Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The REIT owned and operated 65 centers, one office building, six undeveloped properties and one redevelopment project across 12 states. The portfolio contained approximately 5.74 million square feet of gross leasable area and was 89.3% occupied at quarter-end, compared with 93.7% a year earlier.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $17.11 million, up 16.2% | $33.42 million, up 15.1% |
| Operating income | $2.73 million, down 23.3% | $5.46 million, up 15.3% |
| Operating margin | 16.0%, versus 24.2% | 16.3%, versus 16.3% |
| Net loss | $1.56 million | $3.43 million |
| Net loss attributable to common shareholders | $4.73 million, or $0.51 per share | $9.76 million, or $1.08 per share |
| FFO | $4.96 million, up 8.5% | $9.51 million, up 14.6% |
| AFFO | $2.40 million, versus $3.71 million | $4.36 million, versus $6.56 million |
- Rental revenue increased 17.1% in the quarter and 15.6% year to date, primarily due to the January 2018 acquisition of JANAF. Tenant reimbursements increased 8.4% and 14.2%, respectively.
- Property net operating income increased to $12.34 million for the quarter and $23.90 million for the six months, from $9.95 million and $19.61 million, respectively. JANAF contributed $2.04 million of quarterly NOI and $3.69 million of year-to-date NOI.
- Corporate general and administrative expense increased 72.2% in the quarter and 34.6% year to date, driven mainly by higher professional fees, compensation, severance, refinancing activity and administrative costs.
- Interest expense increased 13.4% in the quarter and 11.6% year to date because of additional JANAF debt and higher LIBOR.
- Cash flow from operating activities was $12.63 million, compared with $13.63 million in the prior-year period. Investing activities used $21.98 million, including $23.15 million for property acquisitions. Financing activities provided $15.68 million, including proceeds from the Series D preferred offering and new or refinanced debt.
- Cash, cash equivalents and restricted cash totaled $18.61 million at June 30, 2018, compared with $12.29 million at December 31, 2017.
- Total debt, excluding unamortized issuance costs and including debt associated with assets held for sale, was $376.63 million. Approximately 77.2% was fixed-rate and 22.8% variable-rate debt. A 1% increase in interest rates was estimated to reduce annual cash flow by approximately $858 thousand.
- Investment properties, net, increased to $441.08 million from $375.20 million at year-end, primarily reflecting JANAF.
Material Changes Versus Prior Comparable Period
- On January 18, 2018, the Company acquired JANAF, an 810,137-square-foot Norfolk, Virginia retail center anchored by BJ’s Wholesale Club, for $85.65 million. The property was 94% leased at acquisition and was funded with cash, assumed debt and 150,000 common shares.
- Occupancy declined 4.4 percentage points to 89.3%, despite the larger portfolio.
- Asset management fees, commissions and development income declined substantially after certain related-party management and development agreements were terminated in February 2018.
- Common dividends were suspended in 2018; no common dividend was declared for the quarter or six-month period. Preferred dividends totaled $3.21 million for the quarter and $6.41 million year to date.
- Series D preferred stock outstanding increased to 3.60 million shares with a $90.02 million aggregate liquidation preference, following a January public offering that generated $21.16 million of net proceeds.
- The Company sold the Chipotle ground lease at Conyers Crossing for net proceeds of $1.16 million and sold the Laskin Road land parcel for approximately $2.86 million, generating a $903 thousand gain in discontinued operations.
- Same-store NOI increased 3.6% for the quarter and 3.0% year to date, but same-store FFO declined by $857 thousand and $1.08 million, respectively, due primarily to lower interest income, terminated service contracts and higher corporate expenses.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to satisfy near-term liquidity needs through cash and operating cash flow, refinancing maturing debt, property sales and continued efforts to improve occupancy and rental rates.
- Scheduled principal repayments and debt maturities for the remainder of 2018 totaled $24.52 million, including a $6.40 million KeyBank line maturity. Management was refinancing properties to reduce KeyBank borrowings below $52.50 million.
- After quarter-end, KeyBank extended the deadline to August 23, 2018 and identified an anticipated $2.89 million borrowing-base overadvance, with repayment or balancing required by October 31, 2018.
- The Revere Loan was extended to November 1, 2018 at a 9% interest rate, with an increased exit fee and required principal payments. The balance was $3.36 million at June 30, 2018.
- The Company reported compliance with its principal credit agreement covenants, but had obtained waivers for the debt-to-tangible-net-worth and debt-service-coverage ratios under the First National Bank line of credit.
- The Company placed $6.74 million of notes receivable related to Sea Turtle Development on nonaccrual status after a prior $5.26 million impairment. Management identified potential additional impairment risk if the first-lien lender forecloses.
- Thirteen Southeastern Grocers leases were modified and four locations were recaptured. The estimated annualized base-rent impact, including the Cypress lease expiration, was approximately $2.50 million. Two locations had been backfilled with rents commencing in the third quarter.
- A former CEO sued the Company over alleged employment agreement breaches and retaliatory termination. Separate litigation alleges that the Company failed to maintain the Series D preferred stock asset-coverage ratio and must redeem the preferred shares at $25 per share. Both matters were preliminary and their outcomes uncertain.
- Key operating risks include refinancing and covenant risk, declining occupancy, tenant credit and anchor-tenant exposure, regional concentration, interest-rate volatility, capital expenditure requirements, environmental liabilities and the Company’s ability to sell properties or raise capital.
- The Company adopted revenue recognition Topic 606 and restricted-cash guidance in 2018; management stated the revenue standard had no material impact. The new lease standard was expected to require recognition of right-of-use assets and lease obligations beginning January 1, 2019.
Investor Verification Items
- Verify the status and final terms of the KeyBank overadvance, required paydown and related covenant modifications.
- Verify refinancing or repayment of the $24.52 million of 2018 debt maturities and the Company’s ability to meet preferred dividend and other liquidity obligations.
- Assess whether occupancy, Southeastern Grocers recaptures and anchor-tenant exposure could further reduce rental revenue and NOI.
- Review the Series D preferred stock asset-coverage litigation and any potential redemption obligation.
- Evaluate recoverability of the $6.74 million Sea Turtle notes receivable and the risk of further impairment.
- Reconcile GAAP net losses with FFO and AFFO, particularly the decline in AFFO available to common shareholders despite higher FFO.