Wheeler Real Estate Investment Trust, Inc. — 2017 Q2 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2017. The REIT owned and operated 64 centers, one office building, seven undeveloped properties and one redevelopment project across 12 states. Ending occupancy was 93.74%, compared with 93.79% at June 30, 2016. The company completed a one-for-eight reverse stock split effective March 31, 2017.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $14.719 million | $11.084 million | $29.041 million | $20.222 million |
| Operating income | $2.542 million | $(0.013) million | $3.715 million | $(1.177) million |
| Net loss | $(0.726) million | $(3.011) million | $(1.886) million | $(6.573) million |
| Net loss attributable to common shareholders | $(3.207) million | $(3.210) million | $(6.809) million | $(6.950) million |
| Loss per common share | $(0.37) | $(0.38) | $(0.79) | $(0.83) |
| Operating cash flow | Not separately provided | Not separately provided | $13.895 million | $5.727 million |
| FFO | $4.572 million | $1.733 million | $8.299 million | $3.051 million |
| AFFO | $3.705 million | $2.686 million | $6.555 million | $4.560 million |
Reported operating margins were approximately 17.3% for the quarter and 12.8% for the six-month period, compared with negative margins in the prior-year periods. Net losses remained after interest expense and preferred dividends. Interest expense was $4.570 million for the quarter and $8.747 million for the six months.
- Cash and cash equivalents were $7.052 million at June 30, 2017, up from $4.863 million at December 31, 2016; restricted cash was $9.242 million.
- Investment properties, net, were $384.432 million; total assets were $476.760 million.
- Total debt principal was $311.438 million, or approximately 65% of total assets, before unamortized debt issuance costs. Loans payable, net, were $305.018 million.
- Approximately 69.64% of debt was fixed-rate and 30.36% was variable-rate. A 1% increase in interest rates was estimated to reduce annual cash flow by approximately $946 thousand.
- Common dividends declared were $0.34 per share for the quarter, or $0.76 per share for the first six months. Preferred stock dividends were $4.977 million for the six months.
Material changes versus the prior comparable period
- Revenue increased 32.8% for the quarter and 43.6% for the six months, primarily from the full-period contribution of 23 retail properties acquired in 2016.
- Rental revenue increased 30.4% for the quarter and 45.8% for the six months. New-store property NOI was $3.910 million for the quarter and $7.637 million for the six months, versus $1.468 million in each prior-year comparable period.
- Same-store property revenue declined modestly by approximately $0.19 million in both the quarter and six months, primarily due to the closure of Career Point Business School. Same-store property NOI declined $0.318 million for the quarter and $0.185 million for the six months.
- Corporate general and administrative expense decreased 47.6% for the quarter and 26.0% for the six months, partly due to lower compensation costs and the elimination of the chief operating officer role in 2016.
- Interest expense increased $0.828 million for the quarter and $2.585 million for the six months, primarily due to additional acquisition debt and loan-cost amortization.
- FFO increased 163.8% for the quarter and 172.0% for the six months. AFFO increased 37.9% for the quarter and 43.8% for the six months.
- Operating cash flow increased $8.168 million year over year. Investing cash flow was positive $2.252 million, compared with $(9.194) million in the prior year, while financing cash flow was $(13.958) million.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected to meet near-term obligations through cash, operating cash flow, refinancing, and property sales if necessary.
- Debt maturities and scheduled principal repayments within the next 12 months totaled approximately $87.72 million, including the $68.03 million KeyBank line of credit. Management was seeking refinancing and stated that success was probable, but refinancing remained subject to lender commitments, documentation and customary conditions.
- The Walnut Hill Plaza loan of $3.39 million was extended to October 31, 2017. On August 7, 2017, the KeyBank revolving commitment was amended from $75 million to $50 million effective October 7, 2017.
- The company completed sales of the Rivergate Steak n’ Shake outparcel and Carolina Place land parcel, generating approximately $1.022 million of combined gain or loss as reported in continuing operations. The filing contains an apparent inconsistency: Note 3 reports a $1.03 million gain and an $11 thousand loss, while portions of the MD&A describe the Carolina Place transaction as a gain.
- All previously identified Freestanding Properties had been sold by June 30, 2017. Discontinued operations generated $1.518 million of income for the six months, mainly from a $1.502 million disposal gain.
- Bi-Lo represented approximately 12.24% of annualized base rent and announced two store closures, one effective by June 30, 2017. Martin’s at Brook Run announced an August 2018 closure. The affected leases represented approximately $1.40 million of annualized base rent, and management was seeking replacement tenants.
- Preferred stock carries substantial dividend and liquidation claims, including approximately $55.93 million of Series D liquidation preference and $46.78 million of Series B liquidation preference. Preferred dividends exceeded $4.9 million in the first six months.
- The portfolio is geographically concentrated, with approximately 72% of annualized base rent from the Southeast and 23% from the Mid-Atlantic. Key risks include tenant bankruptcies, anchor-store closures, lease-up difficulties, refinancing, interest rates, retail conditions, environmental liabilities and REIT qualification.
- Management reported compliance with applicable loan covenants and no loan defaults as of June 30, 2017. Disclosure controls were assessed as effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Whether the $87.72 million of near-term debt maturities, particularly the KeyBank line of credit, were successfully refinanced on acceptable terms.
- The impact of the KeyBank commitment reduction to $50 million and related borrowing-base requirements.
- Backfilling progress and potential rent loss from Bi-Lo and Martin’s store closures.
- Whether recurring cash flow and AFFO adequately support common and preferred dividends after debt service and capital expenditures.
- The reconciliation of the inconsistent Carolina Place gain/loss descriptions in Note 3 and the MD&A.
- The sustainability of reported FFO and AFFO, given the continuing GAAP net loss, significant preferred dividends, acquisition-related costs and elevated leverage.