Wheeler Real Estate Investment Trust, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly results for the three months ended March 31, 2017. The REIT owned and operated 64 centers, one office building, eight undeveloped properties and one redevelopment project across 12 states. The portfolio contained approximately 4.91 million square feet of gross leasable area and was 93.0% occupied at quarter-end.
Results include the full-quarter contribution from 23 retail properties acquired during 2016. The company effected a one-for-eight reverse stock split on March 31, 2017; all share and per-share data are presented on the split-adjusted basis.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $14.32 million | $9.14 million | Up 56.7% |
| Operating income | $1.17 million | $(1.16) million | Improved $2.34 million |
| Net loss | $(1.16) million | $(3.56) million | Improved $2.40 million |
| Net loss attributable to common shareholders | $(3.60) million | $(3.74) million | Improved $0.14 million |
| Loss per common share | $(0.42) | $(0.45) | Improved $0.03 |
| Property net operating income | $9.92 million | $6.06 million | Up $3.86 million |
| FFO | $3.73 million | $1.32 million | Up 182.8% |
| AFFO | $2.85 million | $1.87 million | Up $0.98 million |
| Cash flow from operating activities | $6.82 million | $0.63 million | Up $6.19 million |
| Cash and cash equivalents | $4.66 million | $4.86 million at Dec. 31, 2016 | Down $0.20 million |
Rental revenue increased 65.1% to $11.13 million, while tenant reimbursements and other revenues increased 39.8% to $2.78 million. Depreciation and amortization was $6.40 million, interest expense was $4.18 million and provision for credit losses was $252 thousand. Operating income divided by revenue was approximately 8.2% in Q1 2017, compared with negative operating income in the prior-year quarter.
Total debt principal was $312.99 million, or $305.89 million net of unamortized debt issuance costs. Approximately 69.3% of debt was fixed-rate and 30.7% was variable-rate. A 1.0 percentage-point increase in interest rates, assuming no change in variable-rate debt, would reduce annual cash flow by approximately $961 thousand.
Total assets were $481.54 million and total equity was $98.80 million at March 31, 2017. Investment properties, net, were $386.70 million. The company declared $0.42 per common share for the quarter and paid or declared $2.48 million of preferred stock dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth was primarily driven by the 23 properties acquired in 2016. New stores contributed $5.18 million of property revenue and $3.73 million of property NOI in Q1 2017, compared with none in Q1 2016.
- Same-store property revenue was essentially flat at $8.73 million, while same-store property expenses declined to $2.55 million from $2.68 million.
- Ending occupancy declined modestly to 93.0% from 93.88%. Leases renewed during the quarter had a weighted-average rate increase of 3.5%, compared with 7.39% in the prior-year quarter.
- Interest expense increased $1.76 million because of additional acquisition-related borrowings and higher loan-cost amortization.
- Credit-loss provision increased to $252 thousand from $88 thousand, and the allowance for uncollectible accounts increased to $964 thousand from $691 thousand at December 31, 2016.
- Corporate general and administrative expense decreased slightly to $2.23 million from $2.28 million. Management identified approximately $587 thousand of Q1 2017 non-recurring acquisition, capital-related and miscellaneous costs.
- The company sold the Ruby Tuesday’s and Outback Steakhouse properties at Pierpont Centre on February 28, 2017, receiving approximately $1.87 million of cash and recognizing a $1.51 million gain. All properties previously classified as held for sale had been sold by March 31, 2017.
- Common shares outstanding increased to 8.59 million from 8.50 million at December 31, 2016, primarily reflecting incentive-plan issuances and conversion of senior convertible notes. The reverse stock split reduced the pre-split share count by eight-for-one.
Guidance, Outlook, Risks and Unusual Items
No formal earnings guidance was provided. Management stated that it expects leases expiring within the next 12 months, representing 9.86% of gross leasable area, to renew at amounts and terms comparable to existing leases. Management also cited future contractual rent increases and expansion opportunities at the properties acquired in 2016.
Management identified $20.80 million of debt maturities during the 12 months following March 31, 2017, including five loans totaling $11.67 million in addition to the $7.45 million Revere Term Loan. On May 1, 2017, the Revere maturity was extended to April 30, 2018 after a $450 thousand principal payment and a $140 thousand extension fee. Management was pursuing refinancing for the other maturities and expected to use cash, operating cash flow, the revolving credit facility and refinancing proceeds to meet liquidity needs.
The company targeted annual common dividends of $1.68 per share, or approximately $15.71 million, and estimated approximately $9.2 million of annual Series B and Series D preferred dividends. Beginning in July 2017, common dividends were expected to be paid quarterly rather than monthly. Dividend capacity depends on refinancing, operating cash flow, capital expenditures and access to additional capital.
The principal risks include refinancing and covenant compliance, interest-rate exposure, tenant credit and collections, occupancy and anchor-tenant concentration, regional economic concentration, capital expenditure requirements, and the ability to maintain REIT qualification. The company reported compliance with applicable debt covenants and no defaults as of March 31, 2017. It reported no material changes to the risk factors in its 2016 Form 10-K and no material litigation, environmental or off-balance-sheet matters.
Related-party activity included a $12.0 million note receivable from an affiliate-related Sea Turtle Development project, bearing interest at 12% and secured by a second deed of trust. The company recognized $356 thousand of interest income and $136 thousand of development fees associated with the project in Q1 2017.
Important Facts for Investors to Verify
- Progress and final terms of refinancing the $11.67 million of additional debt maturing within 12 months, as well as future refinancing of the broader debt schedule.
- Whether operating cash flow and AFFO, after preferred dividends and recurring capital requirements, adequately support the targeted common dividend.
- Occupancy, tenant renewals, rent spreads and the effect of the 9.86% of gross leasable area expiring over the next 12 months.
- Tenant receivable aging, the increased credit-loss provision and the $964 thousand allowance for uncollectible accounts.
- Exposure to variable interest rates, including the potential annual cash-flow impact of approximately $961 thousand for a 1.0 percentage-point increase.
- Terms and collectability of the $12.0 million related-party notes receivable and the company’s continuing transactions with affiliates.
- Cash requirements for preferred dividends, common dividends, debt service and non-recoverable property capital expenditures.
- Reconciliation of GAAP net loss to FFO and AFFO, including the treatment of non-recurring costs, preferred dividends, loan-cost amortization and recurring capital expenditures.