Business Context and Reporting Period
Wheeler Real Estate Investment Trust, Inc. is a Maryland REIT that owned and operated 61 centers, one office building and six undeveloped properties across 12 states as of September 30, 2019. The unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the same 2018 periods.
Ending occupancy was 89.0%, compared with 90.0% a year earlier. The portfolio had approximately 5.64 million square feet of gross leasable area, down 1.3% year over year.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $15.565 million | $16.073 million | $47.092 million | $49.307 million |
| Operating income | $3.701 million | $4.622 million | $6.947 million | $10.084 million |
| Net loss from continuing operations | $0.960 million | $0.590 million | $7.468 million | $4.925 million |
| Net loss attributable to common shareholders | $4.616 million | $3.810 million | $18.340 million | $13.573 million |
| Loss per common share | $0.48 | $0.41 | $1.90 | $1.48 |
| Property NOI | $10.564 million | $11.286 million | $32.697 million | $35.181 million |
| FFO | $4.587 million | $4.198 million | $8.821 million | $13.706 million |
| AFFO | $1.093 million | $1.272 million | $3.733 million | $5.644 million |
Operating margin was approximately 23.8% in Q3 2019 and 14.7% for the first nine months, versus approximately 28.8% and 20.4%, respectively, in the comparable 2018 periods. Property NOI margin on reported property revenues was approximately 68.1% in Q3 2019 and 69.6% for the first nine months.
- Rental revenue declined 2.4% in Q3 and 1.6% for the first nine months, primarily reflecting rent adjustments, sold properties and vacant anchor spaces, partly offset by a full period of JANAF operations.
- Property operating expenses increased 6.0% in Q3 and 3.5% for the first nine months, driven primarily by repairs and maintenance.
- Depreciation and amortization declined 16.2% in Q3 and 22.8% for the first nine months, reflecting property sales, held-for-sale classifications and prior-year lease-intangible write-offs.
- Interest expense decreased to $4.654 million in Q3 and $14.394 million for the first nine months, primarily due to lower debt and loan-cost amortization.
- FFO increased 9.3% in Q3 but declined 35.6% for the first nine months. AFFO declined 14.1% in Q3 and 33.9% for the first nine months, primarily due to higher preferred dividend accruals and lower property NOI.
Balance Sheet, Debt and Liquidity
- Total assets were $489.2 million at September 30, 2019, including $418.3 million of net investment properties.
- Loans payable, net, were $342.8 million, compared with $360.2 million at December 31, 2018. Gross principal debt was $349.1 million, including $26.0 million outstanding on the KeyBank line of credit.
- Cash and cash equivalents were $5.2 million, and restricted cash was $17.3 million, for total cash, cash equivalents and restricted cash of $22.5 million.
- Nine-month operating cash flow was $12.6 million, compared with $18.5 million in 2018. Investing activities provided $2.2 million, compared with $21.0 million used in 2018. Financing activities used $10.3 million, compared with $10.5 million provided in 2018.
- Debt principal repayments and maturities totaled $48.9 million in the remaining three months of 2019 and $64.4 million during the twelve months ending September 30, 2020, according to the debt maturity table. The MD&A separately identifies $68.9 million of liquidity needs for the same twelve-month period; the filing does not clearly reconcile the difference.
- Management expected to address maturities through refinancing, dispositions, operating cash flow, available cash, possible sales of six undeveloped parcels and continued suspension of preferred dividends.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased $0.5 million in Q3 and $2.2 million for the first nine months. Other revenue declined sharply because 2018 included significant early lease termination fees.
- Net loss attributable to Wheeler REIT increased to $1.0 million in Q3 and $7.4 million for the first nine months, from $0.6 million and $4.0 million, respectively.
- The company recorded $5.0 million of Sea Turtle notes receivable impairment in the first nine months and $1.5 million of impairment on assets held for sale; neither category had comparable 2018 charges.
- Preferred dividend accruals increased substantially because the Series A, Series B and Series D dividends remained suspended. Accumulated undeclared preferred dividends totaled approximately $13.5 million at September 30, 2019.
- Property NOI declined 6.4% in Q3 and 7.1% for the first nine months. Same-store NOI declined $0.2 million in Q3 and $1.9 million for the first nine months.
- The company sold Jenks Plaza, Graystone Crossing, the Harbor Pointe land parcel and Perimeter Square during 2019 for aggregate contract prices of $15.95 million and recognized an aggregate gain of $1.76 million before considering related debt and cash proceeds.
- The company adopted ASC Topic 842 on January 1, 2019, recognizing approximately $11.9 million of operating lease right-of-use assets and $12.0 million of operating lease liabilities. The adoption materially affected the balance sheet but had no material impact on cash flow or operations.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal earnings or revenue guidance. Management stated that refinancing and dispositions are central to meeting near-term debt obligations and that the ability to execute those actions will affect liquidity, growth and any future reinstatement of dividends.
- Subsequent to quarter-end, the company paid down $7.16 million on the KeyBank line and entered into a non-binding term sheet requiring further reductions to $12.0 million by December 31, 2019, $10.0 million by January 31, 2020, $2.0 million by April 30, 2020 and full maturity by June 30, 2020. The term sheet was not a binding commitment and required formal documentation.
- Sea Turtle Development, a related-party project, entered Chapter 11 after defaulting on construction debt. The company’s $12.0 million of related notes receivable had been fully impaired, and $3.86 million of accrued interest remained unpaid.
- Preferred dividends were suspended beginning with the fourth quarter of 2018. Series D dividends accrue at an increased 10.75% rate until accumulated dividends are paid.
- Material litigation includes claims concerning disclosure, Series D preferred redemption rights, former CEO severance and defamation. The filing states that outcomes cannot presently be predicted; one former CEO claim alleges approximately $1.0 million in damages.
- The portfolio is geographically concentrated in the Southeast and Mid-Atlantic, with approximately 60% and 36% of annualized base rent, respectively. Risks include tenant credit, anchor-store closures, occupancy, refinancing availability, interest rates, real estate conditions and environmental liabilities.
- The company reported compliance with debt covenants and no defaults as of September 30, 2019. The filing states that disclosure controls were effective and that there were no changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether the KeyBank term sheet was converted into a binding amendment and whether the required debt paydowns and June 2020 maturity were achieved.
- The company’s ability to refinance or sell assets against near-term maturities, especially the $48.9 million due in the fourth quarter of 2019 and the approximately $64.4 million identified for the following twelve months.
- The status and potential recovery of the fully impaired Sea Turtle notes and related bankruptcy and foreclosure proceedings.
- The amount and payment status of accumulated preferred dividends, including the effect of the Series D dividend-rate increase.
- Occupancy, same-store NOI, vacant anchor spaces and tenant renewals, given the decline in occupancy and property NOI.
- The status and potential financial impact of the Series D redemption litigation and other legal proceedings.
- The reason for the filing’s differing liquidity figures of $64.4 million and $68.9 million for the twelve months ending September 30, 2020.