Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015. The company is a self-managed REIT focused primarily on grocery-anchored and necessity-based retail centers in secondary and tertiary markets.
At year-end, the portfolio comprised 53 properties: 39 retail shopping centers, three freestanding retail properties, one office property and 10 undeveloped land parcels. The operating portfolio totaled 3.15 million square feet and was 94.2% leased, with 478 tenants and $27.3 million of annualized base rent. The company had 59 full-time and two part-time employees.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $27.7 million | $14.9 million | +86.5% |
| Operating loss | $(12.3) million | $(6.1) million | Loss increased $6.2 million |
| Net loss | $(18.8) million | $(11.7) million | Loss increased $7.0 million |
| Net loss attributable to Wheeler REIT | $(17.5) million | $(10.6) million | Loss increased $7.0 million |
| Net loss attributable to common shareholders | $(103.8) million | $(13.3) million | Includes $72.6 million deemed dividend |
| Loss per common share | $(2.67) | $(1.80) | Worsened |
| Property NOI | $18.4 million | $10.3 million | +79.0% |
| Total FFO | $(3.4) million | $(3.5) million | Improved $0.1 million |
| AFFO | $0.85 million | $(1.43) million | Improved $2.3 million |
| Cash and cash equivalents | $11.3 million | $10.0 million | +13.4% |
| Net cash used in operating activities | $(9.3) million | $(4.4) million | Outflow increased $4.9 million |
| Total debt | $191.3 million | $141.5 million | +35.3% |
Operating and net loss margins were approximately negative 44.5% and negative 67.7%, respectively. Revenue growth primarily reflected acquisitions, while operating expenses increased 90.6%, including $16.9 million of depreciation and amortization and $13.5 million of corporate general and administrative expense.
Material Changes Versus the Prior Comparable Period
- The company acquired 20 properties or land parcels during 2015, with approximately $62.0 million of cash used for acquisitions and $77.0 million of acquisition-related debt incurred.
- Investment properties, net increased to $238.8 million from $129.0 million. Total assets increased to $314.0 million from $205.0 million.
- Property NOI increased substantially, including new-store NOI of $9.6 million versus $1.7 million in 2014. Same-store NOI increased to $8.9 million from $8.6 million.
- Ending occupancy declined to 94.2% from 95.6%, despite the expanded portfolio.
- Corporate general and administrative expense rose to $13.5 million from $9.4 million. Approximately $7.4 million consisted of acquisition, capital-related, legal, professional, recruitment, marketing and other identified non-recurring costs.
- Interest expense increased to $9.0 million from $5.9 million as acquisition-related debt expanded.
- The company completed a $93.0 million Series C preferred stock transaction, generating $83.4 million of net proceeds. The Series C securities converted into 46.5 million common shares on June 11, 2015, producing a $72.6 million deemed dividend related to the beneficial conversion feature.
- The company exchanged 1,247 Series A preferred shares and 865,481 Series B preferred shares for 11.4 million common shares. Common shares outstanding increased to 66.3 million at March 8, 2016, compared with 7.5 million at December 31, 2014.
- The company sold Bixby Commons, Harps at Harbor Point and Jenks Reasors for aggregate proceeds of approximately $28.2 million and recognized a total gain of approximately $2.1 million. Starbucks/Verizon and certain Pierpont Centre ground leases remained held for sale at year-end.
Debt, Liquidity and Distributions
Total debt was $191.3 million at December 31, 2015, including $189.3 million related to continuing operations and $2.0 million associated with assets held for sale. Fixed-rate debt had a weighted-average interest rate of approximately 4.71% and a weighted-average term of 7.6 years. The company had $6.9 million outstanding on a KeyBank credit facility at 2.79%, with approximately $38.1 million of additional borrowing capacity subject to collateral and covenant requirements.
| Scheduled principal maturities | Amount |
|---|---|
| 2016 | $9.1 million |
| 2017 | $7.0 million |
| 2018 | $14.9 million |
| 2019 | $2.5 million |
| 2020 | $9.2 million |
| Thereafter | $146.6 million |
Management stated that the company was in compliance with applicable debt covenants and had not experienced an event of default. The company paid $14.2 million of dividends and distributions in 2015, including $9.8 million to common shareholders and common unitholders and $13.6 million of preferred dividends as presented in the equity disclosures. Management acknowledged that current cash flow did not support the targeted $0.21 per common share annual dividend and that the dividend could be reduced if the cash flow deficit continued.
Outlook, Commentary, Risks and Unusual Items
- Management intended to continue acquiring grocery-anchored properties in secondary and tertiary markets, where it cited typical capitalization rates of approximately 8% to 10% or higher. No formal earnings or FFO guidance was provided.
- Management identified refinancing the $9.1 million of 2016 debt maturities, funding ongoing debt service and sustaining distributions as key liquidity requirements. Failure to refinance could materially affect financial condition and results.
- Approximately 5.97% of gross leasable area was scheduled to expire during 2016 without having already been renewed. Management expected renewals at comparable terms, but this remains subject to leasing conditions.
- The portfolio is geographically concentrated, with approximately 72% of annualized base rent generated in the Southeast and 23% in the Mid-Atlantic. Major tenants include Bi-Lo/Winn-Dixie and Food Lion, which together represented approximately 20.3% of annualized base rent.
- The company is exposed to tenant credit, anchor-store closures, lease-up risk, capital expenditure requirements, interest-rate changes, financing availability, local economic conditions, environmental liabilities and REIT qualification requirements.
- Related-party matters include acquisitions from affiliates of Chairman and CEO Jon S. Wheeler, ground leases with entities affiliated with Mr. Wheeler, and approximately $1.46 million advanced for redevelopment services for a related party.
- The company paid approximately $415,000 in December 2015 to resolve the Perimeter litigation. Management stated that other ordinary-course legal proceedings were not expected to have a material adverse effect.
- The auditor expressed an opinion on the consolidated financial statements but was not engaged to audit internal control over financial reporting. Management nevertheless concluded that disclosure controls and internal controls were effective as of December 31, 2015.
Important Facts for Investors to Verify
- Whether operating cash flow can become positive and sustainably cover debt service, capital expenditures and common and preferred distributions.
- The company’s ability to refinance or repay the 2016 and 2017 maturities without unfavorable terms or additional equity issuance.
- Actual post-acquisition occupancy, leasing spreads, tenant collections and performance of the 2015 acquisitions.
- The sustainability of the common dividend, given negative operating cash flow and management’s admission that current cash flow did not support the targeted rate.
- Exposure to grocery anchors and other major tenants, including lease expirations and tenant financial condition.
- The effect of substantial common-share issuance, preferred conversions, operating partnership units and warrants on per-share results and dilution.
- Terms and economics of related-party acquisitions, ground leases and redevelopment advances.
- Whether projected acquisition growth and cited 8% to 10% capitalization rates can be achieved while maintaining liquidity and debt covenant compliance.