Wheeler Real Estate Investment Trust, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2022. Wheeler is a self-managed REIT focused primarily on grocery-anchored retail centers. At quarter-end, it owned and operated 76 retail shopping centers and four undeveloped properties across 15 states, with approximately 8.18 million square feet and a 92.1% leased rate.
The August 22, 2022 acquisition of Cedar Realty Trust added 19 primarily grocery-anchored shopping centers, approximately 2.8 million square feet, and expanded the portfolio into the Northeast. Cedar contributed to consolidated results for approximately one month of the quarter.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $18.72 million, up 20.7% | $49.69 million, up 8.7% |
| Rental revenue | $18.49 million, up 23.2% | $49.14 million, up 9.3% |
| Operating income | $4.58 million | $14.63 million |
| Operating margin | Approximately 24.5% | Approximately 29.4% |
| Net income attributable to Wheeler REIT | $(4.24) million | $(8.87) million |
| Net loss attributable to common stockholders | $(6.50) million; $(0.66) per share | $(15.66) million; $(1.61) per share |
| Property NOI | $12.06 million | $33.04 million |
| FFO | $1.98 million | $5.36 million |
| AFFO | $1.24 million | $7.12 million |
| Operating cash flow | Not separately provided | $27.95 million |
Same-store property revenue increased 3.6% for both the quarter and nine-month period, while same-store NOI increased 2.9% for the quarter and 2.3% for the nine-month period. Same-store FFO declined to $2.29 million for the quarter and $5.70 million for the nine months, primarily reflecting higher expenses and non-operating impacts.
At September 30, 2022, investment properties, net, were $567.57 million, compared with $386.73 million at December 31, 2021. Total assets were $693.05 million. Cash and cash equivalents were $24.06 million, and restricted cash was $30.25 million, for total cash, cash equivalents and restricted cash of $54.30 million.
Loans payable, net, totaled $467.23 million, compared with $333.28 million at December 31, 2021. Total principal debt was $483.66 million, including $130.00 million of adjustable-rate debt under the KeyBank-Cedar Agreement. Total equity was $55.16 million, while stockholders’ deficit was $(9.78) million. Series D preferred stock had a $111.33 million liquidation value and $32.52 million of accrued dividends in arrears.
Material changes versus the prior comparable period
- Revenue increased primarily because of the Cedar acquisition, partially offset by property dispositions.
- Operating expenses increased 35.1% in the quarter and 7.0% for the nine months, driven largely by Cedar-related property expenses and depreciation and amortization.
- Operating income declined 34.6% in the quarter and 3.3% for the nine months. The prior-year quarter benefited from a $1.97 million gain on property disposals.
- Net loss before taxes was $3.01 million for the quarter versus net income of $3.08 million in the prior-year quarter. Results were adversely affected by a $656 thousand decrease in derivative fair value and higher interest expense.
- FFO declined 58.8% for the quarter and 24.2% for the nine months. AFFO increased to $7.12 million for the nine months, partly because of adjustments for non-cash items, derivative revaluations, loan costs, paid-in-kind interest and other non-recurring expenses.
- Operating cash flow increased to $27.95 million from $14.51 million, but investing cash flow was $(140.11) million due primarily to the Cedar acquisition. Financing activities provided $126.04 million.
- The Company refinanced or added debt through a $75.00 million Guggenheim loan, a $60.00 million JANAF loan and the $130.00 million KeyBank-Cedar loan.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects to fund liquidity needs through operating cash flow, refinancing or extending maturing debt, property dispositions and available cash and restricted cash. The filing states that $123.32 million of principal repayments and scheduled payments were due in the twelve months ending September 30, 2023.
The Company disclosed that Series D preferred holders may require redemption beginning September 21, 2023 at $25.00 per share plus accrued and unpaid dividends. Management stated that it likely would not have sufficient cash to fund the aggregate redemption price and may need to liquidate assets, issue substantial common stock or complete its proposed exchange offer for 6.00% subordinated notes due 2027. The exchange offer was being pursued through a Form S-4 filed November 1, 2022.
On October 28, 2022, after quarter-end, the Company entered into a $110.00 million Guggenheim-Cedar loan at a fixed 5.25% rate, with interest-only payments through November 2027. The proceeds were used to refinance a portion of the Cedar portfolio debt.
Key risks include refinancing and interest-rate risk, particularly the floating-rate KeyBank-Cedar debt; tenant defaults, bankruptcies and rent collection; geographic concentration in the Southeast, Mid-Atlantic and Northeast; integration of Cedar; retail and e-commerce trends; inflation and operating cost increases; environmental and weather risks; litigation; and the ability to maintain REIT qualification.
Unusual items included $2.53 million of unfavorable derivative fair-value changes, $760 thousand of impairment on the Harbor Pointe Land Parcel, $691 thousand of legal settlement expense, $2.61 million of loan prepayment penalties for refinancing, and $2.10 million of paid-in-kind interest. The filing also reports ongoing Cedar preferred shareholder litigation with an uncertain outcome.
Important facts for investors to verify
- Whether the Company can refinance or otherwise address the $123.32 million of debt maturities and scheduled repayments due within twelve months.
- The terms, completion status and dilution implications of the proposed Series D preferred exchange offer and the September 2023 redemption rights.
- The effect of the Cedar acquisition on occupancy, same-store versus non-same-store NOI, cash flow and leverage once Cedar is included for a full reporting period.
- Exposure to the floating-rate $130.00 million KeyBank-Cedar loan, including the margin increase scheduled for February 2023.
- The Company’s ability to collect rents given the increase in the allowance for uncollectible tenant receivables to $3.81 million from $633 thousand at December 31, 2021.
- The status and potential financial impact of Cedar-related preferred shareholder litigation and other legal proceedings.
- The reconciliation and sustainability of non-GAAP FFO and AFFO, particularly after excluding derivative revaluations, refinancing costs, paid-in-kind interest and other non-recurring items.