Wheeler Real Estate Investment Trust, Inc. — 2014 Q1 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. The company owned and operated 23 properties totaling 1,294,572 square feet across eight states, compared with 11 properties and 470,350 square feet in the prior-year period.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $3.66 million | $1.62 million | 126.5% |
| Rental revenue | $2.95 million | $1.39 million | 111.7% |
| Operating income | $123,050 | $70,290 | 75.1% |
| Net loss | $1.25 million | $479,338 | Loss increased $766,550 |
| Net loss attributable to common shareholders | $1.20 million | $433,682 | Loss increased $765,657 |
| Basic and diluted loss per share | $0.17 | $0.13 | Loss per share increased |
| Operating cash flow | $62,894 | $(74,638) | Improved $137,532 |
| FFO | $539,714 | $168,794 | 219.8% |
| Core FFO, excluding acquisition and legal costs | $596,714 | $168,794 | Increased $427,920 |
Margins: Operating margin was approximately 3.4% in Q1 2014 versus 4.3% in Q1 2013. Net margin was approximately negative 34.0% versus negative 29.6%. FFO represented approximately 14.7% of revenue, although FFO is a non-GAAP measure.
- Ending occupancy was 94.2%, compared with 94.3% in the prior-year period.
- Same-store revenue increased 1.8% to $1.65 million, while same-store property NOI declined to $1.30 million from $1.32 million.
- Cash and cash equivalents were $2.14 million at March 31, 2014, compared with $1.16 million at December 31, 2013.
- Total assets were $125.09 million and investment properties, net, were $101.25 million at March 31, 2014.
- Total debt was $96.48 million, up from $94.56 million at December 31, 2013. Management reported a weighted-average interest rate of 5.39% and a weighted-average term of 5.24 years.
- Debt-to-total-assets was approximately 77.1%; the filing does not provide a debt covenant or net debt metric.
- Dividends and distributions paid were $1.01 million, while operating cash flow was only $62,894.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected a full quarter of operations from 12 properties acquired during 2013. New-store properties contributed approximately $2.02 million of revenue and $1.44 million of property NOI.
- Operating expenses increased 128.8%, including higher property expenses, depreciation and amortization, and general and administrative costs.
- Interest expense increased 149.1% to $1.37 million, principally due to additional debt issued in December 2013 and January 2014.
- Same-store property expenses increased because of repairs, maintenance, utilities and unusually severe winter weather. Snow-removal costs rose to approximately $98,400 from $11,400.
- Corporate general and administrative expense increased 42.6% to $832,318, partly due to the timing of recurring professional fees.
- The company issued $2.16 million of 9% senior non-convertible notes in January 2014, together with warrants to purchase 227,372 common shares at $4.75 per share, subject to shareholder approval conditions.
- Common shares outstanding increased to 7,216,238 from 7,121,000, primarily through conversion of operating partnership units.
Liquidity, Debt and Outlook
- Debt principal maturities total $6.45 million during the twelve months ending March 31, 2015, $18.71 million in 2016 and $13.84 million in 2017. Total scheduled maturities are $96.48 million.
- Management stated that it expects to refinance maturing loans on reasonable market terms, but acknowledged that failure to refinance could materially affect financial position and results.
- The company identified debt maturities, ongoing debt service, a targeted annual dividend of $0.42 per share and acquisition funding as its principal near-term liquidity demands.
- On April 1, 2014, the company announced a $25 million secured guidance line of credit with KeyBank, available through December 31, 2015, for acquisitions of selected grocery-anchored properties.
- On April 29, 2014, the company completed a Series B preferred stock offering that generated $16.6 million of net proceeds, before certain professional fees. Proceeds are intended for acquisitions and general corporate purposes.
- On May 5, 2014, the company assigned itself the purchase agreement for Cypress Shopping Center in South Carolina for $8.3 million. The 80,435-square-foot center was 94.37% leased, and closing was expected in Q2 2014.
- Management expected approximately 5.11% of gross leasable area to expire during the twelve months ending March 31, 2015 without having already been renewed, but believed the leases would be renewed on comparable terms.
Risks, Contingencies and Unusual Items
- The company continues to have significant leverage and substantial refinancing requirements, while current operating cash flow is well below dividends and distributions paid.
- Interest expense and corporate overhead exceeded operating income, resulting in a net loss despite substantial revenue growth.
- A subsidiary is appealing an Oklahoma judgment involving $13,300 of damages and approximately $267,000 of awarded legal fees. The company has posted bonds and accrued for the judgments.
- Related-party activity includes a lease with Wheeler Interests, controlled by Chairman and CEO Jon S. Wheeler. Rent and reimbursement income from Wheeler Interests was $97,494 in Q1 2014, while tenant receivables due from the affiliate were $422,339 at March 31, 2014.
- The company is subject to REIT qualification requirements, including distributing at least 90% of taxable income. Loss of REIT status could result in corporate-level taxation and restrict re-election for up to five years, subject to applicable exceptions.
- Management reported effective disclosure controls as of March 31, 2014 and no significant off-balance-sheet arrangements.
Investor Verification Checklist
- Verify the refinancing plan and available liquidity for the $6.45 million of debt maturing within the next twelve months.
- Assess whether operating cash flow and recurring FFO can support the targeted $0.42 annual dividend after debt service and capital expenditures.
- Review the terms, covenants and collateral supporting the $25 million KeyBank facility and the subsequent Series B preferred offering.
- Evaluate the sustainability of revenue and NOI from the 12 properties acquired in 2013, including occupancy, lease expirations and tenant concentration.
- Monitor the Cypress Shopping Center acquisition, its financing and post-closing contribution.
- Review related-party balances and transactions with Wheeler Interests, including the $422,339 receivable.
- Track the Oklahoma litigation appeal and any additional legal-fee exposure.