Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. is an internally managed REIT focused primarily on retail shopping centers. As of June 30, 2019, it owned and operated 62 centers, one office building and six undeveloped properties across 12 states. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $15.5 million | $31.5 million |
| Net loss | $7.2 million | $6.5 million |
| Net loss attributable to common shareholders | $10.7 million | $13.7 million |
| Loss per common share | $1.10 | $1.42 |
| Property NOI | $10.9 million | $22.1 million |
| FFO | $(0.4) million | $4.2 million |
| AFFO | $1.6 million | $2.6 million |
| Cash flow from operating activities | Not separately reported | $7.8 million |
- Total revenue declined 8.3% for the quarter and 5.1% for the six-month period. Rental revenue declined 2.0% and 1.2%, respectively.
- Property NOI margins were approximately 70.3% for the quarter and 70.2% for the six-month period, based on property NOI divided by property revenues.
- Same-store property NOI declined $1.4 million, or approximately 13.7%, in the quarter and $2.0 million, or approximately 10.0%, for the six-month period.
- Ending occupancy was 89.2%, compared with 89.3% at June 30, 2018. Gross leasable area was 5.70 million square feet versus 5.74 million square feet.
- Cash, cash equivalents and restricted cash totaled $20.4 million at June 30, 2019, including $3.9 million of unrestricted cash and $16.4 million of lender-restricted cash.
- Total assets were $498.8 million and total liabilities were $383.9 million. Investment properties, net, totaled $422.5 million.
- Total debt principal was $357.5 million, or $346.6 million net of debt issuance costs and excluding debt classified with assets held for sale. The weighted-average rate and term of fixed-rate debt, including assets held for sale, were 4.70% and 5.07 years.
- Preferred dividends were suspended, resulting in approximately $10.0 million of accumulated undeclared preferred dividends at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Quarterly net loss increased to $7.2 million from $1.6 million; six-month net loss increased to $6.5 million from $3.4 million.
- The company recorded a $5.0 million impairment of Sea Turtle notes receivable and a $1.15 million impairment of Perimeter Square, neither of which occurred in the 2018 comparable periods.
- Sea Turtle notes receivable were reduced to zero after cumulative impairment charges of $12.0 million. Related interest income remained on nonaccrual status.
- Operating expenses increased 22.5% in the quarter and 3.3% for the six-month period, primarily because of the impairments. Excluding those impairments, operating expenses decreased by approximately $3.0 million and $5.2 million, respectively.
- Depreciation and amortization decreased 28.8% in the quarter and 25.5% for the six-month period, primarily because of lease-intangible write-offs in 2018.
- Operating cash flow declined 38.2% to $7.8 million, primarily due to lower same-store NOI and working-capital changes.
- Investing activities generated $2.6 million in cash versus $22.0 million of cash used in 2018, when the company acquired JANAF.
- Financing activities used $8.1 million versus providing $15.7 million in 2018, reflecting lower preferred-stock proceeds and higher debt repayments.
- The company sold Jenks Plaza, Graystone Crossing and a Harbor Pointe land parcel for aggregate contract proceeds of $8.75 million and aggregate gains of $1.84 million.
- The company adopted ASC Topic 842 on January 1, 2019, recognizing approximately $11.9 million of operating lease right-of-use assets and $12.0 million of lease liabilities. The adoption had no material cash-flow effect.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal earnings or revenue guidance is provided. Management expects to address liquidity through operating cash flow, asset sales, refinancing, possible sales of undeveloped land, available cash and continued suspension of preferred dividends.
- Debt maturities and scheduled principal payments were reported as $65.0 million for the remaining six months of 2019. The filing also reports $78.2 million and, elsewhere in MD&A, $82.7 million due during the twelve months ending June 30, 2020; investors should reconcile these differing disclosures.
- The KeyBank line of credit had $34.3 million outstanding at June 30, 2019, with a December 2019 maturity and required balance reductions under an April 2019 amendment. Management stated that covenant requirements were satisfied and no default notice had been received.
- Subsequent to quarter-end, Perimeter Square was sold for $7.2 million, with the related $6.5 million debt repaid. Laburnum Square was refinanced on August 1, 2019, reducing the KeyBank balance by $7.55 million.
- Sea Turtle Development was in Chapter 11 bankruptcy after defaulting on construction debt. The company’s notes were subordinated to approximately $20.0 million of senior construction loans, creating substantial recovery uncertainty.
- Preferred dividend suspensions increase liquidity but also accumulate obligations. The Series D dividend rate increased to 10.75% beginning January 1, 2019 while dividends remained unpaid.
- Material litigation includes claims by the former CEO and a lawsuit concerning alleged Series D preferred-stock asset-coverage requirements. The filing states that outcomes cannot currently be predicted.
- Portfolio risk is concentrated geographically, with approximately 59% of annualized base rent in the Southeast and 36% in the Mid-Atlantic. Retail performance depends significantly on anchor tenants and tenant credit quality.
- The company funded approximately $44 thousand of Harbor Pointe tax-increment-financing debt-service shortfalls during the quarter and six-month period. Future obligations are uncertain and were not accrued.
Investor Verification Checklist
- Verify the company’s ability to refinance or repay near-term debt maturities, particularly the KeyBank facility and other obligations due through June 30, 2020.
- Reconcile the differing reported amounts of near-term debt maturities: $78.2 million in the debt note versus $82.7 million in MD&A.
- Monitor occupancy, same-store NOI, vacant anchor spaces, tenant renewals and rent concessions.
- Assess the potential recovery, if any, from the impaired Sea Turtle notes and related bankruptcy proceedings.
- Track accumulated preferred dividends, the timing and conditions for any dividend reinstatement, and potential Series D redemption or voting consequences.
- Review the outcomes and potential financial exposure from the Series D asset-coverage litigation and former executive litigation.
- Confirm post-quarter-end debt reductions from the Perimeter Square sale and Laburnum Square refinancing and their effect on covenant compliance.