Wheeler Real Estate Investment Trust, Inc. — FY 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, including fourth-quarter results. Wheeler 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 73 properties, including 64 income-producing properties, seven undeveloped land parcels and one redevelopment project, totaling approximately 4.9 million square feet and 91.9% occupied.
The Company owned 94.34% of Wheeler REIT, L.P. and had 8.74 million common shares outstanding at December 31, 2017. A one-for-eight reverse stock split became effective March 31, 2017.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $58.5 million | $44.2 million |
| Operating income (loss) | $0.5 million | $(0.3) million |
| Net loss | $(12.8) million | $(12.2) million |
| Net loss attributable to common shareholders | $(22.1) million | $(15.9) million |
| Loss per common share | $(2.54) | $(1.89) |
| Property NOI | $40.8 million | $30.2 million |
| FFO | $10.9 million | $7.7 million |
| AFFO | $12.3 million | $8.7 million |
| Net cash from operating activities | $24.8 million | $10.4 million |
| Cash and cash equivalents | $3.7 million | $4.9 million |
| Total debt outstanding | $313.8 million | $315.0 million |
Revenue increased 32.6%, primarily because 23 properties acquired in 2016 contributed a full year of operations. Property NOI increased 35.0%, but same-store NOI increased only 1.3% according to management. Interest expense rose 28.5% to $17.2 million, while depreciation and amortization rose to $26.2 million.
Results included a $5.3 million non-cash impairment of Sea Turtle Development notes receivable and $2.8 million of provisions for credit losses, substantially related to Sea Turtle and other related-party receivables. Fourth-quarter operating loss was $5.0 million, continuing-operations net loss was $8.7 million, and net loss attributable to common shareholders was $10.7 million.
Operating cash flow of $24.8 million exceeded reported AFFO of $12.3 million, but cash distributions paid totaled $20.7 million. The filing states that operating cash flow was insufficient to cover anticipated common and preferred distributions and that distributions had been funded from sources other than operating cash flow.
Material changes versus the prior comparable period
- Revenue increased by $14.4 million, while property NOI increased by $10.6 million, reflecting the full-year contribution from prior acquisitions.
- Occupancy declined from 94.0% to 91.9%, and available space represented 8.07% of gross leasable area at year-end.
- Same-store property revenue was essentially flat at $34.8 million versus $34.9 million; same-store FFO declined by $3.8 million, largely because of the Sea Turtle impairment and credit-loss reserves.
- Corporate general and administrative expense decreased from $9.9 million to $7.4 million, although 2017 still included approximately $2.0 million of non-recurring costs.
- The Company sold the Ruby Tuesday and Outback Steakhouse ground leases at Pierpont Centre, the Carolina Place land parcel and the Steak n’ Shake outparcel at Rivergate. These transactions generated reported gains, including a $1.5 million gain from the Pierpont dispositions and a $1.0 million gain from the Rivergate outparcel.
- The KeyBank revolving facility was amended in December 2017. Borrowings were approximately $68.0 million against a $52.5 million commitment, and the Company was required to reduce borrowings to $52.5 million by July 1, 2018.
- Management changed materially after year-end: Jon Wheeler was terminated as CEO and Chairman in January 2018, David Kelly became CEO, Wilkes Graham resigned as CFO, and Matthew Reddy became CFO.
Guidance, outlook, commentary, risks and unusual items
Management intended to increase occupancy, obtain rental-rate growth, reduce expenses, sell undeveloped land parcels and refinance near-term maturities. It stated that refinancing plans were probable, but acknowledged that failure to refinance or sell assets could limit growth and future dividends. The Board suspended the common-stock dividend for the remainder of 2018.
Approximately $39.8 million of debt maturities and scheduled principal payments were due during 2018, including the $15.5 million KeyBank line maturity. Preferred-stock dividends were approximately $12.1 million annually. Management was also reviewing refinancing of approximately $11.1 million related to the Revere Loan, Shoppes at Eagle Harbor and Riversedge.
Sea Turtle Development is a material related-party exposure. The Company had originally advanced approximately $12.0 million through second-lien notes, carried $6.7 million net at year-end after impairment, reserved $1.34 million of accrued interest and reserved $2.36 million of related-party receivables. The development-services agreement was terminated after year-end, and foreclosure by the senior lender could result in additional impairment.
Tenant concentration is significant: the ten largest tenants represented 32.0% of contractual base revenue. BI-LO alone represented 11.2% of annualized base rent, and the filing identified financial-distress and potential-bankruptcy risks involving BI-LO and Southeastern Grocers. Approximately 9.4% of portfolio square footage and 10.0% of annualized base rent expired in 2018.
Approximately 68.9% of debt was fixed-rate and 31.1% variable-rate. Management estimated that a 1.0% increase in interest rates would reduce annual cash flow by approximately $1.0 million. The Series D preferred stock requires at least 200% asset coverage and could require cash redemption if the requirement is not cured.
Subsequent events included the January 2018 acquisition of the 887,917-square-foot JANAF shopping center for $85.7 million, funded with assumed debt, cash and 150,000 common shares; issuance of 1.36 million Series D preferred shares for net proceeds of $21.2 million; and a $1.05 million gain on the sale of a Chipotle ground lease.
Most important facts an investor should verify
- Whether the Company successfully refinanced or repaid the $39.8 million of 2018 debt maturities and reduced KeyBank borrowings to the required level by July 1, 2018.
- Whether operating cash flow can sustainably cover common and preferred distributions after the common dividend suspension.
- The ultimate recoverability of the Sea Turtle notes receivable and related-party receivables, including potential additional impairment.
- BI-LO and Southeastern Grocers lease status, rent collections, store closures and any bankruptcy proceedings.
- Occupancy trends, 2018 lease renewals and the effect of vacant space and co-tenancy provisions on rental income.
- Compliance with the Series D 200% asset-coverage requirement and other debt covenants.
- The integration, financing and operating performance of the JANAF acquisition.
- The effect of management turnover, activist-stockholder campaigns and related-party transactions on governance and strategy.
- The filing’s non-GAAP FFO, AFFO and NOI measures, including the reconciliation to GAAP and the impact of preferred dividends and unusual items.