Wheeler Real Estate Investment Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarterly and nine-month periods ended September 30, 2020. The unaudited filing covers a REIT owning and operating 60 retail shopping centers, one office building and six undeveloped properties across 12 states. The portfolio was 88.3% leased at September 30, 2020, compared with 89.2% at September 30, 2019.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $15.0 million | $15.6 million | $45.7 million | $47.1 million |
| Operating income | $4.8 million | $3.7 million | $12.9 million | $6.9 million |
| Net income (loss) | $0.7 million | $(1.0) million | $(0.9) million | $(7.5) million |
| Net loss attributable to common shareholders | $(2.2) million | $(4.6) million | $(11.1) million | $(18.3) million |
| Basic and diluted loss per share | $(0.22) | $(0.48) | $(1.14) | $(1.90) |
| Property NOI | $10.1 million | $10.6 million | $31.3 million | $32.7 million |
| FFO | $4.9 million | $4.6 million | $13.2 million | $8.8 million |
| AFFO | $1.3 million | $1.1 million | $3.0 million | $3.7 million |
Revenue declined primarily because of property dispositions, a vacant anchor space and higher credit losses on operating lease receivables associated with COVID-19. Operating income, net income and FFO improved largely because 2019 included a $5.0 million notes-receivable impairment and higher asset impairments, depreciation and amortization. Property NOI nevertheless declined 4.1% in the quarter and 4.2% for the nine months.
At September 30, 2020, investment properties, net were $394.4 million, total assets were $474.3 million, loans payable, net were $318.2 million and total equity was $18.2 million. Principal debt outstanding, before debt issuance costs, was $336.6 million, down from $347.1 million at December 31, 2019. Fixed-rate debt, including debt on assets held for sale, had a weighted-average interest rate of 4.68% and a weighted-average term of 4.15 years.
Cash flow and liquidity
- Cash flow from operating activities was $14.0 million for the first nine months of 2020, compared with $12.6 million in the prior-year period.
- Investing activities provided $16 thousand, including $1.7 million of proceeds from the sale of St. Matthews and $1.6 million of capital expenditures.
- Financing activities used $11.4 million, including $23.8 million of loan principal payments, partially offset by $13.4 million of loan proceeds and $552 thousand of PPP proceeds.
- Cash, cash equivalents and restricted cash totaled $24.2 million at September 30, 2020, consisting of $7.0 million of unrestricted cash and $17.2 million of restricted cash.
- Debt maturities and scheduled principal repayments totaled $38.6 million for the remainder of 2020 and $48.6 million for the 12 months ending September 30, 2021.
- Management expects to fund maturities through refinancing, extensions, asset sales, operating cash flow and available cash and restricted cash. The filing does not provide assurance that these plans will be completed on acceptable terms.
Material changes and unusual items
- Revenue decreased 3.9% in Q3 and 2.9% for the nine months, while total operating expenses decreased 14.2% and 21.2%, respectively.
- The Company recorded a $600 thousand impairment on Columbia Fire Station during the nine months. Prior-year results included a $5.0 million impairment of notes receivable and $1.5 million of impairments on assets held for sale.
- The Company sold St. Matthews for a $1.8 million contract price, recording a $26 thousand loss and receiving $1.7 million of net proceeds. Assets held for sale totaled $15.1 million at September 30, 2020.
- The Company refinanced Shoppes at Myrtle Park and Folly Road and entered into multiple debt extensions, amendments and forbearance arrangements. The KeyBank Credit Agreement maturity was extended to December 31, 2020.
- The Operating Partnership purchased and retired 71,343 shares of Series D Preferred Stock for $15.50 per share.
- Preferred dividends remained suspended. Cumulative undeclared dividends on Series A, Series B and Series D Preferred Stock totaled $27.1 million at September 30, 2020. The suspension provides approximately $3.4 million of quarterly cash preservation, according to management.
- The Company received $552 thousand under the Paycheck Protection Program. Forgiveness of the related 1% note, maturing April 24, 2022, is not assured.
COVID-19, outlook and risks
All 60 shopping centers were open and operating at September 30, 2020, and 45 were grocery- or drug-store anchored. Grocers represented approximately 27% of annualized base rent. The Company had collected 95% of contractual base rent and tenant reimbursements billed for Q3 as of November 5, 2020; second-quarter collections had also reached 95% by that date, up from 83% previously reported.
The Company granted 145 rent concessions through October 30, 2020 and modified 68 leases through September 30, 2020. Five bankrupt tenants received lease modifications, seven tenants vacated due to bankruptcy and two of those spaces had been backfilled. COVID-19 caused rent deferral requests, increased receivables and credit losses, and could lead to additional tenant bankruptcies, lower collections, vacancies, impairments and reduced access to capital.
Management has not provided formal earnings or revenue guidance. Its stated priorities are refinancing or extending maturing debt, selling selected assets and undeveloped land, backfilling vacant anchor space, managing tenant defaults and preserving liquidity. The filing identifies substantial refinancing and disposition execution risk, geographic concentration, retail tenant and consumer-spending risk, interest-rate risk, loan covenant risk and the risk of losing REIT tax status.
Other notable matters include a $500 thousand post-period settlement with former CEO Jon Wheeler, subject to his preserved appeal rights, and a pending former CEO David Kelly lawsuit seeking $3.15 million plus bonuses, benefits, interest, fees and costs. The Company states that the outcome of the Kelly matter cannot currently be predicted.
Investor verification items
- Verify the status and terms of the $48.6 million of debt maturities and scheduled repayments through September 30, 2021, including the KeyBank facility and other extended loans.
- Monitor unrestricted cash versus restricted cash and whether lender reserves can be released for operating or debt-service needs.
- Track rent collections, tenant deferrals, concessions, bankruptcies, vacancies and the recovery of the 88.3% leased rate.
- Assess whether planned property and land sales, refinancings and loan extensions occur at expected values and terms.
- Reconcile FFO and AFFO with GAAP results, especially the effects of preferred dividends, nonrecurring costs and credit losses.
- Monitor the $27.1 million preferred dividend arrearage, the Series D preferred dividend default and potential governance or redemption consequences.
- Review the pending Kelly litigation, the Wheeler appeal and the uncertain Harbor Pointe tax-increment financing obligation, which may require up to $2.21 million of principal plus possible interest.