Wheeler Real Estate Investment Trust, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The REIT owned and operated 42 centers, one office building and 10 undeveloped properties across 11 states. The portfolio included 3.15 million square feet of gross leasable area and was 93.88% occupied at period-end.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $9.14 million | $5.15 million | Up 77.3% |
| Property NOI | $6.06 million | $3.28 million | Up $2.78 million |
| Operating loss | $(1.16) million | $(2.13) million | Improved $0.96 million |
| Net loss | $(3.56) million | $(4.22) million | Improved $0.66 million |
| Net loss attributable to common shareholders | $(3.74) million | $(6.26) million | Improved $2.52 million |
| Basic and diluted loss per share | $(0.06) | $(0.80) | Improved |
| Operating cash flow | $0.66 million | $(4.34) million | Improved $5.01 million |
| FFO | $1.32 million | $(0.99) million | Improved $2.31 million |
| AFFO | $1.87 million | $(0.93) million | Improved $2.80 million |
Revenue growth was driven primarily by 15 retail acquisitions completed in 2015. Operating expenses were $10.30 million, including $4.88 million of depreciation and amortization. The operating margin was approximately negative 12.7%, compared with negative 41.3% in the prior-year quarter. Net loss margin was approximately negative 39.0%.
Cash and cash equivalents were $7.03 million at March 31, 2016, down from $10.71 million at December 31, 2015. Restricted cash was $7.18 million. Total assets were $301.95 million and total equity was $101.22 million.
Total loans payable, net of unamortized debt issuance costs, were $184.97 million. Principal debt outstanding before issuance costs was $189.57 million, with approximately $9.79 million scheduled to mature in the following year based on the March 31 schedule. Approximately 96.4% of debt was fixed-rate and 3.6% variable-rate. A 1% increase in interest rates was estimated to reduce annual cash flow by approximately $0.07 million, assuming no change in variable-rate debt.
Material changes versus the prior comparable period
- Properties owned and operated increased from 31 to 42, while gross leasable area increased 55.3% to 3.15 million square feet.
- Ending occupancy declined to 93.88% from 95.81%.
- Rental revenue increased 77.9%, and tenant reimbursements and other revenue increased 90.6%.
- Total property NOI increased 84.7%, largely from the 2015 acquisitions. Same-store property NOI increased modestly to $3.11 million from $3.09 million.
- Interest expense increased 12.9% because of debt supporting acquired properties, although same-store interest expense declined by approximately $0.52 million.
- Corporate general and administrative expense was broadly stable at $2.28 million. Management identified approximately $0.67 million of acquisition, capital-related and other nonrecurring expenses in the quarter.
- Dividends declared per common share declined to $0.05 from $0.09. The company declared a $0.0175 per-share dividend payable in April and preferred dividends of $422,774.
- The company paid off $2.16 million of senior subordinated debt on January 29, 2016 and raised $3.0 million through new loan proceeds during the quarter.
Guidance, outlook, risks and unusual items
No formal earnings guidance was provided. Management expects leases representing approximately 8.57% of gross leasable area that expire in the year ending March 31, 2017 to be renewed at comparable terms, based on recent market trends. Ten renewals completed during the quarter produced a weighted-average rent increase of 7.39%; ten new leases covered 18,937 square feet at weighted-average rents of $14.03 per square foot.
After quarter-end, the company acquired the 14-property A-C Portfolio for $71 million. The portfolio was 92% leased and was funded with cash, debt and 888,889 operating-partnership common units. Related subsequent financing included an $8 million Revere term loan at 8%, an increase in the KeyBank facility to approximately $67.2 million with pricing of 500 basis points over 30-day LIBOR, and approximately $60.4 million of KeyBank borrowings used for the acquisition. The Revere loan is due April 30, 2017 and is secured by a warrant exercisable upon default for up to 6 million common shares at $0.0001 per share.
Management identified total debt payments of approximately $27.1 million due within a year after giving effect to the subsequent financing, including $17.3 million related to the A-C Portfolio financing. The amended KeyBank agreement requires leverage reduction by March 31, 2017. Management stated that it plans to refinance debt, reduce general and administrative expenses and pursue additional capital sources, but acknowledged that failure to refinance or raise capital could limit growth and future dividends.
Other risks include continued net losses, dependence on refinancing, covenant compliance, tenant credit quality, occupancy and anchor tenants, geographic concentration, interest rates, capital expenditures, environmental liabilities and the ability to maintain REIT qualification. The company reported compliance with its debt covenants at March 31, 2016, no event of default under the KeyBank facility and no material environmental or litigation contingencies known to management.
Freestanding properties with assets of $1.68 million and associated liabilities of $1.98 million remained held for sale. Discontinued operations contributed only $20,525 of income in Q1 2016 versus $46,367 in Q1 2015.
Most important facts for investors to verify
- Whether the company can refinance or otherwise fund approximately $27.1 million of debt payments due within one year after the A-C Portfolio financing.
- Compliance with the amended KeyBank leverage requirements and the consequences if the company does not meet the March 31, 2017 conditions.
- The sustainability of common and preferred dividends given negative GAAP earnings, limited cash, debt service requirements and the targeted annual common dividend of approximately $14.9 million.
- Actual occupancy, lease expirations, renewal spreads and tenant credit performance, particularly for the geographically concentrated retail portfolio.
- The final purchase-price allocation, financing terms and operating contribution of the A-C Portfolio.
- The dilution and potential control impact of convertible preferred stock, convertible notes, operating-partnership units and the Revere default warrant.
- The comparability of FFO and AFFO, including management’s adjustments for acquisition costs, nonrecurring expenses, financing-cost amortization and other items.