Wheeler Real Estate Investment Trust, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning, ladies and gentlemen. And welcome to Wheeler Real Estate Investment Trust 2018 Second Quarter Earnings Conference Call. At this time, all lines have been placed in a listen-only mode. Please note that today's conference call is being recorded with a webcast replay available for the next 90 days. The dial-in details for the replay can be found in yesterday's press release and can be obtained from the Investor Relations section of the Company’s Web site at www.whlr.us. After our 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 results can be expected to differ from our expectations and those differences maybe material. For a more detailed description of some potential risks, please refer to our SEC filing, which can be found in the Investor Relations section of our Web site. All information presented on this call is current as of today, August 8, 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 Wheeler’s quarterly reports, which also can be obtained on the Investor Relations section of our Web site. During our prepared remarks today, Dave Kelly will provide an update on recent business activities and Matt Reddy will discuss our quarterly financial and operating results that we released yesterday. With that, I would like to turn the call over to Dave Kelly. Dave?

[Dave Kelly:]

Thank you, Mary. Good morning. and thank you for making time to join us this morning. I just want to hit on a few highlights before pass the call over to Matt Reddy, who will give you the details behind the second quarter earnings release. We have been working diligently to follow through with the initiatives we outlined earlier this year. And while we are not near completed our work in progress, we have made a number of positive steps. With the refinancing of certain assets, we have moved over $9 million off the KeyBank line. We are near closing on our initial $8 million loan that will reduce our exposure on the KeyBank's credit facility to approximately $51 million from $68 million at the beginning of the year. As we have demonstrated significant progress in reducing the balance on the line, KeyBank has executed an extension that not only gives us the period of time to get this refinancing completed, but also relaxes certain covenants within the line agreement. We appreciate our relationship with Keybank, they continue to be a valuable partner as we work through this process. Through a combination of asset dispositions and cash payments, we continue to reduce the balance on the Revere line, which is currently under $3.2 million down from over $6.8 million at the beginning of the year, and on schedule to be paid off later this year. Net of non-recurring expenses associated with the management transition and non-cash stock compensation, we’ve reduced non-property operating expenses by approximately $900,000 through the first six months of the year compared to the same period of last year. Net of these onetime expenses and stock compensation, non-property operating expenses represent 8.2% of total revenue and 11.4% of NOI versus 12.5% and 18.5% respectively for the same period last year. On a sequential basis from Q1 to Q2, we have a generated growth for our core portfolio reflected in revenue growth and reduced operating expenses, thereby improving FFO, AFFO and EBITDA metrics. Further, we have reduced our overall debt by over $2.5 million. The storyline that dominated much of the first half of the year was anticipated an eventual bankruptcy filing by Southeastern Grocers. During the second quarter, SEG emerged from bankruptcy on May 31st. as we have expected, none of these leased qualifications we started with the SEG were altered by the bankruptcy process. And we are pleased to see SEG reinvesting in our stores for remodels and system upgrades. We recaptured four locations as part of this process. Two of the four locations we recaptured currently opened and operating with replacement grocers. We are in the final stages of negotiations with a third grocer and in active lease discussions on the last. We look forward to sharing the eventual outcome of these negotiations shortly. In addition, this also significantly reduced our SEG exposure to 9.54% of our total leasable square footage compared to 12.7% before the bankruptcy, representing a 25% reduction. We were currently at over $14 million in restricted cash held in lender reserves. Over $8 million of that is earmarked for leasing cost and capital improvements. We're focused on putting that money to work by reinvesting in our properties and then our tenants. We have commenced a systematic plan to upgrade pylon sign, parking lot lighting, roofs and parking fields within the portfolio. As Matt will detail, we have renewed almost 169,000 square feet this quarter and over 320,000 square feet this year, with a positive rent spread of 9.17% for the quarter and 3.58% for the year. We have also signed 21 new leases for 131,000 square feet this quarter and 36 year-to-date for over 200,000 square feet. We believe maintaining improving our well located centers will enable us to continue this type of positive leasing activity. We have listed select number of assets for disposition. These assets are non-core properties such as non-grocery anchored or shadow anchored retail strips that do not fit our long-term strategic plan. This process frees up equity and further reduces our property level debt, including the remaining Revere balance and further rightsizing the KeyBank line. In addition to reducing debt and solidifying our cash foundation, these dispositions will also provide cash that we can prudently reinvest in a manner we deem appropriate at that time, which may include additional investment in our portfolio or the buyback of our securities. Please note that when I say this, we are still committed to not embarking on any new acquisitions in the foreseeable future. Together with the Board of Directors, management will identify the best use of proceeds at that appropriate time. We have recently announced our Annual Meeting on October 3rd and have filed our preliminary proxy statement for 2018. WHLR's Board of Directors are soliciting proxies from WHLR stockholders in connection with WHLR's 2018 Annual Meeting of Stockholder. WHLR intends to file final proxy materials in connection with the 2018 annual meeting in due course, and strongly encourages stockholders to reach its proxy materials. As a result, we’re unable to answer any questions concerning this issue on today's call. WHLR has issued what we are referring to as our stop, look and listen letter to our shareholders. In essence, it’s stated that WHLR's Board of Directors does not endorse the election of any Stilwell Group nominees, and strongly urge our shareholders not to sign and return any proxy card sent to them by or on behalf of the Stilwell Group. We’re asking to await the recent proxy filing by the Stilwell Group that all shareholders refrain from voting any proxy until they're reviewed all materials by WHLR. JCP Investments filed a complaint related to our Series B preferred stock. This as well is an ongoing litigation matter, which I cannot comment on at this juncture. However, through careful due diligence, we believe we have acted appropriately and in the best interest of our shareholders in correcting and grafting error on the original filing. The progress we have made in the above areas demonstrates our commitments to our shareholders and our efforts to maximize value. With that, I'll turn the call over to Matt.

[Matt Reddy:]

Thanks, Dave. Yesterday, we reported FFO of $0.20 and AFFO of $0.25 per diluted share for the second quarter of 2018, which compares to FFO of $0.24 and AFFO of $0.40 per diluted share during the second quarter of 2017. Second quarter total revenue increased 16% from the same period last year to $17.1 million. Revenue for the quarter was impacted by onetime $980,000 termination fee, which represents 80% of the lease value for an anchored tenant at Berkley Shopping Center that has recently vacated the Hampton Roads market. In additional, our JANAF shopping center asset generated $2.8 million of incremental revenue during the quarter. Consistent with our prior quarter results, the decrease in AFFO year-over-year could be attributed to a few key factors. First and as anticipated, asset management fees, leasing commissions and development fees decreased by $774,000 or $0.08 per share. Additionally, the note receivable due from the Sea Turtle marketplace development has been placed on a non-accrual basis, which accounted for a decrease of interest income of $239,000 or $0.025 per share when compared to the second quarter of 2017. This amount excludes the 4% portion of interest due at loan maturity, which has been excluded from AFFO in previous periods. Interest expense, net of non-cash loan cost amortization, increased $251,000 or $0.026 per share for same store operations. This is primarily attributed to increases in variable interest rates tied to the adjustable rate debt across our portfolio. Furthermore, non-property operating expenses impacting AFFO, including expenses associated with non-REIT management and leasing services, increased by $498,000 or $0.052 per share when compared to the same period last year. As Dave discussed earlier, net of non-recurring expenses associated with the management transition, we have reduced non-property operating expenses. We expect these onetime costs to decrease during the second half of the year. These year-over-year reductions to AFFO were partially offset by the NOI generated by the JANAF asset, which we acquired on January 18, 2018. During the second quarter, JANAF generated $2 million of NOI, which contributed $1.2 million in FFO and $267,000 of AFFO after considering preferred dividends. JANAF contributed $0.027 of AFFO per share during the second quarter. Same store NOI improved during the quarter, increasing 3.58% when compared to the second quarter of 2017. As previously mentioned, we recognize the one-time termination fee of Berkley Shopping Center, which added $0.10 of AFFO during the second quarter when compared to the same period prior year. Disregarding this termination fee, same-store NOI decreased and reduced AFFO by $0.094 per share when compared to the previous quarter last year. The decrease in same-store NOI can be attributed to the loss of revenue associated with the recent SEG recaptures interim adjustments and other vacancies that have yet to be backfilled or open for operation. We expect some of this decrease to be offset in future quarters as the following anchored tenants become fully operational and commence rent; Planet Fitness at Myrtle Park; Harbor Freight at Fort Howard; Aspire Fitness at Perimeter; Tractor Supply at Chesapeake Square; and the recent Piggly Wiggly backfilled our Ladson Crossing and Mullins South Park, which were two of the four previously disclosed SEG recaptures. As of June 30, 2018, our core portfolio is 90.1% leased and 89.3% occupied. The decrease in the percent occupied from the first quarter of this year is primarily related to the two remaining SEG recaptures in the vacated Farm Fresh anchor at Berkley Shopping Center. The average rental rate for our portfolio is $9.62 per square foot with an average lease term of over 4.34 years. During the quarter, we executed 21 new leases totaling over 131,000 square feet at a weighted average rate of $8.46 per square foot. Exclusive of any lease modifications associated with Southeastern Grocers, which went into effect following the approval of the modified leases in the bankruptcy proceedings, we executed on 36 lease renewals totaling 169,000 square feet at a weighted average increase of $0.85 per square foot, an increase of 9.17% over the prior rates. Rent spreads are calculated based on the average rate per square foot for the reviewed or new lease term. We ended the quarter with $4.1 million of cash at June 30, 2018. Total debt was $376.6 million at June 30th, including debt associated with assets held for sale. During the quarter, we reduced our debt obligations by $2.5 million when compared to March 31 2018. Further, we ended the quarter with a weighted average interest rate of 4.75% and 4.66 years weighted average term remaining, including debt associated with assets held for sale. Additional detail on the second quarter financing activities can be found on the press release and supplemental package we filed yesterday afternoon. With that, we will be happy to take your questions.

[Dave Kelly:]

Thank you, Operator. While I am not yet satisfied with the where we are today, I am pleased with the progress we have made in a very short period of time. We'll continue to work in the fundamentals of growing revenues by maximizing the portfolio, reinvesting in our properties and our tenants, reducing debt, returning value to the common shareholders. Thank you again for joining us this morning. And have a good day.

[Operator:]

This concludes today's call. You may now disconnect.