Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. is a self-managed Maryland REIT that owns, leases and operates primarily grocery-anchored and necessity-based retail properties through Wheeler REIT, L.P. This Form 10-K covers the fiscal year ended December 31, 2018. Following the JANAF acquisition, management shifted emphasis from acquisitions and third-party management toward owning, leasing and operating the existing portfolio.
- Portfolio at year-end: 71 properties, including 64 retail centers, one office property and six undeveloped land parcels.
- Operating portfolio: 5.72 million leasable square feet and 89.4% leased; annualized base rent was $49.25 million.
- Geographic exposure was concentrated in the Southeast, Mid-Atlantic, Northeast and Midwest, representing approximately 76%, 19%, 4% and 1% of annualized base rent, respectively.
- No tenant exceeded 10% of annualized base rent; the top 10 tenants represented 24.59% of annualized base rent.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $65.71 million | $58.54 million | +12.3% |
| Operating income | $6.39 million | $1.56 million | +309.0% |
| Net loss | $16.91 million | $12.78 million | Loss increased $4.13 million |
| Net loss attributable to Wheeler REIT | $16.50 million | $12.09 million | Loss increased $4.41 million |
| Loss per common share | $3.17 | $2.54 | Loss increased $0.63 |
| Property NOI | $46.40 million | $40.33 million | +15.1% |
| FFO | $16.25 million | $10.93 million | +48.6% |
| AFFO | $7.08 million | $12.26 million | -42.3% |
| Cash flow from operations | $22.00 million | $23.82 million | -7.6% |
| Total debt outstanding | $369.61 million | $313.78 million | +$55.83 million |
| Cash, cash equivalents and restricted cash | $18.00 million | $12.29 million | +$5.71 million |
Revenue growth primarily reflected the January 2018 acquisition of JANAF, which added $10.70 million of property revenue and $7.69 million of NOI during the year. Same-store property revenue declined from $56.17 million to $54.68 million, while same-store NOI declined from $40.33 million to $38.71 million. Year-end occupancy declined to 89.1% from 91.9%.
Interest expense increased to $20.23 million from $17.17 million, principally because of JANAF-related borrowings and higher LIBOR on variable-rate debt. AFFO declined despite higher FFO because of preferred dividends, including $3.04 million of undeclared preferred dividends, and other adjustments.
At December 31, 2018, total assets were $508.08 million, total liabilities were $386.87 million and total equity was $44.26 million. Investment properties, net, were $433.14 million. The company had $3.54 million of unrestricted cash and $14.46 million of restricted cash held primarily for tenant improvements, taxes and insurance.
Material Changes Versus the Prior Comparable Period
- JANAF acquisition: Acquired for $85.65 million, including assumed debt, cash, restricted cash and 150,000 common shares. The property added 810,137 square feet and was 94% leased at acquisition.
- Capital structure: Debt increased to $369.61 million from $313.78 million. Approximately $88.04 million of principal repayments and maturities were scheduled for 2019, including $52.10 million under the KeyBank line of credit.
- Liquidity actions: The company reduced the Revere Term Loan to $1.06 million from $6.81 million and reduced KeyBank borrowings by approximately $15.93 million, but ended the year with a $3.83 million KeyBank borrowing-base overadvance.
- Dividends: Common dividends were suspended in March 2018. Fourth-quarter 2018 dividends on Series A, Series B and Series D preferred stock were also suspended, creating approximately $3.04 million of preferred dividends in arrears at year-end.
- Impairments: The company recorded a $5.49 million goodwill impairment, a $1.74 million impairment of Sea Turtle Development notes receivable and a $3.94 million impairment of undeveloped land classified in discontinued operations.
- Disposition strategy: Four properties or land interests were sold in 2018 for approximately $6.28 million of net proceeds, primarily to deleverage. Additional properties and land parcels were classified as held for sale.
- Leasing: The company modified 13 Southeastern Grocers leases and recaptured four locations. These actions had an initial annualized base-rent impact of approximately $2.50 million, partly offset by termination fees and subsequent backfilling.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. Its stated priorities are to refinance or repay 2019 maturities, sell undeveloped land and selected properties, improve occupancy through leasing and tenant improvements, reduce leverage and preserve liquidity. Management stated that refinancing plans remain subject to lender commitments, definitive documentation and customary conditions.
- Debt and covenant risk: The company was not in compliance with the Revere Term Loan interest coverage covenant at December 31, 2018, although management expected to repay the remaining balance by April 1, 2019. The KeyBank overadvance also required repayment or correction of borrowing-base availability.
- Preferred stock obligations: Series D preferred stock requires at least 200% asset coverage. Failure to cure a shortfall could require redemption of preferred shares. Preferred dividends are cumulative and senior to common-stock dividends.
- Distribution sustainability: Operating cash flow was insufficient to cover anticipated common and preferred distributions. The company has funded distributions historically from sources other than operating cash flow and suspended dividends to conserve cash.
- Sea Turtle Development: The $5.00 million note receivable is secured by a second mortgage and remains exposed to foreclosure by a $20.00 million first-lien lender. Further impairment remains possible.
- Tenant and leasing risk: Approximately 7.08% of square footage, representing 10.31% of annualized base rent, was month-to-month or expiring during 2019; an additional 10.89% of space was available. Anchor tenant bankruptcies, closures, co-tenancy provisions and online retail competition could reduce rent and occupancy.
- Litigation: The company disclosed lawsuits involving its former CEO and a lawsuit alleging failure to maintain the Series D preferred asset-coverage ratio. Outcomes were not predictable as of the filing date.
- Related-party matters: Sea Turtle Development was managed by former CEO Jon Wheeler. Related-party management agreements were terminated in 2018, while the company retained impaired notes receivable and related-party receivables.
- Post-year-end developments: Jenks Plaza and a Harbor Pointe parcel were sold; the Revere maturity was extended to April 1, 2019; and first-quarter 2019 preferred dividends were suspended.
Most Important Facts for Investors to Verify
- Whether the company successfully refinanced or repaid the $88.04 million of 2019 debt maturities and resolved the KeyBank overadvance.
- Whether Revere and other lender covenant issues were fully cured without additional defaults, fees or property dispositions.
- Current occupancy, leasing progress and rent recovery following Southeastern Grocers lease modifications and anchor recaptures.
- The collectability and collateral value of the $5.00 million Sea Turtle Development notes receivable and the potential for further impairment.
- The amount and timing of accumulated preferred dividends, any required redemption obligations and the company’s ability to reinstate distributions.
- The status and potential financial exposure of the disclosed litigation, including the Series D asset-coverage claim.
- Whether asset sales and refinancing activities are sufficient to reduce leverage while funding required tenant improvements and capital expenditures.
- The comparability of FFO and AFFO: 2018 FFO increased to $16.25 million, but AFFO declined to $7.08 million and remained below stated distribution needs.