Wheeler Real Estate Investment Trust, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Wheeler Real Estate Investment Trust’s 2018 First Quarter Earnings Conference Call. At this time, all participant lines are in place a listen-only mode. Please note that today's conference call is being recorded with the webcast replay available for the next 90 days. The dial-in details for the replay can be found in the yesterday's press release and can be obtained from the Investor Relations section of the company’s website at www.whlr.us. After speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] I will now turn the conference over to Mary Jensen, of IRRealized.

[Mary Jensen:]

Thank you, Operator. Joining us on the call today are Dave Kelly, President and Chief Executive Officer; Matt Reddy, Chief Financial Officer; and Andy Franklin, Chief Operating Officer. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences maybe material. For a more detail description of some potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website. All information presented on this call is current as of today May 9th, 2018. Wheeler does not intend and undertakes no duty to update forward-looking statement unless required by law. In addition, reconciliations of non-GAAP financial measures presented in this call such as FFO and AFFO can be found in the company's quarterly reports which also can be obtained on the Investor Relations section of our website. During our prepared remarks today, Dave Kelly will provide an update on recent business activities and Matt Reddy will discuss our quarterly financial results that were released yesterday. After the prepared remarks, Dave, Matt and Andy will be available to take your questions. With that I would like to turn the call over to Dave Kelly. Dave, you may proceed.

[Dave Kelly:]

Thank you, Mary, and thank you everyone for joining us today. As of today, it has been exactly 100 days since our company began a vital and necessary transformation. One that we feel will ultimately improve transparency and create a better operating platform, capable of generating consistent cash flows. While we’re pleased with the profitable performance, our financial results for the first quarter do not represent what we ultimately want to be. Our vision is to be a grocery-anchored REIT with sustainable and growing cash flows that has a strong and flexible balance sheet with debt obligations are in line with our peers. And for our shareholders, we want to return to a dividend paying REIT, all of which are ways to establish our primary goal, maximizing shareholder value. We believe the best way to realize this vision is to first, solidify our cash position. Suspended the dividend was a difficult decision. But it was necessary step to maintain the cash, we need to show up our balance sheet. Paying an unsustainable dividend hampered our ability to pay down debt and led to expense of refinancing deals. By paying down our debt to the disposition of select, non-core properties and land parcels, we are committed to bring our debts to levels that are in line with our well-respected REIT peers. To that end, we've been working diligently in the $6.8 million Revere loan which came due on April 30. While we had the option to enter into a long-term refinance, we have instead extended this long for May 15 or we finalize the terms to pay this debt off within 6 months through select asset dispositions. These dispositions coupled with the associated property level debt, Revere debt service pay off will actually increase cash flows. Right now, we are under contract to sell 1.5-acre parcel in Virginia Beach at a price above the acquisition cost. We are working through the external valuation process on two non-core Virginia assets and three other non-core properties outside our immediate geography. Our disposition focus is on properties which have maximized the value or do not fit our core strategy while minimizing the impact to our cash flows. As you may recall, last quarter, we announced that we amended and restated the terms to our KeyBanc line of credit. The amendment extended the dates at which the company must repay its current outstanding balance of $15.5 million to July 1, 2018. We'll continue to pay down this debt by refinancing properties on the KeyBanc line the first of which is expected to close next week. As Matt will explain later we anticipate refinancing some of the properties that were previously impacted by the uncertainty surrounding Southeastern Grocers. We are working closely with KeyBanc Capital Markets to implement a business strategy that retains the attributes of our core portfolio, strengthens on capital structure and helps us reach our stated goals as soon as practical. We continue to leverage the experience and knowledge of our Board of Directors. John Sweet has served on the WHR Board since 2016, has more than 40 years of public company and capital markets experience was recently elected to the Chairman of the Board. In addition, the board appointed two new directors and accepted the retirement of two existing board members. Andrew Jones who is Founder and Chief Executive Officer of North Star Partners and Sean Armstrong who serves as Principle and Portfolio Manager of Westport Capital Partners are well aligned with the investment community as fellow investors in WHLR and will bring their unique experience to the table. Moving on to operations. Our JANAF property which we acquired on January 18, has performed as expected with strong leasing activity at South Tenant Roaster. This is an iconic shopping center in Northern Virginia with irreplaceable real estate that we acquired for $85.65 million at 9.4% cap rate based on annualized in place rents at the time of acquisition. This asset diversifies our tenant exposure and creates future opportunities which we expect will deliver long term value and sustainable cash flows. As we've stated last quarter, we're taking a very disciplined approach for external growth and will not be entering into any new acquisition transactions for the foreseeable future. Our focus remains on maximizing our current portfolio and deleveraging our balance sheet. As you may recall on March 15, 2018, Southeastern Grocers, the parent company of our largest tenant BI-LO, filed for a pre-packaged Chapter 11 bankruptcy. Due to our proactive outreach with the tenant we were able to modify 13 leases prior to the bankruptcy announcement. These modifications included a combination of increases and decrease to rental rates and lease terms as well as some deferral landlord contributions for remodels. This placed us in a better position to find suitable new tenants which have minimized the impact in our ABR. We will capture 3 BI-LOs in one Harveys' locations as part of our overall portfolio discussions. I am pleased to announce we have signed two leases related to the future captures. We expect to sign a third later this week and a fourth is the last stages of negotiation. As a result, this improves tenant quality and better diversifies our portfolio, while stabilizing a significant portion of the rental income and reducing our exposure to this single tenant from 12.4% to 7.6%. I'd like to note that these backfill leases are not subject to any approval by the [indiscernible]. Initially, we estimated that the base revenue impact to these modifications are recaptured, would be approximately $2.5 million without the consideration for lease in the recaptured space. This also included the lost revenue associated with the BI-LO at Cypress lease which is expired on March 31, 2018. We now expect this impact to decrease to approximately $1.2 million once the new leases are executed at the recaptured occasions. In addition to the recaptured space, we are now on schedule to deliver Planet Fitness to backfill the former BI-LO at the shops at Myrtle Park in Boston, South Carolina, with rent commencement occurring in the fourth quarter of 2018. In addition to the SEG backfills, we have diverse space to aspire fitness at Perimeter Square with rents expected to commence early in the third quarter. Tractor Supply has taken possession of 28,568 square feet at Chesapeake Square which included 10,000 square feet of previously decommissioned space. We are in final negotiations on another backfill. The former [Fred] space at Fort Howard. We'll release more details once that lease is signed. We believe these are significant steps in the right direction we appreciate your support and patience. With that I’ll turn the discussion over to Matt, who’ll walk you through our first quarter financial highlights. Matt?

[Matt Reddy:]

Thanks Dave. Yesterday we reported FFO of $0.16 and AFFO of $0.21 per diluted share for the first quarter of 2018 which compares to FFO of $0.15 and AFFO of $0.31 per diluted share during the first quarter of 2017. Overall, we are pleased with how our full real estate portfolio performed during the quarter. Total revenue increased almost 14% from the same period last year, to $16.3 million. However, as mentioned on our previous earnings call, we did expect certain revenue items to decrease going into 2018 which impacted our financial results. The decrease in AFFO year-over-year can be attributed to a few key factors, first asset management fees, leasing commissions and development fees relating to our third-party services decreased $351,000 or $3.07 per share from the same period last year resulting from the cancelled management agreement associated with certain propertied as previously noted. Additionally, during the first quarter of 2018 we placed the note receivable due from Sea Turtle marketplace development on a non-accrual basis going forward which resulted in a loss of interest income of $235,000 of $2.05 per share. This amount excludes the 4% portion of interest due at loan maturity which has been excluded from AFFO and previous periods. Interest expense net of non-cash loan cost amortization increased $177,000 or $1.08 per share for same-store operations. This is primarily attributed to increases in variable interest rates tied to approximately $97.4 million of adjustable rate debt across our portfolio. Furthermore, expenses associated with professional fees increased by $294,000 or $0.03 per share when compared to the same period last year. Most of this increase is associated with legal and advisory services that had been incurred in recent months to facilitate the company’s recent transition efforts. We believe some of these expenses will continue through the end of the second quarter, as we execute on our plans, but believe they are primarily non-recurring in nature and expect them to decrease during the second half of the year. This year-over-year reductions in AFFO were partially offset by the JANA F acquisition that occurred on January 18, 2018. We have spent the past few months on-boarding the property and we are excited about this performance. During the first quarter, JANAF generated $1.65 million of NOI, which contributed $1 million in FFO and $296,000 of AFFO after considering preferred dividends. We’re looking forward to the long term benefits we believe this asset will provide. Turning to our same-store results. On a GAAP basis, our portfolio generated a 2.5% increase in the same-store NOI from the prior year. On a cash basis, our portfolio generated a 1.6% increase in same-store NOI. Same-store results were driven, in part, by $246,000 in lease termination fees on Southeastern Grocers' recaptures, as well as a decrease of 61% in tenant provision for credit losses primarily resulting from increased collections on accounts receivable while property revenues and expenses remain relatively flat. Moving on to our operating results. Our core portfolio is currently 92% leased and 91% occupied. The average rental rate for our portfolio is $9.78 per square foot with an average lease term of over four years. During the quarter, we executed 15 new leases, totalling over 72,000 square feet at a weighted average rate of $8.08 per square foot. In addition, we executed on 26 lease renewals, totalling 154,000 square feet at a weighted average decrease of $0.29 per square foot and a decrease of 3.42% over the prior rates. These amounts include an incur lease that was renewed at a rate decrease of $1.83 per square foot. Excluding this one renewal, we would have reported an overall increase of $0.09 per square foot or 0.95% increase on 124,000 square feet. These amounts do not include any lease modifications associated with Southeastern Grocers as the lease amendments will not going to effect until approved by the bankruptcy court. Moving on to our balance sheet. We ended the quarter with $5.1 million of cash at March 31st, 2018. This compares to $3.67 million of cash at December 31st, 2017. Regarding our debt obligations, we are currently in the process of working through the refinancing of the $6.8 million loan with Revere that was scheduled to mature on April 30th, 2018. Both the company and Revere have agreed to extend the maturity date to May 15th, 2018 as we finalize the terms to pay off this debt within six months. Furthermore, we are actively refinancing the underlying debt on multiple properties to meet our commitment with KeyBanc to reduce line of credit balance from $68 million to below $52.5 million by July 1st, 2018. We are working through the refinancing of Newmarket which is expected to be finalized this month and should be -- and should reduce the balance on the line by approximately $6 million. Additionally, we have made progress on this front by securing backfills of the BI-LO recaptured that Ladson Crossing and South Park which gives us the flexibility to remove these assets from our lines of credit. With that we will be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Larry Raiman with LDR. Please go ahead with your question.

[Larry Raiman:]

Hi, thanks for the update on the quarterly review and a nice job. A Question on how you're going to balance everything going forward from your capital sources and deployment. I know you have an agenda to reduce debt obligations to get in line with peers Dave as you mentioned earlier and get your balance sheet back in order particularly the KeyBanc line for one. And then other debt obligations for two, how do you do that and not dilute the earnings level and balance everything out because I would presume some of the debt obligations you maybe reducing come at a pretty low-cost relative to the source of funds asset sales which will be at pretty high cap rate.

[Dave Kelly:]

Larry good morning thanks for joining us and appreciate the question. That is and I mentioned in the transcript that our criteria for choosing disposition properties are going to be properties that we think we maximize value on already or that no longer fit our strategy. But also [position] transaction won't significantly impact cash flow. And so just take for instance, the parcel land that we have for sale here in Virginia Beach obviously that's not an income producing asset, so the sale and then the pay down of that associated debt obviously won't dilute our earnings. But the other two Virginia transactions we're contemplating right now and paying down the Revere debt, the Revere debt is a significantly higher interest rate than we typically have on the property level loans. So, the goal here is on the Refi or the pay down of Revere. The ending result are actually positive cash flow as the properties net cash flow after debt after the property level debt actually less than the corresponding debt service with Revere. So that pay down is actually going to be [indiscernible] more cash flow. And that's going to be [indiscernible] going forward. We're looking to strategically dispose of assets, we're not on a wholesale asset disposition. We're looking for assets that just don't fit the strategy going forward whether it's geography or as I said, maximizing value but again we're not looking at a whole lot of dispositions here, it is just strategic and that is certainly one of the considerations is the ending cash flow.

[Larry Raiman:]

So, as you do some strategic transactions just one final question to maybe tweak down your leverage. Doesn't sound like there is a mass wholesale disposition program. How are you thinking about overhead costs for the entity relative to the overall organization, my calculus was 25% of NOI which is certainly quite high relative to most other companies in the universe. So, is there way to work that down to create some cost efficiencies and free cash flow to work and other usage for the business?

[Dave Kelly:]

We have been aggressively carrying down our cost structure over the past couple of years in particularly over the last several months. And it may sound like nickels and dimes but they're having now, for instance our participation in ICSC events, our advertising, our operational -- office in Charleston in South Carolina. We're looking -- we're going to make significant changes to that cost basis. On kind of the general operating basis for the company we have at this point, we are at I think pretty lean rate on personnel and while we'll do some of these dispositions we don't think this is going to significantly impact the personnel [indiscernible] probably maybe just need some administration, accounting, that’s going to be required to manage those. So, I don't see any significant change in that end, but as I said there is a room here for us to tear back expenses on basically on discretionary spending which we have pulled back considerably on. And I think you’ll see that not so much here in the first quarter, because we haven’t had a whole lot of time, the first quarter implement that, but going forward you’ll see kind of a gradual decrease in those operating expenses. So, I agree with you, our cost is too high and we are working to bring those down to more in line with our peers.

[Operator:]

Thank you, there are no further questions at this time, I’d like to turn the floor back to Dave Kelly for closing comments.

[Dave Kelly:]

Thank you everybody for taking your time out this morning to join us. Look forward to talking to you again and as events occur, we will be releasing more information and keeping you abreast on our progress. So, thank you again, have a good day.

[Operator:]

This concludes today’s teleconference, you may disconnect your lines at this time, and thank you for your participation.