Wheeler Real Estate Investment Trust, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2023. Wheeler is a self-managed REIT focused primarily on grocery-anchored retail shopping centers. At quarter-end, it owned and operated 75 retail shopping centers and four undeveloped properties across 15 states. The portfolio included 19 properties acquired through the August 2022 Cedar Realty Trust transaction.
As of June 30, 2023, the portfolio’s ending leased rate was 92.6%, compared with 95.7% at June 30, 2022. The portfolio represented approximately 45% of annualized base rent in the Mid-Atlantic, 40% in the Southeast and 15% in the Northeast.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $24.8 million, up 60.5% | $50.9 million, up 64.3% |
| Operating income | $6.4 million, up 19.3% | $13.0 million, up 29.0% |
| Operating margin | 25.7%, versus 34.6% | 25.4%, versus 32.4% |
| Net loss | $1.3 million | $1.7 million |
| Net loss attributable to common stockholders | $6.2 million, or $0.64 per share | $11.6 million, or $1.18 per share |
| FFO | $6.0 million | $13.1 million |
| AFFO | $1.3 million | $3.2 million |
| Same-store NOI | $10.1 million, down 2.3% | $20.5 million, up 0.9% |
| Net cash from operating activities | Not separately provided | $11.5 million |
Cash, cash equivalents and restricted cash totaled $51.1 million at June 30, 2023, including $28.7 million of unrestricted cash and $22.4 million held in lender reserves. Cash decreased by $4.7 million during the first six months of 2023.
Loans payable had a principal balance of $488.1 million and a net carrying value of $469.3 million at June 30, 2023. Weighted average fixed-rate debt was 5.39% with a weighted average term of 8.97 years. Management reported no debt maturities during the 12 months ending June 30, 2024, although scheduled principal and regularly scheduled payments during that period were approximately $1.4 million.
Total assets were $673.4 million, total liabilities were $525.9 million and total stockholders’ deficit was $26.6 million. Series D Preferred Stock had a $121.5 million aggregate liquidation value, including $38.8 million of cumulative undeclared dividends.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the Cedar Acquisition, which contributed approximately $7.7 million of non-same-store rental revenue in the quarter and $15.9 million in the six-month period.
- Operating expenses increased faster than revenue, rising 82.2% in the quarter and 81.4% for the six-month period. Property operations, depreciation and amortization, and corporate general and administrative costs all increased substantially following the Cedar Acquisition.
- Interest expense increased 35.7% to $10.2 million in the quarter and 37.3% to $16.7 million for the six-month period, including Cedar debt interest, defeasance costs and higher deferred financing cost amortization.
- Six-month net loss improved from $4.6 million to $1.7 million, aided by a $4.9 million gain from changes in derivative fair values versus a $1.9 million loss in the prior period. These gains were non-cash and valuation-driven.
- Six-month FFO increased to $13.1 million from $3.4 million, while AFFO declined to $3.2 million from $5.9 million after preferred dividends, noncontrolling-interest distributions and other adjustments.
- Same-store NOI was broadly stable for the first six months but declined in the second quarter as property expenses increased 11.9%.
- The Company completed two refinancings in May 2023 totaling approximately $114.2 million: a $61.1 million loan at 6.194% and a $53.1 million loan at 6.24%, both maturing in 2033.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or operating guidance. Management expects to improve liquidity through lease-up, delivery of leased but unoccupied space, backfilling vacant anchor space, tenant improvements funded partly by restricted cash, asset dispositions and property refinancing.
- Series D redemption exposure: Beginning September 21, 2023, Series D holders may require redemption at $25 per share plus accrued dividends. The estimated total liquidation value at that date was approximately $123.8 million. Management stated that it would not have sufficient cash to fund a cash redemption and intends to settle redemptions in common stock, which could cause substantial dilution.
- Preferred dividend arrears: Series D cumulative undeclared dividends totaled $38.8 million at June 30, 2023. The annual dividend rate increases by 2 percentage points after September 21, 2023, subject to a 14% maximum.
- Nasdaq compliance: The Company received a June 2023 notice for failure to meet the $1.00 minimum bid-price requirement. It announced a one-for-ten reverse stock split effective August 17, 2023, intended to assist with compliance, but continued listing is not assured. The Company also must restore its Audit Committee to at least three members by the earlier of its next annual meeting or June 2, 2024.
- Litigation: A Maryland Cedar preferred-shareholder case was dismissed on August 1, 2023, subject to possible reconsideration or appeal. Other Cedar-related preferred-shareholder litigation remained unresolved, and the filing states that outcomes are uncertain.
- Related-party investment: The Company invested $3.0 million in Stilwell Activist Investments, L.P., a fund associated with directors. The investment had a reported value of $3.0 million at quarter-end and may not be withdrawn for one year, subject to exceptions. A portion of the fund’s investments is in Wheeler securities.
- Unusual items: Six-month results included $2.4 million of Exchange Offer costs, $1.8 million of defeasance payments and a $0.6 million loss on repurchase of convertible notes. The Company also paid $2.0 million of preferred or paid-in-kind interest rather than cash.
Most important facts for investors to verify
- Whether Series D holders exercise redemption rights and the resulting amount and price of common stock issued.
- The Company’s ability to maintain Nasdaq listing after the reverse stock split and to appoint a third Audit Committee member.
- Refinancing capacity, interest costs and covenant requirements as debt maturities approach, particularly given $488.1 million of principal debt.
- Leasing progress and whether occupancy can recover from the 92.6% level without materially higher tenant-improvement or leasing costs.
- Underlying recurring cash earnings: AFFO of $3.2 million for six months was substantially below reported FFO of $13.1 million.
- Potential outcomes and costs of the remaining Cedar-related litigation.
- The effect of non-cash derivative gains, paid-in-kind interest and preferred dividend arrears on reported earnings, liquidity and dilution.