Wheeler Real Estate Investment Trust, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2016. Wheeler is an internally managed REIT that owned and operated 55 centers, one office building, eight undeveloped properties and one redevelopment project across 11 states. The portfolio totaled 3.75 million square feet and was 93.90% occupied at quarter-end, compared with 94.25% for the prior-year comparable period.
The April 12, 2016 acquisition of the 14-property, $71 million A-C Portfolio contributed approximately two quarters of operations in 2016. The portfolio contained 605,358 square feet and was 92% leased at acquisition.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $11.91 million | $7.23 million | $32.13 million | $18.38 million |
| Operating income (loss) | $1.67 million | $(5.08) million | $0.49 million | $(10.69) million |
| Operating margin | 14.0% | (70.2%) | 1.5% | (58.2%) |
| Net loss attributable to Wheeler REIT | $(1.51) million | $(6.73) million | $(7.44) million | $(15.35) million |
| Net loss attributable to common shareholders | $(2.75) million | $(22.13) million | $(9.70) million | $(101.11) million |
| Loss per common share | $(0.04) | $(0.35) | $(0.14) | $(3.40) |
| FFO | $3.36 million | $(2.17) million | $6.41 million | $(4.37) million |
| AFFO | $2.66 million | $1.36 million | $7.22 million | $(1.02) million |
- Revenue increased 64.8% in the quarter and 74.8% year to date, primarily from acquisitions, higher property revenue, tenant reimbursements and commissions.
- Property NOI was $7.96 million in Q3 and $22.01 million for nine months, up from $4.89 million and $12.09 million, respectively. New stores generated $4.46 million of Q3 NOI and $11.86 million of nine-month NOI.
- Interest expense increased 56.3% in Q3 and 52.0% year to date to $3.64 million and $9.80 million, respectively, reflecting acquisition-related debt.
- Corporate general and administrative expense declined 69.2% in Q3 and 40.7% year to date, partly because of lower acquisition, equity and refinancing costs.
- Cash flow from operating activities was $11.00 million for the first nine months, compared with $(2.44) million in 2015. Cash used in investing was $21.34 million, and financing activities provided $35.68 million.
- Cash and cash equivalents were $35.82 million at September 30, 2016, compared with $10.48 million at December 31, 2015; restricted cash was $10.31 million.
Balance sheet, debt and liquidity
- Investment properties, net, increased to $292.21 million from $238.76 million at December 31, 2015. Total assets were $404.61 million and total liabilities were $251.98 million.
- Total loans payable, net of unamortized debt issuance costs, were $231.77 million; principal debt was $238.55 million. Debt excluding issuance costs increased from $191.32 million at year-end 2015 to $239.90 million.
- Approximately 66.4% of debt was fixed rate and 33.6% variable rate. Management estimated that a 1.0% increase in interest rates would reduce annual cash flow by approximately $0.81 million.
- Scheduled principal maturities total $16.40 million through September 30, 2017, including the $7.45 million Revere loan maturing April 30, 2017. Total maturities are $53.07 million in 2018 and $154.12 million thereafter.
- The company stated that it was in compliance with applicable debt covenants and had not incurred an event of default as of September 30, 2016. The KeyBank credit facility had $46.1 million outstanding at 3.01% and was subject to leverage, coverage and net-worth covenants.
- Management identified near-term liquidity needs including debt maturities, debt service, approximately $7.9 million of preferred dividends and approximately $15.5 million of targeted annual common dividends. Management believes refinancing and other capital plans will be successful, but acknowledged that failure to refinance or raise capital could restrict growth and future dividends.
Material changes, outlook and risks
- The company raised net proceeds of $23.4 million through Series B preferred stock and $38.0 million through Series D preferred stock during 2016. Series B proceeds were used primarily to reduce KeyBank borrowings; Series D proceeds were intended primarily for acquisitions and working capital.
- Series D preferred stock carries an initial 8.75% cumulative dividend rate, is convertible at an initial $2.12 common-stock conversion price and requires minimum asset coverage of 200%.
- Leasing activity was positive: nine-month renewals covered 150,191 square feet at a weighted-average rent increase of 5.58%; new leases covered 91,414 square feet at weighted-average rents of $14.15 per square foot. Approximately 8.31% of gross leasable area was scheduled to expire in the following 12 months without having been renewed.
- The company sold the Starbucks/Verizon property for approximately $2.1 million, recognizing a gain of approximately $689,000. One remaining portion of the Freestanding Properties portfolio was classified as held for sale at quarter-end.
- The company issued $12.0 million of related-party notes receivable at 12% annual interest to fund the Sea Turtle Development and a related land sale. The notes are secured by a second deed of trust and mature no later than September 29, 2021 or disposition of the property.
- Principal risks include refinancing and interest-rate risk, dependence on retail anchors and tenant credit quality, regional concentration, occupancy and leasing execution, required preferred and common distributions, and potential environmental or litigation liabilities. Management reported no material environmental contingencies and did not expect ordinary-course litigation to materially affect results.
- No formal quantitative earnings or dividend guidance was provided. Management expressed expectations for continued contribution from acquired properties, contractual rent increases and expansion opportunities, but stated that future growth and dividends depend on refinancing and access to capital.
Important facts for investors to verify
- Ability to refinance or repay the $16.4 million of debt maturing through September 30, 2017, particularly the Revere loan.
- Compliance with KeyBank, Revere and other debt covenants, including the Series D preferred stock asset-coverage requirement.
- Whether operating cash flow and AFFO sustainably cover preferred dividends, common distributions, recurring capital expenditures and debt service.
- Occupancy trends and renewal outcomes for the 8.31% of gross leasable area scheduled to expire within 12 months.
- Creditworthiness and repayment prospects for the $12.0 million related-party Sea Turtle Development notes receivable.
- Potential dilution from convertible preferred stock, convertible debt, operating partnership units and warrants, including the 6.0 million-share Revere warrant exercisable upon loan default.
- The preliminary purchase-price allocation and operating performance of the A-C Portfolio, which remained subject to finalization.