Wheeler Real Estate Investment Trust, Inc. — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013. The REIT owns and operates grocery-anchored and other retail properties through Wheeler REIT, L.P. As of September 30, 2013, it owned 15 properties totaling 982,429 square feet across seven states, with 95.0% ending occupancy. Management described the business as being approximately one year beyond its formation transactions and focused on acquiring stabilized shopping centers in secondary and tertiary markets.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $1.98 million, up 304.4% | $5.22 million, up 247.2% |
| Operating loss | $(1.92) million | $(2.79) million |
| Net loss | $(2.51) million | $(4.37) million |
| Net loss attributable to common shareholders | $(1.80) million; $(0.38) per share | $(3.53) million; $(0.93) per share |
| Operating margin | Approximately (97.2%) | Approximately (53.3%) |
| Net margin | Approximately (127.2%) | Approximately (83.8%) |
| Funds from operations | $(1.64) million | $(2.17) million |
| Core FFO | $543,202 | $994,343 |
Revenue growth primarily reflected properties acquired since September 30, 2012. Same-store property revenue was $497,841 in the quarter, up 1.9%, and $1.47 million for the nine months, down 2.0%. Same-store property net operating income was $382,862 in the quarter and $1.15 million for the nine months.
- Investment properties, net, increased to $83.56 million from $43.35 million at December 31, 2012.
- Total assets were $99.08 million versus $52.69 million at year-end 2012.
- Cash and cash equivalents were $1.82 million versus $2.05 million at year-end.
- Total debt was $66.78 million versus $31.84 million at year-end. Weighted-average fixed interest rate was 4.77%, with a weighted-average term of 5.39 years.
- Total equity was $25.66 million, including $19.37 million attributable to shareholders and $6.29 million of noncontrolling interests.
- Net cash used in operating activities was $1.70 million; investing cash outflows were $14.35 million; financing cash inflows were $15.82 million.
- Future minimum contractual rental payments totaled $71.49 million, excluding common-area maintenance and percentage rent.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because the portfolio expanded from five to 15 properties in the comparative property data, and acquired properties generated $1.48 million of third-quarter revenue and $3.75 million for the nine months.
- Operating expenses increased to $3.90 million in the quarter and $8.01 million for the nine months, driven by depreciation, acquisition-related costs, public-company expenses, professional fees and legal matters.
- Corporate general and administrative expense increased to $2.61 million in the quarter and $4.77 million for the nine months, compared with $354,401 and $787,654, respectively.
- Interest expense increased to $592,231 in the quarter and $1.59 million for the nine months because of substantially higher debt balances, despite lower rates on refinanced loans.
- Operating cash flow declined from $27,605 provided in the prior-year nine-month period to $1.70 million used, while financing inflows funded acquisitions and other cash needs.
- Common shares outstanding increased to 7.121 million from 3.302 million at December 31, 2012, primarily from the secondary offering and preferred-stock conversion.
Acquisitions, Outlook, Risks and Unusual Items
During the period, the company acquired Bixby Commons for approximately $10.6 million, Tampa Festival for approximately $11.85 million, Forrest Gallery for approximately $11.5 million and Jenks Reasors for approximately $11.4 million. These acquisitions were funded with cash and debt. On October 21, 2013, after quarter-end, the company acquired the Starbucks/Verizon building for approximately $1.39 million from a related party using operating-partnership units and assumed debt.
Management provided no formal earnings, FFO or occupancy guidance. It expected several additional acquisitions to close in the fourth quarter of 2013, including Winslow Plaza, Northeast Plaza, Jenks Plaza, Brook Run and Port Crossing. The Warren Commons contracts were terminated because clear title could not be obtained.
- Liquidity and refinancing: Approximately $8.34 million of debt matures during the 12 months ending September 30, 2014. A $2.0 million line of credit and the Riversedge North loan were scheduled to mature in December 2013. Management expected to refinance maturing debt on comparable terms, but acknowledged that failure to do so could materially affect financial condition and results.
- Dividend burden: The company was paying a targeted annual common dividend of $0.42 per share, or $0.035 monthly, despite negative operating cash flow and negative GAAP earnings. Preferred stock accrued dividends at 9% annually.
- Legal and contingent liabilities: The company accrued approximately $267,000 for legal fees in the Perimeter litigation and $856,000 for a mechanic’s lien settlement related to affiliated entities. Management expected affiliates to satisfy the lien, but had not confirmed their funding at the filing date.
- Acquisition and legal costs: Nine-month corporate expenses included approximately $1.425 million of acquisition fees, $616,000 of acquisition-related legal and professional costs, the Perimeter accrual and the Harp’s settlement accrual. Management’s Core FFO excludes these items.
- Internal controls: Management identified a material weakness involving the timely accounting and reporting of potential contingent liabilities involving affiliated entities. It stated that the weakness had been remediated through weekly reviews.
- REIT status: The company elected REIT treatment and must satisfy applicable asset, income and distribution tests, including distributing at least 90% of taxable income. Loss of REIT status could result in corporate-level taxation and a five-year restriction on re-election, subject to applicable exceptions.
Important Facts for Investors to Verify
- Whether the Riversedge North maturity, the $2.0 million line of credit and other near-term maturities were refinanced or repaid after September 30, 2013.
- Whether projected fourth-quarter acquisitions closed and how they were financed.
- Whether operating cash flow and Core FFO improved sufficiently to support the common and preferred dividends.
- The final resolution and funding of the $856,000 Harp’s lien settlement and the Perimeter litigation accrual.
- The effect of acquisition-related expenses, related-party transactions and continued equity issuance on per-share results and ownership dilution.
- Whether the material weakness in controls over affiliated-entity contingent liabilities remained remediated in subsequent filings.