Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2015. The REIT owned and operated 31 shopping centers and held seven undeveloped properties across ten states. Results included a partial quarter from the January 2015 acquisition of Pierpont Centre and the full-quarter impact of the 2014 internalization of its operating companies.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $5.75 million | $3.66 million | +57.0% |
| Rental revenue | $4.38 million | $2.95 million | +48.6% |
| Operating income (loss) | $(1.84) million | $0.12 million | Declined $1.97 million |
| Net loss | $(4.22) million | $(1.25) million | Loss increased $2.98 million |
| Net loss attributable to common shareholders | $(6.26) million | $(1.20) million | Loss increased $5.06 million |
| Basic and diluted loss per share | $(0.80) | $(0.17) | Declined $0.63 |
| Net cash used in operating activities | $(4.74) million | $0.06 million | Declined $4.80 million |
| Funds from operations | $(0.99) million | $0.54 million | Declined $1.53 million |
Revenue growth was offset by materially higher operating expenses, including property operations of $1.63 million, depreciation and amortization of $3.24 million, corporate general and administrative expense of $2.31 million, and interest expense of $2.38 million. Operating and net loss margins were approximately negative 32% and negative 73%, respectively, based on total revenue.
At March 31, 2015, investment properties, net were $163.27 million; cash and cash equivalents were $80.96 million; total assets were $288.00 million; loans payable were $147.63 million; and total equity was $45.65 million. Debt had a weighted-average interest rate of approximately 5.00% and a weighted-average term of 6.11 years.
Material Changes Versus the Prior Comparable Period
- Properties owned and operated increased from 22 to 31, gross leasable area increased 58.0% to 2.03 million square feet, and ending occupancy increased from 94.20% to 95.81%.
- New-store properties contributed $1.80 million of revenue and $1.26 million of property net operating income, compared with none in the prior-year quarter.
- Same-store property revenue decreased modestly to $3.63 million from $3.66 million, although management estimated an approximately $60,000 increase excluding 2014 revenue from Riversedge North, which stopped paying rent following the internalization transaction.
- Same-store property expenses increased $165,494, primarily due to repairs and maintenance, reassessed real estate taxes, adverse weather-related utilities, and higher cost allocations.
- Corporate general and administrative expense increased $1.48 million. The increase included approximately $653,000 of acquisition and capital transaction costs, $655,800 of compensation and benefits, approximately $125,000 of annual audit fees, and other annual or nonrecurring expenses.
- Interest expense increased $1.01 million, primarily due to acquisition-related debt issued since March 2014 and accelerated loan-cost amortization associated with the conversion of senior convertible debt.
- The company completed a private placement of 93,000 Series C mandatorily convertible preferred shares for $93.0 million of consideration, including $90.0 million in cash and $3.0 million of debt reduction. Net proceeds were $83.50 million.
- Cash increased by $70.99 million during the quarter, principally from the Series C financing. Operating activities used $4.74 million and investing activities used $4.55 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately 10.51% of gross leasable area to expire during the following 12 months without having already been renewed and believed those leases would renew at comparable terms.
- Management stated that acquired properties should provide additional revenue, contractual rent increases, and expansion opportunities, but no formal earnings or revenue guidance was provided.
- Debt principal maturities totaled $21.65 million during the 12 months ending March 31, 2016, including a $2.87 million Lumber River Plaza note that was subsequently paid in full on May 1, 2015. Management expected to refinance maturing loans but warned that failure to do so could materially affect financial position and results.
- Future liquidity requirements include debt service, preferred dividends, the targeted annual common dividend of $0.21 per share, acquisitions, and potentially significant property capital expenditures. Management stated that inability to refinance debt or execute its growth strategy could limit future growth and dividends.
- Series C preferred stock was subject to mandatory conversion provisions and, beginning June 19, 2015, could accrue a dividend equal to the excess of 15% per annum over common-equivalent distributions, subject to the terms described in the filing. The preferred financing significantly increased preferred dividend obligations.
- FFO available to common shareholders and common unitholders was negative $2.28 million, and Core FFO was negative $1.03 million. Preferred dividends, acquisition costs, loan-cost amortization, and other adjustments materially affected these non-GAAP measures.
- The company reported ordinary-course litigation and an appealed Oklahoma matter involving approximately $13,300 of damages and approximately $267,000 of awarded legal fees; bonds were posted and liabilities accrued. Management did not expect a material adverse effect.
- The company completed acquisitions after quarter-end of Alex City Marketplace for $10.25 million and Butler Square for $9.40 million, funded through combinations of cash and debt.
- The filing states that disclosure controls and procedures were effective as of March 31, 2015 and identifies no significant off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether operating cash flow and Core FFO improve after deployment of the Series C proceeds and integration of acquired properties.
- The company’s ability to refinance or repay the $21.65 million of debt maturing in the following 12 months.
- The terms, timing, dilution effects, and dividend burden associated with conversion of the Series C and Series B preferred stock and other convertible instruments.
- Whether occupancy, lease renewals, tenant credit quality, and same-store property net operating income remain stable.
- The amount and timing of acquisition-related capital expenditures, escrow releases, and post-quarter-end acquisition debt.
- Whether recurring general and administrative expenses decline as management suggested after first-quarter audit, transaction, and other nonrecurring costs.