Wheeler Real Estate Investment Trust, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Wheeler REIT owned and operated 65 centers, one office building, seven undeveloped properties and one redevelopment project across 12 states. The portfolio contained approximately 5.74 million square feet of gross leasable area and was 90.8% occupied at March 31, 2018, compared with 93.0% a year earlier.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $16.31 million | $14.32 million | 13.9% increase |
| Rental revenue | $12.70 million | $11.13 million | 14.1% increase |
| Tenant reimbursements | $3.22 million | $2.68 million | 20.2% increase |
| Operating expenses | $14.64 million | $13.15 million | 11.3% increase |
| Operating income | $2.73 million | $1.17 million | Increase of $1.56 million |
| Net loss | $1.87 million | $1.16 million | Loss increased $0.71 million |
| Net loss attributable to common shareholders | $5.03 million | $3.60 million | Loss increased $1.43 million |
| Basic and diluted loss per share | $0.57 loss | $0.42 loss | Loss widened |
| FFO | $4.55 million | $3.73 million | 22.1% increase |
| AFFO | $1.96 million | $2.85 million | 31.2% decrease |
| Cash flow from operations | $6.47 million | $6.49 million | Essentially flat |
Operating margin was approximately 16.7% of revenue, compared with 8.2% in the prior-year quarter. The improvement included a $1.06 million gain on the sale of the Chipotle ground lease at Conyers Crossing. Interest expense increased to $4.58 million from $4.18 million, primarily because of debt used in the JANAF acquisition.
At March 31, 2018, total assets were $542.75 million, including $448.56 million of net investment properties. Cash and cash equivalents were $5.15 million and restricted cash was $12.20 million. Total loans payable, net of debt issuance costs, were $373.05 million, versus $308.12 million at December 31, 2017. Total debt including debt associated with assets held for sale was $379.15 million. Total equity was $67.00 million, including $74.54 million of Series D preferred stock classified outside shareholders’ equity.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the partial-quarter contribution from the JANAF retail center, acquired January 18, 2018, and higher tenant reimbursements.
- JANAF was acquired for $85.65 million using cash, restricted cash, assumed debt and 150,000 common shares. The 810,137-square-foot center was 94% leased at acquisition.
- Investment property acquisitions used $23.15 million of cash in Q1 2018, compared with no acquisition cash outflow in Q1 2017.
- The Company issued 1,363,636 Series D preferred shares in January 2018, generating $21.16 million of net proceeds. Series D liquidation preference increased to $90.02 million from $55.93 million at year-end 2017.
- Property net operating income increased to $11.56 million from $9.66 million, largely due to $1.65 million of NOI from JANAF. Same-store NOI increased to $9.90 million from $9.66 million.
- Occupancy declined to 90.8% from 93.0%. Lease renewals covered 154,440 square feet and produced a weighted-average rate change of negative 3.42%, compared with a positive 3.50% in Q1 2017.
- Management and leasing agreements for Sea Turtle Development and certain other non-REIT properties were terminated in February 2018. Related asset management fees, commissions and development income declined.
- The Company classified seven undeveloped land parcels, with assets of $9.13 million and associated liabilities of $0.71 million, as held for sale.
- Common dividends declared were zero in Q1 2018, compared with $3.92 million in Q1 2017. Preferred dividends declared were $3.21 million.
Liquidity, debt and cash flow
Cash, cash equivalents and restricted cash increased to $17.35 million at March 31, 2018 from $12.29 million at December 31, 2017. Operating cash flow of $6.47 million was offset by $23.47 million of investing outflows, principally JANAF acquisition funding, and supported by $22.05 million of financing inflows, including preferred equity and loan proceeds.
Scheduled principal repayments and debt maturities, including assets held for sale, totaled $37.56 million for the remaining nine months of 2018, $80.64 million in 2019 and $21.25 million in 2020. Key near-term maturities included the $15.53 million KeyBank line of credit in July 2018 and the $6.81 million Revere Loan, which was extended after quarter-end to May 15, 2018. Management was pursuing refinancing and property sales to address these obligations.
Approximately 74.3% of debt carried fixed interest rates and 25.7% carried variable rates. Management estimated that a 1.0% increase in interest rates, assuming no change in variable-rate debt, would reduce annual cash flow by approximately $0.97 million. The Company reported compliance with the KeyBank Credit Agreement covenants as of March 31, 2018, but had received waivers for certain Bank Line of Credit covenants.
Outlook, commentary, risks and unusual items
- Management expected to fund near-term liquidity needs through operating cash flow, available cash, debt refinancing and the planned sale of the seven undeveloped land parcels and potentially other properties.
- Management stated that refinancing plans were subject to lender commitments, definitive documentation and customary conditions; failure to refinance could materially affect liquidity, operations and future distributions.
- Southeastern Grocers lease modifications and recaptures were significant. Four locations were recaptured or scheduled for recapture, and the initial annualized base rent impact, including the Cypress lease expiration, was approximately $2.50 million. Certain modifications required bankruptcy court approval.
- The Company received $246 thousand of lease termination fees related to Southeastern Grocers store recaptures. Management was negotiating potential replacement tenants for three BI-LO locations and one Harvey’s location.
- The Sea Turtle Development notes receivable had a $6.74 million carrying value, were on nonaccrual status, and had $355 thousand of unrecognized interest for Q1 2018. Further impairment could result if the first mortgage holder forecloses or project assumptions deteriorate.
- Adoption of ASC Topic 606, restricted-cash presentation guidance and other accounting standards did not materially affect results, except that restricted cash presentation reduced reported Q1 2017 operating cash flow by $329 thousand and increased investing cash flow by $1 thousand on a retrospective basis.
- The Company identified retail-anchor concentration, tenant bankruptcies, occupancy declines, refinancing risk, interest-rate exposure, regional economic concentration and potential environmental liabilities as key risks. The ten largest tenants represented approximately 25.96% of contractual base revenue; BI-LO and other Southeastern Grocers affiliates represented a significant concentration.
- Management reported no material legal proceedings, no material environmental contingencies known to the Company, no off-balance-sheet arrangements likely to have a material effect, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Progress and final terms of refinancing the 2018 maturities, particularly the KeyBank line of credit and Revere Loan.
- Whether planned land- parcel and other property sales close on expected terms and generate sufficient liquidity.
- Bankruptcy court treatment of Southeastern Grocers leases, the final rent reductions and recaptures, and replacement-tenant prospects.
- JANAF occupancy, leasing performance, debt service and contribution to recurring NOI and AFFO.
- Coverage of preferred dividends and the absence of common dividends in Q1 2018.
- Recoverability of the $6.74 million Sea Turtle Development notes receivable and the risk of additional impairment.
- Occupancy trends, lease rollover and the effect of negative renewal spreads on future rental revenue.
- Ability to maintain debt covenant compliance while funding capital expenditures and required distributions.