Wheeler Real Estate Investment Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited interim financial statements. The REIT owned and operated 55 shopping centers, one office building and 10 undeveloped properties across 11 states. Shares outstanding were 67.9 million as of August 3, 2016.
Business Context
Operations expanded substantially through the April 12, 2016 acquisition of the 14-property A-C Portfolio in Georgia and South Carolina for $71.0 million. The portfolio added 605,358 square feet, was 92% leased at acquisition and was funded with cash, debt and 888,889 operating partnership units.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $11.1 million | $6.1 million | $20.2 million | $11.2 million |
| Operating loss | $(13,370) | $(3.4) million | $(1.2) million | $(5.5) million |
| Net loss from continuing operations | $(3.8) million | $(5.4) million | $(7.3) million | $(9.6) million |
| Net loss attributable to Wheeler REIT | $(2.7) million | $(4.9) million | $(5.9) million | $(8.6) million |
| Net loss attributable to common shareholders | $(3.2) million | $(72.7) million | $(7.0) million | $(79.0) million |
| Loss per common share | $(0.05) | $(4.13) | $(0.10) | $(6.20) |
| Operating cash flow | Not separately provided | Not separately provided | $5.7 million | $(9.8) million |
| FFO | $1.7 million | $(1.2) million | $3.1 million | $(2.2) million |
| AFFO | $2.7 million | $(1.5) million | $4.6 million | $(2.4) million |
Margins and operating indicators: Q2 operating margin was approximately breakeven before interest, while the net margin attributable to common shareholders was approximately negative 29%. Six-month property NOI was $14.0 million versus $7.3 million in the prior-year period. Ending occupancy declined to 93.79% from 95.57%; the portfolio comprised 3.75 million square feet versus 2.40 million square feet.
Liquidity and capital structure: Cash and cash equivalents were $2.7 million at June 30, 2016, down from $10.5 million at December 31, 2015; restricted cash was $9.0 million. Total loans payable were $248.2 million, against $255.4 million of principal before unamortized debt issuance costs. Approximately 72.7% of debt was fixed-rate and 27.3% variable-rate. A 1% increase in interest rates was estimated to reduce annual cash flow by approximately $0.7 million.
Material Changes Versus Prior Comparable Period
- Total revenue increased 82% for the quarter and 80% for the six-month period, principally from acquisitions completed after June 30, 2015.
- Rental revenue increased 96% in Q2 and 88% for the six-month period. Property NOI increased 100% in Q2 and 93% for the six-month period.
- Operating losses narrowed materially despite higher depreciation and amortization and interest expense. Interest expense increased to $3.7 million in Q2 and $6.2 million for the six-month period, reflecting acquisition-related debt.
- Corporate general and administrative expense declined 28% in Q2 and 17% for the six-month period. Management identified $0.76 million of Q2 and $1.42 million of six-month nonrecurring acquisition, capital-related and other costs.
- Common-shareholder losses improved substantially because the 2015 period included a $59.5 million deemed dividend related to a preferred-stock beneficial conversion feature.
- Operating cash flow improved from a $9.8 million use to $5.7 million provided, but cash declined because of acquisitions, capital expenditures, financing costs, debt payments and distributions.
- Same-store property revenue was broadly stable in Q2 and increased modestly for the six-month period. Six-month same-store NOI increased to $6.7 million from $6.4 million.
Outlook, Liquidity, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management expected the acquired properties to contribute additional revenue through contractual rent increases and expansion opportunities.
- Approximately 8.15% of gross leasable area was scheduled to expire during the twelve months ending June 30, 2017 and had not been renewed. Management expected renewals at comparable terms based on recent market trends.
- Management identified $34.6 million of debt maturities or required debt reductions during the twelve months following June 30, 2016, including the Revere Term Loan balance and required KeyBank credit-facility paydowns. The Revere loan had a $7.45 million balance, matured April 30, 2017 and carried an 8% rate.
- The amended KeyBank facility had $67.2 million outstanding at June 30, 2016, a 5% spread over LIBOR, and required reductions to $60.3 million by August 12, 2016 and $49.95 million by April 12, 2017. The company was in compliance with covenants at quarter-end.
- Subsequent to quarter-end, the company refinanced approximately $3.9 million of KeyBank borrowings and a $4.1 million Perimeter loan. It also issued approximately $15.3 million of Series B convertible preferred stock for net proceeds of approximately $14.8 million and used $14.8 million of those proceeds to reduce KeyBank borrowings.
- Management stated that refinancing and additional capital plans were probable of success, but acknowledged that failure to refinance debt or raise capital could limit growth and future dividends. The filing does not provide an explicit going-concern conclusion.
- Starbucks/Verizon was sold on June 29, 2016 for approximately $2.1 million, producing a gain of approximately $688,000. Other designated freestanding properties remained held for sale.
- The company declared common dividends of $0.11 per share for the first six months and disclosed a targeted annual common dividend of $0.21 per share. Dividend payments and distributions totaled $8.4 million in the first six months.
- Principal risks include high leverage and near-term refinancing needs, variable-rate exposure, declining occupancy, geographic concentration, dependence on grocery and other anchor tenants, tenant credit risk, capital expenditure requirements and environmental or litigation exposure.
Most Important Facts for Investors to Verify
- Whether the company completed the required KeyBank paydowns and refinanced or repaid all debt maturing before June 30, 2017.
- Current cash balances, covenant compliance and available liquidity after the post-quarter-end preferred-stock issuance and debt repayments.
- Whether occupancy and same-store NOI stabilized or improved following the decline in occupancy to 93.79%.
- The final purchase-price allocation and operating performance of the A-C Portfolio, which remained preliminary at June 30, 2016.
- Whether recurring AFFO adequately supports common and preferred dividends after debt service, capital expenditures and tenant-improvement requirements.
- The terms, dilution potential and dividend obligations associated with Series B convertible preferred stock, operating partnership units and outstanding conversion rights.