UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September~~March 3031, ~~2012~~2013



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

For the transition period from ____________ to ____________

Commission file number 000-53966

WHITESTONE REIT OPERATING PARTNERSHIP, L.P.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		76-0594968
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



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

(713) 827-9595

(Registrant's Telephone Number, Including Area Code)

N/A

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ýYes ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ~~(§ 232.405)~~ during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ýYes ¨No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ~~(Do not check if a smaller reporting company)~~ ý Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

As of ~~November~~May 613, ~~2012~~2013, the ~~Registrant~~registrant had ~~outstanding 786~~584,~~191~~608 units of limited partnership interest held by non-affiliates. There is no established market for such units.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	1
	Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011	1
	Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	1
	Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	2
	Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2013 and 2012	2
	Consolidated Statement of Changes in Partners' Capital (Unaudited) for the Nine Months Ended September 30, 2012	4
	Consolidated Statement of Changes in Partners' Capital (Unaudited) for the Three Months Ended March 31, 2013	4
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	5
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2013 and 2012	5
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	2019
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	3732
Item 4.	Controls and Procedures.	3732

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	3833
Item 1A.	Risk Factors.	3833
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	3833
Item 3.	Defaults Upon Senior Securities.	3833
Item 4.	Mine Safety Disclosures.	3833
Item 5.	Other Information.	3833
Item 6.	Exhibits.	3833
	Signatures	3934
	Exhibit Index	4035

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except per unit data)

	September 30, 2012			December 31, 2011
	March 31, 2013			December 31, 2012
	(unaudited)
ASSETS
Real estate assets, at cost
Property	$	~~389~~436,~~280~~331		$	~~292~~409,~~360~~669
Accumulated depreciation	(5156,~~362~~600		)	(4553,~~472~~920		)
Total real estate assets	~~337~~379,~~918~~731			~~246~~355,~~888~~749
Cash and cash equivalents	82,~~339~~843			56,~~695~~544
Marketable securities	1,~~373~~705			51,~~131~~403
Escrows and acquisition deposits	54,~~539~~529			46,~~996~~672
Accrued rents and accounts receivable, net of allowance for doubtful accounts	79,~~177~~059			67,~~053~~947
Unamortized lease commissions and loan costs	4,269			3,755
Related party receivable	—			652
Prepaid expenses and other assets	1,271			975
Unamortized lease commissions and loan costs	5,025			4,160
Total assets	$	365,886		$	273,493
Prepaid expenses and other assets	2,939			2,244
Total assets	$	405,831		$	385,371
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Notes payable	$	~~167~~216,~~816~~935		$	~~127~~190,~~890~~608
Accounts payable and accrued expenses	11,~~099~~453			913,~~017~~824
Tenants' security deposits	23,~~846~~151			23,~~232~~024
Dividends and distributions payable	5,027			3,647
Distributions payable	5,028			5,028
Total liabilities	~~186~~236,~~788~~567			~~142~~212,~~786~~484
Commitments and contingencies:	—			—
Partners' Capital:
General Partner, 16,718,796 and 11,317,042 units outstanding as of September 30, 2012 and December 31, 2011, respectively	171,336			117,077
General Partner, 16,903,464 and 16,822,293 units outstanding as of March 31, 2013 and December 31, 2012, respectively	163,557			166,296
Limited Partners, 786,191 and 1,360,927 units outstanding as of September 30, 2012 and December 31, 2011, respectively	8,209			14,959
Limited Partners, 607,057 and 685,486 units outstanding as of March 31, 2013 and December 31, 2012, respectively	6,080			6,999
Accumulated other comprehensive loss	(~~447~~373		)	(~~1,329~~408		)
Total partners' capital	~~179~~169,~~098~~264			~~130~~172,~~707~~887
Total liabilities and partners' capital	$	~~365~~405,~~886~~831		$	~~273~~385,~~493~~371

See accompanying notes to Consolidated Financial Statements

Table of Contents

Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~(LOSS)~~

(Unaudited)

(in thousands, except per unit data)

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2012			2011			2012			2011
	2013			2012
Property revenues
Rental revenues	$	811,~~992~~001		$	78,~~086~~128		$	~~25,643~~		$	~~20,462~~
Other revenues	2,~~626~~868			12,~~705~~298			~~7,388~~			~~4,485~~
Total property revenues	1113,~~618~~869			810,~~791~~426			~~33,031~~			~~24,947~~
Property expenses
Property operation and maintenance	23,~~969~~065			2,~~376~~352			~~8,080~~			~~6,328~~
Real estate taxes	1,~~629~~798			1,~~262~~310			~~4,442~~			~~3,390~~
Total property expenses	4,~~598~~863			3,~~638~~662			~~12,522~~			~~9,718~~
Other expenses (income)
General and administrative	12,~~888~~444			1,~~495~~641			~~5,392~~			~~4,737~~
Depreciation and amortization	3,~~112~~073			2,~~161~~283			~~8,319~~			~~6,126~~
Interest expense	12,~~815~~449			1,~~430~~973			~~5,261~~			~~4,277~~
Interest, dividend and other investment income	(~~121~~19		)	(~~264~~70		)	~~(274~~		)	~~(379~~		)
Total other expense	67,~~694~~947			45,~~822~~827			~~18,698~~			~~14,761~~
Income before gain (loss) on sale or disposal of assets and income taxes	326			331			1,811			468
Income before loss on sale or disposal of assets and income taxes	1,059			937
Provision for income taxes	(7765		)	(5465		)	~~(212~~		)	~~(165~~		)
Gain (loss) on sale or disposal of assets	(77		)	1			(105		)	(17		)
Loss on sale or disposal of assets	(8		)	(12		)
Income before gain on sale of property	172			278			1,494			286
Net income	$	986		$	860
Gain on sale of property	—			397			—			397
Net income	$	172		$	675		$	1,494		$	683

See accompanying notes to Consolidated Financial Statements

Table of Contents

Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ~~(LOSS)~~

(Unaudited)

(in thousands, except per unit data)

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2012			2011			2012			2011
	2013			2012
Basic and Diluted Earnings Per Unit:
Net income attributable to unitholders excluding amounts attributable to unvested restricted shares	$	0.01		$	0.05		$	0.11		$	0.07
Net income excluding amounts attributable to unvested restricted shares	$	0.06		$	0.07
Weighted average number of units outstanding:
Basic	1417,~~667~~509			12,~~676~~680			~~13,349~~			~~10,166~~
Diluted	1417,~~786~~629			12,~~688~~694			~~13,466~~			~~10,181~~
Distributions declared per OP unit	$	0.2850		$	0.2850		$	~~0.8550~~		$	~~0.8550~~
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Comprehensive Income
Net income	$	~~172~~986		$	~~675~~860		$	~~1,494~~		$	~~683~~
Other comprehensive gain (loss)
Unrealized loss on cash flow hedging activities	(9268		)	—			(9		)	—
Unrealized gain (loss) on available-for-sale marketable securities	92			(1,672		)	891			(1,881		)
Unrealized gain on available-for-sale marketable securities	303			766
Comprehensive income (loss)	$	255		$	(997	)	$	2,376		$	(1,198	)
Comprehensive income	$	1,021		$	1,626

See accompanying notes to Consolidated Financial Statements

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Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL

(Unaudited)

(in thousands)

											Other			Total
											Accumulated
	General Partner		General Partner			Limited Partner		Limited Partner			Comprehensive			Partners'
	General		General			Limited		Limited			Other			Total
	Partner		Partner			Partner		Partner			Comprehensive			Partners'
	Units		Unitholders			Units		Unitholders			Loss			Capital
Balance, December 31, 2011	11,317		$	117,077		1,361		$	14,959		$	(1,329	)	$	130,707
Balance, December 31, 2012	16,822		$	166,296		685		$	6,999		$	(408	)	$	172,887
Exchange of noncontrolling interest OP units for common shares	~~575~~78		~~6,224~~783			(~~575~~78	)	(~~6,224~~783		)	—			—
Exchange offer costs	—		(334		)	—		—			—			(334		)
Issuance of shares under dividend reinvestment plan	2		23			—		—			—			23
Issuance of OP units, net of costs	4,830		58,679			—		—			—			58,679
Share-based compensation	1		322			—		—			—			322
Issuance of shares under distribution reinvestment plan	5		68			—		—			—			68
Distributions	—		(4,816		)	—		(173		)	—			(4,989		)
Share-based compensation	(8	)	248			—		—			—			248
Unrealized loss on change in value of cash flow hedge	—		—			—		—			(268		)	(268		)
Distributions	—		(12,021		)	—		(625		)	—			(12,646		)
Unrealized gain on change in fair value of available-for-sale marketable securities	—		—			—		—			303			303
Unrealized loss on change in value of cash flow hedge	—		—			—		—			(9		)	(9		)
Net income	—		949			—		37			—			986
Unrealized gain on change in fair value of available-for-sale marketable securities	—		—			—		—			891			891
Balance, March 31, 2013	16,903		$	163,557		607		$	6,080		$	(373	)	$	169,264
Net income	—		1,395			—		99			—			1,494
Balance September 30, 2012	16,719		$	171,336		786		$	8,209		$	(447	)	$	179,098

See accompanying notes to Consolidated Financial Statements

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Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2012			2011
	2013			2012
Cash flows from operating activities:
Net income	$	~~1,494~~986		$	~~683~~860
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	73,~~255~~073			52,~~701~~283
Amortization of deferred loan costs	~~1,064~~273			~~425~~261
Amortization of notes payable discount	86149			—
Gain on sale of marketable securities	~~(110~~—		)	(~~192~~1		)
Loss (gain) on sale or disposal of assets and properties	105			(380		)
Loss on sale or disposal of assets	8			12
Bad debt expense	~~720~~317			~~379~~132
Share-based compensation	~~384~~356			~~233~~78
Changes in operating assets and liabilities:
Escrows and acquisition deposits	292,143			~~385~~2,378
Accrued rents and accounts receivable	(~~1,876~~777		)	(~~959~~551		)
Unamortized lease commissions	(~~674~~263		)	(~~705~~280		)
Prepaid expenses and other assets	~~630~~162			~~581~~177
Accounts payable and accrued expenses	~~200~~(2,621		)	13(2,980		)
Tenants' security deposits	~~614~~127			~~160~~45
Net cash provided by operating activities	93,~~921~~933			62,~~324~~414
Cash flows from investing activities:
Acquisitions of real estate	(7925,~~400~~700		)	~~(34,034~~—		)
Additions to real estate	(91,~~297~~197		)	(32,~~970~~893		)
Investments in marketable securities	~~(750~~—		)	(~~13,520~~750		)
Proceeds from sale of property	—			1,571
Proceeds from sales of marketable securities	—			2,614
Proceeds from sales of marketable securities	5,509			7,252
Net cash used in investing activities	(26,897		)	(1,029		)
Net cash used in investing activities	(83,938		)	(42,701		)
Cash flows from financing activities:
Distributions paid to OP unitholders	(115,~~326~~001		)	(83,~~396~~623		)
Proceeds from issuance of common shares	58,679			59,667
Payments of exchange offer costs	(34		)	(225		)
Payments of exchange offer costs	(249		)	—
Proceeds from notes payable	—			6,956
Proceeds from notes payable	—			2,905
Proceeds from revolving credit facility, net	26,400			—
Proceeds from revolving credit facility, net	33,956			—
Repayments of notes payable	(1,017		)	(713		)
Repayments of notes payable	(2,853		)	(2,356		)
Payments of loan origination costs	(1,085		)	(1,187		)
Payments of loan origination costs	(1,546		)	(374		)
Net cash provided by financing activities	19,263			1,208
Net cash provided by financing activities	76,661			51,446
Net increase (decrease) in cash and cash equivalents	(3,701		)	2,593
Net increase in cash and cash equivalents	2,644			15,069
Cash and cash equivalents at beginning of period	6,544			5,695
Cash and cash equivalents at beginning of period	5,695			17,591
Cash and cash equivalents at end of period	$	2,843		$	8,288
Cash and cash equivalents at end of period	$	8,339		$	32,660

See accompanying notes to Consolidated Financial Statements

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Whitestone REIT Operating Partnership, L.P. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2012			2011
	2013			2012
Supplemental disclosure of cash flow information:
Cash paid for interest	$	52,~~250~~146		$	41,~~271~~671
Cash paid for taxes	$	225		$	215
Non cash investing and financing activities:
Disposal of fully depreciated real estate	$	~~523~~130		$	~~162~~11
Financed insurance premiums	$	~~856~~883		$	~~649~~31
Value of shares issued under distribution reinvestment plan	$	68		$	—
Value of shares issued under dividend reinvestment plan	$	23		$	22
Accrued offering costs	$	8520		$	—54
Acquired interest rate swap	$	1,901		$	—
Value of common shares exchanged for OP units	$	782		$	4,917
Debt discount on acquired note payable	$	(1,329	)	$	—
Change in fair value of available-for-sale securities	$	303		$	766
Value of common shares exchanged for OP units	$	6,224		$	—
Change in fair value of cash flow hedge	$	(268	)	$	—
Change in fair value of available-for-sale securities	$	891		$	(1,881	)
Change in fair value of cash flow hedge	$	(9	)	$	—

See accompanying notes to Consolidated Financial Statements

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

The use of the words “we,” “us,” “our,” the "Operating Partnership" or the "Partnership" refers to Whitestone REIT Operating Partnership, L.P. and our consolidated subsidiaries, except where the context otherwise requires. The use of the words "Whitestone," the "General Partner," "Management" or the "Company" refers to Whitestone REIT, except where the context requires otherwise.

1. INTERIM FINANCIAL STATEMENTS

The consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, ~~2011~~2012 are derived from our audited consolidated financial statements as of that date. The unaudited financial statements as of ~~September~~March 3031, ~~2012~~2013 have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information on a basis consistent with the annual audited consolidated financial statements and with the instructions to Form 10-Q.

The consolidated financial statements presented herein reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of the Partnership and its subsidiaries as of ~~September~~March 3031, ~~2012~~2013, and the results of operations for the three ~~and nine~~ month periods ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012, the consolidated statements of changes in partners' capital for the ~~nine~~three month period ended ~~September~~March 3031, ~~2012~~2013 and cash flows for the ~~nine~~three month periods ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012. All of these adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and the notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012.

Business. Whitestone REIT Operating Partnership, L.P., a Delaware limited partnership, was formed on December 31, 1998 to conduct, together with its subsidiaries, substantially all of the operations and activities of its sole general partner, Whitestone REIT. Whitestone was formed as a real estate investment trust ("REIT"), pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998. In July 2004, Whitestone changed its state of organization from Texas to Maryland. As the general partner of the Partnership, Whitestone has the exclusive power to manage and conduct the business of the Partnership, subject to certain customary exceptions. As of ~~September~~March 3031, ~~2012~~2013 and December 31, ~~2011~~2012, ~~the~~we ~~Partnership~~ owned and operated 5052 and 4551 commercial properties, respectively, in and around Houston, Dallas, San Antonio, Chicago and Phoenix.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation. The accompanying consolidated financial statements include the accounts of the Partnership and its subsidiaries. All net income or loss is allocated between the General Partner and the limited partners based on the weighted-average percentage ownership of the Partnership during the period. Issuances of additional common shares of beneficial interest, par value $0.001 per share, in Whitestone (the "common shares") and units of limited partnership interest in the Partnership that are convertible into cash or, at Whitestone's option, common shares on a one-for-one basis (the “"OP units”") ~~changes~~change the ownership interests of both the Partnership and Whitestone.

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

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent ~~assets and~~ liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that we use include the estimated fair values of properties acquired, the estimated useful lives for depreciable and amortizable assets and costs, the estimated allowance for doubtful accounts, the estimated fair value of interest rate swaps and the estimates supporting our impairment analysis for the carrying values of our real estate assets. Actual results could differ from those estimates.

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

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

~~Marketable Securities~~Reclassifications. We ~~classify~~have ~~our~~reclassified ~~existing~~certain ~~marketable~~prior ~~equity~~period ~~securities~~amounts ~~as available-for-sale~~ in ~~accordance with~~ the ~~Financial~~accompanying ~~Accounting~~consolidated ~~Standards~~financial ~~Board's~~statements ~~("FASB")~~in ~~Investments-Debt~~order ~~and~~to ~~Equity~~be ~~Securities~~consistent ~~guidance. These securities are carried at fair value~~ with ~~unrealized gains and losses reported in partners' capital as a component of accumulated other comprehensive income or loss. The fair value of~~ the ~~marketable~~current ~~securities~~period ~~is determined using Level 1 inputs under FASB Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures~~presentation." These ~~Level~~reclassifications 1had ~~inputs~~no ~~represent~~effect ~~quoted prices available in an active market for identical investments as of the reporting date. Gains and losses~~ on ~~securities~~net ~~sold are based on the specific identification method~~income, ~~and~~total ~~are reported as a component of interest~~assets, ~~dividend~~total ~~and~~liabilities ~~other~~or ~~investment~~partners' ~~income~~capital. WeDuring ~~recognized~~2012, ~~gains~~we onreclassified the ~~sale~~amortization of ~~marketable~~our ~~securities~~loan ~~of approximately $78~~fees,~~000~~ ~~and~~previously ~~$154,000~~classified ~~for~~as ~~the~~depreciation ~~three months ended September 30, 2012~~ and ~~2011,~~amortization ~~respectively~~expenses, ~~and~~to ~~$110,000~~interest ~~and~~expense ~~$192,000~~ for ~~the~~all ~~nine~~periods ~~months ended September 30, 2012 and 2011, respectively~~presented. ~~As of September 30, 2012, our investment in available-for-sale marketable securities was approximately $1,373,000, which includes an aggregate unrealized loss of approximately $438,000.~~

~~Derivative~~Marketable ~~Instruments~~Securities. We ~~and~~classify ~~Hedging~~our ~~Activities. On~~existing ~~August~~marketable 8,equity ~~2012,~~securities as ~~part~~available-for-sale ofin ~~our~~accordance ~~acquisition~~with ofthe ~~Paradise~~Financial ~~Plaza~~Accounting ~~(see~~Standards ~~Note~~Board's 15("FASB"), weInvestments-Debt ~~assumed~~and aEquity $9Securities guidance.2 ~~million~~These ~~variable~~securities ~~rate~~are ~~note~~carried ~~(see~~at ~~Note~~fair ~~6). The~~value ~~note~~with ~~included~~unrealized angains ~~interest~~and ~~rate~~losses ~~swap~~reported ~~that~~in ~~had~~partners' acapital ~~fixed~~as ~~interest~~a ~~rate~~component of ~~5.72%. Whitestone~~accumulated ~~has~~other ~~designated~~comprehensive ~~the~~income ~~interest~~or ~~rate~~loss. The ~~swap~~fair asvalue aof ~~cash~~the ~~flow~~marketable ~~hedge~~securities ~~with~~is ~~the~~determined ~~effective~~using ~~portion~~Level of1 ~~the~~inputs ~~changes~~under inFASB ~~fair~~Accounting ~~value~~Standards ~~recorded~~Codification in("ASC") ~~comprehensive~~820, ~~income~~"Fair ~~(loss)~~Value Measurements and ~~subsequently~~Disclosures." ~~reclassified~~Level ~~into~~1 ~~earnings~~inputs inrepresent ~~the~~quoted ~~period~~prices ~~that~~available ~~the~~in ~~hedged~~an ~~transaction~~active ~~affects~~market ~~earnings. The~~for ~~ineffective~~identical ~~portion~~investments as of the ~~change~~reporting indate. Gains ~~fair~~and ~~value,~~losses ifon ~~any,~~securities issold ~~recognized~~are ~~directly~~based inon ~~earnings. As~~the ofspecific ~~September~~identification 30method, ~~2012,~~and weare ~~consider~~reported ~~the~~as ~~cash~~a ~~flow~~component ~~hedge~~of tointerest, bedividend ~~highly~~and ~~effective~~other investment income. ~~The~~We ~~cash~~recognized ~~flow~~gains ~~hedge~~on isthe ~~determined~~sale ~~using~~of ~~Level~~marketable 2securities ~~inputs~~of ~~under~~approximately ~~ASC~~$0 ~~820. Level~~and 2$1,000 ~~inputs~~for ~~represent~~the ~~quoted~~three ~~prices~~months inended ~~active~~March 31, ~~markets~~2013 ~~for~~and ~~similar~~2012, ~~assets~~respectively. As orof ~~liabilities;~~March 31, ~~quoted~~2013, ~~prices~~our investment in ~~markets~~ ~~that~~available-for-sale ~~are~~marketable ~~not~~securities ~~active;~~was ~~and~~approximately ~~model-derived~~$1,705,000, ~~valuations~~which ~~whose~~includes ~~inputs~~an ~~are~~aggregate ~~observable~~unrealized loss of approximately $106,000.

Derivative Instruments and Hedging Activities. On March 8, 2013, we entered into an interest rate swap with U.S. Bank National Association that fixed the LIBOR portion of our $50 million term loan under our unsecured credit facility at 0.84%. See Note 6 for additional information regarding our credit facility. The swap will begin on January 7, 2014 and will mature on February 3, 2017. Whitestone has designated the interest rate swap as a cash flow hedge with the effective portion of the changes in fair value to be recorded in the comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value, if any, will be recognized directly in earnings. As of ~~September~~March 3031, ~~2012~~2013, the fair value of the cash flow hedge was $10.83 million. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2012~~2013, we recognized $9257,000 as other comprehensive losses. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2012~~2013, we did not recognize any portion of the cash flow hedge into earnings. because we are not required to make cash settlements until 2014.

~~Development~~On ~~Properties. Land~~August 8, ~~buildings~~2012, ~~and~~as ~~improvements~~part ~~are~~of ~~recorded~~our atacquisition ~~cost. Expenditures~~of ~~related~~Paradise toPlaza ~~the~~(see ~~development~~Note of15), ~~real~~we ~~estate~~assumed ~~are~~a ~~carried~~$9.2 atmillion ~~cost~~variable ~~which~~rate ~~includes~~note ~~capitalized~~(see ~~carrying~~Note ~~charges and development costs~~6). ~~Carrying~~The ~~charges,~~note ~~primarily~~included an interest, ~~real~~rate ~~estate~~swap ~~taxes,~~that ~~loan~~had ~~fees,~~a ~~and~~fixed ~~direct~~interest ~~and~~rate ~~indirect~~of ~~development~~5.72%. Whitestone ~~costs~~has ~~related~~designated tothe ~~buildings~~interest ~~under~~rate ~~construction,~~swap ~~are~~as ~~capitalized~~a ascash ~~part~~flow ofhedge ~~construction~~with inthe ~~progress. The~~effective ~~capitalization~~portion of ~~such~~the ~~costs~~changes ~~ceases~~in ~~when~~fair ~~the~~value ~~property,~~recorded orin ~~any~~comprehensive ~~completed~~income ~~portion,~~(loss) ~~becomes~~and ~~available~~subsequently ~~for~~reclassified ~~occupancy. For~~into ~~the~~earnings ~~three~~in ~~months~~the ~~ended~~period ~~September 30,~~that ~~2012,~~the ~~approximately~~hedged ~~$47,000~~transaction ~~and~~affects ~~$50,000~~earnings. The inineffective ~~interest~~portion ~~expense~~of ~~and~~the ~~real~~change ~~estate~~in ~~taxes,~~fair ~~respectively~~value, ~~were~~if ~~capitalized~~any, ~~and~~is ~~for~~recognized ~~the~~directly ~~nine~~in ~~months~~earnings. As ~~ended~~of ~~September~~March 3031, ~~2012~~2013, ~~approximately~~the ~~$135,000~~fair ~~and~~value ~~$113,000~~of inthe ~~interest~~cash ~~expense~~flow ~~and~~hedge ~~real~~was ~~estate~~$1.7 ~~taxes,~~million. ~~respectively,~~For ~~were~~the ~~capitalized. No~~three ~~interest~~months ~~expense~~ended orMarch 31, ~~real~~2013, ~~estate~~we ~~taxes~~recognized ~~were~~$11,000 ~~capitalized~~as ~~during~~other comprehensive losses. For the three ~~or nine~~ months ended ~~September~~March 3031, ~~2011~~2013, we recognized $88,000 as interest expense.

~~Share-Based~~As ~~Compensation. From~~of ~~time~~March 31, ~~to time~~2013, ~~Whitestone~~we ~~awards~~consider ~~nonvested~~the ~~restricted~~cash ~~common~~flow ~~share~~hedges ~~awards~~to ~~or restricted common share unit awards that may~~ be ~~converted~~highly ~~into common shares to its trustees, to executive officers and employees under Whitestone's 2008 Long-Term Equity Incentive Ownership Plan (the “2008 Plan”)~~effective. The ~~vast~~cash ~~majority~~flow ofhedges ~~the awarded shares and units vest when certain performance conditions~~ are ~~met. We~~determined ~~recognize compensation expense when achievement of the performance conditions is probable based on Whitestone's most recent estimates~~ using ~~the~~Level ~~fair~~2 ~~value~~inputs ofunder ~~the~~ASC ~~shares as of the grant date~~820. WeLevel ~~recognized~~2 ~~$118,000~~inputs ~~and~~represent ~~$78,000~~quoted prices in ~~share-based~~active ~~compensation~~markets for ~~the~~similar ~~three~~assets ~~months~~or ~~ended~~liabilities; ~~September 30,~~quoted ~~2012~~prices ~~and~~in markets ~~2011,~~that ~~respectively,~~are ~~and~~not weactive; ~~recognized $384,000~~ and ~~$233,000 in share~~model-~~based~~derived ~~compensation~~valuations ~~for~~whose ~~the~~inputs ~~nine~~are ~~months ended September 30, 2012 and 2011, respectively~~observable.

~~See~~Development ~~our~~Properties. Land, ~~Annual~~buildings ~~Report~~and onimprovements ~~Form~~are ~~10-K~~recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges and development costs. Carrying charges, primarily interest, real estate taxes, loan fees, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress. The capitalization of such costs ceases when the property, or any completed portion, becomes available for occupancy. For the ~~year~~three months ended ~~December~~March 31, ~~2011~~2013, ~~for~~approximately ~~further~~$36,000 ~~discussion~~and on$24,000 ~~significant~~in ~~accounting~~interest ~~policies~~expense and real estate taxes, respectively, were capitalized. For the three ended March 31, 2012, approximately $44,000 and $32,000 in interest expense and real estate taxes, respectively, were capitalized.

~~Recent~~Share-Based ~~Accounting~~Compensation. From ~~Pronouncements~~time to time, Whitestone awards nonvested restricted common share awards or restricted common share unit awards, which may be converted into common shares, to its trustees, executive officers and employees under Whitestone's 2008 Long-Term Equity Incentive Ownership Plan (the “2008 Plan”). ~~There~~The ~~are~~vast nomajority ~~new~~of ~~unimplemented~~the ~~accounting~~awarded ~~pronouncements~~shares ~~that~~and units vest when certain performance conditions are ~~expected~~met. We torecognize ~~have~~compensation aexpense ~~material~~when ~~impact~~achievement of the performance conditions is probable based on ~~our~~Whitestone's ~~results~~most recent estimates using the fair value of ~~operations~~the shares as of the grant date. We recognized $356,000 ~~financial~~and ~~position~~$78,000 orin ~~cash~~share-based ~~flows~~compensation for the three months ended March 31, 2013 and 2012, respectively.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

See our Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion on significant accounting policies.

Recent Accounting Pronouncements. In February 2013, the FASB issued guidance requiring entities to disclose certain information relating to amounts reclassified out of accumulated other comprehensive income. We do not expect the pronouncement to have a significant impact on our consolidated financial statements.

3. MARKETABLE SECURITIES

All of our marketable securities were classified as available-for-sale securities as of ~~September~~March 3031, ~~2012~~2013 and December 31, ~~2011~~2012. Available-for-sale securities consisted of the following (in thousands):

	September 30, 2012
	March 31, 2013
	Amortized Cost		Gains in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
Real estate common stock	$	1,811	$	—	$	(438	)	$	1,373
Real estate sector common stock	$	1,811	$	—	$	(106	)	$	1,705
Total available-for-sale securities	$	1,811	$	—	$	(~~438~~106	)	$	1,~~373~~705

	December 31, 2011
	December 31, 2012
	Amortized Cost		Gains in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
Exchange-traded fund	$	301	$	—	$	(37	)	$	264
Real estate sector common stock	$	1,811	$	—	$	(408	)	$	1,403
Real estate sector mutual funds	351		—		(55		)	296
Total available-for-sale securities	$	1,811	$	—	$	(408	)	$	1,403
Real estate common stock	5,808		—		(1,237		)	4,571
Total available-for-sale securities	$	6,460	$	—	$	(1,329	)	$	5,131

During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2012~~2013, no available-for-sale securities were sold ~~for total proceeds of $1,583,000 and $5,509,000, respectively~~. ~~The~~During ~~gross realized gains and losses on these sales during~~ the three months ended ~~September~~March 3031, 2012 ~~totaled $78~~,~~000~~ and $0, respectively, and the gross realized gains and losses on the sales during the nine months ended September 30, 2012 totaled $152,000 and $42,000, respectively. During the three and nine months ended September 30, 2011, available-for-sale securities were sold for total proceeds of $62,~~343~~614,000 ~~and $7,252,000, respectively~~. ~~Gross~~The ~~realized gains or losses on the sales recognized during the three months ended September 30, 2011 were $263,000 and $109,000, respectively, and the~~ gross realized gains and losses on ~~the~~these sales during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 ~~totaled~~were $~~302~~40,000 and $~~110~~39,000, respectively.

4. ACCRUED RENTS AND ACCOUNTS RECEIVABLE, NET

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

	September 30, 2012			December 31, 2011
	March 31, 2013			December 31, 2012
Tenant receivables	$	34,~~767~~930		$	13,~~914~~536
Accrued rents and other recoveries	56,~~393~~728			56,~~505~~696
Allowance for doubtful accounts	(12,~~983~~599		)	(12,~~366~~285		)
Total	$	79,~~177~~059		$	67,~~053~~947

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

5. UNAMORTIZED LEASING COMMISSIONS AND LOAN COSTS

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

	September 30, 2012			December 31, 2011
	March 31, 2013			December 31, 2012
Leasing commissions	$	5,~~378~~782		$	5,~~326~~530
Deferred financing cost	45,~~463~~658			24,~~916~~574
Total cost	911,~~841~~440			810,~~242~~104
Less: leasing commissions accumulated amortization	(23,~~890~~101		)	(2,~~861~~899		)
Less: deferred financing cost accumulated amortization	(23,~~682~~314		)	(13,~~626~~045		)
Total cost, net of accumulated amortization	$	45,~~269~~025		$	34,~~755~~160

6. DEBT

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

Description	~~September~~March 3031, ~~2012~~2013		December 31, ~~2011~~2012
Fixed rate notes
$1.4 million 5.00% Note, due 2012	$	1,363	$	1,318
$1.1 million 4.71% Note, due 2013	$	1,087	$	1,087
$14.1 million 5.695% Note, due 2013	13,~~923~~773		1413,~~110~~850
$3.0 million 6.00% Note, due 2021 (1)	2,~~952~~933		2,~~978~~943
$10.0 million 6.04% Note, due 2014	9,~~189~~095		9,~~326~~142
$1.5 million 6.50% Note, due 2014	1,~~451~~437		1,~~471~~444
$11.2 million 6.52% Note, due 2015	10,~~648~~569		10,~~763~~609
$21.4 million 6.53% Notes, due 2013	1918,~~034~~694		1918,~~524~~865
$24.5 million 6.56% Note, due 2013	23,~~254~~015		23,~~597~~135
$9.9 million 6.63% Notes, due 2014	98,~~001~~848		98,~~221~~925
$0.7 million 2.97% Note, due 2012	193		23
$0.9 million 2.97% Note, due 2013	694		15
Floating rate notes
Unsecured line of credit, LIBOR plus 2.75% to 3.75%, due 2015	45,000		11,000
Unsecured credit facility, LIBOR plus 1.75% to 2.50%, due 2017 (2)	95,400		69,000
$9.2 million, Prime Rate less 2.00%, due 2017	7,~~861~~860		—7,854
$26.9 million, LIBOR plus 2.86% Note, due 2013	23,~~947~~530		2423,~~559~~739
	$	~~167~~216,~~816~~935	$	~~127~~190,~~890~~608


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

As(2) ofWe ~~September 30,~~have ~~2012,~~entered ~~our~~into ~~$122.6~~an ~~million~~interest inrate ~~secured~~swap ~~debt~~that ~~was~~fixed ~~collateralized~~the byLIBOR 27portion ~~properties with a carrying value~~ of our $~~162.5~~50 million~~. Our~~ ~~loans~~term ~~contain~~loan ~~restrictions~~under ~~that~~our ~~would~~unsecured ~~require~~credit ~~prepayment~~facility ~~penalties~~at ~~for~~0.84%. ~~the~~The ~~acceleration~~swap ofwill ~~outstanding~~begin ~~debt and are secured by deeds of trust~~ on ~~certain~~January of7, ~~our~~2014 ~~properties~~ and bywill ~~assignment~~mature ofon ~~the~~February ~~rents and leases associated with those properties. As of September 30~~3, ~~2012, we were in compliance with all loan covenants~~2017.

As of March 31, 2013, our $120.8 million in secured debt was collateralized by 27 properties with a carrying value of $160.7 million. Our loans contain restrictions that would require prepayment penalties for the acceleration of outstanding debt and are secured by deeds of trust on certain of our properties and by assignment of the rents and leases associated with those properties. As of March 31, 2013, we were in compliance with all loan covenants.

Table of Contents

WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

On ~~August~~February 84, ~~2012~~2013, we ~~assumed~~entered ainto ~~$9.2~~an ~~million~~unsecured ~~variable~~credit ~~rate~~facility ~~note as part of our acquisition of Paradise Plaza~~ (~~See~~the ~~Note 15~~“Facility”)~~. The~~ ~~variable~~with ~~rate~~the islenders ~~based~~party onthereto, ~~the~~with ~~Prime~~BMO ~~Rate~~Capital ~~less~~Markets ~~2.00%~~ and ~~matures~~Wells onFargo ~~December~~Securities, 27LLC, ~~2017. We~~as ~~consider the variable rate to be below~~co-~~market~~lead arrangers and ~~have~~joint ~~imputed~~book anrunners, ~~interest~~Bank ~~rate~~ of ~~4.13%~~Montreal, ~~which~~as weadministrative ~~consider~~agent to(the be"Agent"), anWells ~~appropriate~~Fargo ~~market~~Bank, ~~rate. As~~National ~~a result~~Association, weas ~~recorded~~syndication aagent, ~~discount~~and onU.S. ~~the~~Bank ~~note~~National ~~of $1.3 million~~Association, ~~which~~as ~~will~~documentation ~~amortize~~agent. The ~~into~~Facility ~~interest~~amended ~~expense~~and ~~over~~restated ~~the~~our ~~life~~previous ofunsecured ~~the~~credit ~~loan~~facility. ~~See~~We ~~Note~~plan 2 to use the ~~accompanying~~Facility ~~consolidated financial statements~~ for aacquisitions, ~~discussion~~redevelopment of ~~the~~value-add ~~interest~~properties ~~rate~~in ~~swap~~our ~~included~~portfolio, ~~with~~and ~~this~~general ~~note~~corporate purposes.

~~Our~~In addition to a $125 million unsecured ~~revolving~~borrowing ~~credit~~capacity ~~facility~~under (the ~~“Credit~~revolving ~~Facility”)~~loan, ~~which~~the isFacility ~~available~~also toincludes usa ~~for~~$50 ~~acquisitions~~million ofterm ~~properties~~loan and ~~and~~permits ~~working~~us ~~capital,~~to isincrease ~~our~~the ~~primary~~borrowing ~~source~~capacity ofunder ~~additional credit. As of September 30, 2012, $45.0 million was drawn on~~ the ~~Credit~~ Facility, ~~and~~to ~~our~~a ~~borrowing~~total ~~capacity~~of ~~was~~ $~~80.0~~225 million, ~~assuming~~upon ~~use of~~ the ~~proceeds~~satisfaction toof ~~acquire~~certain ~~properties,~~conditions. The orFacility ~~repayment~~will ofmature ~~debt~~ on ~~properties~~February 3, ~~that~~2017, ~~are~~and ~~eligible~~provides tothat ~~be included in~~ the ~~unsecured~~we ~~borrowing~~may ~~base. The~~extend ~~Credit~~the ~~Facility~~maturity ~~bears~~date ~~interest~~for atone ~~LIBOR~~year ~~plus~~subject ~~2.75%~~ to ~~3.75%,~~certain ~~and matures on February 27~~conditions, ~~2015. As~~including ~~of September 30, 2012,~~ the ~~interest~~payment ~~rate~~of ~~was~~an 3extension fee.~~00%.~~

~~Whitestone~~Borrowings ~~serves~~under as the ~~guarantor~~Facility ~~for~~accrue ~~funds~~interest ~~borrowed~~(at byour ~~the~~option) ~~Partnership~~at ~~under~~a ~~the~~Base ~~Credit~~Rate ~~Facility.~~or ~~The~~an ~~Credit~~Adjusted ~~Facility~~LIBOR ~~contains~~plus ~~customary~~an ~~terms~~applicable ~~and~~margin ~~conditions,~~based ~~including,~~upon ~~without~~our ~~limitation,~~then ~~affirmative~~existing ~~and~~leverage. Base ~~negative~~Rate ~~covenants~~means ~~such~~the ashigher ~~information~~of: ~~reporting~~(a) ~~requirements,~~the ~~maximum~~Agent's ~~secured~~prime ~~indebtedness~~commercial torate, ~~total~~(b) ~~asset~~the ~~value,~~sum ~~minimum~~of ~~EBITDA~~ (~~earnings~~i) ~~before~~average ~~interest,~~rate ~~taxes,~~quoted ~~depreciation,~~the ~~amortization~~Agent ~~and~~by ~~extraordinary~~two ~~items)~~or tomore ~~fixed~~federal ~~charges,~~funds ~~minimum~~brokers ~~property~~selected ~~net~~by ~~operating~~the ~~income~~Agent for sale to ~~total~~the ~~indebtedness~~Agent ~~and~~at ~~maintenance~~face value of ~~net~~federal ~~worth.~~funds ~~The~~in ~~Credit~~the ~~Facility~~secondary ~~also~~market ~~contains~~in ~~customary~~an ~~events~~amount ofequal ~~default~~or ~~with~~comparable ~~customary~~to ~~notice~~the ~~and~~principal ~~cure,~~amount ~~including,~~for ~~without~~which ~~limitation,~~such ~~nonpayment,~~rate ~~breach~~is ofbeing ~~covenant~~determined, ~~material~~plus ~~misrepresentation~~(ii) 1/2 of ~~representations~~1%, and ~~warranties,~~(c) ~~cross-default~~the toLIBOR ~~other~~rate ~~major~~for ~~indebtedness,~~such ~~change~~day ofplus ~~control,~~1.00%. Adjusted ~~bankruptcy~~LIBOR ~~and~~means ~~loss~~LIBOR ofdivided ~~REIT~~by ~~tax~~one ~~status~~minus ~~for~~the ~~Whitestone~~Eurodollar Reserve Percentage. The AsEurodollar Reserve Percentage means the maximum reserve percentage at which reserves are imposed by the Board of ~~September 30,~~Governors ~~2012,~~of wethe ~~were~~Federal inReserve ~~compliance~~System ~~with~~on ~~all~~eurocurrency ~~covenants~~liabilities.

~~Scheduled~~Whitestone ~~maturities~~is ofthe ~~our~~guarantor ~~outstanding~~for ~~debt~~funds we borrow under the Facility. The Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization and extraordinary items) to fixed charges and maintenance of ~~September~~net worth. The Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status for Whitestone. As of March 3031, ~~2012~~2013, we were asin ~~follows~~compliance ~~(in~~with ~~thousands):~~all covenants.

Year	Amount Due
2012	$	2,291
2013	80,292
2014	19,171
2015	55,317
2016	73
Thereafter	10,672
Total	$	167,816

As of March 31, 2013, $95.4 million was drawn on the Facility, and our remaining borrowing capacity was $79.6 million. Proceeds from the Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and retenanting of properties in our portfolio and working capital.

WeScheduled ~~will~~maturities ~~have~~of ~~approximately~~our ~~$14~~outstanding ~~million of~~ debt ~~maturing~~as inof ~~June~~March 31, 2013 ~~and~~were ~~approximately~~as ~~$66~~follows ~~million maturing~~ (in October and November 2013. The majority of this debt is with insurance companies and was entered into in late 2008. We have begun renewal discussions with our current lenders and expect to renew this debt with our current lenders or new lenders at rates and terms similar or better than our current rates and terms. We also have availability under our Credit Facility should we be unable to obtain similar or better financing from our current lenders or new lenders. thousands):

7. EARNINGS PER UNIT



Year	Amount Due

2013	$	81,317
2014	19,172
2015	10,317
2016	73
2017	103,342
Thereafter	2,714
Total	$	216,935

~~Basic~~We ~~earnings~~will ~~per~~have OPapproximately ~~unit~~$14 ~~for~~million ~~Partnership's~~of ~~unitholders~~debt ismaturing ~~calculated~~in byJune ~~dividing~~2013 ~~income~~and ~~from~~approximately ~~continuing~~$64 ~~operations~~million ~~excluding~~of ~~amounts~~debt ~~attributable~~maturing toin ~~unvested~~October ~~restricted~~and ~~shares~~November by2013. The ~~the~~majority ~~Partnership's~~of ~~weighted-average~~this OPdebt ~~units~~is ~~outstanding~~with ~~during~~insurance ~~the~~companies ~~period. Diluted~~and ~~earnings~~was ~~per~~entered ~~share~~into isin ~~computed~~late by2008. We ~~dividing~~have ~~the~~begun ~~net~~renewal ~~income~~discussions ~~from~~with ~~continuing~~our ~~operations~~current ~~excluding~~lenders ~~amounts~~and ~~attributable~~expect to ~~unvested~~renew ~~restricted~~this ~~shares~~debt bywith ~~the~~our ~~Partnership's~~current ~~weighted-average~~lenders OPor ~~units~~new ~~outstanding~~lenders ~~during~~at ~~the~~rates ~~period,~~and ~~including~~terms ~~any~~similar ~~dilutive~~or ~~unvested~~better ~~restricted~~than ~~shares~~our current rates and terms. We also have availability under our Facility should we be unable to obtain similar or better financing from our current lenders or new lenders.

Certain of Whitestone's performance-based restricted common shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per OP unit.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

For the three months ended September 30, 2012 and 2011, distributions of $45,000 and $53,000, respectively, were made to holders of certain restricted common shares, $40,000 and $49,000 of which were charged against earnings7. ~~For~~ EARNINGS ~~the~~PER nine months ended September 30, 2012 and 2011, distributions of $148,000 and $160,000, respectively, were made to holders of certain restricted common shares, $137,000 and $147,000 of which were charged against earnings. See Note 12 for information related to restricted common shares under the 2008 Plan.UNIT

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
(in thousands, except per unit data)
Numerator:
Net income	$	172		$	675		$	1,494		$	683
Distributions paid on unvested restricted shares	(5		)	(4		)	(11		)	(13		)
Undistributed earnings attributable to unvested restricted shares	—			—			—			—
Net income attributable to unitholders excluding amounts attributable to unvested restricted shares	$	167		$	671		$	1,483		$	670
Denominator:
Weighted average number of units - basic	14,667			12,676			13,349			10,166
Effect of dilutive securities:
Unvested restricted shares	119			12			117			15
Weighted average number of units - dilutive	14,786			12,688			13,466			10,181
Earnings Per Unit:
Basic:
Net income attributable to unitholders excluding amounts attributable to unvested restricted shares	$	0.01		$	0.05		$	0.11		$	0.07
Diluted:
Net income attributable to unitholders excluding amounts attributable to unvested restricted shares	$	0.01		$	0.05		$	0.11		$	0.07

Basic earnings per OP unit for the Partnership's unitholders is calculated by dividing net income excluding amounts attributable to unvested restricted shares by the Partnership's weighted-average OP units outstanding during the period. Diluted earnings per OP unit is calculated by dividing net income excluding amounts attributable to unvested restricted shares by the Partnership's weighted-average OP units outstanding during the period including any dilutive unvested restricted shares.

Certain of Whitestone's performance-based restricted common shares are considered participating securities that require the use of the two-class method for the computation of basic and diluted earnings per OP unit.

For the three months ended March 31, 2013 and 2012, distributions of $45,000 and $53,000, respectively, were made to holders of certain restricted common shares, $34,000 and $49,000, respectively, of which were charged against earnings. See Note 12 for information related to restricted common shares under the 2008 Plan.



	Three Months Ended
	March 31,
(in thousands, except per unit data)	2013			2012
Numerator:
Net income	$	986		$	860
Distributions paid on unvested restricted shares	(11		)	(4		)
Net income excluding amounts attributable to unvested restricted shares	$	975		$	856

Denominator:
Weighted average number of units - basic	17,509			12,680
Effect of dilutive securities:
Unvested restricted shares	120			14
Weighted average number of units - dilutive	17,629			12,694

Earnings Per Unit:
Basic:
Net income excluding amounts attributable to unvested restricted shares	$	0.06		$	0.07
Diluted:
Net income excluding amounts attributable to unvested restricted shares	$	0.06		$	0.07

8. INCOME TAXES

Federal income taxes are not provided because we are taxed as a partnership and the liability incurred is that of our partners. ~~Federal~~As ~~taxes~~our ~~are~~general ~~not~~partner, ~~provided for~~ Whitestone ~~because it~~ intends to ~~continue to~~ and believes it qualifies as a REIT under the provisions of the Internal Revenue Code (the "Code") and because it ~~has~~ distributed and intends to continue to distribute all of its taxable income to its shareholders. Whitestone's shareholders include their proportionate taxable income in their individual tax returns. As a REIT, Whitestone must distribute at least 90% of its real estate investment trust taxable income to its shareholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If Whitestone fails to qualify as a REIT in any taxable year, Whitestone will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

During 2010, Whitestone discovered that it may have inadvertently violated the “5% asset test,” as set forth in Section 856(c)(4)(B)(iii)(I) of the Code, for the quarter ended March 31, 2009 as a result of utilizing a certain cash management arrangement with a commercial bank. If ~~Whitestone's~~its investment in a commercial paper investment sweep account through such cash management agreement is not treated as cash, and is instead treated as a security of a single issuer for purposes of the “5% asset test,” then ~~Whitestone~~it failed the “5% asset test” for the first quarter of its 2009 taxable year. Whitestone believes, however, that if it failed the “5% asset test,” ~~the~~its failure would be considered due to reasonable cause and not willful neglect and, therefore, ~~Whitestone~~it would not be disqualified as a REIT for its 2009 taxable year. ~~Whitestone~~It would be, however, subject to certain reporting requirements and a tax equal to the greater of $50,000 or 35% of the net income from the commercial paper investment account during the period in which it failed to satisfy the “5% asset test.” The amount of such tax is $50,000, and ~~Whitestone~~it paid such tax on April 27, 2010.

If the ~~IRS~~Internal Revenue Service were to assert that Whitestone failed the “5% asset test” for the first quarter of its 2009 taxable year and that such failure was not due to reasonable cause, and the courts were to sustain that position, ~~Whitestone's~~its status as a REIT would terminate as of December 31, 2008. Whitestone would not be eligible to again elect REIT status until its 2014 taxable year. Consequently, ~~Whitestone~~it would be subject to federal income tax on its taxable income at regular corporate rates without the benefit of the dividends-paid deduction, and its cash available for distributions to shareholders and our partners would be reduced.

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

We are subject to the Texas Margin Tax, which is computed by applying the applicable tax rate (1% for us) to the profit margin, which generally will be determined for us as total revenue less a 30% standard deduction. Although ~~House Bill 3 states that~~ the Texas Margin Tax is not an income tax, ~~SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) which is codified in~~ FASB ASC 740, "“Income Taxes"” (“ASC 740”) applies to the Texas Margin Tax. For the three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012, we recognized $6160,000 and $5458,000 in margin tax provision, respectively~~, and for the nine months ended September 30, 2012 and 2011, we recognized $184,000 and $164,000, respectively~~.

9. RELATED PARTY TRANSACTIONS

Executive Relocation. On July 9, 2010, upon the unanimous recommendation of Whitestone's Compensation Committee ~~of Whitestone's board of trustees~~, Whitestone entered into an arrangement with ~~James C~~Mr. Mastandrea, Whitestone's Chairman, President and Chief Executive Officer, with respect to the disposition of his residence in Cleveland, Ohio. Mr. Mastandrea listed the residence in the second half of 2007 and has had ~~no offers. In the meantime, Mr. Mastandrea has continued~~ to pay for security, taxes, insurance and maintenance expenses related to the residence. InUnder ~~May~~the ~~2010,~~relocation ~~Whitestone~~arrangement ~~engaged~~as aamended ~~professional~~on ~~relocation~~August ~~firm~~9, 2012, Whitestone agreed to ~~market~~pay Mr. Mastandrea the ~~home~~shortfall, ~~and~~if ~~assist~~any, in ~~moving~~ the ~~Mastandrea~~amount ~~family~~realized tofrom ~~Houston. Since~~ the ~~engagement~~sale of the ~~relocation~~Cleveland ~~firm~~residence, nobelow ~~offers~~$2,450,000, plus tax on the ~~home~~amount ~~have~~of ~~been~~such ~~received. On~~payment ~~August~~at 6,the ~~2012,~~maximum ~~upon~~federal ~~the~~income ~~unanimous~~tax ~~recommendation~~rate. The amount of ~~Whitestone's~~the ~~Compensation~~shortfall ~~Committee~~was to ~~Whitestone's~~be ~~board~~paid ofin ~~trustees,~~a ~~the~~combination ~~arrangement~~of ~~with~~cash ~~Mr.~~and ~~Mastandrea~~Whitestone's ~~with~~common ~~respect~~shares toat the ~~disposition~~market value of ~~his~~the ~~residence~~shares, inas ~~Cleveland,~~determined ~~Ohio~~upon ~~was~~agreement ~~amended~~between Mr. ~~The~~ ~~following~~Mastandrea ~~summarizes~~and ~~the~~Whitestone's ~~amended~~Compensation ~~arrangement:~~Committee.

•In ~~Reimbursement~~addition, ofthe ~~Mr.~~arrangement ~~Mastandrea~~required ofWhitestone to continue paying the ~~amount,~~previously ifagreed ~~any,~~upon bycost ~~which~~of housing expenses for the ~~sales~~Mastandrea ~~price~~family in Houston, Texas for a period of one year following the date of sale of the residence. Whitestone ishad ~~less~~previously ~~than~~agreed ~~$2,450,000~~to ~~(the~~reimburse ~~“Sales~~Mr. ~~Price~~Mastandrea ~~Shortfall”)~~for ~~upon~~out-of-pocket ~~sale~~moving ofcosts ~~the~~including ~~residence~~packing, ~~(the~~temporary ~~“Shortfall~~storage, ~~Reimbursement”);~~transportation and moving supplies.

•On ~~Payment~~December to21, 2012, Mr. Mastandrea ofsold anthe ~~amount~~residence ~~equal~~to a third party for a price of $1,125,000. Pursuant to the relocation arrangement, Whitestone paid cash of $1,325,000, representing the shortfall of the amount realized from the sale of ~~any~~the ~~Shortfall~~property, ~~Reimbursement~~and ~~divided~~$852,000, which represented moving expenses and closing costs incurred by ~~the~~Mr. ~~net~~Mastandrea ~~difference~~and federal taxes. No Whitestone common shares were issued. The total expense incurred by Whitestone of ~~one~~$2,177,000 ~~(1)~~is ~~minus~~shown separately in our consolidated financial statements for the ~~maximum~~year Uended December 31, 2012.S In addition, Whitestone issued a note receivable for $975,000 to the buyer. The ~~federal~~note ~~income~~bears ~~tax~~interest at a rate inof ~~effect~~4.5% atand ~~the~~matures ~~time~~on December 31, 2013. As a result of ~~the~~this ~~sale~~transaction, Whitestone also recorded a related party receivable of $652,000 for the ~~residence~~year ended December 31, ~~less~~2012, which represents the ~~Shortfall~~federal ~~Reimbursement~~income (tax withholding not deducted from Whitestone's payment to Mr. Mastandrea. On January 14, 2013, Whitestone received the ~~“Tax~~$652,000 ~~Payment”);~~and paid it to the federal government on behalf of Mr. Mastandrea.

• Payment of the sum of the Shortfall Reimbursement and Tax Payment (the “Lump Sum Payment”) as follows:

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

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

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

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

10. PARTNERS' CAPITAL

Reclassification of Whitestone's Common Shares

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

Common Shares

Following the reclassification of Whitestone's common shares on June 27, 2012, as described above, under its declaration of trust, as amended, Whitestone has authority to issue up to 400,000,000 common shares of beneficial interest, $0.001 par value per share, and up to 50,000,000 preferred shares of beneficial interest, $0.001 par value per share.

Equity Offering

On August 28, 2012, Whitestone completed the sale of 4,830,000 common shares, $0.001 par value per share, including 630,000 common shares pursuant to the exercise of the underwriters' over-allotment option, at a price to the public of $12.80 per share. Total net proceeds from the offering, including over-allotment shares, and after deducting the underwriting discount and offering expenses, were approximately $58.7 million, which ~~were~~Whitestone contributed to the Partnership ~~in exchange~~ for 4,830,000 OP units. Whitestone ~~intends~~used ~~to use~~ the net proceeds for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and/or re-tenanting of properties in its portfolio, working capital and other general purposes.

Operating Partnership Units

Substantially all of Whitestone's business is conducted through the Partnership. Whitestone is the sole general partner of the Partnership. As of ~~September~~March 3031, ~~2012~~2013, Whitestone owned a 9596.5% interest in the Partnership.

Limited partners in the Operating Partnership holding OP units have the right to convert their OP units into cash or, at Whitestone's option, common shares at a ratio of one OP unit for one common share. Distributions to OP unitholders are paid at the same rate per unit as distributions per share to holders of Whitestone common shares. As of ~~September~~March 3031, ~~2012~~2013 and December 31, ~~2011~~2012, there were 17,~~504~~510,~~987~~521 and 1217,~~677~~507,~~969~~779 OP units outstanding, respectively. Whitestone owned 16,~~718~~903,~~796~~464 and 1116,~~317~~822,~~042~~293 OP units as of ~~September~~March 3031, ~~2012~~2013 and December 31, ~~2011~~2012, respectively. The balance of the OP units is owned by third parties, including certain of Whitestone's trustees. Whitestone's weighted-average share ownership in the Partnership was approximately 94.61% and 8592.72% for the three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012, respectively. During the three months ended March 31, ~~and~~2013, ~~93.4%~~78,429 ~~and~~OP ~~82.2%~~units were redeemed for 78,429 common shares. There were no OP units redeemed during the ~~nine~~three months ended ~~September~~March 3031, 2012 ~~and September 30, 2011, respectively~~.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

Distributions

The following table summarizes the cash distributions paid or payable to holders of OP units during each quarter during ~~2011~~2012 and the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 (in thousands, except per ~~share/~~unit data):

	Whitestone				Limited Partners Other ~~than~~Than Whitestone				Total
Quarter Paid	~~Distributions~~Distribution Per OP Unit		Total Amount Paid		~~Distributions~~Distribution Per OP Unit		Total Amount Paid		Total Amount Paid
2013
First Quarter	$	0.2850	$	4,807	$	0.2850	$	194	$	5,001
Total	$	0.2850	$	4,807	$	0.2850	$	194	$	5,001
2012
Third Quarter	$	0.2850	$	3,859	$	0.2850	$	224	$	4,083
Fourth Quarter	$	0.2850	$	4,781	$	0.2850	$	221	$	5,002
Third Quarter	0.2850		3,859		0.2850		224		4,083
Second Quarter	0.2850		3,362		0.2850		258		3,620
First Quarter	0.2850		3,322		0.2850		301		3,623
Total	$	01.~~8550~~1400	$	1015,~~543~~324	$	01.~~8550~~1400	$	~~783~~1,004	$	1116,~~326~~328
2011
Fourth Quarter	$	0.2850	$	3,193	$	0.2850	$	430	$	3,623
Third Quarter	0.2850		3,115		0.2850		514		3,629
Second Quarter	0.2850		2,121		0.2850		515		2,636
First Quarter	0.2850		1,616		0.2850		515		2,131
Total	$	1.1400	$	10,045	$	1.1400	$	1,974	$	12,019

New York Stock Exchange Listing

On June 29, 2012, Whitestone transferred the listing of its common shares to the New York Stock Exchange under its existing ticker symbol "WSR." As a result of the transfer, Whitestone voluntarily delisted its common shares from the NYSE MKT LLC (“NYSE MKT”) effective June 28, 2012.

Exchange Offers

On ~~September~~May 210, ~~2011~~2012, Whitestone commenced an exchange offer to exchange Class B common shares on a one-for-one basis for (i) up to 867,789 outstanding Class A common shares; and (ii) up to 453,642 outstanding OP units ~~(the “First Exchange Offer”)~~. The ~~First~~exchange ~~Exchange~~offer ~~Offer~~ expired on ~~October~~June 38, ~~2011~~2012, and ~~867~~426,~~789~~986 Class A common shares and ~~453~~121,~~642~~156 OP units were accepted for exchange.

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

OnWe ~~May~~are ~~10,~~subject ~~2012,~~to ~~Whitestone~~various ~~commenced~~legal aproceedings ~~third~~and ~~offer~~claims tothat ~~exchange~~arise ~~Class~~in Bthe ~~common~~ordinary ~~shares~~course onof abusiness. These ~~one-for-one~~matters ~~basis~~are ~~for~~generally ~~(i)~~covered upby toinsurance. While ~~867,789~~the ~~outstanding~~resolution ~~Class~~of Athese ~~common~~matters ~~shares;~~cannot ~~and~~be ~~(ii)~~predicted upwith ~~to 453~~certainty,~~642~~ ~~outstanding~~management OPbelieves ~~units (~~the ~~“Third~~final ~~Exchange~~outcome ~~Offer”). The~~of ~~Third~~such ~~Exchange~~matters ~~Offer~~will ~~expired~~not onhave ~~June~~a 8,material ~~2012,~~adverse ~~and~~effect ~~426,986~~on ~~Class~~our Aconsolidated ~~common~~financial ~~shares and 121,156 OP units were accepted for exchange~~statements.

~~See~~Executive ~~Note~~Relocation. On 16July ~~for~~9, a2010, ~~description~~upon the unanimous recommendation of Whitestone's ~~registration~~Compensation Committee, Whitestone entered into an arrangement with Mr. Mastandrea with respect to the disposition of ~~additional~~his ~~common~~residence ~~shares~~in ~~subsequent~~Cleveland, Ohio. Mr. Mastandrea listed the residence in the second half of 2007 and has had to pay for security, taxes, insurance and maintenance expenses related to the ~~quarter~~residence. Under ~~ending~~the ~~September 30~~relocation arrangement as amended on August 9, 2012, Whitestone agreed to pay Mr. Mastandrea the shortfall, if any, in the amount realized from the sale of the Cleveland residence, below $2,450,000, plus tax on the amount of such payment at the maximum federal income tax rate. The amount of the shortfall was to be paid in a combination of cash and common shares at the market value of the shares, as determined upon agreement between Mr. Mastandrea and Whitestone's Compensation Committee.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

11In addition, the arrangement required Whitestone to continue paying the previously agreed upon cost of housing expenses for the Mastandrea family in Houston, Texas for a period of one year following the date of sale of the residence. ~~COMMITMENTS~~ Whitestone ~~AND~~had ~~CONTINGENCIES~~previously agreed to reimburse Mr. Mastandrea for out-of-pocket moving costs including packing, temporary storage, transportation and moving supplies.

WeOn ~~are~~December ~~subject~~21, 2012, Mr. Mastandrea sold the residence to ~~various~~a ~~legal~~third ~~proceedings~~party ~~and~~for ~~claims~~a ~~that~~price ~~arise~~of in$1,125,000. Pursuant to the ~~ordinary~~relocation ~~course~~arrangement, Whitestone paid cash of ~~business~~$1,325,000, representing the shortfall of the amount realized from the sale of the property, and $852,000, which represented moving expenses and closing costs incurred by Mr. ~~These~~ ~~matters~~Mastandrea ~~are~~and ~~generally~~federal ~~covered~~taxes. No Whitestone common shares were issued. The total expense incurred by ~~insurance~~Whitestone of $2,177,000 is shown separately in our consolidated financial statements for the year ended December 31, 2012. ~~While~~ In addition, Whitestone issued a note receivable for $975,000 to the ~~resolution~~buyer. The note bears interest at a rate of ~~these~~4.5% ~~matters~~and ~~cannot~~matures beon ~~predicted~~December 31, ~~with~~2013. As ~~certainty~~a result of this transaction, ~~management~~Whitestone ~~believes~~also ~~the~~recorded ~~final~~a ~~outcome~~related party receivable of ~~such~~$652,000 ~~matters~~for ~~will~~the year ended December 31, 2012, which represents the federal income tax withholding not ~~have~~deducted afrom ~~material~~Whitestone's ~~adverse~~payment ~~effect~~to Mr. Mastandrea. On January 14, 2013, Whitestone received the $652,000 and paid it to the federal government on ~~our~~behalf ~~consolidated~~of ~~financial~~Mr. ~~statements~~Mastandrea.

Executive Relocation. On July 9, 2010, upon the unanimous recommendation of Whitestone's Compensation Committee of Whitestone's board of trustees, Whitestone entered into an arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland, Ohio. Mr. Mastandrea listed the residence in the second half of 2007 and has had no offers. In the meantime, Mr. Mastandrea has continued to pay for security, taxes, insurance and maintenance expenses related to the residence. In May 2010, Whitestone engaged a professional relocation firm to market the home and assist in moving the Mastandrea family to Houston. Since the engagement of the relocation firm, no offers on the home have been received. On August 6, 2012, upon the unanimous recommendation of Whitestone's Compensation Committee to Whitestone's board of trustees, the arrangement with Mr. Mastandrea with respect to the disposition of his residence in Cleveland, Ohio was amended. See Note 9 above for a description of the amendment to the arrangement with Mr. Mastandrea.

12. INCENTIVE SHARE PLAN

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

The Compensation Committee of Whitestone's board of trustees administers the 2008 Plan, except with respect to awards to non-employee trustees, for which the 2008 Plan is administered by Whitestone's board of trustees. The Compensation Committee is authorized to grant share options, including both incentive share options and non-qualified share options, as well as share appreciation rights, either with or without a related option. The Compensation Committee is also authorized to grant restricted common shares, restricted common share units, performance awards and other share-based awards.

A summary of the share-based incentive plan activity as of and for the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 is as follows:

	Shares		Weighted-AverageGrant DateFair Value (1)
Non-vested at January 1, 2012	504,023		$	12.48
Non-vested at January 1, 2013	534,920		$	12.53
Granted	~~99,700~~—		~~13.03~~—
Vested	(~~15,041~~474	)	1315.8445
Forfeited	(464,~~302~~778	)	1211.6216
Non-vested as of September 30, 2012	542,380		12.53
Non-vested at March 31, 2013	529,668		$	12.54
Available for grant at September 30, 2012	1,882,240
Available for grant at March 31, 2013	1,893,312


⁽¹⁾	The fair value of the common shares granted before trading of the common shares commenced on the NYSE MKT on August 26, 2010 were determined based on observable market transactions occurring near the date of the grants. The fair value of the common shares granted subsequent to August 26, 2010 was determined based on the fair value at the date of grant.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

A summary of ~~Whitestone's~~ non-vested and vested ~~shares~~share activity for the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 and years ended December 31, ~~2011~~2012, ~~2010~~2011 and ~~2009~~ 2010 is presented below:

	Shares Granted			Shares Vested
	Non-Vested Shares Issued	Weighted-Average Grant-Date Fair Value		Vested Shares		Total Vest-Date Fair Value
						(in thousands)
Nine months ended September 30, 2012	99,700	$	13.03	(15,041	)	$	208
Three months ended March 31, 2013	—	$	—	(474	)	$	7
Year ended December 31, 2012	99,700	13.03		(16,208	)	223
Year ended December 31, 2011	—	—		(5,169	)	80
Year ended December 31, 2010	31,858	14.09		(55,699	)	695
Year ended December 31, 2009	600,731	12.37		—		—

Total compensation recognized in earnings for share-based payments was $~~118~~356,000 and $78,000 for the three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012, respectively,. Taking ~~and~~into ~~$384,000~~account ~~and~~the ~~$233,000~~acquisition ~~for~~that occurred during the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011, respectively. With~~ the ~~acquisitions~~year ~~during the three months~~ ended ~~September 30~~December 31, 2012 (see Note 15), Whitestone expects additional performance-based shares to vest due to the achievement of certain ~~Company-wide~~ performance goals. As a result, atas ~~September~~of March 3031, ~~2012~~2013, there was approximately $1824,~~376,~~000 in unrecognized compensation cost related to outstanding non-vested performance-based shares, which is expected to vest over a period of ~~fifteen~~nine months and approximately $9034,000 in unrecognized compensation cost related to outstanding non-vested time-based shares, which ~~are~~is expected to be recognized over a weighted-average period of approximately one year. ~~The fair value of the shares granted during the nine months ended September 30, 2012 was determined using quoted prices available on the date of grant.~~

13. GRANTS TO TRUSTEES

On May 22, 2012, each of Whitestone's four independent trustees was granted 1,500 common shares, which vested immediately. The 6,000 common shares granted to Whitestone's four independent trustees had a grant date fair value of $13.03 per share. On June 25, 2012, two of Whitestone's independent trustees elected to receive a total of 915 common shares with a grant date fair value of $13.39 in lieu of cash for board fees. The fair value of the shares granted during the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 was determined using quoted prices available on the date of grant.

14. SEGMENT INFORMATION

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

15. REAL ESTATE

Property Acquisitions. On ~~September~~March 2128, ~~2012~~2013, we acquired Headquarters Village ~~Square~~Shopping ~~at Dana Park~~Center, a property that meets our Community Centered Property strategy, for approximately $4625.57 million in cash and net prorations. The ~~310~~89,~~979~~134 square foot ~~center~~property was 71100% leased at the time of purchase and is located in ~~the Mesa submarket of Phoenix~~Plano, ~~Arizona~~Texas. ~~In the same purchase, we also acquired an adjacent development parcel of 4.7 acres for approximately $4.0 million in cash.~~

On December 28, 2012, we acquired the Shops at Pecos Ranch, a property that meets our Community Centered Property strategy, for approximately $19.0 million in cash and net prorations. The 78,767 square foot property was 100% leased at the time of purchase and is located in Chandler, Arizona, a suburb of Phoenix.

On September 21, 2012, we acquired Village Square at Dana Park, a property that meets our Community Centered Property strategy, for approximately $46.5 million in cash and net prorations. The 310,979 square foot center was 71% leased at the time of purchase and is located in the Mesa submarket of Phoenix, Arizona. In the same purchase, we also acquired an adjacent development parcel of 4.7 acres for approximately $4.0 million in cash.

On September 21, 2012, we acquired Fountain Square, a property that meets our Community Centered Property strategy, for approximately $15.4 million in cash and net prorations. The 118,209 square foot property was 76% leased at the time of purchase and is located in Scottsdale, Arizona.

On August 8, 2012, we acquired Paradise Plaza, a property that meets our Community Centered Property strategy, for approximately $16.3 million, including the assumption of a $9.2 million non-recourse loan, and cash of $7.1 million. Paradise Plaza was 100% occupied at the time of purchase with 125,898 of square feet of gross leasable area, and is located in Paradise Valley, Arizona, a suburb of Phoenix.

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September~~March 3031, ~~2012~~2013

(Unaudited)

On August 8, 2012, we acquired Paradise Plaza, a property that meets our Community Centered Property strategy, for approximately $16.3 million, including the assumption of a $9.2 million non-recourse loan, and cash of $7.1 million. The 125,898 square foot property was 100% leased at the time of purchase and is located in Paradise Valley, Arizona, a suburb of Phoenix.

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

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

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

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

On December 22, 2011, we acquired Phase I of Pinnacle of Scottsdale, or Pinnacle, a property that meets our Community Centered Property strategy, for approximately $28.8 million, including a non-recourse loan we assumed for $14.1 million that is secured by the property, and cash of $14.7 million. Pinnacle is a 100% occupied Class A Community Center with 113,108 square feet of gross leasable area in North Scottsdale, Arizona.

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

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

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

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

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

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WHITESTONE REIT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

16. SUBSEQUENT EVENTS

On October 9, 2012, Whitestone filed a prospectus supplement, relating to its effective universal shelf registration statement on Form S-3, covering the issuance of up to 786,191 of Whitestone's common shares, par value $0.001 per share, to certain holders of OP units in the Partnership. The OP units may be issued to the extent that OP unit holders tender their OP units for redemption in accordance with the terms of the limited partnership agreement of the Partnership and Whitestone elects, at its sole discretion, to issue common shares to the tendering OP unit holders.

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

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”), and the consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited consolidated financial statements included in this Report.

This Report contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our unitholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of 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 management's view only as of the date of this Report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Report include:


•	the imposition of federal taxes if Whitestone fails to qualify as a REIT in any taxable year or forego an opportunity to ensure REIT status;


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


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


•	adverse economic or real estate developments in Texas, Arizona or Illinois;


•	increases in interest rates and operating costs;


•	inability to obtain necessary outside financing;


•	decreases in rental rates or increases in vacancy rates;


•	litigation risks;


•	lease-up risks;


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


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


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

The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012, as previously filed with the Securities and Exchange Commission ("SEC") and of this Report below.

Overview

We are a Delaware limited partnership formed in 1998 and a majority-owned subsidiary of our sole general partner, Whitestone, a fully integrated real estate company that owns and operates Community Centered Properties in culturally diverse markets in major metropolitan areas. We define Community Centered Properties as visibly located properties in established or developing culturally diverse neighborhoods in our target markets. We have a portfolio of commercial properties in Texas, Arizona and Illinois.

In October 2006, Whitestone's current management team joined Whitestone and adopted a strategic plan to acquire, redevelop, own and operate Community Centered Properties. Management markets, leases and manages our centers to match tenants with the shared needs of the surrounding neighborhood. Those needs may include specialty retail, grocery, restaurants and medical, educational and financial services. Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property. Whitestone employs and develops a diverse group of associates who understand the needs of our multicultural communities and tenants.

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As of ~~September~~March 3031, ~~2012~~2013, we owned and operated 5052 commercial properties consisting of:

Operating Portfolio

• ~~twenty-four~~28 retail centers containing approximately 12.81 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $~~170~~213.24 million;

• seven office centers containing approximately 0.6 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $4342.38 million; and

• ~~eleven~~11 office/flex centers containing approximately 1.2 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $4039.14 million.

Redevelopment, New Acquisitions Portfolio

• ~~five~~three retail Community Centered Properties containing approximately 0.65 million square feet of gross leasable area and having a total carrying value (net of accumulated depreciation) of $7776.29 million; and

• three parcels of land held for future development having a total carrying value of $7.13 million.

As of ~~September~~March 3031, ~~2012~~2013, we had aan ~~total~~aggregate of 1,~~051~~101 tenants. We have a diversified tenant base with our largest tenant comprising only 1.21% of our annualized rental revenues for the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013. Lease terms for our properties range from less than one year for smaller tenants to over 15 years for larger tenants. Our leases generally include minimum monthly lease payments and tenant reimbursements for payment of taxes, insurance and maintenance. We completed ~~245~~71 new and renewal leases during the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013, totaling approximately ~~493~~131,000 square feet and approximately $247.01 million in total lease value. This compares to ~~224~~90 new and renewal leases totaling approximately ~~636~~159,000 square feet and approximately $256.18 million in total lease value during the same period in ~~2011~~2012.

As of ~~September~~March 3031, ~~2012~~2013, we had no employees and Whitestone employed 5968 full-time employees. As an internally managed REIT, Whitestone bears its own expenses of operations, including the salaries, benefits and other compensation of its employees, office expenses, legal, accounting and investor relations expenses and other overhead costs. As the management and employees of Whitestone work for ~~the~~our benefit ~~of the Partnership~~, the costs and expenses of Whitestone have been presented in this Report in a manner consistent with Whitestone's presentation in its quarterly report on Form 10-Q for the period ended ~~September~~March 3031, ~~2012~~2013.

How We Derive Our Revenue

Substantially all of our revenue is derived from rents received from leases at our properties. We had rental income and tenant reimbursements of approximately $1113.69 million and $810.84 million for the three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011, respectively, and $33.0 million and $24.9 million for the nine months ended September 30,~~ 2012 ~~and 2011~~, respectively.

Known Trends in Our Operations; Outlook for Future Results

Rental Income

We expect our rental income to increase year-over-year due to the addition of properties. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods~~. We~~, although we expect modest continued improvement in the ~~economic~~overall ~~conditions~~economy in our markets to provide slight increases in occupancy at certain of our properties.

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Scheduled Lease Expirations

We tend to lease space to smaller businesses that desire shorter term leases. As of ~~September~~March 3031, ~~2012~~2013, approximately 29% of our gross leasable area was subject to leases that expire prior to December 31, ~~2013~~2014. Over the last two years, we have renewed leases covering approximately 75% of our square footage as a result of lease maturities. We routinely seek to renew leases with our existing tenants prior to their expiration and typically begin discussions with tenants as early as 18 months prior to the expiration date of the existing lease. In the markets in which we operate, we obtain and analyze market rental rates by reviewing third-party publications, which provide market and submarket rental rate data, and by inquiring of property owners and property management companies as to rental rates being quoted at properties located in close proximity to our properties that we believe display similar physical attributes as our properties. We ~~utilize~~use this data to negotiate leases with new tenants and renew leases with our existing tenants at rates we believe to be competitive in the markets for our individual properties. Due to the short term nature of our leases, and based upon our analysis of market rental rates, we believe that, in the aggregate, our current leases are at market rates. During the year ended December 31, ~~2011~~2012, our revenue rate per square foot for new and renewal comparable spaces increased 12% when compared to the expiring revenue rate per square foot for the previous leases in the same spaces. As such, we expect tothe ~~renew~~2013 ~~our~~and ~~leases~~2014 expiring insquare ~~the~~footage ~~near~~to ~~term~~lease at rates which are at, or near, their current rates. Market conditions, including new supply of properties, and macroeconomic conditions in our markets and nationally affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could adversely impact our renewal rate and/or the rental rates we are able to negotiate. We continue to monitor our tenants' operating performances, as well as overall economic trends, to evaluate any future negative impact on our renewal rates and rental rates, which could adversely affect our cash flow and ability to pay distributions to our unitholders.

Acquisitions

We expect to actively seek acquisitions in the foreseeable future. We believe that over the next few years we will continue to have excellent opportunities to acquire quality properties at historically attractive prices. Whitestone, our general partner, has extensive relationships with community banks, attorneys, title companies and others in the real estate industry, which we believe ~~will~~enables ~~enable~~ us to take advantage of these market opportunities and maintain an active acquisition pipeline.

Property Acquisitions

We seek to acquire commercial properties in high-growth markets. Our acquisition targets are properties that fit our Community Centered Properties strategy. We define Community Centered Properties as visibly located properties in established or developing, culturally diverse neighborhoods in our target markets, primarily in and around Phoenix, Chicago, Dallas, San Antonio and Houston. Management markets, leases and manages our centers to match tenants with the shared needs of the surrounding neighborhood. Those needs may include specialty retail, grocery, restaurants, medical, educational and financial services. Our goal is for each property to become a Whitestone-branded business center or retail community that serves a neighboring five-mile radius around our property.

On March 28, 2013, we acquired Headquarters Village Shopping Center, a property that meets our Community Centered Property strategy, for approximately $25.7 million in cash and net prorations. The 89,134 square foot property was 100% leased at the time of purchase and is located in Plano, Texas.

On August 8, 2012, we acquired Paradise Plaza, a property that meets our Community Centered Property strategy, for approximately $16.3 million, including the assumption of a $9.2 million non-recourse loan, and cash of $7.1 million. ~~Paradise~~The ~~Plaza~~125,898 square foot property was 100% ~~occupied~~leased at the time of purchase ~~with 125,898 of square feet of gross leasable area,~~ and is located in Paradise Valley, Arizona, a suburb of Phoenix.

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On ~~December~~May 2829, ~~2011~~2012, we acquired the Shops at ~~Starwood~~Pinnacle Peak, a property that meets our Community Centered Property strategy, for approximately $156.74 million in cash and net prorations. The ~~Class~~41,530 Asquare foot center, ~~which~~ was 9876% ~~occupied~~leased at the time of purchase, ~~contains 55,385 square feet of gross leasable area~~ and is located in ~~Frisco,~~North ~~Texas~~Scottsdale, ~~a northern suburb of Dallas~~Arizona. ~~The Shops at Starwood has a complementary tenant mix of restaurants, fashion boutiques, salons and second-level office space.~~

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

Property Dispositions

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

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Critical Accounting Policies

In preparing the consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012, under "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no significant changes to these policies during the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012.

Results of Operations

Comparison of the Three Months Ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012

The following table provides a summary comparison of our results of operations for the three months ended ~~September~~March 3031, ~~2012~~2013 and ~~2011~~2012 (dollars in thousands, except per OP unit ~~amounts~~data):

	Three Months Ended September 30,
	Three Months Ended March 31,
	2012			2011
	2013			2012
Number of properties owned and operated	5052			4145
Aggregate gross leasable area (sq. ft.)(1)	4,~~195~~363,~~924~~825			3,~~428~~595,~~844~~308
Ending occupancy rate - operating portfolio(2)	8786		%	8687		%
Ending occupancy rate - all properties	8584		%	8485		%
Total property revenues	$	1113,~~618~~869		$	810,~~791~~426
Total property expenses	4,~~598~~863			3,~~638~~662
Total other expenses	67,~~694~~947			45,~~822~~827
Provision for income taxes	7765			5465
Gain (loss) on disposal of assets	77			(1		)
Loss on disposal of assets	8			12
Income before gain on sale of property	172			278
Net income	$	986		$	860
Gain on sale of property	—			397
Funds from operations (3)	$	4,044		$	3,121
Net income	$	172		$	675
Property net operating income (4)	9,006			6,764
Funds from operations (3)	$	2,906		$	2,210
Distributions paid on OP units	5,001			3,623
Property net operating income (4)	7,020			5,153
Distributions per Whitestone common share and OP unit	$	0.2850		$	0.2850
Distributions paid on OP units	4,083			3,629
Distributions paid as a % of funds from operations	124		%	116		%
Per OP unit	$	0.2850		$	0.2850
Distributions paid as a % of funds from operations	141		%	164		%

(1) During the first quarter of 2012, we concluded that approximately 2,029 square feet at our Lion Square ~~location~~property was no longer leasable, therefore, such area is no longer included in the gross leasable area ~~as of March 31, 2012~~.


⁽²⁾	Excludes (i) new acquisitions, through the earlier of attainment of 90% occupancy or 18 months of ownership, and (ii) properties that are undergoing significant redevelopment or re-tenanting.


⁽³⁾	For a reconciliation of funds from operations to net income, see "Funds From Operations" below.


⁽⁴⁾	For a reconciliation of property net operating income to net income, see "Property Net Operating Income" below.

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Property revenues. We had rental income and tenant reimbursements of approximately $13,869,000 for the three months ended March 31, 2013 as compared to $10,426,000 for the three months ended March 31, 2012, an increase of $3,443,000, or 33%. The three months ended March 31, 2013 included $3,053,000 in increased revenues from New Store operations. We define "New Stores" as properties acquired since the beginning of the the period being compared. For purposes of comparing the three months ended March 31, 2013 to the three months ended March 31, 2012, New Stores include properties acquired between January 1, 2012 and March 31, 2013. Same Store revenues increased $390,000 for the three months ended March 31, 2013 as compared to the same period in the prior year. We define "Same Stores" as properties that have been owned since the beginning of the period being compared. For purposes of comparing the three months ended March 31, 2013 to the three months ended March 31, 2012, Same Stores include properties currently owned that were acquired before January 1, 2012. Same Store average occupancy increased from 84.3% for the three months ended March 31, 2012 to 85.5% for the three months ended March 31, 2013, increasing Same Store revenue $151,000. The Same Store average revenue per leased square foot increased $0.31 for the three months ended March 31, 2013 to $14.06 per leased square foot as compared to the average revenue per leased square foot of $13.75 for the three months ended March 31, 2012, resulting in an increase of Same Store revenues of $239,000.

Property expenses. Our property expenses were approximately $4,863,000 for the three months ended March 31, 2013 as compared to $3,662,000 for the three months ended March 31, 2012, an increase of $1,201,000, or 33%. The primary components of total property expenses are detailed in the table below (in thousands, except percentages):



	Three Months Ended March 31,
Overall Property Expenses	2013		2012		Change		% Change
Real estate taxes	$	1,798	$	1,310	$	488	37	%
Utilities	759		676		83		12	%
Contract services	828		631		197		31	%
Repairs and maintenance	424		377		47		12	%
Bad debt	317		132		185		140	%
Labor and other	737		536		201		38	%
Total property expenses	$	4,863	$	3,662	$	1,201	33	%



	Three Months Ended March 31,
Same Store Property Expenses	2013		2012		Change			% Change
Real estate taxes	$	1,330	$	1,310	$	20		2	%
Utilities	658		676		(18		)	(3	)%
Contract services	623		631		(8		)	(1	)%
Repairs and maintenance	340		377		(37		)	(10	)%
Bad debt	237		132		105			80	%
Labor and other	613		536		77			14	%
Total property expenses	$	3,801	$	3,662	$	139		4	%



	Three Months Ended March 31,
New Store Property Expenses	2013		2012		Change
Real estate taxes	$	468	$	—	$	468
Utilities	101		—		101
Contract services	205		—		205
Repairs and maintenance	84		—		84
Bad debt	80		—		80
Labor and other	124		—		124
Total property expenses	$	1,062	$	—	$	1,062

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Real estate taxes. Real estate taxes increased $488,000, or 37%, during the three months ended March 31, 2013 as compared to the same period in 2012. Real estate taxes for New Store properties were approximately $468,000 for the three months ended March 31, 2013. Same Store real estate taxes increased approximately $20,000 during the three months ended March 31, 2013 as compared to the same period in 2012. Whitestone's management actively works to keep our valuations and resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases, and we strive to keep these charges to our tenants as low as possible.

Utilities. Utilities expenses increased $83,000, or 12%, during the three months ended March 31, 2013 as compared to the same period in 2012. Utilities expenses for New Store properties were approximately $101,000 for the three months ended March 31, 2013. Same Store utilities expenses decreased approximately $18,000 during the three months ended March 31, 2013 as compared to the same period in 2012.

Contract services. Contract services increased $197,000, or 31%, during the three months ended March 31, 2013 as compared to the same period in 2012. The increase in contract services expenses included $205,000 in contract expenses increases for New Store properties for the three months ended March 31, 2013. Same Store contract service expenses decreased approximately $8,000 during the three months ended March 31, 2013 as compared to the same period in 2012.

Repairs and maintenance. Repairs and maintenance expenses increased $47,000, or 12%, during the three months ended March 31, 2013 as compared to the same period in 2012. Repairs and maintenance expenses for the three months ended March 31, 2013 included approximately $84,000 in increases for New Store properties. Same Store repairs and maintenance expenses decreased approximately $37,000 during the three months ended March 31, 2013 as compared to the same period in 2012. The decrease in Same Store repair expenses was primarily attributable to parking lot repairs completed during 2012.

Bad debt. Bad debt expenses increased $185,000, or 140%, during the three months ended March 31, 2013 as compared to the same period in 2012. Bad debt expenses for the three months ended March 31, 2013 included approximately $80,000 in increases for New Store properties. Same Store bad debt increased approximately $105,000 during the three months ended March 31, 2013 as compared to the same period in 2012. The Same Store increase in bad debt expenses was primarily attributable to a retail tenant default at our Torrey Square property in Houston, Texas. The tenant occupied approximately 25,000 square feet, and we have an agreement in place with the national retailer to fill the space later this year. Management vigorously pursues past due accounts, but expects collection of rents to continue to be challenging for the foreseeable future.

Labor and other. Labor and other expenses increased $201,000, or 38%, during the three months ended March 31, 2013 as compared to the same period in 2012. Labor and other expenses for the three months ended March 31, 2013 included approximately $124,000 in increased cost for New Store properties. Same Store labor and other expenses increased approximately $77,000 during the three months ended March 31, 2013 as compared to the same period in 2012. The increase in Same Store labor and other cost was primarily attributable to increased insurance rates.

Same Store and New Store net operating income. The components of Same Store, New Store and total property net operating income are detailed in the table below (in thousands):



	Three Months Ended March 31,
	Same Store				New Store				Total
	2013		2012		2013		2012		2013		2012
Property revenues	$	10,816	$	10,426	$	3,053	$	—	$	13,869	$	10,426
Property expenses	3,801		3,662		1,062		—		4,863		3,662
Property net operating income	$	7,015	$	6,764	$	1,991	$	—	$	9,006	$	6,764

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~~Property~~Other ~~revenues~~expenses. Our Weother ~~had~~expenses ~~rental~~were ~~income and tenant reimbursements of approximately~~ $117,~~618~~947,000 for the three months ended ~~September~~March 3031, ~~2012~~2013, as compared to $85,~~791~~827,000 for the three months ended ~~September~~March 3031, ~~2011~~2012, an increase of $2,~~827~~120,000, or 3236%. The ~~three~~primary ~~months~~components ~~ended~~of ~~September 30,~~other ~~2012~~expenses ~~included~~are ~~$2,458,000~~detailed in ~~increased revenues from New Store operations. We define "New Stores" as properties acquired since~~ the ~~beginning~~table ofbelow the the period being compared. For purposes of comparing the three months ended September 30, 2012 to the three months ended September 30, 2011, New Stores include properties acquired between July 1, 2011 and September 30, 2012. Same Store revenues increased $369,000 for the three months ended September 30, 2012 as compared to the same period (in ~~the prior year. We define "Same Stores" as properties that were owned at the beginning of the period being compared. For purposes of comparing the three months ended September 30~~thousands, ~~2012~~except to the three months ended September 30, 2011, Same Stores include properties owned before July 1, 2011. Same Store average occupancy increased from 81.8% for the three months ended September 30, 2011 to 85.0% for the three months ended September 30, 2012, increasing Same Store revenue $321,000. The Same Store average revenue per leased square foot increased $0.07 for the three months ended September 30, 2012 to $12.72 per leased square foot as compared to the average revenue per leased square foot of $12.65 for the three months ended September 30, 2011, resulting in an increase of Same Store revenues of $48,000.percentages):

Property expenses. Our property expenses were approximately $4,598,000 for the three months ended September 30, 2012 as compared to $3,638,000 for the three months ended September 30, 2011, an increase of $960,000, or 26%. The primary components of total property expenses are detailed in the table below (in thousands, except percentages):



	Three Months Ended March 31,
	2013			2012			Change		% Change
General and administrative	$	2,444		$	1,641		$	803	49	%
Depreciation and amortization	3,073			2,283			790		35	%
Interest expense	2,449			1,973			476		24	%
Interest, dividend and other investment income	(19		)	(70		)	51		(73	)%
Total other expenses	$	7,947		$	5,827		$	2,120	36	%

	Three Months Ended September 30,
	2012		2011		Change		% Change
Real estate taxes	$	1,629	$	1,262	$	367	29	%
Utilities	810		678		132		19	%
Contract services	657		594		63		11	%
Repairs and maintenance	476		396		80		20	%
Bad debt	362		165		197		119	%
Labor and other	664		543		121		22	%
Total property expenses	$	4,598	$	3,638	$	960	26	%

General and administrative. General and administrative expenses increased approximately $803,000, or 49%, for the three months ended March 31, 2013 as compared to the same period in 2012. The increases in general and administrative expenses included increases in payroll expenses of $265,000, increases in share-based compensation expenses of $261,000, increases in legal expenses of $159,000, increases in acquisition expenses of $76,000 and $42,000 in other increases.

~~Real~~ ~~estate~~Payroll ~~taxes. Real~~expenses ~~estate~~increased ~~taxes~~due ~~increased~~to ~~$367~~the addition of nine full-time Whitestone employees between March 31,~~000,~~ or2012 ~~29%~~and March 31, ~~during~~2013. The majority of the ~~three~~employees ~~months~~were ~~ended~~added ~~September 30,~~to ~~2012~~Whitestone's regional office in Arizona as ~~compared~~a toresult ~~the~~of ~~same~~recent ~~period~~property acquisitions in ~~2011~~the Phoenix area. ~~Real~~The ~~estate~~increase ~~taxes~~in ~~for~~share-based ~~New~~compensation ~~Store~~expense ~~properties~~is ~~were~~due to the expected vesting of performance-based shares. As of March 31, 2013, there was approximately $~~360~~824,000 ~~for~~in ~~the~~unrecognized ~~three~~compensation ~~months~~cost ~~ended~~related ~~September 30~~to outstanding non-vested performance-based shares, ~~2012. Same~~which ~~Store~~are ~~real~~expected ~~estate~~to ~~taxes~~vest ~~increased~~over a period of approximately nine months and approximately $734,000 ~~during~~in ~~the~~unrecognized ~~three~~compensation ~~months~~cost ~~ended~~related ~~September 30~~to outstanding non-vested time-based shares, ~~2012~~which asare ~~compared~~expected to ~~the~~be ~~same~~recognized over a weighted-average period inof ~~2011~~approximately 9 months. ~~Management~~The ~~actively~~majority ~~works~~of the increase in legal expenses is attributable to ~~keep~~a ~~our~~$145,000 ~~valuations~~settlement ~~and~~we ~~resulting~~received ~~taxes~~from ~~low~~litigation ~~because~~with a ~~majority~~former oftenant ~~these~~regarding ~~taxes~~damages ~~are~~to ~~charged~~one toof our ~~tenants~~properties ~~through~~during ~~triple~~the ~~net~~three ~~leases~~months ended March 31, ~~and~~2012 wethat ~~strive~~did tonot ~~keep~~occur ~~these~~during ~~charges~~the three months ended March 31, 2013. The increase in acquisition expenses is due to our ~~tenants~~recent asacquisition ~~low~~of asHeadquarters ~~possible~~Village Shopping Center in Plano, Texas.

~~Utilities~~Depreciation and amortization. ~~Utilities~~ Depreciation ~~expenses~~and amortization increased $~~132~~790,000, or 1935%, ~~during~~for the three months ended ~~September~~March 3031, ~~2012~~2013 as compared to the same period in ~~2011~~2012. ~~Utilities~~Depreciation ~~expenses~~ for ~~New~~improvements to Same Store properties ~~were~~increased ~~approximately~~ $99345,000 for the three months ended ~~September~~March 3031, 2013 as compared to the same period in 2012. ~~Same~~The ~~Store~~increase ~~utilities~~in ~~expenses~~Same ~~increased~~Store ~~approximately~~depreciation ~~$33,000~~is ~~during~~attributable ~~the~~to ~~three~~redevelopment ~~months~~and ~~ended~~re-tenanting ~~September 30~~investments, ~~2012~~most asnotably ~~compared~~at toour ~~the~~Windsor ~~same~~and ~~period~~Pinnacle inof ~~2011~~Scottsdale properties. ~~The~~Lease ~~majority~~commission amortization and depreciation of ~~the~~corporate ~~Same~~assets ~~Store~~decreased ~~increase~~$10,000 ~~was~~for ~~attributable~~the tothree ~~water~~months ~~and~~ended ~~drainage~~March 31, ~~fees~~2013 ~~charged~~as compared to ~~our~~the ~~Houston~~same ~~properties~~period byin ~~the~~2012. Depreciation ~~City~~for ofNew ~~Houston~~Store properties increased $455,000.

~~Contract~~Interest ~~services~~expense. ~~Contract~~ Interest ~~services~~expense increased $63476,000, or 1124%, ~~during~~for the three months ended ~~September~~March 3031, ~~2012~~2013 as compared to the same period in ~~2011~~ 2012. The increase in ~~contract~~interest ~~services~~expense ~~expenses~~is ~~included~~comprised of approximately $771,003,000 in ~~contract~~interest ~~expenses~~expense ~~increases~~resulting ~~for~~from ~~New~~an ~~Store~~approximate ~~properties~~$72,723,000 ~~for~~increase in our average notes payable balance during the three months ended ~~September~~March 3031, 2013 as compared to the same period 2012, offset by a $635,000 decrease in interest expense resulting from a decrease in the average effective interest rate on our average notes payable from 5.52% to 4.27% during three months ended March 31, 2013 as compared to the same period in 2012. ~~Same~~Amortized ~~Store~~loan ~~contract~~fees ~~service~~included ~~expenses~~in ~~decreased~~interest ~~approximately~~expense increased $14108,000 ~~during~~for the three months ended ~~September 30~~March 31, ~~2012~~2013 with the addition of new debt and our $125 million unsecured credit facility (which has been replaced by the unsecured credit facility entered into on February 4, 2013; see Note 6 to the accompanying consolidated financial statement for additional information) to $273,000 as compared to $165,000 for the same period in ~~2011~~2012.

~~Repairs~~Interest, dividend and ~~maintenance~~other investment income. ~~Repairs~~Interest, dividend and ~~maintenance~~other ~~expenses~~investment ~~increased~~income decreased $8051,000, or 2073%, ~~during~~for the three months ended ~~September~~March 3031, ~~2012~~2013 as compared to the same period in ~~2011. Repairs and maintenance expenses for the three months ended September 30,~~ 2012 ~~included approximately $150,000 in increases for New Store properties~~. ~~Same~~The ~~Store repairs and maintenance expenses decreased approximately~~ $7051,000 ~~during the three months ended September 30, 2012 as compared to the same period in 2011. The~~ decrease inis ~~Same Store repair expenses was primarily~~ attributable to ~~parking~~lower ~~lot~~dividends ~~repairs~~investment ~~completed during 2011~~income.

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Bad debt. Bad debt expenses increased $197,000, or 119%, during the three months ended September 30, 2012 as compared to the same period in 2011. Bad debt expenses for the three months ended September 30, 2012 included approximately $63,000 in increases for New Store properties. Same Store bad debt increased approximately $134,000 during the three months ended September 30, 2012 as compared to the same period in 2011. The Same Store increase in bad debt expenses was primarily attributable to outstanding rent and fees owed by several tenants in our Texas market. We are currently evaluating collection options ranging from downsizing the tenants to possible lockouts. Management vigorously pursues past due accounts, but expects collection of rents to continue to be challenging for the foreseeable future.

Labor and other. Labor and other expenses increased $121,000, or 22%, during the three months ended September 30, 2012 as compared to the same period in 2011. Labor and other expenses for the three months ended September 30, 2012 included approximately $51,000 in increased cost for New Store properties. Same Store labor and other expenses increased approximately $70,000 during the three months ended September 30, 2012 as compared to the same period in 2011. The increase in Same Store labor and other cost was primarily attributable to increased insurance rates and labor allocated for repairs and maintenance and was offset by lower non-recoverable repair costs.

	Three Months Ended September 30,
	Same Store				New Store				Total
	2012		2011		2012		2011		2012		2011
Property revenues	$	8,789	$	8,420	$	2,829	$	371	$	11,618	$	8,791
Property expenses	3,736		3,575		862		63		4,598		3,638
Property net operating income	$	5,053	$	4,845	$	1,967	$	308	$	7,020	$	5,153

Other expenses. Our other expenses were $6,694,000 for the three months ended September 30, 2012, as compared to $4,822,000 for the three months ended September 30, 2011, an increase of $1,872,000, or 39%. The primary components of other expenses are detailed in the table below (in thousands, except percentages):

	Three Months Ended September 30,
	2012			2011			Change		% Change
General and administrative	$	1,888		$	1,495		$	393	26	%
Depreciation and amortization	3,112			2,161			951		44	%
Interest expense	1,815			1,430			385		27	%
Interest, dividend and other investment income	(121		)	(264		)	143		(54	)%
Total other expenses	$	6,694		$	4,822		$	1,872	39	%

General and administrative. General and administrative expenses increased approximately $393,000, or 26%, for the three months ended September 30, 2012 as compared to the same period in 2011. The increases in general and administrative expenses included increases in legal fees of $187,000, increases in acquisition expenses of $151,000, increases in share-based compensation of $52,000 and $3,000 in other increases. The majority of the increase in legal expense is attributable to a $190,000 settlement we received from litigation with a former tenant regarding damages to our properties during the three months ended September 30, 2011 that did not repeat during the three months ended September 30, 2012. The increase in acquisition expenses is due to acquisition-related costs for our acquisitions of Paradise Plaza, Fountain Square and Village Square at Dana Park during the three months ended September 30, 2012. The increase in share-based compensation is due to expense related to additional employee grants and expenses related to the expected vesting of performance-based shares. As of September 30, 2012, there was approximately $1,380,000 in unrecognized compensation cost related to outstanding non-vested performance-based shares, which is expected to to vest over a period of fifteen months and approximately $90,000 in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a weighted-average period of approximately one year.

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Depreciation and amortization. Depreciation and amortization increased $951,000, or 44%, for the three months ended September 30, 2012 as compared to the same period in 2011. Depreciation for improvements to Same Store properties increased $328,000 for the three months ended September 30, 2012 as compared to the same period in 2011, and amortization of capitalized loan fees increased $233,000. The increase in Same Store depreciation is attributable to redevelopment and re-tenanting investments, most notably at our Windsor Park and Lion Square locations, and the increase in amortization of capitalized loan fees is the result of fees associated with our Credit Facility (as defined below). Lease commissions and depreciation of corporate assets increased $14,000 for the three months ended September 30, 2012 as compared to the same period in 2011. Depreciation for New Store properties increased $376,000.

Interest expense. Interest expense increased $385,000, or 27%, for the three months ended September 30, 2012 as compared to the same period in 2011. The increase in interest expense is comprised of approximately $715,000 in interest expense resulting from an approximate $51,292,000 increase in our average notes payable balance during the three months ended September 30, 2012 as compared to the same period 2011, offset by a $330,000 decrease in interest expense resulting from a decrease in the effective interest rate from 5.57% to 4.72% during three months ended September 30, 2012 as compared to the same period in 2011.

Interest, dividend and other investment income. Interest, dividend and other investment income decreased $143,000, or 54%, for the three months ended September 30, 2012 as compared to the same period in 2011. The $143,000 decrease is comprised of a $58,000 decrease in dividend income, a $75,000 decrease in gains on sales of available-for-sale marketable securities and a $10,000 decrease in interest income.

Results of Operations

Comparison of the Nine Month Periods Ended September 30, 2012 and 2011

The following table provides a summary comparison of our results of operations for the nine months ended September 30, 2012 and 2011 (dollars in thousands, except per OP unit amounts):

	Nine Months Ended September 30,
	2012			2011
Number of properties owned and operated	50			41
Aggregate gross leasable area (sq. ft.)(1)	4,195,924			3,428,844
Ending occupancy rate - operating portfolio(2)	87		%	86		%
Ending occupancy rate - all properties	85		%	84		%
Total property revenues	$	33,031		$	24,947
Total property expenses	12,522			9,718
Total other expenses	18,698			14,761
Provision for income taxes	212			165
Gain (loss) on disposal of assets	105			17
Income before gain on sale of property	1,494			286
Gain on sale of property	—			397
Net income	$	1,494		$	683
Funds from operations (3)	$	8,759		$	5,913
Property net operating income (4)	20,509			15,229
Distributions paid on OP units	11,326			8,396
Per OP unit	$	0.8850		$	0.8850
Distributions paid as a % of funds from operations	129		%	142		%

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(1) During the first quarter of 2012, we concluded that approximately 2,029 square feet at our Lion Square location was no longer leasable, therefore such area is no longer included in the gross leasable area as of March 31, 2012.

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

(3) For a reconciliation of funds from operations to net income, see "Funds From Operations" below.

(4) For a reconciliation of property net operating income to net income, see "Property Net Operating Income" below.

Property revenues. We had rental income and tenant reimbursements of approximately $33,031,000 for the nine months ended September 30, 2012 as compared to $24,947,000 for the nine months ended September 30, 2011, an increase of $8,084,000, or 32%. The nine months ended September 30, 2012 included $7,342,000 in increased revenues from New Store operations. For purposes of comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011, New Stores include properties acquired between January 1, 2011 and September 30, 2012. Same Store revenues increased $742,000 for the nine months ended September 30, 2012 as compared to the same period in the prior year. For purposes of comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011, Same Stores include properties owned before January 1, 2011. Same Store average occupancy increased from 84.0% for the nine months ended September 30, 2011 to 84.5% for the nine months ended September 30, 2012, increasing Same Store revenue $344,000. The Same Store average revenue per leased square foot increased $0.30 for the nine months ended September 30, 2012 to $12.53 per leased square foot as compared to the nine months ended September 30, 2011 average revenue per leased square foot of $12.23, resulting in an increase of Same Store revenues of $398,000.

Property expenses. Our property expenses were approximately $12,522,000 for the nine months ended September 30, 2012 as compared to $9,718,000 for the nine months ended September 30, 2011, an increase of $2,804,000, or 29%. The primary components of total property expenses are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
	2012		2011		Change		% Change
Real estate taxes	$	4,442	$	3,390	$	1,052	31	%
Utilities	2,199		1,823		376		21	%
Contract services	1,959		1,724		235		14	%
Repairs and maintenance	1,335		945		390		41	%
Bad debt	720		379		341		90	%
Labor and other	1,867		1,457		410		28	%
Total property expenses	$	12,522	$	9,718	$	2,804	29	%

Real estate taxes. Real estate taxes increased $1,052,000, or 31%, during the nine months ended September 30, 2012 as compared to the same period in 2011. Real estate taxes for New Store properties were approximately $905,000 for the nine months ended September 30, 2012. Same Store real estate taxes increased approximately $147,000 during the nine months ended September 30, 2012 as compared to the same period in 2011. The primary reason for the increases in Same Store taxes were increases in 2011 property values of several of our Houston properties that were under dispute with the taxing authority. Approximately $100,000 of the increase related to 2011 valuations, which will not repeat in future periods. Management actively works to keep our valuations and resulting taxes low because a majority of these taxes are charged to our tenants through triple net leases, and we strive to keep these charges to our tenants as low as possible.

Utilities. Utilities expenses increased $376,000, or 21%, during the nine months ended September 30, 2012 as compared to the same period in 2011. Utilities expenses for New Store properties were approximately $261,000 for the nine months ended September 30, 2012. Same Store utilities expenses increased approximately $115,000 during the nine months ended September 30, 2012 as compared to the same period in 2011. The majority of the Same Store increase was attributable to a new drainage utility fee with respect to our Houston properties charged by the City of Houston, which took effect July 1, 2011.

Contract services. Contract services expenses increased $235,000, or 14%, during the nine months ended September 30, 2012 as compared to the same period in 2011. The increase in contract services expenses included $210,000 in contract expense increases for New Store properties for the nine months ended September 30, 2012. Same Store contract service expenses increased approximately $25,000 during the nine months ended September 30, 2012 as compared to the same period in 2011.

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Repairs and maintenance. Repairs and maintenance expenses increased $390,000, or 41%, during the nine months ended September 30, 2012 as compared to the same period in 2011. Repairs and maintenance expenses for the nine months ended September 30, 2012 included approximately $325,000 in increases for New Store properties. Same Store repairs and maintenance expenses increased approximately $65,000 during the nine months ended September 30, 2012 as compared to the same period in 2011. The increase in Same Store repair expenses was primarily attributable to routine roof repairs completed in 2012.

Bad debt. Bad debt expenses increased $341,000, or 90%, during the nine months ended September 30, 2012 as compared to the same period in 2011. Bad debt expenses for the nine months ended September 30, 2012 included approximately $124,000 in increases for New Store properties. Same Store bad debt expenses increased approximately $217,000 during the nine months ended September 30, 2012 as compared to the same period in 2011. The Same Store increase in bad debt expenses was primarily attributable to outstanding rent and fees owed by several tenants in our Texas market. We are currently evaluating collection options ranging from downsizing the tenants to possible lockouts. Management vigorously pursues past due accounts, but expects collection of rents to continue to be challenging for the foreseeable future.

Labor and other. Labor and other expenses increased $410,000, or 28%, during the nine months ended September 30, 2012, as compared to the same period in 2011. Labor and other expenses for the nine months ended September 30, 2012 included approximately $185,000 in increased cost for New Store properties. Same store labor expenses and other increased approximately $225,000 during the nine months ended September 30, 2012 as compared to the same period in 2011. The increase in Same Store labor and other expenses was primarily attributable to increased insurance rates and labor allocated for repairs and maintenance.

	Nine Months Ended September 30,
	Same Store				New Store				Total
	2012		2011		2012		2011		2012		2011
Property revenues	$	24,952	$	24,210	$	8,079	$	737	$	33,031	$	24,947
Property expenses	10,249		9,455		2,273		263		12,522		9,718
Property net operating income	$	14,703	$	14,755	$	5,806	$	474	$	20,509	$	15,229

Other expenses. Our other expenses were $18,698,000 for the nine months ended September 30, 2012, as compared to $14,761,000 for the nine months ended September 30, 2011, an increase of $3,937,000, or 27%. The primary components of other expenses, are detailed in the table below (in thousands, except percentages):

	Nine Months Ended September 30,
	2012			2011			Change		% Change
General and administrative	$	5,392		$	4,737		$	655	14	%
Depreciation and amortization	8,319			6,126			2,193		36	%
Interest expense	5,261			4,277			984		23	%
Interest, dividend and other investment income	(274		)	(379		)	105		(28	)%
Total other expenses	$	18,698		$	14,761		$	3,937	27	%

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General and administrative. General and administrative expenses increased approximately $655,000, or 14%, for the nine months ended September 30, 2012 as compared to the same period in 2011. The increases in general and administrative expenses included increases in Whitestone's salaries and benefits allocated to the Partnership of $304,000, a Whitestone employee separation cost of $107,000, share-based compensation costs of $151,000 and acquisition, accounting and other professional fees of $367,000 offset by a decrease in legal expenses of $226,000. The majority of the share-based compensation cost is from an annual grant of common shares to Whitestone's independent members of its board of trustees, additional Whitestone employee grants and expenses related to the expected vesting of performance-based shares. As of September 30, 2012, there was approximately $1,380,000 in unrecognized compensation cost related to outstanding non-vested performance-based shares, which is expected to to vest over a period of fifteen months and approximately $90,000 in unrecognized compensation cost related to outstanding non-vested time-based shares, which are expected to be recognized over a weighted-average period of approximately one year. The decrease in legal and professional fees is primarily attributable to litigation costs incurred in 2011 with a former tenant regarding damages to one of our properties.

Depreciation and amortization. Depreciation and amortization increased $2,193,000, or 36%, for the nine months ended September 30, 2012 as compared to the same period in 2011. Depreciation for improvements to Same Store properties increased $463,000 for the nine months ended September 30, 2012 as compared to the same period in 2011, and amortization of capitalized loan fees increased $638,000. The increase in Same Store depreciation is attributable to redevelopment and re-tenanting investments, most notably at our Windsor and Lion Square locations, and the increase in amortization of capitalized loan fees is the result of fees associated with our Credit Facility (as defined below). Lease commissions and depreciation of corporate assets increased $14,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. Depreciation for New Store properties was $1,078,000.

Interest expense. Interest expense increased $984,000, or 23%, for the nine months ended September 30, 2012 as compared to the same period in 2011. The increase in interest expense is comprised of approximately $1,669,000 in interest expense resulting from an approximate $39,995,000 increase in our average notes payable balance during the nine months ended September 30, 2012 as compared to the same period 2011, offset by a $685,000 decrease in interest expense resulting from a decrease in the effective interest rate from 5.56% to 4.92% during nine months ended September 30, 2012 as compared to the same period in 2011.

Interest, dividend and other investment income. Interest, dividend and other investment income decreased $105,000, or 28%, for the nine months ended September 30, 2012 as compared to the same period in 2011. The $105,000 decrease is comprised of a $1,000 decrease in dividend income, a $82,000 decrease in gains on sales of available-for-sale marketable securities and a $22,000 decrease in interest income.

Reconciliation of Non-GAAP Financial Measures

Funds From Operations ("FFO")

The National Association of Real Estate Investment Trusts ("NAREIT"), defines FFO as net income (loss) available to common shareholders computed in accordance with U.S. GAAP, excluding gains or losses from sales of operating real estate assets, impairment charges on properties held for investment and extraordinary items, plus depreciation and amortization of operating properties, including our share of unconsolidated real estate joint ventures and partnerships. We calculate FFO in a manner consistent with the NAREIT definition. In October 2011, NAREIT communicated to its members that the exclusion of impairment writedowns of depreciable real estate is consistent with the definition of FFO, and prior periods should be restated to be consistent with this guidance. As we have not had any impairments in the past five years, we were not required to restate our FFO for prior periods.

Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using U.S. GAAP net income (loss) alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself. In addition, securities analysts, investors and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs.

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

FFO Core

Management believes that the computation of FFO in accordance with NAREIT's definition includes certain items

that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include, but are not limited to, legal settlements, ~~legal and professional fees,~~ gains and losses on insurance claim settlements and acquisition costs. Therefore, in addition to FFO, management uses FFO Core, which we define to exclude such items. Management believes that these adjustments are appropriate in determining FFO Core as they are not indicative of the operating performance of our assets. In addition, we believe that FFO Core is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that FFO Core presented by us is comparable to the adjusted or modified FFO of other REITs.

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

	Three Months Ended					~~Nine Months Ended~~
	September 30,					September 30,
	March 31,
	2012		2011			2012			2011
FFO AND FFO-CORE	2013		2012
FFO AND FFO-CORE
Net income	$	986	$	860
Net income	$	172	$	675		$	1,494		$	683
Depreciation and amortization of real estate assets	3,050		2,249
Depreciation and amortization of real estate assets	2,657		1,933			7,160			5,610
Loss on sale or disposal of assets	8		12
(Gain) loss on sale or disposal of assets	77		(398		)	105			(380		)
FFO	$	4,044	$	3,121
FFO	2,906		2,210			8,759			5,913
Acquisition costs	138		64
Acquisition costs	338		185			532			327
Legal settlement	—		(131		)
Legal settlement	—		(103		)	(131		)	254
FFO-Core	$	4,182	$	3,054
FFO-Core	$	3,244	$	2,292		$	9,160		$	6,494

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Property Net Operating Income ("NOI")

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

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

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2012			2011			2012			2011
PROPERTY NET OPERATING INCOME	2013			2012
PROPERTY NET OPERATING INCOME
Net income	$	986		$	860
Net income	$	172		$	675		$	1,494		$	683
General and administrative expenses	2,444			1,641
General and administrative expenses	1,888			1,495			5,392			4,737
Depreciation and amortization	3,073			2,283
Depreciation and amortization	3,112			2,161			8,319			6,126
Interest expense	2,449			1,973
Interest expense	1,815			1,430			5,261			4,277
Interest, dividend and other investment income	(19		)	(70		)
Interest, dividend and other investment income	(121		)	(264		)	(274		)	(379		)
Provision for income taxes	65			65
Provision for income taxes	77			54			212			165
Loss on disposal of assets	8			12
Loss on disposal of assets	77			(1		)	105			17
NOI	$	9,006		$	6,764
Gain on sale of property	—			(397		)	—			(397		)
NOI	$	7,020		$	5,153		$	20,509		$	15,229

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of distributions to holders of OP units, including those to our general partner required in order for Whitestone to maintain its REIT status and satisfy its current quarterly distribution target of $0.2850 per share and OP unit, recurring expenditures, such as repairs and maintenance of our properties, non-recurring expenditures, such as capital improvements and tenant improvements, debt service requirements, and, potentially, acquisitions of additional properties.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013, our cash provided from operating activities was $93,~~921~~933,000 and our total distributions were $115,~~326~~001,000. Therefore, we had distributions in excess of cash flow from operations of approximately $1,~~405~~068,000. On February 274, ~~2012~~2013, we entered into an unsecured credit facility (the "Facility"). The Facility amended and restated our ~~three-year~~previous unsecured credit facility. In addition to a $125 million unsecured ~~revolving~~borrowing ~~credit~~capacity ~~facility~~under (the ~~"Credit~~revolving ~~Facility")~~loan, ~~which~~the weFacility ~~use~~also ~~for~~includes ~~general~~a ~~corporate~~$50 ~~purposes,~~million ~~including~~term ~~acquisitions~~loan and ~~redevelopment~~permits ofus ~~existing~~to ~~properties~~increase inthe ~~our~~borrowing ~~portfolio. The~~capacity ~~Credit~~under the Facility ~~replaced~~to ~~our~~a ~~previous~~total ~~unsecured~~of ~~revolving~~$225 ~~credit~~million, ~~facility~~upon the satisfaction of certain conditions. We anticipate that cash flows from operating activities and our borrowing capacity under the ~~Credit~~ Facility will provide adequate capital for our working capital requirements, anticipated capital expenditures and scheduled debt payments in the short term. We also believe that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for Whitestone to continue to qualify to be taxed as a REIT for federal income tax purposes.

Our long-term capital requirements consist primarily of maturities under our longer-term debt agreements, development and redevelopment costs, and potential acquisitions. We expect to meet our long-term liquidity requirements with net cash from operations, long-term indebtedness, issuances of Whitestone's common shares and our OP units, sales of properties that no longer meet our Community Centered Property strategy and other financing opportunities, including debt financing. We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to access the equity markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us. 27

We expect that our rental income will increase as we continue to acquire additional properties, subsequently increasing our cash flows generated from operating activities. We intend to continue acquiring such additional properties through equity issuances and debt financing.

On July 12, 2012, Whitestone filed a universal shelf registration statement on Form S-3 with the SEC, allowing it to offer up to $350 million in securities, from time to time, including common shares, preferred shares, debt securities, depositary shares and subscription rights. However, there can be no assurance that Whitestone will be able to complete any such offerings of securities. Factors influencing the availability of additional financing include investor perception of Whitestone's prospects and the general condition of the financial markets, among others.

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OnOur ~~August~~long-term ~~28,~~capital ~~2012,~~requirements ~~Whitestone~~consist ~~completed~~primarily ~~the~~of ~~sale~~maturities ofunder 4our longer-term debt agreements,~~830,000~~ ~~common~~development ~~shares~~and redevelopment costs, $0and potential acquisitions.~~001~~ We ~~par~~expect ~~value~~to ~~per~~meet ~~share~~our long-term liquidity requirements with net cash from operations, ~~including~~long-term ~~630~~indebtedness,~~000~~ issuances of Whitestone's common shares ~~pursuant~~and toour ~~the~~OP ~~exercise~~units, sales of ~~the~~properties ~~underwriters'~~that ~~over-allotment~~no ~~option,~~longer atmeet aour ~~price~~Community toCentered ~~the~~Property ~~public~~strategy ofand ~~$12.80~~other ~~per~~financing ~~share~~opportunities, including debt financing. ~~Total~~We ~~net~~believe ~~proceeds~~that ~~from~~we ~~the~~have ~~offering,~~access ~~including~~to ~~over~~multiple sources of capital to fund our long-~~allotment~~term ~~shares~~liquidity requirements, ~~and~~including ~~after~~the ~~deducting~~incurrence ~~the~~of ~~underwriting~~additional ~~discount~~debt and ~~offering~~the ~~expenses,~~issuance ~~were~~of ~~approximately~~additional ~~$58.7~~equity ~~million~~by Whitestone. However, ~~which~~our ~~were~~ability ~~contributed~~ to ~~the~~incur ~~Partnership~~additional indebt ~~exchange~~will ~~for~~be 4dependent on a number of factors,~~830,000~~ OPincluding ~~units. Whitestone~~our ~~intends~~degree toof ~~use~~leverage, the ~~net~~value ~~proceeds~~of ~~for~~our ~~general~~unencumbered ~~corporate~~assets ~~purposes,~~and ~~including~~borrowing ~~property~~restrictions ~~acquisitions,~~that ~~debt~~may ~~repayment,~~be ~~capital~~imposed ~~expenditures,~~by lenders. Our ability to access the ~~expansion,~~equity ~~redevelopment~~markets ~~and/or~~will ~~re-tenanting~~be ofdependent ~~properties~~on ina ~~its~~number ~~portfolio~~of factors as well, ~~working~~including ~~capital~~general market conditions for REITs and ~~other~~market ~~general~~perceptions ~~purposes~~about us.

~~Our~~We ~~capital~~expect ~~structure~~that ~~includes~~our ~~non-recourse~~rental ~~mortgage~~income ~~debt~~will ~~that~~increase as we ~~assumed~~continue orto ~~originated~~acquire onadditional ~~certain~~ properties., subsequently increasing our cash flows generated from operating activities. We ~~may~~intend ~~hedge~~to ~~the~~continue ~~future~~acquiring ~~cash~~such ~~flows~~additional ofproperties ~~certain~~that ~~variable~~meet ~~rate~~our ~~debt~~Community ~~transactions~~Centered ~~principally~~Property strategy through ~~interest~~Whitestone's ~~rate~~equity ~~swaps~~issuances ~~with~~and ~~major~~debt ~~financial institutions~~financing.

Our capital structure includes non-recourse mortgage debt that we assumed or originated on certain properties. We may hedge the future cash flows of certain variable rate debt transactions principally through interest rate swaps with major financial institutions. See Note 2 (Derivative Instruments and Hedging Activities) to the accompanying consolidated financial statements for a description of our current cash flow hedge.

Cash and Cash Equivalents

We had cash and cash equivalents of approximately $82,~~339~~843,000 as of ~~September~~March 3031, ~~2012~~2013, as compared to $56,~~695~~544,000 on December 31, ~~2011~~2012. The ~~increase~~decrease of $23,~~644~~701,000 was primarily the result of the following:

Sources of Cash

• Cash flow from operations of $93,~~921~~933,000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013;

• Net proceeds of $3326,~~956~~400,000 from our revolving credit facility, net of origination costs;

• Net proceeds of $58,679,000 from issuance of Whitestone's common shares;

• Proceeds from sales of marketable securities of $5,509,000;

Uses of Cash

• Payment of distributions to OP unitholders of $115,~~326~~001,000;

• ~~Investments~~Acquisitions inof ~~marketable~~real ~~securities~~estate of $~~750~~25,700,000;

• ~~Acquisitions~~Additions ofto real estate of $791,~~400~~197,000;

• ~~Additions~~Payments toof ~~real~~notes ~~estate~~payable of $91,~~297~~017,000; and

• Payments of ~~exchange~~loan ~~offer~~origination costs of $~~249~~1,085,000;.

• Payments of notes payable of $2,853,000;

• Payments of loan origination costs of $1,546,000.

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

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Debt

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

Description	~~September~~March 3031, ~~2012~~2013		December 31, ~~2011~~2012
Fixed rate notes
$1.4 million 5.00% Note, due 2012	$	1,363	$	1,318
$1.1 million 4.71% Note, due 2013	$	1,087	$	1,087
$14.1 million 5.695% Note, due 2013	13,~~923~~773		1413,~~110~~850
$3.0 million 6.00% Note, due 2021 (1)	2,~~952~~933		2,~~978~~943
$10.0 million 6.04% Note, due 2014	9,~~189~~095		9,~~326~~142
$1.5 million 6.50% Note, due 2014	1,~~451~~437		1,~~471~~444
$11.2 million 6.52% Note, due 2015	10,~~648~~569		10,~~763~~609
$21.4 million 6.53% Notes, due 2013	1918,~~034~~694		1918,~~524~~865
$24.5 million 6.56% Note, due 2013	23,~~254~~015		23,~~597~~135
$9.9 million 6.63% Notes, due 2014	98,~~001~~848		98,~~221~~925
$0.7 million 2.97% Note, due 2012	193		23
$0.9 million 2.97% Note, due 2013	694		15
Floating rate notes
Unsecured line of credit, LIBOR plus 2.75% to 3.75%, due 2015	45,000		11,000
Unsecured credit facility, LIBOR plus 1.75% to 2.50%, due 2017 (2)	95,400		69,000
$9.2 million, Prime Rate less 2.00%, due 2017	7,~~861~~860		—7,854
$26.9 million, LIBOR plus 2.86% Note, due 2013	23,~~947~~530		2423,~~559~~739
	$	~~167~~216,~~816~~935	$	~~127~~190,~~890~~608


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

As(2) ofWe ~~September 30,~~have ~~2012,~~entered ~~our~~into ~~$122.6~~an ~~million~~interest inrate ~~secured~~swap ~~debt~~that ~~was~~fixed ~~collateralized~~the byLIBOR 27portion ~~properties with a carrying value~~ of our $~~162.5~~50 million~~. Our~~ ~~loans~~term ~~contain~~loan ~~restrictions~~under ~~that~~our ~~would~~unsecured ~~require~~credit ~~prepayment~~facility ~~penalties~~at ~~for~~0.84%. ~~the~~The ~~acceleration~~swap ofwill ~~outstanding~~begin ~~debt and are secured by deeds of trust~~ on ~~certain~~January of7, ~~our~~2014 ~~properties~~ and bywill ~~assignment~~mature ofon ~~certain~~February ~~rents and leases associated with those properties. As of September 30~~3, ~~2012, we were in compliance with all loan covenants~~2017.

OnAs ~~August~~of 8March 31, ~~2012~~2013, weour ~~assumed a~~ $9120.28 million ~~variable~~in ~~rate~~secured ~~note~~debt aswas ~~part~~collateralized ofby ~~our~~27 ~~acquisition~~properties ofwith ~~Paradise~~a ~~Plaza~~carrying ~~(See~~value ~~Note~~of 15$160.7 tomillion. Our ~~the~~loans ~~accompanying~~contain ~~consolidated~~restrictions ~~financial~~that ~~statements). The~~would ~~variable~~require ~~rate~~prepayment ispenalties ~~based~~for on the ~~Prime~~acceleration ~~Rate~~of ~~less~~outstanding ~~2.00%~~debt and ~~matures~~are onsecured ~~December~~by ~~27,~~deeds ~~2017. As~~of ~~part~~trust on certain of ~~the~~our ~~purchase,~~properties weand ~~recorded~~by aassignment ~~discount~~of oncertain ~~the~~rents ~~note~~and ofleases ~~$1.3~~associated ~~million,~~with ~~which~~those ~~will~~properties. As ~~amortize~~of ~~into~~March 31, ~~interest~~2013, ~~expense~~we ~~over~~were ~~the~~in ~~life~~compliance ofwith ~~the~~all loan covenants.

The ~~Credit~~ Facility, which is available to us for acquisitions of properties and ~~and~~ working capital, is our primary source of additional credit. As of ~~September~~March 3031, ~~2012~~2013, $4595.04 million was drawn on the ~~Credit~~ Facility, and our borrowing capacity was $8079.06 million, assuming use of the proceeds to acquire properties, or repayment of debt on properties, that are eligible to be included in the unsecured borrowing base. ~~The~~Proceeds ~~Credit~~from the Facility were used for general corporate purposes, including property acquisitions, debt repayment, capital expenditures, the expansion, redevelopment and retenanting of properties in our portfolio and working capital. The Facility bears interest at LIBOR plus 21.75% to 32.7550%, and matures on February 273, ~~2015~~2017. As of ~~September 30~~March 31, ~~2012~~2013, the interest rate was 32.0025%. We have an interest rate swap that fixes the LIBOR portion of our $50 million term loan under the Facility at 0.84%. The swap will begin on January 7, 2014 and will mature on February 3, 2017.

Whitestone serves as the guarantor for funds ~~borrowed~~we byborrow ~~the Partnership~~ under the ~~Credit~~ Facility. The ~~Credit~~ Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, maximum secured indebtedness to total asset value, minimum EBITDA (earnings before interest, taxes, depreciation, amortization and extraordinary items) to fixed charges, ~~minimum property net operating income to total indebtedness~~ and maintenance of net worth. The ~~Credit~~ Facility also contains customary events of default with customary notice and cure, including, without limitation, nonpayment, breach of covenant, material misrepresentation of representations and warranties in a material respect, cross-default to other major indebtedness, change of control, bankruptcy and loss of REIT tax status. As of ~~September 30~~March 31, ~~2012~~2013, we were in compliance with all covenants.

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Scheduled maturities of our outstanding debt as of ~~September~~March 3031, ~~2012~~2013 were as follows (in thousands):

Year	Amount Due
2012	$	2,291
2013	$	81,317
2013	80,292
2014	19,172
2014	19,171
2015	10,317
2015	55,317
2016	73
Thereafter	10,672
2017	103,342
Total	$	167,816
Thereafter	2,714
Total	$	216,935

We will have approximately $14 million of debt maturing in June 2013 and approximately $6664 million maturing in October and November 2013. The majority of this debt is with insurance companies and was entered into in late 2008. We have begun renewal discussions with our current lenders and expect to renew this debt with our current lenders or new lenders at rates and terms similar or better than our current rates and terms. We also have availability under our ~~Credit~~ Facility should we be unable to obtain similar or better financing from our current lenders or new lenders.

Capital Expenditures

We continually evaluate our properties’ performance and value. We may determine it is in our unitholders’ best interest to invest capital in properties that we believe have potential for increasing value. We also may have unexpected capital expenditures or improvements for our existing assets. Additionally, we intend to continue investing in similar properties outside of the markets on which we focus in cities with exceptional demographics to diversify market risk, and we may incur significant capital expenditures or make improvements in connection with any properties we may acquire.

Contractual Obligations

During the three months ended ~~September 30~~March 31, ~~2012~~2013, there were no material changes outside of the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012.

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Distributions

The following table summarizes the cash distributions paid or payable to holders of ~~our~~ OP units during each quarter during ~~2011~~2012 and the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013 (in thousands, except per unit data):

	Whitestone				Limited Partners Other ~~than~~Than Whitestone				Total
Quarter Paid	~~Distributions~~Distribution Per OP Unit		Total Amount Paid		~~Distributions~~Distribution Per OP Unit		Total Amount Paid		Total Amount Paid
2013
First Quarter	$	0.2850	$	4,807	$	0.2850	$	194	$	5,001
Total	$	0.2850	$	4,807	$	0.2850	$	194	$	5,001
2012
Third Quarter	$	0.2850	$	3,859	$	0.2850	$	224	$	4,083
Fourth Quarter	$	0.2850	$	4,781	$	0.2850	$	221	$	5,002
Third Quarter	0.2850		3,859		0.2850		224		4,083
Second Quarter	0.2850		3,362		0.2850		258		3,620
First Quarter	0.2850		3,322		0.2850		301		3,623
Total	$	01.~~8550~~1400	$	1015,~~543~~324	$	01.~~8550~~1400	$	~~783~~1,004	$	1116,~~326~~328
2011
Fourth Quarter	$	0.2850	$	3,193	$	0.2850	$	430	$	3,623
Third Quarter	0.2850		3,115		0.2850		514		3,629
Second Quarter	0.2850		2,121		0.2850		515		2,636
First Quarter	0.2850		1,616		0.2850		515		2,131
Total	$	1.1400	$	10,045	$	1.1400	$	1,974	$	12,019

Taxes

We are a partnership under Subchapter K of the Code for federal income tax purposes and, therefore, do not expect to be subject to federal income tax. As long as we qualify as a partnership for federal income tax purposes, our partners will be required to recognize their allocable share of our income, gain, deduction and loss in computing their federal income tax ~~liabilites~~liabilities. If we become a " “publicly traded partnership"” and our taxable income does not substantially consist of specified types of passive income, we will be treated as an association taxable as a corporation (rather than as a partnership) for federal income tax purposes.

Whitestone elected to be taxed as a REIT under the Code, beginning with its taxable year ended December 31, 1999. As a REIT, Whitestone is generally is not subject to federal income tax on income that it distributes to its shareholders. If itWhitestone fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate rates. Whitestone believes that it is organized and operates in ~~such~~ a manner as to qualify toand be taxed as a REIT, and it intends to operate so as to remain qualified as a REIT for federal income tax purposes.

Environmental Matters

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

Off-Balance Sheet Arrangements

We had no significant off-balance sheet arrangements as of ~~September~~March 3031, ~~2012~~2013 and December 31, ~~2011~~2012.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Fixed Interest Rate Debt

As of ~~September~~March 3031, ~~2012~~2013, $90.1 million, or approximately 5942% of our outstanding debt was subject to fixed interest rates, which limit the risk of fluctuating interest rates. Though a change in the market interest rates affects the fair market value of our fixed interest rate debt, it does not impact net income to unitholders or cash flows. Our total outstanding fixed interest rate debt had an average effective interest rate as of ~~September~~March 3031, ~~2012~~2013 of approximately 6.3230% per annum with ~~expirations~~scheduled maturities ranging from ~~2012~~2013 to 2021 (see Note 6 to our accompanying consolidated financial statements for further detail). ~~As of September 30, 2012, we had approximately $98.9 million of fixed rate debt outstanding.~~ Holding other variables constant, a 1% increase or decrease in interest rates would cause a $1.20 million decline or increase, respectively, in the fair value for our fixed rate debt.

Variable Interest Rate Debt

As of ~~September~~March 3031, ~~2012~~2013, we had $68126.98 million of loans, or approximately 4158% of our outstanding debt, subject to floating interest rates of LIBOR plus 21.75% to 32.7586%~~. As~~ ofand ~~September 30,~~not ~~2012,~~currently wesubject ~~had~~to a ~~fixed rate~~ hedge ~~on $7~~.~~9 million of variable rate debt, which is not subject to interest rate fluctuations.~~ The impact of a 1% increase or decrease in interest rates on our non-hedged variable rate debt would result in a decrease or increase of annual net income of approximately $01.73 million, respectively. We have an interest rate swap that fixes the LIBOR portion of our $50 million term loan under the Facility at 0.84%. The swap will begin on January 7, 2014 and will mature on February 3, 2017.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The management of Whitestone REIT, under the supervision and with the participation of its 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 Whitestone REIT's management, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, Whitestone REIT's principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of ~~September~~March 3031, ~~2012~~2013 (the end of the period covered by this Report).

Changes in Internal Control Over Financial Reporting

During the ~~nine~~three months ended ~~September~~March 3031, ~~2012~~2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012.

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


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


(b)	Not applicable.


(c)	Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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SIGNATURES

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

		WHITESTONE REIT OPERATING PARTNERSHIP, L.P.
		(Registrant)
		By: Whitestone REIT, its General Partner
Date:	~~November~~May 14, ~~2012~~2013	/s/ James C. Mastandrea
		James C. Mastandrea
		Chief Executive Officer
		(Principal Executive Officer)

Date:	~~November~~May 14, ~~2012~~2013	/s/ David K. Holeman
		David K. Holeman
		Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

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EXHIBIT INDEX



Exhibit No.	Description



3.1.1	Agreement of Limited Partnership of Whitestone REIT Operating Partnership, L.P. (previously filed as and incorporated by reference to Exhibit 10.1 to Whitestone's General Form for Registration of Securities on Form 10, filed on April 30, 2003)



3.1.2	Amendment to the Agreement of Limited Partnership of Whitestone REIT Operating Partnership, L.P. (previously filed and incorporated by reference to Exhibit 10.1 to Whitestone REIT's Registration Statement on Form S-11, Commission File No. 333-111674, filed on December 31, 2003)

10.1 ~~Summary~~Credit ofAgreement ~~Relocation~~between ~~Arrangement,~~Whitestone asREIT ~~amended~~Operating Partnership, ~~between~~L.P. ~~Whitestone~~and ~~REIT~~Bank ~~and~~of ~~James~~Montreal C.dated ~~Mastandrea.~~February 4, 2013 (previously filed and incorporated by reference to Exhibit 10.21 to ~~Whitestone~~the ~~REIT~~Registrant's ~~Quarterly~~Current Report on Form 108-QK, filed onFebruary ~~August 9~~8, ~~2012~~2013)



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



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



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



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



101.INS***	XBRL Instance Document

101. SCH***	XBRL Taxonomy Extension Schema Document

101.CAL***	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB***	XBRL Taxonomy Extension Label Linkbase Document

101.PRE***	XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF***	XBRL Taxonomy Extension Definition Linkbase Document

________________________

* Filed herewith.

** Furnished herewith.

*** The following financial information of the Registrant for the quarter ended ~~September~~March 3031, ~~2012~~2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited), (iii) Consolidated Statements of Changes in Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Consolidated Financial Statements (unaudited).

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Filing Compare · Whitestone REIT Operating Partnership, L.P.