Wheeler Real Estate Investment Trust, Inc. annual report, FY2014

Business Context and Reporting Period

Wheeler Real Estate Investment Trust, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company is a self-managed Maryland REIT focused primarily on grocery-anchored and necessity-based retail properties in secondary and tertiary markets.

At year-end, the portfolio comprised 36 properties: 24 retail shopping centers, six freestanding retail properties, one office property and five undeveloped land parcels. The portfolio totaled 1,904,146 gross leasable square feet and was 95.61% leased, with 258 tenants and $16.86 million of annualized base rent. The company had 44 full-time and four part-time employees.

Financial Performance and Key Metrics

Metric	2014	2013	Change
Total revenue	$17.16 million	$8.71 million	+97.1%
Rental revenue	$13.60 million	$7.16 million	+90.0%
Property net operating income	$12.39 million	$6.99 million	+77.2%
Operating loss	$(4.93) million	$(1.88) million	Worsened
Net loss	$(11.75) million	$(4.38) million	Worsened
Net loss attributable to common shareholders	$(13.27) million	$(3.80) million	Worsened
Basic and diluted loss per share	$(1.80)	$(0.82)	Worsened
FFO	$(3.53) million	$(0.91) million	Worsened
Core FFO	$(1.13) million	$1.60 million	Declined

Operating margin was approximately negative 28.7%, and net margin was approximately negative 68.4%. Property NOI represented approximately 72.2% of total revenue. Results were affected by acquisition costs, depreciation and amortization, higher corporate expenses, preferred dividends and interest expense.

Corporate general and administrative expense increased to $9.50 million from $5.30 million, including $3.79 million of acquisition costs and $2.26 million of professional fees.
Interest expense increased to $6.81 million from $2.50 million, primarily because of debt incurred for 2014 acquisitions and $12.16 million of 9% senior notes issued in December 2013 and January 2014.
Same-store property revenue declined 2.2% to $6.40 million, while same-store NOI declined to $5.04 million from $5.27 million. Management attributed the revenue decline principally to Riversedge rent disruption following internalization and lower amortization of below-market leases.

Cash Flow, Liquidity and Debt

Cash and cash equivalents increased to $9.97 million from $1.16 million at December 31, 2013.
Operating activities used $4.44 million, compared with $2.45 million used in 2013.
Investing activities used $18.16 million, including $17.64 million for property acquisitions and $0.52 million for capital expenditures.
Financing activities provided $31.42 million, supported primarily by $37.24 million of Series B preferred stock proceeds and $9.04 million of loan proceeds.
Total debt was $141.45 million, compared with $94.56 million at year-end 2013. Weighted-average interest rate was 5.14% and weighted-average remaining term was 6.04 years.
Debt maturities totaled $19.51 million in 2015, $18.58 million in 2016 and $6.85 million in 2017. Management stated that it expected to refinance maturing debt on reasonable terms, but warned that failure to do so could materially affect financial condition and results.
The company reported compliance with applicable debt covenants at December 31, 2014.
Common dividends were paid monthly at $0.035 per share, or $0.42 annualized. Management stated that current cash flow did not support the targeted dividend and that a reduction could be required if the deficit continued.

Material Changes Versus the Prior Comparable Period

The company expanded from 22 to 30 income-producing properties, increased gross leasable area 48.3% to 1.90 million square feet and improved ending occupancy from 94.0% to 95.6%.
Eight 2014 acquisitions and related land purchases added grocery-anchored centers and undeveloped parcels. Major acquisitions included Cypress, Harrodsburg, Port Crossing, LaGrange, Freeway Junction, Graystone Crossing, Bryan Station and Crockett Square.
Acquisition activity increased investment properties, net, to $152.25 million from $101.77 million and total assets to $200.48 million from $125.37 million.
Series B preferred stock offerings generated $37.24 million of net proceeds and increased preferred dividends to $2.72 million from $0.14 million.
On October 24, 2014, the company internalized management by acquiring Wheeler Interests, Wheeler Real Estate and WHLR Management from Chairman and CEO Jon Wheeler for 1,516,853 operating partnership units valued at $6.75 million.
Operating expenses grew faster than revenue, resulting in a larger operating loss and net loss. FFO declined to negative $3.53 million, and Core FFO declined from positive $1.60 million to negative $1.13 million.

Guidance, Outlook, Risks and Unusual Items

Management expected to continue acquiring grocery-anchored properties in the Northeast, Mid-Atlantic, Southeast and Southwest, generally targeting secondary and tertiary markets with acquisition cap rates of approximately 8% to 10% or higher. The company expected to use equity, property contributions, debt financing and a $25 million secured guidance line available through December 31, 2015.

Management acknowledged that current cash flow did not support the $0.42 annual common dividend.
Approximately 10.14% of gross leasable area was scheduled to expire during 2015 without having already been renewed. Management expected renewals at comparable rents and terms, but this remains a leasing risk.
The portfolio is geographically concentrated, with approximately 64% of annualized base rent from the Southeast and 20% from the Mid-Atlantic. Regional economic weakness, tenant failures or anchor-store closures could materially affect results.
Food Lion and Bi-Lo/Winn Dixie represented approximately 8.65% and 7.53% of annualized base rent, respectively; the ten largest tenants represented 37.22% of annualized base rent.
All properties were pledged as collateral for mortgage debt. Risks include refinancing, interest rates, leverage, tenant credit, occupancy, operating costs and access to additional financing.
The company was involved in ordinary-course litigation. A Perimeter subsidiary had accrued approximately $280,000 for a $13,300 judgment and approximately $267,000 of legal fees; the matter was under appeal. A separate approximately $856,000 construction lien was satisfied by affiliates without liability to the company.
Ground leases for the Amscot and Starbucks/Verizon properties involve related parties and require future payments totaling approximately $883,000, including extension periods.
Subsequent to year-end, the company acquired Pierpont Centre for $13.89 million, signed contracts for Butler Square and Beaver Ruin Village, and raised $93 million through Series C preferred stock, consisting of $90 million in cash and $3 million of debt reduction.
The company recorded no impairment charges in 2014 or 2013. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2014.

Most Important Facts an Investor Should Verify

Whether the company can refinance the $19.51 million of debt maturing in 2015 and subsequent maturities without unfavorable terms or equity dilution.
Whether operating cash flow and FFO improve sufficiently to support the $0.42 annual common dividend.
The effect of internalization on recurring corporate expenses, acquisition fees, related-party transactions and Riversedge rent.
Lease renewal and re-leasing performance for the 2015-2018 expirations, particularly the 24.29% of gross leasable area expiring in 2018.
Tenant concentration and credit exposure, especially to grocery anchors and the ten largest tenants.
The final economics, conversion terms and dilution potential of Series B preferred stock, senior convertible notes and outstanding warrants.
Whether 2015 acquisitions and the Series C capital raise generate sufficient incremental NOI and cash flow to offset financing costs and corporate overhead.
Final purchase-price allocations and valuation assumptions for 2014 acquisitions, which were identified as preliminary in the filing.