Wheeler Real Estate Investment Trust, Inc. annual report, FY2022

Wheeler Real Estate Investment Trust, Inc. — FY2022 Form 10-K Summary

Business context and reporting period

Wheeler Real Estate Investment Trust, Inc. is a self-managed Maryland REIT focused on grocery-anchored, neighborhood and community retail centers in the Mid-Atlantic, Southeast and Northeast. This Form 10-K covers the year ended December 31, 2022, and was filed March 2, 2023.

On August 22, 2022, the Company completed its acquisition of Cedar Realty Trust, adding 19 primarily grocery-anchored shopping centers totaling approximately 2.9 million square feet. Cedar’s results are included from the acquisition date.

• Portfolio at year-end: 75 operating retail properties and four undeveloped land parcels.
• Total leasable area: 8.17 million square feet; leased rate: 92.9%.
• Annualized base rent: $73.24 million.
• Geographic annualized base rent concentration: Mid-Atlantic 44%, Southeast 41% and Northeast 15%.
• Top 10 tenants represented 23.19% of annualized base rent; no individual tenant exceeded approximately 10%.

Financial performance and key metrics

Metric	2022	2021	Change
Total revenue	$76.65 million	$61.31 million	+25.0%
Operating income	$24.60 million	$19.51 million	+26.1%
Net loss	$8.47 million	$9.35 million	Improved by $0.88 million
Net loss attributable to Wheeler REIT	$12.45 million	$9.44 million	Worsened by $3.01 million
Net loss attributable to common stockholders	$21.51 million	$13.24 million	Worsened by $8.27 million
Basic and diluted loss per share	$2.20 loss	$1.36 loss	Worsened
Property NOI	$48.81 million	$41.67 million	+17.1%
FFO	$9.23 million	$5.69 million	+62.1%
AFFO	$7.90 million	$6.77 million	+16.7%
Cash flow from operating activities	$30.76 million	$17.04 million	+80.5%

Revenue growth and higher NOI were primarily attributable to the Cedar acquisition. Same-store property revenue increased 4.3%, while same-store NOI increased approximately $1.23 million. Operating expenses increased 24.6%, including higher property operations, depreciation and amortization, and corporate expenses.

Interest expense declined to $30.11 million from $33.03 million despite the larger portfolio, primarily because of lower amortization of deferred financing costs and the elimination of certain corporate debt interest, partly offset by Cedar debt interest, convertible-note interest and refinancing-related defeasance costs. The Company reported a $2.34 million non-cash loss from changes in derivative fair values, compared with a $3.77 million gain in 2021.

Liquidity, debt and capital structure

• Cash and cash equivalents: $28.49 million; restricted cash: $27.37 million; combined cash, cash equivalents and restricted cash: $55.87 million.
• Total debt principal: $482.45 million versus $346.26 million at December 31, 2021.
• Net loans payable after unamortized debt issuance costs: $466.03 million.
• Weighted-average fixed-rate debt interest rate: 4.99%; weighted-average remaining term: 7.43 years.
• Scheduled principal repayments: $2.34 million in 2023, $33.69 million in 2024, $79.70 million in 2025, $19.35 million in 2026, $9.44 million in 2027 and $337.93 million thereafter.
• Operating cash flow was $30.76 million, compared with $2.34 million of scheduled 2023 principal repayments disclosed by management.

During 2022, the Company entered into or refinanced several loans, including a $75 million Guggenheim loan at 4.25%, a $60 million JANAF loan at 5.31%, a $110 million Guggenheim-Cedar loan at 5.25% and a $25 million Patuxent Crossing/Coliseum Marketplace loan at 6.35%. The Cedar acquisition and related financing substantially increased debt and noncontrolling interests.

Common and preferred dividends were suspended. At December 31, 2022, accrued and undeclared Series D Preferred dividends totaled $34.63 million, including $8.47 million attributable to 2022. The Company reported total Series D Preferred liquidation value of approximately $113.44 million.

Material changes versus the prior comparable period

• Cedar’s acquisition increased operating properties from 58 to 75, gross leasable area by 49.2% and total assets from $465.28 million to $684.54 million.
• Leased occupancy declined from 94.2% to 92.9%, primarily reflecting the lower occupancy of the acquired Cedar portfolio.
• Investment properties, net increased from $386.73 million to $560.98 million.
• Debt increased by approximately $136.19 million, while total equity increased from $3.80 million to $51.03 million largely because of noncontrolling interests associated with Cedar.
• The Company sold Walnut Hill Plaza and Butler Square for aggregate net proceeds of $10.51 million and used related proceeds to reduce debt.
• Impairment expense declined to $0.76 million from $2.30 million.
• Operating cash flow increased substantially, but investing cash flow changed from $5.10 million provided in 2021 to $133.51 million used in 2022, primarily because of the Cedar acquisition.
• The Company issued 1.51 million shares of Series B Preferred as payment-in-kind interest on its convertible notes during 2022.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal earnings or revenue guidance. Management expects to improve liquidity through operating cash flow, leasing currently leased but unoccupied space, backfilling vacant anchor spaces, tenant improvements, property dispositions and refinancing.

The most significant near-term financial contingency is the Series D Preferred redemption right beginning after September 21, 2023. Management stated that it does not expect to have sufficient cash to satisfy the estimated redemption obligation, which could reach approximately $119.80 million including accrued dividends. The Company expects redemptions would likely be settled largely in common stock, creating substantial dilution.

An exchange offer seeking to exchange up to 67% of Series D Preferred for convertible notes and common stock expired on January 20, 2023 after only 26.8% of the outstanding shares were tendered. The required participation threshold was not met, and the Series D terms remained unchanged.

• Retail tenant bankruptcies, defaults, e-commerce competition and lease expirations could reduce occupancy and rental income.
• Inflation has increased insurance, maintenance and other operating costs; tenant reimbursements and lease escalators provide only partial protection.
• Higher interest rates could increase financing costs, although most debt was fixed-rate at year-end.
• The portfolio is geographically concentrated in the Mid-Atlantic, Southeast and Northeast and is exposed to regional economic conditions and severe weather.
• Allowance for uncollectible tenant receivables increased to $3.15 million from $0.63 million.
• The Company recorded $0.69 million of legal settlement expense, including the $0.69 million payment resolving the former CEO litigation.
• Pending Cedar preferred shareholder litigation remains uncertain; the filing does not provide a clear estimate of potential damages.
• The Harbor Pointe tax increment financing arrangement could require up to $2.04 million of principal reimbursement, plus potentially variable interest, although no liability was accrued because future shortfalls could not be reasonably estimated.
• The Company reported effective disclosure controls and internal control over financial reporting; the independent auditor was not required to provide an internal-control attestation because the Company is a smaller reporting company.

Most important facts for an investor to verify

• Whether the Company can fund or otherwise settle Series D Preferred redemptions after September 21, 2023 without materially weakening liquidity or diluting common shareholders.
• The sustainability of operating cash flow and FFO after incorporating the full Cedar portfolio, higher debt service and recurring capital expenditures.
• Occupancy trends and lease-up plans for the Cedar properties, including properties with materially low occupied rates.
• Refinancing and covenant requirements for the substantial debt maturities beginning in 2024 and 2025.
• Tenant receivable collections, tenant bankruptcies and the adequacy of credit-loss reserves.
• The status and potential financial impact of pending Cedar preferred shareholder litigation.
• The Company’s ability to maintain REIT qualification while managing accumulated preferred dividends and potential stock-based redemption settlements.