating and other expenses to increase significantly as a result of the internalization of management and lack of significant cooperation in these efforts from Whitestone, the expenses of the ongoing litigation with Whitestone, and our addressing significant life safety and deferred maintenance issues at the Real Estate Assets that occurred during Whitestone’s management of the Real Estate Assets through Whitestone’s termination of its management activities for the Real Estate Assets in August 2022.

Our effective tax rate for the three months ended September 30, 2022 and September 30, 2021 was 20% and 0%, respectively. The primary difference from the federal statutory rate of 21% in each period is related to state taxes and permanent differences for non-deductible expenses.

Noncontrolling interest in subsidiary represents the share earnings of Pillarstone OP allocable to holders of partnership interests other than us.

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

The following provides a general comparison of our results of operations (dollars in thousands):

	Nine Months Ended September 30,
	2022			2021
Number of properties		8			8
Aggregate GLA (sq. ft.)		926,798			926,798
Ending occupancy rate		54	%		59	%

Total revenues	$	6,608		$	6,843
Total operating expenses		6,685			5,962
Total other expenses		585			584
Provision for income tax expense (benefit)		167			(12	)
Net income (loss)		(829	)		309
Less: Non-controlling interest in subsidiary		(1,383	)		510
Net income (loss) attributable to Common Shareholders	$	554		$	(201	)

Revenues. We had total revenues for the nine months ended September 30, 2022 and 2021 of $6.6 million and $6.8 million, respectively, a decrease of $235 thousand, or 3%. The decrease was principally caused by a decline in average occupancy rates in the nine months ended September 30, 2022. This decline was most notable at our two office buildings in the Dallas metropolitan areas. Leasing activity was adversely affected by Whitestone’s efforts in early-2022. In response, we began soliciting leasing assistance from independent brokers. Whitestone’s unexpected termination of their managerial services in August 2022 further impaired our leasing activities.

Expenses. Our operating expenses were approximately $6.7 million for the nine months ended September 30, 2022 compared to $6.0 million the same period of 2021, an increase of approximately $723 thousand, or 12%. The overall increase was primarily due to legal expenses incurred for the lawsuits with Whitestone and contract accounting services and other costs as we began internalizing management after Whitestone’s unexpected termination of managerial services. The primary components of operating expenses are detailed in the table below (in thousands):

	Nine Months Ended September 30,
	2022		2021		Change			% Change
Depreciation and amortization	$	1,504	$	1,540	$	(36	)		-2	%
Operating and maintenance		2,431		2,213		218			10	%
Real estate taxes		1,186		1,232		(46	)		-4	%
General and administrative		1,142		550		592			108	%
Management fees		422		427		(5	)		-1	%
Total operating expenses	$	6,685	$	5,962	$	723			12	%

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Other expenses principally include interest expense on our indebtedness. We made scheduled payments of principal and interest on our mortgage for Uptown Tower. We recognized a loss on disposal of fixed assets of $8 thousand in the 2022 period as compared with $1 thousand in the 2021 period. We expect our operating and other expenses to increase significantly as a result of the internalization of management and lack of significant cooperation in these efforts from Whitestone, the expenses of the ongoing litigation with Whitestone, and our addressing significant life safety and deferred maintenance issues at the Real Estate Assets that occurred during Whitestone’s management of the Real Estate Assets through Whitestone’s termination of its management activities for the Real Estate Assets in August 2022.

Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 25% and 4%, respectively. The primary difference from the federal statutory rate of 21% in each period is related to state taxes and permanent differences for non-deductible expenses.

Noncontrolling interest in subsidiary represents the share earnings of Pillarstone OP allocable to holders of partnership interests other than us.

Liquidity and Capital Resources

~~Cash~~As ~~Flows~~of September 30, 2022, our unrestricted cash resources were $5.3 million.

AsSignificant ofsources ~~June~~and ~~30,~~uses ~~2022,~~of ~~our unrestricted~~ cash ~~resources~~during ~~were approximately $4,796,000. We are dependent on cash generated by our ownership of~~ the ~~eight~~nine ~~Real~~months ~~Estate~~ended ~~Assets~~September to30, ~~meet our liquidity needs~~2022.

22 Sources of cash:

●

Cash from operating activities was $1.3 million, which included $349 thousand from the primary components of our working capital (receivables, prepaid expenses, accounts payable, security deposits).

●

We received $817 thousand of insured loss reimbursements for elevator damage at Uptown Tower.

Uses of cash:

●

Capital expenditures were $1.4 million principally for elevator repairs at Uptown Tower and other health and safety needs at our properties.

●

We made repayments of notes payable totaling $638 thousand.

We expect our cash needs to increase significantly during the rest of 2022 and 2023 as a result of the internalization of management and lack of significant cooperation in these efforts from Whitestone, the expenses of the ongoing litigation with Whitestone, and our addressing significant life safety and deferred maintenance issues at the Real Estate Assets that occurred during Whitestone’s management of the Real Estate Assets through Whitestone’s termination of its management activities for the Real Estate Assets in August 2022.

Expense Reimbursements. Under the Pillarstone OP Amended and Restated Agreement of Limited Partnership, Pillarstone OP is responsible for all expenses relating to its organization, the ownership of its assets and its operations. It is also responsible for the administrative and operating costs and expenses incurred by Pillarstone Capital REIT as its General Partner, including, without limitation, all expenses relating to the General Partner’s (i) continued existence and subsidiary operations, (ii) offerings and registration of securities, (iii) preparation and filing of any periodic or other reports and communications required under federal, state or local laws and regulations, (iv) compliance with laws, rules and regulations promulgated by any regulatory body, and (v) operating or administrative costs incurred in the ordinary course of business on behalf of Pillarstone OP; provided, however, that such costs and expenses shall not include any administrative or operating costs of the General Partner attributable to assets owned by the General Partner directly and not through Pillarstone OP or its subsidiaries. We have no assets, activities or operations other than those related to Pillarstone OP.

Indemnification provisions within the Pillarstone OP Amended and Restated Agreement of Limited Partnership also provide for indemnification by Pillarstone of all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys fees and other legal fees and expenses), judgments, fines, settlements and other amounts, arising from or in connection with any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, relating to Pillarstone OP or the General Partner or the operation of, or the ownership of property in which an indemnitee may be involved, or is threatened to be involved, unless a court of competent jurisdiction establishes that indemnification is not permitted under the circumstances described in the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

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~~During~~These ~~the~~reimbursement ~~six months~~provisions ~~ended~~have ~~June~~provided ~~30,~~us ~~2022,~~with ~~the~~critical ~~Company's~~sources of cash ~~balance~~and ~~decreased~~liquidity byto ~~$410,000~~maintain ~~from~~our ~~$5,206,000~~operations. atFollowing ~~December~~Whitestone’s ~~31,~~abrupt ~~2021~~termination toof ~~$4,796,000~~managerial atservices ~~June~~to 30Pillarstone OP, ~~2022.~~we ~~This~~have ~~decrease~~incurred insignificant ~~cash~~costs ~~was~~to ~~due~~internalize tomanagement, ~~cash~~and ~~provided~~to ~~by operating~~select ~~activities~~and ofimplement ~~approximately~~an ~~$608,000,~~enterprise-wide ~~cash~~system ~~used~~of inour ~~investing~~own. ~~activities~~We ofhave ~~approximately~~also ~~$700,000~~incurred ~~and~~substantial ~~cash~~legal ~~used~~costs in ~~financing~~our ~~activities~~litigation ofwith ~~approximately $318,000~~Whitestone.

~~During~~We ~~the first quarter of 2022, Pillarstone Capital REIT (“Pillarstone REIT”)~~ determined that itWhitestone, ~~should~~under ~~be reimbursed for its operating and administrative expenses from Pillarstone OP on a historical and ongoing basis in accordance with~~ the ~~Pillarstone~~property OPmanagement ~~operating~~agreements ~~partnership agreement~~ in ~~which~~effect ~~Pillarstone~~until ~~REIT~~August is2022, ~~the~~was ~~general~~not ~~partner~~making ~~and~~appropriate ~~Whitestone OP is the limited partner. Whitestone and Whitestone OP contested the~~ reimbursement of ~~expenses of approximately $1.8 million for~~ the ~~years~~General ~~ended~~Partner’s ~~2017~~operating ~~through 2021~~ and ~~Pillarstone~~administrative ~~REIT~~expenses ~~intends to pursue the reimbursement~~ from Pillarstone OP. ~~The~~During ~~funds~~the ~~are~~first inquarter ~~bank accounts currently controlled by affiliates~~ of ~~Whitestone and Whitestone OP pursuant to Pillarstone OP management agreements with those Whitestone affiliates~~2022, ~~and~~we ~~the~~recorded ~~parties are in the process of transitioning the accounts to Pillarstone's control~~$1.8 ~~For~~million ~~financial~~as ~~reporting purposes, Pillarstone REIT and Pillarstone OP report on a consolidated basis, therefore, the~~ reimbursement of ~~Pillarstone REIT's~~ expenses ~~would~~for ~~not change net income but only~~ the ~~allocations~~years ~~between~~ended ~~controlling~~2017 ~~and~~through ~~noncontrolling interests~~2021. ~~For~~We ~~the~~recorded ~~three~~reimbursements months ended March 31, 2022, Pillarstone OP reimbursed Pillarstone REIT in May 2022 approximately $117,000 for a portion of operating and administrative expenses and Pillarstone REIT will pursue reimbursement from Pillarstone OP ~~for~~totaling ~~the remaining amount of approximately~~ $~~59,000~~487 ~~that~~thousand ~~Whitestone~~during ~~and Whitestone OP have contested. For~~ the ~~three~~nine months ended ~~June~~September 30, 2022, ~~Pillarstone~~for ~~determined approximately $95,000 of its~~ operating and administrative expenses ~~should~~incurred ~~be reimubursed by Pillarstone OP, of which Whitestone and Whitestone OP contested approximately $62,000. Pillarstone OP will reimburse Pillarstone approximately $33,000 for the uncontested expenses~~ in ~~the third quarter of~~ 2022 ~~and Pillarstone will pursue the contested expenses based on the provisions in the Amended and Restated Agreement of Limited Partnership~~.

The reimbursements initially reported in our Quarterly Reports on Forms 10-Q for the periods ended March 31, 2023 and June 30, 2023 were substantially offset by reserves totaling $1.9 million because the amounts were disputed by Whitestone. In addition, while in control of the bank accounts, Whitestone refused to transfer the reimbursements as directed by the General Partner. As the manager responsible for all of our day-to-day operations prior to August 2022, Whitestone maintained financial records and access to all of our cash balances. The reserves were necessary then in recognition that significant efforts, including litigation, may have been necessary to collect these amounts.

~~When~~Following ~~Pillarstone~~Whitestone’s ~~REIT~~termination ~~made its determination for reimbursement~~ of ~~its operating and administrative expenses from Pillarstone OP for~~ the ~~years~~management ~~ended~~agreements ~~2017~~in ~~through~~August ~~2021~~2022, ~~Whitestone~~we ~~and~~internalized ~~Whitestone~~management OPof ~~determined~~the ~~Whitestone~~Real OPEstate ~~should~~Assets. beThis ~~reimbursed~~includes ~~for~~maintenance ~~construction and lease commissions~~ of ~~approximately~~our ~~$1.4~~financial ~~million~~records ~~that~~and itdirect ~~paid~~access onto ~~behalf~~all of ~~Pillarstone~~our OPcash ~~for 2017 and 2018~~balances. ~~Pillarstone~~Based ~~REIT~~on ~~and~~this ~~Pillarstone OP requested additional information from Whitestone~~ and ~~Whitestone~~our OPrights ~~for~~to ~~these~~the ~~expenditures.~~full ~~If any~~ reimbursement isas ~~made~~provided toby ~~Whitestone~~the ~~OP, then~~ Pillarstone OP ~~would~~Amended ~~have less cash available for operations~~ and ~~distributions~~Restated toAgreement ~~its~~of ~~partners~~Limited ~~and~~Partnership, ~~Pillarstone~~we ~~OP’s~~reversed ~~investment~~the ~~account~~reserves ~~with~~in ~~Whitestone~~August ~~OP would be reduced~~2022.

~~Our~~Whitestone ~~ability~~has notified us that they will contest some or all of these reimbursements. We intend to ~~access~~vigorously ~~the~~defend ~~capital~~these ~~markets~~reimbursements ~~will~~as bethey ~~dependent~~are onpermitted aunder ~~number~~provisions of ~~factors,~~the ~~including~~Pillarstone ~~general~~OP ~~market~~Amended ~~conditions~~ and ~~market~~Restated ~~perceptions~~Agreement ~~about~~of ~~our~~Limited ~~Company~~Partnership.

~~Future~~For ~~Obligations~~financial reporting purposes, Pillarstone REIT and Pillarstone OP report on a consolidated basis, therefore, the reimbursement of our expenses does not change net income but only the allocations between controlling and noncontrolling interests.

~~None~~Whitestone Claim for Expenses. After we notified Whitestone of the $1.8 million reimbursement required from Pillarstone OP, Whitestone and Whitestone OP made a claim to Pillarstone and Pillarstone OP to be reimbursed for construction and lease commission expenditures of $1.4 million paid by Whitestone OP on behalf of Pillarstone OP during 2017 and 2018. Pillarstone requested additional information for the $1.4 million expenditures to determine if any of the items claimed should have been prorated between Pillarstone OP and Whitestone OP in our transaction with Whitestone and Whitestone OP on December 8, 2016 for the initial acquisition of the Real Estate Assets. These expenditures were recorded on Pillarstone OP in 2017 and 2018 as an increase in the Whitestone OP limited partner investment account and as assets of Pillarstone OP that have been depreciated and amortized to expense over their useful lives. The amount due Whitestone OP for these expenditures, if any, has not been determined. If Pillarstone OP reimburses any amounts to Whitestone OP, the payment would reduce the Whitestone OP limited partner investment account.

~~Long~~Indebtedness. The ~~Term~~Company’s ~~Liquidity~~indebtedness at September 30, 2022 is presented in Item 8, “Financial Statements – Note 7 – Debt” and ~~Operating~~our ~~Strategies~~lease obligations are presented in Item 8, “Financial Statements—Note 4 – Leases.”

~~Historically~~At September 30, we2022, ~~have~~Whitestone ~~financed~~Uptown ~~our~~Tower, ~~long~~LLC, ~~term~~Pillarstone ~~capital~~OP’s ~~needs~~subsidiary that owns the Uptown Tower office building, ~~including~~was ~~acquisitions~~the borrower under a loan agreement. The Uptown Tower office building was subject to a mortgage under the loan agreement. The mortgage debt is guaranteed by Whitestone OP. This mortgage is an obligation of Whitestone Uptown Tower, asLLC, ~~follows:~~a subsidiary included in our consolidated financial statements. Neither Pillarstone Capital REIT nor Pillarstone OP had any obligation or guarantee of this indebtedness nor did any of our other properties collateralize this indebtedness.

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As of September 30, 2022, the borrower was not in compliance with loan covenants requiring timely filing of financial information to the lender for mortgage loan.

In July 2023, Rialto Capital Advisors, LLC, the special servicer for the mortgage loan, implemented a cash sweep and began to seize the funds from the operations of the Uptown Tower property under the cash management agreement relating to the mortgage loan. Prior to Rialto Capital Advisors, LLC’s seizing the funds from those operations, those funds had been used for the operation and maintenance of the Uptown Tower property, with excess funds used for the operations of Pillarstone OP and the General Partner. We did not have an alternate source of funds for the operation of Uptown Tower.

On August 3, 2023, we received a notice of the default of the mortgage loan from counsel for the lender and Rialto Capital Advisors, LLC. The default notice asserted non-monetary defaults resulting from Whitestone’s failure to comply with the loan agreement in connection with the Contribution Agreement in 2016. The default notice also alleged a non-monetary default caused by Whitestone’s termination of its management agreement for Uptown Tower in August 2022.

As the 2016 alleged defaults occurred while Whitestone was in control of all loan parties and we believe Whitestone caused the 2022 default through its unilateral termination of the management agreement for Uptown Tower, we are not in a position to agree with or dispute the determination of the alleged defaults or Whitestone OP’s liability under its guaranty, or any further effect they may have on the borrower or the Uptown Tower property.

The borrower had requested disbursements of capital and operating expenditures from Rialto Capital Advisors, LLC under the terms of the loan agreement in August 2023 and September 2023, but Rialto Capital Advisors, LLC did not release the funds and indicated that it did not intend to release funds or reverse the cash sweep to permit the funding of the operations and leasing of Uptown Tower.

The mortgage loan matured on October 1, 2023. The registrant and the borrower had been working to extend the maturity date and to find new financing or a buyer for the Uptown Tower property. When Whitestone learned of our negotiations with Rialto Capital Advisors, LLC to attempt to resolve this issue and believing we were intending to abandon the building, it filed a motion with the Delaware Court of Chancery asking the court for an order declaring that we shall not (a) stop managing the Uptown Tower, (b) “hand the keys” to Uptown Tower to the lender, or (c) otherwise abandon the Uptown Tower, which the court granted on a temporary basis on September 22, 2023. On October 19, 2023, Whitestone objected to a proposed sale of the Uptown Tower property under the Status Quo Order issued by the court in the previously disclosed lawsuit Whitestone OP instituted against us in the Delaware Court of Chancery.

On October 24, 2023, the lender delivered a notice of foreclosure sale to the borrower providing notice that, among other things, as of the maturity date, the borrower failed to repay all amounts due under the note, and making a demand on (1) the borrower and all persons and entities obligated on the promissory note evidencing the mortgage loan (except to the extent that the obligation is expressly limited by written contract or applicable law) for payment in full of the entire indebtedness, and on (2) the borrower for payment of rents and proceeds of any rents to which the lender is entitled under the mortgage loan documents and Texas Property Code chapter 64, Assignment of Rents to Lienholder. The notice of foreclosure sale also included a notice regarding the planned foreclosure sale of Uptown Tower on December 5, 2023.

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On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated but that Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

On January 3, 2024, Rialto Capital Advisors, LLC provided a preliminary estimate of the payoff amounts for the Uptown Loan as of December 4, 2023. The estimated total amount due was listed as approximately $21.5 million, which included an outstanding principal balance of approximately $14.4 million, note interest of approximately $242,000 and default interest of approximately $6.6 million. In addition, Rialto was also holding approximately $2.6 million of trapped cash, escrows and reserves under the mortgage loan, which the borrower needed to operate the Uptown Tower property and pay its obligations, including then-upcoming property taxes. On January 31, 2024, the lender sued Whitestone OP to enforce Whitestone OP’s guaranty of the mortgage loan.

In June 2024, Whitestone Uptown Tower, LLC and Whitestone OP each settled with the lender. Whitestone Uptown Tower entered into a loan agreement with American Bank, N.A. for a loan amount of up to $1,500,000, secured by Uptown Tower and all of the other assets of Whitestone Uptown Tower. Whitestone Uptown Tower paid approximately $1.1 million to the prior lender, and the prior lender retained approximately $2.2 million of trapped cash and escrows from the cash sweep and the approximately $13.6 million mistakenly sent to it by Whitestone OP in satisfaction of the prior mortgage loan.

The plan of reorganization in the bankruptcy case, providing for the sale of Uptown Tower and treatment of claims, was confirmed in July 2024. We sold Uptown Tower in July 2025 for a purchase price of $20 million, or $17.3 million after deductions, closing costs and commissions and paid off the American Bank, N.A. indebtedness. We are holding approximately $13.6 million of the sale proceeds representing funds Whitestone OP mistakenly paid to the prior mortgage lender for Uptown Tower when it attempted to pay off the mortgage loan without informing us and without authority to do so on Whitestone Uptown Tower, LLC’s behalf. We are currently disputing the treatment and timing of repayment of the $13.6 million to Whitestone OP in the Whitestone Uptown Tower bankruptcy case.

In addition to the mortgage loan, we have approximately $198,000 of convertible notes payable and corresponding accrued interest of approximately $128,000 as of September 30, 2022. The convertible notes payable can be converted by the noteholders into Common Shares at the rate of $1.331 per Common Share at any time. At maturity or when the Company chooses to call the convertible notes payable, the noteholders have the option to receive cash plus accrued interest or convert the convertible notes payable into Common Shares at $1.331 per Common Share. The commencement of our bankruptcy case constituted an event of default under the notes, pursuant to which all principal and accrued interest became automatically and immediately due and payable. Any repayment of the convertible notes will be determined under our plan of liquidation and bankruptcy court proceedings.

At September 30, 2022, the reported net equity in Whitestone Uptown Tower, LLC was $4.9 million.

Long Term Liquidity and Operating Strategies.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. We have incurred significant losses since the year ended September 30, 2020 and have an accumulated deficit of approximately $23.4 million as of September 30, 2022 and need to raise substantial amounts of additional funds to meet our obligations and afford us time to implement our business plan and resume profitable operations.

We worked diligently to restore normal operations and leasing activities following Whitestone’s unanticipated termination of its managerial services. Many of Pillarstone’s actions were affected by a lack of usable information being made available to it by Whitestone on a timely basis. Prior to receiving the termination notice, we had anticipated an orderly transition of the management of the Real Estate Assets over an appropriate timeframe, particularly as Whitestone OP owns 81.4% of Pillarstone OP as a non-controlling limited partner. We believe the management functions as operated by Whitestone were deeply integrated with Whitestone’s management functions for its own business and have been difficult, expensive, and time-consuming to separate, causing material adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity and prospects. As a result, Whitestone did significant damage to us by its intentional actions. In addition, our litigation with Whitestone has been and is expected to continue to be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of these proceedings are difficult to predict. As a result, future adverse rulings, settlements, or unfavorable developments could result in charges that could have a material adverse effect on our business, results of operations or financial condition.

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We are dependent on cash generated by our ownership of the eight Real Estate Assets to meet our liquidity needs. Historically, we have financed our long-term capital needs, including acquisitions, as follows:

•

borrowings from new loans;

•

additional equity issuances of our common and preferred shares and operating partnership units; and

•

proceeds from the sales of our Real Estate Assets.

~~From~~We ~~2006~~have ~~until~~been ~~December~~developing ~~2016,~~strategies for the ~~Company~~Real ~~continued~~Estate ~~its~~Assets ~~existence~~in asorder ato ~~corporate~~create ~~shell~~value ~~filing~~for ~~its~~the ~~periodic~~enterprise ~~reports~~and our shareholders and selling assets to pay off some of our debt. To implement the strategy to create value with the ~~SEC~~Real soEstate ~~that~~Assets, itadditional ~~could~~capital will need to be ~~used~~raised. ~~for~~Our ~~future~~ability ~~real~~to ~~estate~~access ~~transactions~~the orcapital ~~sold~~markets towill ~~another~~be ~~company.~~dependent ~~During~~on ~~this~~a ~~time~~number of factors, ~~the~~including general market conditions and market perceptions about our Company. ~~was~~There ~~funded~~can bybe ~~its~~no ~~trustees~~assurance ~~who~~that ~~contributed~~we ~~$500,000~~will inbe ~~exchange~~able ~~for~~to ~~125~~raise capital,~~000~~ ~~Preferred~~obtain Cdebt ~~Shares~~financing, ~~and~~or ~~$197~~improve operating results sufficiently to continue as a going concern,~~780~~ if at all. The consolidated financial statements included in ~~exchange~~this ~~for~~report ~~convertible~~do ~~notes~~not ~~payable~~include any adjustments that might result from the outcome of this uncertainty.

~~Subsequent~~Interest toRates ~~the Acquisition, Pillarstone has been developing strategies for the Real Estate Assets in order to create value for the enterprise~~ and ~~our shareholders and selling assets to pay off some of its debt. To implement the strategy to create value with the Real Estate Assets, additional capital will need to be raised.~~Inflation

~~Current~~We ~~Tax~~were ~~Status~~not significantly affected by rising interest rates during the periods presented in this report due primarily to having 100% of our debt with a fixed rate as of September 30, 2022. Any new indebtedness may be at higher rates than the 4.97% base rate of interest under the loan agreement, plus the default rate of interest, which is 5% above the interest rate under the loan agreement. For example, the mortgage loan with American Bank, N.A. that replaced the prior loan for Uptown Tower bears interest at the WSJ Prime Rate (as defined in the loan agreement) plus 7.5%. If we are not able to incur indebtedness on favorable terms to us, our business, financial condition, results of operations, or cash flows could be materially adversely affected.

AsWe anticipate that the majority of ~~June~~our ~~30,~~leases ~~2022~~will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and ~~December~~will ~~31,~~contain ~~2021,~~provisions that we ~~had~~believe ~~net~~will ~~deferred~~mitigate ~~tax~~the ~~liabilities~~effect of ~~approximately~~inflation. ~~$11~~In addition,~~000~~ ~~and~~many ~~$36~~of our leases are for terms of less than five years,~~000,~~ ~~respectively~~which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. AsLeases of ~~June~~longer-term ~~30,~~durations ~~2022,~~or which include renewal options that specify a maximum rate increase may result in below-market lease rates over time if we ~~have~~do annot ~~operating~~accurately ~~loss~~estimate ~~carryforward~~inflation or market lease rates. Provisions of ~~approximately~~our ~~$139~~leases designed to mitigate the risk of inflation and unexpected increases in market lease rates,~~000~~ ~~available~~such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to bebelow-market ~~carried~~lease rates on a significant number of our properties pursuant to ~~future~~long-term ~~periods~~leases and our operating and other expenses increase faster than anticipated, our business, financial condition, results of operations, or cash flows could be materially adversely affected.

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The income tax expense (benefit) included in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 was comprised of the following components (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Federal	$	(19)		$	(17	)	$	(24	)	$	(35	)
Texas franchise tax		7			12			19			23
Provision for income tax expense (benefit)	$	(12	)	$	(5	)	$	(5	)	$	(12	)

Interest Rates

The Company was not significantly affected by interest rates during the periods presented in this report due primarily to the Company having approximately 100% of its debt with fixed rates as of June 30, 2022.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

~~Application of~~ Critical Accounting Estimates

Our ~~condensed~~ consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. The following section is a summary of certain estimates that both require our most subjective judgment and are most important to the presentation of our financial condition and results of operations. It is possible that the use of different estimates or assumptions in making these judgments could result in materially different amounts being reported in our ~~condensed~~ consolidated financial statements.

Revenue recognition. 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. For the three months ended June 30, 2022, we did not have a straight-line rent reserve adjustment. For the six months ended June 30, 2022, we had a straight-line rent reserve adjustment of $1,000 for the conversion of one tenant to cash basis as a result of our COVID-19 collectibility analysis. For the three and six months ended June 30, 2021, we had a straight-line rent reserve adjustment of $1,000 for the conversion of one tenant to cash basis as a result of our COVID-19 collectibility analysis. 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. 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 and recoveries into a single line item, Rental, within the condensed consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured. 44

Acquired Properties and Acquired Lease Intangibles. We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values at the time of purchase. Identifiable intangibles include amounts allocated to acquired out-of-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.

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Revenue recognition. 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. 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 non-lease components in lease contracts, which includes combining base rent and recoveries into a single line item, Rental, within the consolidated statements of operations. We recognize lease termination fees in the year that the lease is terminated, and collection of the fee is reasonably assured.

Impairment. We review our properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value. There was no impairment of our Real Estate Assets during the periods presented in this Quarterly Report.

Accrued Rents and Accounts Receivable. Included in accrued rent 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. 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.

Income taxes. We have not elected to be taxed as a REIT for federal income tax purposes. As such, we account for income taxes using the asset and liability method under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We are also subject to certain state and local income, excise and franchise taxes. The provision for state and local taxes has been reflected in the provision for income taxes in the consolidated statements of operations and has not been separately stated due to its insignificance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including ensuring that such information is accumulated and communicated to its management, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were not effective as of September 30, 2022 (the end of the period covered by this Quarterly Report).

~~Based~~Material onWeaknesses. ~~such~~We ~~evaluation, our principal executive and financial officers~~ have ~~concluded~~identified ~~that such disclosure controls and procedures were effective as of June 30, 2022 (~~the ~~end~~following ofmaterial ~~the period covered by this Quarterly Report).~~weaknesses:

●

we did not design and implement logical access controls for certain financially relevant systems. Business processes, both automated and manual, that are dependent upon the information derived from those financially relevant systems were also determined to be ineffective as a result of such deficiency; and

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●

business process controls across our financial reporting processes were not effectively designed and implemented to properly address the risk of material misstatement, including controls without proper segregation of duties between preparer and reviewer and key management review controls.

Management has concluded that our internal control over financial reporting was not effective to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

We believe that the circumstances leading to this conclusion is a result of the lack of an orderly transition of the management services provided by Whitestone prior to its abrupt termination of our management agreements in August 2022.

The services provided by Whitestone under the management agreements were extensive and material to the operation of our business and our accounting and financial reporting. The management functions, as operated by Whitestone, were deeply co-mingled with Whitestone’s management functions for its own business and have been difficult, expensive and time-consuming to separate. As a result, we were materially and adversely affected by Whitestone’s abrupt termination of the management agreements, incomplete and inadequate delivery of books and records and other materials required to be delivered under the management agreements, and the failure to provide for an appropriate transition. We had no way to continue our accounting and financial reporting responsibilities as a public company. Further, for several months following the abrupt termination of services by Whitestone, we were unable to systematically invoice our tenants and pursue collection of delinquent accounts as an independent, internally managed company. In addition, several vendor service contracts were tied to Whitestone and the pricing of services was based on the combination of Pillarstone and Whitestone. The transition caused us to obtain separate services, which caused disruption to our business and higher costs. In other cases, Whitestone obligated us to long-term contracts for essential services that we cannot easily replace.

Specifically, Whitestone:

•

removed our access to all operations, accounting, and financial reporting systems intentionally causing harm to landlord-tenant relations at all of our properties. They immediately ceased daily accounting responsibilities and exported our general ledger history into disparate and unorganized Microsoft Excel files;

•

copied more than 27,000 files into poorly organized and incomplete electronic folders containing Adobe PDF, Microsoft Excel and other file formats not easily available, and in some situations not readable by industry standard software, as source documents or historical filings and accounting records;

•

ceased daily managerial responsibilities without documentation of key processes and communicating the status of incomplete items;

•

neglected routine proper maintenance of the Real Estate Assets while under their management; and

•

As a result of Whitestone’s unwillingness to have a collaborative and planned transition, we were unable to timely file our annual and quarterly reports with the SEC.

This conclusion does not relate to periods prior to Whitestone’s termination of its management functions under the management agreements.

Remediation Plans. These material weaknesses arose in large part because of Whitestone’s abrupt termination in August 2022 of managerial services they provided. At the date their managerial services ceased, we did not have our own personnel, processes or systems needed for proper accounting and financial reporting. While we immediately began to address these needs after Whitestone’s termination, we were unable to complete the design and implementation of appropriate internal control over financial reporting before September 30, 2022. These material weaknesses did not result in a material misstatement of our consolidated financial statements for the periods presented.

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We have been working diligently on the process of designing and implementing effective internal control measures to remediate the reported material weaknesses. Our efforts include implementing a new enterprise-wide system that will help us in reducing reliance on manual processes and spreadsheets supporting the financial statements. This implementation was completed in 2023. We are using contract personnel for specialized accounting and financial reporting roles.

While we believe that these efforts will improve our internal control over financial reporting, our remediation efforts are ongoing and will require validation and testing of the design and operating effectiveness of internal controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the remaining material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

~~There~~We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. The Company’s efforts to internalize management, establish new accounting and financial reporting processes and implement new systems have ~~been~~resulted noin ~~significant~~changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Except as otherwise described herein, there were no changes in our internal control over financial reporting that occurred during the ~~three~~period ~~months~~covered ~~ended~~by ~~June~~this ~~30,~~Quarterly ~~2022~~Report 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

On July 12, 2022, after the quarterly period ended June 30, 2022, Pillarstone was named as a defendant in a lawsuit filed in the Court of Chancery of the State of Deleware by Whitestone OP. The lawsuit is described in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations", under the heading "Lawsuit and Termination of Management Agreements". We may from time to time become a party to legal proceedings and claims that arise in the ordinary course of our business. These matters are generally covered by insurance. While the frequency and resolutions of any ~~such~~ordinary course matters cannot be predicted with certainty, we believe that occurrence and outcomes of these ordinary course matters will not have a material effect on our financial position, results of operations or cash flows. Other legal matters are discussed below.

Delaware Case

On July 12, 2022, we were named as a defendant in a lawsuit by Whitestone OP in a lawsuit styled Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW, in the Court of Chancery of the State of Delaware. The suit challenges our rights agreement, dated as of December 27, 2021 (as the same may be amended from time to time, the “Rights Agreement”), between us and American Stock Transfer & Trust Company, LLC, as rights agent, and claims that our adoption of the Rights Agreement breached the Pillarstone OP Amended and Restated Agreement of Limited Partnership, and that we breached our fiduciary duties as general partner of Pillarstone OP to Whitestone OP and breached the implied covenant of good faith and fair dealing under the Amended and Restated Agreement of Limited Partnership.

On July 21, 2022, Whitestone OP filed a Motion to Preserve the Status Quo in the Delaware lawsuit requesting broad restrictions on our ability to conduct our business, including buying properties, enforcing the Rights Agreement, incurring expenses, or engaging in transactions. The Status Quo Order also prevents Whitestone OP from exercising its right under the Pillarstone OP Amended and Restated Agreement of Limited Partnership to require Pillarstone OP to redeem its OP Units. Our amended petition in the Texas lawsuit argues that Whitestone’s material breaches of contract and fiduciary duty operate to discharge and/or excuse any obligation to perform under the redemption provisions of the Pillarstone OP Amended and Restated Agreement of Limited Partnership.

Whitestone indicated to us its intent to cause Whitestone OP to exercise its redemption right and stated publicly that it intends to monetize its investment in Pillarstone OP. We believed that if Whitestone were to be permitted to exercise its redemption right for cash amounts, we may not have the cash available to pay such amounts and may be required to sell one or more of our Real Estate Assets to satisfy this obligation, which may cause us to sell some or all of our Real Estate Assets at below fair market value and otherwise have a material adverse effect on our liquidity and financial condition and our ability to operate and improve our Real Estate Assets. We have stated that a redemption request would not trigger the Rights Agreement, and our board of trustees has the sole discretion to interpret the Rights Agreement. However, Whitestone OP indicated that the Rights Agreement caused them to not exercise their redemption rights and claimed damages based on the alleged decline in the value of the Real Estate Assets following their failure to exercise the redemption rights.

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On January 25, 2024, Whitestone OP delivered its notice of redemption for all but one of its OP Units.

Houston Case

On September 16, 2022, we filed a lawsuit styled Pillarstone Capital REIT and Pillarstone Capital REIT Operating Partnership LP v. Whitestone TRS, Inc., Whitestone REIT, Whitestone REIT Operating Partnership, L.P., Cause No. 2022-59478, in the District Court, Harris County, Texas, 189th Judicial District alleging, among other things, breach of the Pillarstone OP limited partnership agreement and the management agreements for the Real Estate Assets by the Whitestone defendants and breach of fiduciary duties relating to Pillarstone OP by Whitestone OP going outside the role of limited partner and harming us and Pillarstone OP. A portion of the claims in this case were also brought as an adversary proceeding by Whitestone Uptown Tower, LLC in the Uptown Tower bankruptcy case described in “—Uptown Tower” below.

Jointly Administered Bankruptcy Cases

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The plan agent is entitled to receive compensation as a flat fee the amount of $10,000.00 per month, plus reimbursement of actual, necessary expenses. If during any month the plan agent spends more than fifteen (15) hours in the performance of her duties, she will be entitled to compensation at a rate of $650.00 per hour for each additional hour of services.

Uptown Tower

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On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

~~None.~~Uptown Tower

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On December 1, 2023, Whitestone Uptown Tower, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas in the case styled In re: Whitestone Uptown Tower, LLC a/a/ Pillarstone Capital REIT Operating Partnership, Case No. 23-32832-mvl-11, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The filing of the petition constituted an event of default under the mortgage loan. Prior to the filing of the bankruptcy petition in November 2023, representatives of our board of trustees attempted to initiate discussions with representatives of Whitestone REIT’s board of trustees to address these matters and to approach Rialto Capital Advisors, LLC jointly. However, without the borrower’s knowledge or consent, Whitestone attempted to pay off the loan and grant broad releases to the lender and special servicer on behalf of the borrower, including the application of the trapped cash, escrows and reserves to the indebtedness. No Whitestone REIT entity had the authority to make such agreements on behalf of the borrower, and we have been informed that the agreement was not consummated, but Whitestone did send approximately $13.6 million to Rialto Capital Advisors, LLC pursuant to this arrangement.

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Issuance of Convertible Notes to Trustees

In November 2015, five trustees serving on the Board of Pillarstone Capital at that time loaned funds to us, each pursuant to a Convertible Note Purchase Agreement (the “Agreement”). Pursuant to an Assignment and Assumption Agreement dated as of March 29, 2019 by and between Dennis Chookaszian Revocable Trust (“Mr. Chookaszian”) and a former trustee, and a Stock Purchase Agreement dated as of March 29, 2019 by and between Mr. Chookaszian and the same former trustee, Mr. Chookaszian acquired the Agreement and assumed the rights under the Note. Another former trustee, Mr. DeVos, was a trustee in November 2015 but did not stand for re-election in 2019 and continues to own his note payable as shown in the schedule below.

The following individuals loaned the following face amounts that accrue interest at 10% per annum, which can be converted into common shares of Pillarstone Capital as of September 30, 2022, as follows:

Trustee	Face Amount		Accrued Interest		Convertible into common shares
Dennis H. Chookaszian	$	28,888	$	19,842		30,641
Daniel G. DeVos	$	47,780	$	32,818		60,554
Paul T. Lambert	$	51,112	$	35,106		64,777
James C. Mastandrea	$	52,224	$	35,870		66,186
John J. Dee	$	17,776	$	12,209		22,528
Totals	$	197,780	$	135,845		244,686

The convertible notes can be called by us after six months, at which time the noteholder can choose to receive either the amount of the note plus any accrued but unpaid interest or the number of common shares determined by dividing the amount of the note plus any accrued but unpaid interest by the conversion price of $1.331. The noteholder has the option at any time to convert the note plus any accrued but unpaid interest into common shares based on the conversion price of $1.331.

The convertible notes were issued effective November 20, 2015, had a maturity date of three years and had been extended several times. The commencement of our bankruptcy case constituted an event of default under the notes, pursuant to which all principal and accrued interest became automatically and immediately due and payable. Any repayment of the convertible notes will be determined under our plan of liquidation and bankruptcy court proceedings.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number		Exhibit Description
2.1		Whitestone Uptown Tower, LLC Second Amended Plan of Reorganization
2.2		Pillarstone Capital REIT, Pillarstone Capital REIT Operating Partnership LP, Whitestone Industrial-Office, LLC, Whitestone Offices, LLC and Whitestone CP Woodland Ph 2, LLC Fifth Amended Joint Plan of Liquidation
3.1		Articles of Amendment and Restatement of the Declaration of Trust of the Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 29, 2016 and incorporated herein by reference)
3.2		Third Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 13, 2016 and incorporated herein by reference)
10.1		Executive Compensation Agreement, dated as of January 31, 2025, by and between Pillarstone Capital REIT, Pillarstone Capital REIT Operating Partnership LP and Bradford D. Johnson
10.2		Loan Agreement, dated as of June 7, 2024, by and between American Bank, N.A. and Whitestone Uptown Tower, LLC
10.3		First Amendment to Loan, dated as of March 7, 2025, by and between American Bank, N.A. and Whitestone Uptown Tower, LLC
10.4		Second Amendment to Loan, dated as of June 7, 2025, by and between American Bank, N.A. and Whitestone Uptown Tower, LLC
10.5		Deed of Trust, dated as of June 7, 2024, by Whitestone Uptown Tower, LLC in favor of American Bank, N.A.
10.6		Promissory Note, dated as of June 7, 2024, by Whitestone Uptown Tower, LLC in favor of American Bank, N.A.
10.7		Form of Plan Agent Agreement by and among Pillarstone Capital REIT, Pillarstone Capital REIT Operating Partnership LP, Whitestone Industrial-Office, LLC, Whitestone Offices, LLC and Whitestone CP Woodland Ph 2, LLC, Whitestone REIT Operating Partnership, L.P. and Frances A. Smith
31.1		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 - Chief Executive Officer.
31.2		Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 - Chief Financial Officer.
32.1		CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002.
101		The following financial information of the Registrant for the quarter ended ~~June~~September 30, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2022 (unaudited) and December 31, 2021, (ii) Condensed Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 (unaudited), (iii) Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the three months ended March 31 and ~~June~~September 30, 2022 and 2021 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 (unaudited) and (iv) Notes to Condensed Consolidated Financial Statements (unaudited).
104		Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES

InPursuant ~~accordance~~to ~~with~~ 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.

		PILLARSTONE CAPITAL REIT
		By:	/s/ Bradford D. Johnson
Date:	~~August~~July 1231, ~~2022~~2025		Bradford D. Johnson Chief Executive Officer (Principal executive officer)

		PILLARSTONE CAPITAL REIT
		By:	/s/ Daniel P. Kovacevic
Date:	~~August~~July 1231, ~~2022~~2025		Daniel P. Kovacevic Chief Financial Officer (Principal financial and accounting officer)

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