Wheeler Real Estate Investment Trust, Inc. — Form 10-K Summary
Business Context and Reporting Period
Reporting period: Fiscal year ended December 31, 2013; filed March 21, 2014. The filing reports annual results rather than a standalone fourth quarter.
Wheeler is a Maryland REIT focused primarily on acquiring, financing, developing, leasing and managing grocery-anchored, neighborhood, community and free-standing retail properties. At year-end, the portfolio comprised 23 properties totaling 1,294,572 square feet and was 94.02% leased, with 173 tenants and annualized base rent of approximately $11.75 million.
Financial and Operating Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $8.71 million | $2.43 million |
| Rental revenue | $7.16 million | $1.96 million |
| Property net operating income | $6.99 million | $1.91 million |
| Operating loss | $(1.88) million | $(0.24) million |
| Net loss | $(4.38) million | $(1.21) million |
| Net loss attributable to common shareholders | $(3.80) million | $(1.16) million |
| Basic and diluted loss per share | $(0.82) | $(0.35) |
| FFO | $(0.91) million | $(0.38) million |
| Cash flow from operating activities | $(2.45) million | $(0.29) million |
| Cash flow from investing activities | $(22.58) million | $(8.80) million |
| Cash flow from financing activities | $24.14 million | $11.04 million |
| Cash and cash equivalents at year-end | $1.16 million | $2.05 million |
| Total debt | $94.56 million | $31.84 million |
Operating expenses were $10.58 million, including $3.47 million of depreciation and amortization and $5.30 million of corporate general and administrative expense. Property NOI margin, calculated from reported property NOI and total revenue, was approximately 80.3%; this is not a company-defined overall profit margin and should be interpreted in the context of REIT property accounting.
Debt carried a weighted-average interest rate of 5.31% and an average term of approximately 5.61 years. Scheduled principal maturities totaled $6.42 million in 2014, $16.07 million in 2015 and $13.82 million in 2016. The company stated that its debt-to-total-market-capitalization ratio was approximately 65%.
Material Changes Versus the Prior Comparable Period
- The portfolio expanded from 11 to 23 properties and from 470,350 to 1,294,572 square feet. Ending occupancy declined slightly from 94.3% to 94.0%.
- Revenue increased 257.8%, primarily because of acquisitions completed in 2012 and 2013. The 2013 acquisitions contributed approximately $6.7 million of revenue.
- Corporate general and administrative expense increased $3.99 million, or 305.3%, reflecting public-company costs, acquisition-related expenses and legal matters.
- Net loss attributable to Wheeler increased to $3.66 million from $1.16 million before preferred dividends. FFO declined to a loss of $0.91 million from a loss of $0.38 million.
- Same-store revenue declined 1.0% to $1.99 million, while same-store property expenses declined 1.5% to $0.42 million. Same-store FFO fell substantially, primarily because of higher corporate expenses.
- Investing cash outflows increased because the company acquired approximately $21.88 million of investment properties during 2013. Financing included $11.86 million from a secondary common stock offering, $3.94 million from preferred stock and $10.0 million from senior notes.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It stated that it intended to pursue additional acquisitions in secondary and tertiary markets, using equity, debt, property contributions and other financing sources. Management believed acquisition cap rates generally ranged from 8% to 10% and beyond and expected acquisitions to support future dividends, but these statements are forward-looking and not assured.
- The company intended to maintain an annualized common dividend of $0.42 per share, paid monthly, but explicitly stated that current cash flow did not support this amount and that a reduction could be required if the deficit continued.
- Liquidity was constrained by negative operating cash flow, only $1.16 million of cash, debt service, planned distributions, capital expenditures and near-term maturities. Management identified refinancing the $6.4 million of 2014 maturities as critical.
- The company had $10.0 million of 9% senior convertible and non-convertible notes issued in December 2013. The convertible notes could result in up to 1,417,079 shares of dilution, and 421,053 warrants were issued subject to shareholder approval.
- After year-end, the company completed an additional $2.16 million private placement of 9% non-convertible notes and warrants for up to 227,372 shares, also subject to shareholder approval.
- A lawsuit involving Perimeter Associates resulted in a $13,300 judgment and approximately $267,000 of awarded legal fees; the company posted bonds and accrued the amounts while appealing.
- An approximately $856,000 mechanic’s lien related to pre-acquisition construction costs was accrued and later satisfied by affiliates on January 31, 2014. The accrual was reversed without liability to the company.
- Related-party exposure is significant: affiliates controlled by Chairman Jon Wheeler provide administrative services, lease company property and received approximately $1.41 million in payments from the company and affiliates during 2013.
- Key operating risks include tenant concentration, grocery-anchor and lease-renewal risk, regional concentration, interest rates, refinancing availability, capital needs, REIT qualification, related-party conflicts, litigation and environmental or uninsured losses.
The independent auditor issued an unqualified opinion on the consolidated and combined financial statements. Management reported effective disclosure controls and internal control over financial reporting at December 31, 2013, while noting that a material weakness identified during the third quarter relating to timely reporting of contingent liabilities had been remediated.
Most Important Facts for Investors to Verify
- Whether operating cash flow and recurring property cash flow can support the $0.42 annualized dividend after debt service, corporate overhead and capital expenditures.
- The refinancing or repayment plan for 2014–2016 maturities, particularly the $3.46 million Walnut Hill Plaza loan due in April 2014 and the $2.0 million line of credit due in May 2014.
- Actual same-store performance, occupancy trends and lease rollover exposure, including approximately 24.45% of portfolio square footage scheduled to expire in 2018.
- Tenant and geographic concentration: the ten largest tenants represented 48.17% of total square footage and 40.24% of annualized base rent; South Carolina represented approximately 48% of annualized base rent.
- The terms, covenants, collateral and potential dilution associated with the 9% senior notes, convertible notes and warrants.
- The economic substance and ongoing costs of related-party administrative arrangements and acquisitions from affiliates.
- The final outcomes of the Perimeter litigation, any remaining contingencies and the continuing effectiveness of controls over contingent liabilities.