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, 2014. The REIT owned and operated 23 grocery-anchored and other commercial properties across eight states, totaling approximately 1.29 million square feet. Ending occupancy was 94.7%, compared with 95.1% at June 30, 2013. The filing is presented under U.S. GAAP and should be read with the company’s 2013 Form 10-K.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $3.63 million, up 123.1% | $7.30 million, up 124.8% |
| Operating loss | $0.37 million, versus $0.94 million loss | $0.25 million, versus $0.87 million loss |
| Net loss | $1.91 million, versus $1.38 million loss | $3.15 million, versus $1.86 million loss |
| Net loss attributable to common shareholders | $2.25 million; $(0.31) per share | $3.45 million; $(0.47) per share |
| Property NOI | $2.72 million, versus $1.34 million | $5.47 million, versus $2.66 million |
| FFO | $(0.17) million, versus $(0.70) million | $0.37 million, versus $(0.53) million |
| Core FFO | $0.06 million, versus $0.46 million | $0.68 million, versus $0.46 million |
Revenue growth primarily reflected full-period contributions from properties acquired during 2013. The second-quarter operating loss margin was approximately 10.1%, while the net loss margin was approximately 52.4%; six-month margins were approximately 3.4% and 43.2%, respectively. Interest expense increased to $1.54 million in the quarter and $2.91 million for the six months, mainly because of senior debt issued in December 2013 and January 2014.
Cash and cash equivalents were $16.24 million at June 30, 2014, compared with $1.16 million at December 31, 2013. Six-month operating cash flow was negative $1.62 million, investing cash flow was negative $0.19 million, and financing cash flow was positive $16.90 million. Financing inflows included $18.67 million of net Series B preferred stock proceeds and $2.16 million of senior note proceeds.
Total assets were $140.15 million, including $100.55 million of net investment properties. Loans payable were $95.24 million, compared with $94.56 million at year-end, with a reported weighted-average fixed interest rate of 5.39% and weighted-average term of 5.03 years. Scheduled principal maturities were $9.28 million through June 30, 2015, $19.91 million in 2016, and $36.82 million thereafter. Total equity was $38.94 million.
Material Changes Versus the Prior Comparable Period
- The property portfolio increased from 12 to 23 properties, and gross leasable area increased 137.4% to 1.29 million square feet.
- Revenue more than doubled, but operating expenses also increased substantially, particularly property operations and depreciation and amortization.
- Property NOI increased by $1.38 million in the quarter and $2.80 million for the six months, primarily from the 2013 acquisitions.
- Same-store revenue was broadly stable, but same-store NOI declined because of higher repairs, maintenance, snow removal and utility costs. Six-month snow removal expense rose to approximately $98,400 from $11,400.
- Interest expense increased 244.5% in the quarter and 191.8% for the six months, reflecting additional senior debt.
- The company completed a Series B preferred stock offering in April and May 2014. It issued 828,000 preferred shares with a 9% dividend rate, conversion into up to 4.14 million common shares, and warrants to purchase 993,600 common shares.
- Common shares outstanding increased to 7,421,852 at June 30, 2014 from 7,121,000 at December 31, 2013. The company also issued 31,451 shares under its incentive plan.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It stated that approximately 5.58% of gross leasable area was subject to leases expiring during the twelve months ending June 30, 2015 that had not been renewed, and expected renewals at terms comparable to existing leases. Management expects continued benefits from the 2013 acquisitions, contractual rent increases and expansion opportunities.
Liquidity risks include negative operating cash flow, debt service, the targeted annual dividend of $0.42 per share, capital expenditures and $9.28 million of debt maturities during the following twelve months. The company stated that its ability to refinance maturing debt and execute its growth strategy will determine future liquidity and dividend capacity. It had a $25 million secured guidance line of credit available through December 31, 2015 for selected acquisitions.
Subsequent to quarter-end, the company acquired four shopping centers for aggregate contract prices of approximately $26.3 million: Cypress, Harrodsburg, Port Crossing and LaGrange. The Port Crossing and LaGrange transactions involved related parties and the issuance of Operating Partnership units.
The company reported ordinary-course litigation and an Oklahoma dispute involving approximately $13,300 of damages and approximately $267,000 of awarded legal fees; bonds were posted and liabilities accrued. A related party controlled by the chief executive officer leases the Riversedge property. Six-month payments to the chief executive officer’s affiliates were $1.94 million, and amounts due to those affiliates were $0.57 million.
The company reported effective disclosure controls and no changes in internal control over financial reporting. It was evaluating the impact of the new revenue recognition standard, effective for the company in 2017.
Important Facts for Investors to Verify
- Whether the company can refinance the $9.28 million of debt maturing through June 30, 2015 and later maturities on acceptable terms.
- Whether operating cash flow becomes positive after funding acquisitions, escrows, debt service, capital expenditures and dividends.
- The sustainability of the $0.42 per-share annual common dividend in light of negative GAAP earnings and limited positive FFO available to common holders.
- The occupancy, leasing spreads and tenant concentration of the expanded 23-property portfolio.
- The financing structure, purchase accounting and post-closing performance of the four properties acquired after June 30, 2014.
- The dilution implications of Series B preferred conversion, outstanding warrants and redeemable Operating Partnership units.
- The financial impact of related-party transactions and the status of the Perimeter litigation appeal.