Wheeler Real Estate Investment Trust, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Wheeler REIT is a self-managed Maryland REIT focused primarily on grocery-anchored retail shopping centers. For the quarter ended March 31, 2023, the Company owned and operated 75 retail shopping centers and four undeveloped properties across 15 states. Results include Cedar Realty Trust beginning with its August 22, 2022 acquisition; therefore, the March 2023 and March 2022 periods are not fully comparable.
At March 31, 2023, the portfolio had 8.2 million square feet of gross leasable area and a 92.8% leased rate, compared with 95.8% for the comparable prior-year period. Annualized base rent was geographically concentrated approximately 45% in the Mid-Atlantic, 40% in the Southeast and 15% in the Northeast.
Key financial metrics
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 |
|---|---|---|
| Total revenue | $26.1 million | $15.5 million |
| Operating income | $6.6 million | $4.7 million |
| Operating margin | 25.2% | 30.3% |
| Net loss | $0.4 million | $4.6 million |
| Net loss attributable to Wheeler REIT | $3.1 million | $4.6 million |
| Net loss attributable to common stockholders | $5.4 million | $6.8 million |
| Basic and diluted loss per share | $0.55 | $0.70 |
| Same-store NOI | $10.4 million | $10.0 million |
| FFO | $7.1 million | $(0.3) million |
| AFFO | $1.3 million | $2.3 million |
| Net cash provided by operating activities | $3.7 million | $3.4 million |
Rental revenue increased 66.3% to $25.5 million, primarily due to the Cedar acquisition. Property operations expense increased 70.6% to $9.0 million, depreciation and amortization increased 106.5% to $7.5 million, and corporate general and administrative expense increased 143.0% to $3.1 million. Same-store NOI increased 4.2%, primarily reflecting leasing activity.
Cash, cash equivalents and restricted cash totaled $52.1 million at March 31, 2023, including $24.8 million of unrestricted cash and $27.3 million of lender-restricted reserves. Total assets were $681.2 million and total liabilities were $531.7 million. Stockholders’ deficit was $20.4 million, while total equity including noncontrolling interests was $45.8 million.
Total loan principal was $481.9 million, or $467.1 million net of debt issuance costs, with a weighted-average interest rate of 4.99% and weighted-average term of 7.2 years. Scheduled principal repayments were $1.8 million for the remaining nine months of 2023 and $33.7 million in 2024. Management stated that no debt matures during the 12 months ending March 31, 2024.
Material changes versus the prior comparable period
- Total revenue increased 68.2%, primarily from the Cedar acquisition and the resulting larger property base.
- Operating income increased 40.1%, but the operating margin declined because expenses, depreciation and corporate costs grew faster than revenue.
- Interest expense increased 40.0% to $6.5 million, including $1.8 million of interest on Cedar property debt.
- The Company recorded a $1.9 million non-cash gain from changes in derivative liabilities, compared with a $4.0 million loss in the prior-year period.
- Other expense increased to $2.4 million, primarily reflecting costs of the Series D Preferred exchange offer; the prior-year amount primarily reflected legal settlement costs.
- No impairment expense or property sales were recorded in the first quarter of 2023, compared with $0.7 million of impairment expense and $1.8 million of disposal proceeds in the first quarter of 2022.
- Leased rate declined three percentage points to 92.8%, although 44 leases were renewed, with a 6.4% weighted-average increase over prior rates.
- Operating cash flow was $3.7 million. Investing activities used $4.2 million, mainly for capital expenditures, while financing activities used $3.3 million, including $2.7 million of distributions to noncontrolling interests.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or operating guidance. Management expects to improve liquidity and operations by delivering leased but unoccupied space, backfilling vacant anchor space, replacing defaulting tenants, using restricted cash for tenant improvements, disposing of non-core assets and refinancing properties.
The principal liquidity risk is the Series D Preferred Stock. Approximately 3.1 million shares were outstanding at March 31, 2023, with a liquidation preference of approximately $78.7 million and accrued, undeclared dividends of approximately $36.7 million. Following September 21, 2023, holders may require redemption at $25 per share plus accrued and unpaid dividends. Management stated that the Company is unlikely to have sufficient cash to fund redemptions and would likely settle them in common stock, potentially causing substantial dilution. The Series D exchange offer expired on January 20, 2023 after only 26.8% of shares were tendered, below the required threshold.
The Company faces refinancing, interest-rate, tenant-credit, occupancy, retail-sector, geographic-concentration, litigation, catastrophic-event, cybersecurity and REIT qualification risks. Three legal proceedings related to Cedar preferred stock remain unresolved, and the filing states that their outcomes are uncertain.
On May 5, 2023, subsequent to quarter-end, the Company entered into a $61.1 million loan at a fixed 6.194% interest rate, with interest-only payments through June 2025 and maturity in June 2033. Proceeds were used to refinance 12 properties.
Management reported that disclosure controls and procedures were effective as of March 31, 2023 and that there were no changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Company can fund or otherwise settle the Series D Preferred redemption obligation after September 21, 2023 without excessive common-stock dilution.
- The schedule and availability of lender-restricted cash, including amounts needed for tenant improvements, leasing costs, taxes and insurance.
- Occupancy trends, anchor-tenant stability, tenant receivable collections and leasing spreads following the decline in leased rate to 92.8%.
- Refinancing plans and lender terms for debt maturities, particularly the $33.7 million scheduled in 2024 and $79.7 million in 2025.
- The sustainability of positive FFO and the lower AFFO of $1.3 million after preferred obligations, noncontrolling-interest distributions and recurring capital expenditures.
- The potential financial and operational impact of the pending Cedar-related litigation.
- The effect of the May 2023 $61.1 million refinancing on liquidity, leverage and interest expense.