Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The REIT owned and operated 60 retail shopping centers, one office building and six undeveloped properties across 12 states, with approximately 90.1% leased occupancy at quarter-end. Grocery and drug stores anchored 45 of the 60 retail properties and represented approximately 27% of annualized base rent.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenue | $15.17 million | $15.53 million | $30.74 million | $31.53 million |
| Operating income | $4.54 million | $(2.21) million | $8.09 million | $3.25 million |
| Net income attributable to Wheeler REIT | $0.25 million | $(7.05) million | $(1.61) million | $(6.41) million |
| Net loss attributable to common shareholders | $(3.40) million | $(10.71) million | $(8.93) million | $(13.72) million |
| Basic and diluted loss per share | $(0.35) | $(1.10) | $(0.92) | $(1.42) |
| Property NOI | $10.38 million | $10.92 million | $21.20 million | $22.13 million |
| FFO | $4.71 million | $(0.40) million | $8.26 million | $4.23 million |
| AFFO | $0.78 million | $1.58 million | $1.62 million | $2.64 million |
Property NOI margins were approximately 68.4% in Q2 2020 versus 70.3% in Q2 2019, and 69.0% for the first six months versus 70.3% in the prior-year period. The filing does not present a formal management-defined operating margin.
- Rental revenue declined 3.8% in the quarter and 3.2% year to date, primarily because of property dispositions, vacant anchor space and higher credit-loss provisions related to COVID-19.
- Total operating expenses declined 38.9% in Q2 and 24.0% year to date, largely because 2019 included a $5.0 million notes-receivable impairment and a $1.15 million asset impairment that did not recur. The company recorded a $0.6 million asset-held-for-sale impairment in the first six months of 2020.
- Interest expense decreased 13.6% in Q2 and 11.0% year to date as debt balances declined and loan-cost amortization decreased.
- Six-month operating cash flow was $7.49 million versus $7.81 million in 2019. Investing activities provided $1.12 million, while financing activities used $7.27 million.
- Cash, cash equivalents and restricted cash totaled $22.94 million at June 30, 2020, including $7.66 million of unrestricted cash and $15.28 million of restricted cash.
- Investment properties, net, were $404.39 million, total assets were $477.19 million and loans payable, net, were $331.62 million at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- Q2 2020 net income attributable to the REIT improved by $7.31 million year over year, primarily because prior-year impairment charges did not recur.
- FFO increased to $4.71 million from a loss of $0.40 million; however, AFFO declined to $0.78 million from $1.58 million after preferred dividends and other adjustments.
- Same-store property revenue declined 1.9% in Q2 and 1.0% year to date. Same-store property expenses increased 1.5% and 1.6%, respectively, driven mainly by insurance and real estate taxes.
- The company owned and leased two fewer properties than in the prior-year period, while ending leased occupancy improved to 90.1% from 89.4%.
- Corporate general and administrative expense increased 17.0% in Q2 and 9.2% year to date, primarily because of higher professional fees and litigation-related costs.
- St. Matthews was sold in January 2020 for $1.775 million of contract value, generating $1.665 million of net proceeds and a $26 thousand loss.
Debt, Liquidity, Outlook and Risks
- Total debt principal was $339.56 million at June 30, 2020, consisting primarily of $306.20 million of fixed-rate notes, $23.95 million of adjustable-rate mortgages, $4.01 million of fixed-rate debt associated with assets held for sale and $5.40 million drawn under the KeyBank credit agreement. Weighted-average fixed-rate debt cost was 4.68%, with a 4.39-year weighted-average term.
- Scheduled principal repayments and maturities totaled $41.05 million during the remaining six months of 2020 and $49.85 million during the twelve months ending June 30, 2021. Management expects to address these obligations through refinancing, extensions, property dispositions and operating cash flow.
- After quarter-end, the KeyBank credit agreement maturity was extended to December 31, 2020. Rivergate, Columbia Fire Station and Tuckernuck loans also received extensions or forbearance; Tuckernuck was subsequently extended to November 1, 2020 with a required $337 thousand escrow deposit.
- Preferred dividends on the Series A, Series B and Series D securities remained suspended. Cumulative dividends in arrears totaled approximately $23.96 million at June 30, 2020, and the Series D preferred dividend default triggered potential rights to elect two additional directors.
- The company received $552 thousand under the Paycheck Protection Program. The loan bears 1% interest and may be forgiven for qualifying expenditures, but the filing provides no assurance that forgiveness will be obtained.
- COVID-19 resulted in rent-relief requests, 102 concessions through July 30, 2020 and 46 lease modifications through June 30, 2020. The company collected approximately 83% of contractual base rent and tenant reimbursements billed for Q2, and $355 thousand of receivables related to short-term rent deferrals.
- Management provided no formal earnings or dividend reinstatement guidance. It stated that liquidity preservation, refinancing, dispositions, backfilling vacant anchor space and tenant replacement remain priorities.
- Key risks include prolonged COVID-19 effects, tenant defaults or bankruptcies, reduced rent collection, retail-market weakness, refinancing and covenant risk, concentrated geographic exposure, interest-rate changes, impairment of real estate and the ability to maintain REIT qualification.
- Litigation includes a former CEO claim seeking approximately $3.15 million plus additional damages and fees. The company also recorded approximately $485 thousand for a prior former-CEO employment dispute and incurred $439 thousand reimbursing proxy solicitation expenses.
- The company has an off-balance-sheet Harbor Pointe tax-increment financing obligation with a maximum future principal obligation of approximately $2.21 million, plus potentially variable interest; no shortfall was funded in the first half of 2020.
Important Facts for Investors to Verify
- Progress on refinancing, extending or repaying the $49.85 million of debt obligations due within twelve months of June 30, 2020.
- Subsequent rent collections, tenant concessions, deferrals, defaults, bankruptcies and changes in the 90.1% leased rate.
- Whether the $552 thousand PPP loan is forgiven and the final accounting impact.
- The extent and timing of accumulated preferred dividends, potential Series D director-election rights and any plans to reinstate preferred or common distributions.
- Outcome and potential additional exposure from the David Kelly litigation and the remaining Jon Wheeler employment dispute.
- Valuation and impairment assumptions for Columbia Fire Station, other assets held for sale and the broader retail portfolio.
- Actual AFFO and recurring cash generation after preferred dividends and required capital expenditures; reported AFFO declined despite higher FFO.