Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company is a self-managed REIT focused primarily on grocery-anchored and necessity-based retail properties in secondary and tertiary markets. At year-end, the portfolio comprised 74 properties, including 64 income-producing properties, eight undeveloped land parcels, one office property and one redevelopment project, totaling approximately 4.91 million square feet and 94.0% leased.
The filing reports full-year 2016 results; fourth-quarter information is provided only as unaudited quarterly data within the filing. The company had 68.17 million common shares outstanding as of February 27, 2017.
Financial and Operating Highlights
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $44.16 million | $27.62 million | +59.9% |
| Operating income (loss) | $(0.29) million | $(12.45) million | Improved by $12.16 million |
| Net loss | $(12.24) million | $(18.77) million | Improved by $6.54 million |
| Net loss attributable to common shareholders | $(15.92) million | $(103.79) million | Improved by $87.88 million |
| Loss per common share | $(0.24) | $(2.67) | Improved |
| Funds from operations | $7.71 million | $(3.42) million | Improved by $11.13 million |
| Adjusted funds from operations | $8.67 million | $0.85 million | + $7.82 million |
| Cash flow from operating activities | $10.44 million | $(5.33) million | Improved by $15.77 million |
| Cash and cash equivalents | $4.86 million | $10.48 million | Decreased by $5.61 million |
| Total indebtedness | $315.05 million | $191.32 million | Increased by $123.73 million |
Rental revenue increased 61.4% to $33.16 million, while tenant reimbursements and other revenues increased 46.2% to $8.93 million. Property net operating income increased to $30.20 million from $18.31 million. Same-store property revenue increased 0.8%, and same-store NOI increased 3.7% to $13.43 million.
Operating expenses were $44.45 million, including $20.64 million of depreciation and amortization, $11.90 million of property operations, and $9.92 million of corporate general and administrative expense. The implied operating margin remained slightly negative at approximately 0.7%.
Investment properties, net, increased to $388.88 million from $238.76 million. Total assets were $489.05 million, total liabilities were $331.32 million, and total equity was $105.19 million. The balance sheet included $12.0 million of related-party notes receivable.
Material Changes Versus the Prior Comparable Period
- The company completed 23 retail property acquisitions during 2016, with aggregate acquisition consideration of approximately $186.33 million. The acquisitions included the 14-property A-C Portfolio and several grocery-anchored centers acquired late in the year.
- Portfolio size increased from 42 to 64 income-producing properties, and gross leasable area increased 55.7% to 4.91 million square feet. Year-end occupancy was broadly stable at 94.0% versus 94.2% in 2015.
- Debt increased substantially to approximately $315.0 million, primarily to fund acquisitions. The company reported $134.4 million of acquisition-related debt incurred during 2016.
- The KeyBank revolving credit facility was increased to $75.0 million; $74.08 million was outstanding at year-end and the facility matures in May 2018.
- The company issued approximately $23.4 million of net Series B preferred stock proceeds and $52.4 million of net Series D preferred stock proceeds.
- Corporate general and administrative expense declined 26.0%, partly reflecting lower acquisition, capital-related and professional costs. The company identified approximately $3.21 million of nonrecurring 2016 general and administrative expenses.
- The company sold the Starbucks/Verizon property for approximately $2.10 million, recognizing a gain of approximately $688,000. The Ruby Tuesday and Outback Steakhouse ground leases at Pierpont Centre remained held for sale at year-end.
- In 2016, 69 lease renewals covering 286,263 square feet produced a weighted-average rent increase of 4.9%. Approximately 7.17% of portfolio square footage and 9.07% of annualized base rent was scheduled to expire in 2017.
Liquidity, Debt, Guidance and Risks
Management stated that current operating cash flow did not support the targeted $0.21 per-share annual common dividend. The company indicated that distributions had been funded in part from cash on hand or borrowings and warned that the common dividend could be reduced if the cash-flow deficit continued. Beginning as early as April 2017, common dividends were expected to be paid quarterly rather than monthly.
Scheduled 2017 principal maturities totaled approximately $17.45 million, including the $7.45 million Revere loan maturing April 30, 2017 and approximately $15.63 million of loans expected to mature during 2017. Management expected to address these obligations through cash, operating cash flow, revolving-credit borrowings, refinancing and asset dispositions. The planned refinancing was subject to lender commitments, documentation and customary conditions.
The Revere loan bears interest at 8.0% and is supported by a warrant allowing the lender to purchase up to 6.0 million common shares at $0.0001 per share if an event of default occurs. The company reported compliance with applicable debt covenants and no event of default as of December 31, 2016.
Approximately 67.6% of debt carried fixed interest rates and 32.4% carried variable rates. Management estimated that a 1% increase in interest rates, assuming no change in variable-rate debt, would reduce annual cash flow by approximately $1.02 million. The company had no interest-rate hedges in place.
Major risks include high leverage and refinancing requirements, dependence on grocery and other anchor tenants, geographic concentration in the Northeast, Mid-Atlantic, Southeast and Southwest, lease expirations and vacancies, co-tenancy and go-dark provisions, tenant credit risk, competition from online and discount retailers, development and redevelopment risk, related-party transactions, potential dilution, REIT qualification requirements and the ability to sustain distributions.
The company loaned $12.0 million to a related party in connection with the Sea Turtle Development and land sale. The notes accrue interest at 12%, are secured by a second deed of trust and mature no later than September 2021 or earlier disposition of the property.
Subsequent events included approval of a one-for-eight reverse stock split effective March 31, 2017, a change to quarterly common dividends, and completion on February 28, 2017 of the sale of the Pierpont Centre ground leases for approximately $2.29 million. The related $1.35 million loan was defeased at a cost of $561,000.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and effective internal control over financial reporting; the auditor was not engaged to audit internal control effectiveness.
Most Important Facts for Investors to Verify
- Whether the company successfully refinanced or repaid the 2017 maturities, particularly the Revere loan and other loans totaling approximately $15.63 million.
- Whether operating cash flow can sustainably cover common and preferred distributions, debt service and recurring capital expenditures.
- The terms, collateral, repayment status and collectability of the $12.0 million related-party notes receivable.
- Actual post-acquisition occupancy, rent collections and NOI contribution from the 2016 acquisitions.
- Exposure to Bi-Lo and other major tenants; the ten largest tenants represented 33.23% of contractual base rent, with Bi-Lo representing 12.11%.
- The effect of the reverse stock split, preferred-stock conversion rights, outstanding warrants and potential equity dilution.
- Compliance with KeyBank and other debt covenants, including the Series D preferred stock asset-coverage requirement.
- Whether the stated refinancing and asset-sale plans were completed on the expected terms and whether future dividend policy changes were required.