Wheeler Real Estate Investment Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is the three months ended March 31, 2018. The unaudited filing covers a REIT owning and operating 62 centers, one office building and six undeveloped properties across 12 states. Common shares outstanding at April 30, 2019 were 9.69 million.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $16.00 million | $16.29 million | Down $0.30 million |
| Rental revenue | $15.77 million | $15.82 million | Down $0.05 million |
| Operating expenses | $12.38 million | $14.62 million | Down $2.24 million |
| Operating income | $5.46 million | $2.73 million | Up $2.73 million |
| Net income attributable to Wheeler REIT | $0.64 million | $(1.83) million | Improved $2.47 million |
| Net loss attributable to common shareholders | $(3.02) million | $(5.03) million | Improved $2.02 million |
| Basic and diluted loss per share | $(0.31) | $(0.57) | Improved $0.26 |
| Property NOI | $11.21 million | $11.56 million | Down $0.34 million |
| FFO | $4.63 million | $4.55 million | Up $0.08 million |
| AFFO | $1.06 million | $1.97 million | Down $0.90 million |
| Cash flow from operating activities | $2.70 million | $6.47 million | Down $3.78 million |
Operating margin was approximately 34.1% in Q1 2019 versus 16.8% in Q1 2018, primarily reflecting lower depreciation and amortization, lower corporate general and administrative expense, and higher property-disposition gains. The improvement in GAAP earnings did not translate into higher AFFO available to common shareholders because of increased preferred dividend accruals, lower property NOI and higher interest expense.
- Ending occupancy was 89.0%, down from 90.8% a year earlier. Gross leasable area declined 1.0% to approximately 5.69 million square feet, and properties owned and leased declined from 65 to 62.
- Same-store NOI decreased $0.61 million, partly offset by a $0.27 million contribution from the JANAF property, which provided a full quarter of activity in 2019.
- Cash, cash equivalents and restricted cash totaled $18.61 million at March 31, 2019, including $4.16 million of unrestricted cash and $14.45 million of restricted cash held primarily for taxes, insurance, capital improvements, leasing costs and tenant deposits.
- Total assets were $509.10 million, including $422.84 million of net investment properties. Total liabilities were $387.07 million.
- Total debt, including debt associated with assets held for sale and before unamortized debt issuance costs, was $359.93 million, compared with $369.61 million at December 31, 2018. Net loans payable were $348.65 million.
Material changes versus the prior comparable period
- Revenue declined modestly because of lower rents from certain Southeastern Grocers leases, sold properties and vacant anchor spaces, partially offset by a full quarter of JANAF operations. Other revenue declined because Q1 2018 included larger early lease termination fees.
- Depreciation and amortization declined $1.66 million because Q1 2018 included write-offs of lease intangibles related to early lease terminations.
- Corporate general and administrative expense declined $0.69 million, mainly from lower compensation and benefits, professional fees, taxes and licenses.
- Interest expense increased $0.22 million to $4.79 million, principally due to a full quarter of JANAF interest, higher LIBOR and higher-rate refinancings.
- The Company sold Jenks Plaza, Graystone Crossing and a Harbor Pointe land parcel for aggregate contract prices of $8.75 million, generating a $1.84 million gain and $3.60 million of net proceeds.
- The Revere Term Loan was paid in full by March 31, 2019. Debt principal payments during the quarter totaled $5.35 million.
- The Company adopted ASC Topic 842 on January 1, 2019. The adoption added approximately $11.90 million of operating lease right-of-use assets and $11.99 million of operating lease liabilities, with no material cash-flow impact and no material income-statement impact.
- Preferred dividends were suspended beginning with the fourth quarter of 2018. At March 31, 2019, approximately $6.5 million of preferred dividends were accumulated and undeclared, including approximately $3.5 million accrued during Q1 2019.
Guidance, outlook, liquidity and risks
No formal earnings or revenue guidance is provided. Management expects to fund near-term liquidity needs through operating cash flow, available cash, property sales, refinancing, debt repayments and continued suspension of Series A, Series B and Series D preferred dividends.
- Scheduled debt maturities and principal repayments were $83.75 million for the remaining nine months of 2019 and $90.83 million for the twelve months ending March 31, 2020. The latter includes $51.25 million outstanding on the KeyBank line of credit and $21.97 million on the Rivergate loan maturing in December 2019.
- Management planned to refinance or dispose of assets to address maturities and was working with lenders to reduce the KeyBank balance. The Company stated it was in compliance with loan covenants and had received no default notice as of March 31, 2019.
- Subsequent to quarter-end, KeyBank waived the overadvance, required a $1.00 million principal payment, established monthly principal payments of $250 thousand and imposed scheduled balance reductions. The facility could bear a higher interest rate if required reductions were not achieved.
- Perimeter Square was classified as held for sale; in April 2019, the Company contracted to sell it for $7.43 million and extended its $6.50 million of related loans to June 5, 2019.
- The Company’s $5.00 million related-party notes receivable from Sea Turtle Development are on nonaccrual status after cumulative impairment charges of $7.00 million. Recovery depends on future stabilization and sale assumptions, and foreclosure by the $20.00 million first-lien lender could cause further impairment.
- Material risks include refinancing and covenant risk, high leverage, declining occupancy, tenant and anchor-store concentration, regional economic exposure, interest-rate changes, property-sale execution and potential environmental or insurance liabilities.
- Pending litigation includes claims by a former CEO, litigation concerning Series D preferred asset coverage and a related construction-loan dispute. The filing states that outcomes cannot currently be predicted. The BOKF complaint seeks approximately $21.00 million from other defendants; the Company’s subsidiary is named nominally and no damages are sought from it.
- The Company states that it has no material off-balance-sheet arrangements, but a Harbor Pointe tax-increment financing obligation could require up to $2.28 million of principal plus possible interest; no amount was accrued because future shortfalls could not be reasonably estimated.
Facts investors should verify
- Whether the Company completes the planned Perimeter Square sale and applies proceeds to the related debt.
- Progress toward KeyBank balance-reduction deadlines, the Rivergate refinancing and other 2019-2020 maturities.
- Whether occupancy, same-store NOI and leasing activity stabilize or continue to decline.
- The duration of the preferred-dividend suspension and the growth of cumulative unpaid preferred dividends.
- The status and potential financial impact of the Sea Turtle notes receivable and related litigation.
- Whether the Company can restore dividends or requires additional asset sales, refinancing or capital.