Wheeler Real Estate Investment Trust, Inc.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Greetings, and welcome to Wheeler Real Estate Investment Trust 2017 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to turn the conference over to your host Laura Nguyen. Thank you. You may begin.

[Laura Nguyen:]

Good morning, everyone, and thank you for joining us. Today we will hear from Jon Wheeler, Chairman and CEO, Wheeler Real Estate Investment Trust; and Wilkes Graham, Chief Financial Officer. Following management’s discussion, there will be a question-and-answer session, which is open to all participants on the call. On today’s call, management’s prepared remarks and answers to questions may contain certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For a more detailed discussion related to these risks and uncertainties, we encourage listeners to review the Company’s most recent filings with the SEC. As a reminder, forward-looking statements represent management’s view only as of the date of this call. Wheeler Real Estate Investment Trust assumes no obligations to update any forward-looking statements in the future. Definitions and reconciliations of non-GAAP measures are included in the Company’s quarterly supplemental package, which is available through the Company’s website. At this time, I’d now like to turn the call over to Jon Wheeler, Chief Executive Officer and Chairman of Wheeler Real Estate Investment Trust. Jon, please go ahead.

[Jon Wheeler:]

Thank you, Laura. Good morning, everyone. And welcome to the 2017 second quarter earnings call for Wheeler Real Estate Investment Trust. I’ll begin today's call with an overview of the results from our portfolio operations and an update on the three previously announced anchor of closure. I'll then follow-up with the brief update on the progress of the Sea Turtle Marketplace for redevelopment, which is turned out to be not only a beautiful project, but a significant fee income provider to WHLR. I will also touch on the recent 13D filings, before I turn the call over to Wilkes, who will cover our quarterly financial results, update third quarter and full year 2017 guidance, and discuss the balance sheet and our plans with regards to our KeyBank Line of Credit. I'll then close the few comments regarding our strategy for the second half of the year, and also briefly touch on the retail environment and my thoughts on how our priorities will be affected by the changes taking place in the industry. Then we will take Q&A. From our earnings release last night, you saw that, we reported a 32.8% increase in total revenues year-over-year for continuing operations, and NOI increase of approximately 27% year-over-year. We continue to see opportunities across the portfolio to increase NOI through new leasing, leasing renewals, backfills on vacancies and through specialty and ancillary income, which I'll touch more on later in the call. Our same-store NOI results were disappointing at a negative 4.9% on a GAAP basis, and negative 4.5% on a cash basis. Our decrease in same-store NOI was mainly driven by the closure of Career Point, which we were able to successfully backfill aspire fitness, but where rent will not commence until late 2017. Similarly, we’re reported for the first time ever, a decrease of negative 2.45% in bread spreads, which was driven by a reduction in rent from the 23,000 square foot Office Max, located at Village of Martinsville that we acquired in the fourth quarter of 2016. At the time of acquisition, we were aware of that post reductions and underwrote rents at that time of acquisition at $0.50 below what we actually executed, that we excuse Office Max renewal. Rents spreads were a positive 1.61% over prior rates for the balance of the portfolio. Turning to leasing operations, I want to reiterate that, we’re focused on increasing the quality of our cash flows via the other replacement third-party fees with NOI from new leasing, as well as protecting our cash flows via prudent backfills of tenant vacancies. At the beginning of the year, our leasing team was tasked with very strategic leasing goals for the portfolio to maximize rents and increase overall occupancy. We came into 2017 ready to execute on those goals. But during the second quarter, we learned about three anchor closures on top of the already break in Career space. Our team had to shift its focus to anchor backfills in order to protect cash flows. This shift in focus was a material driver behind the change in our 2017 guidance in May, as a substantial amount of target NOI for new leasing was delayed until 2018, as a result of our leasing team increased focus on backfills, as well as an incrementally together retail leasing environment overall. We have a fantastic team is evidence by the Career Point backfill within 75 days, at a higher rent per square foot than the prior rate and the current progress the team has made of the anchor closure announced process 60 to 90 days ago. Addressing these three announced closures, I will now discuss some positive news regarding our Bi-Lo vacancies. We are currently in active negotiations with multiple retailers for both vacancies located at shops at Myrtle Park and Cypress Shopping Center. While we cannot divulge this, the specifics surrounding negotiations or the users, we remain optimistic that we'll be able to have a quality tenant, an appropriate use of the space – for the space for the time Bi-Lo’s natural lease expirations occur both in spring of 2018. In addition, the third announced closure was Martin’s, which vacated the space last week at our Brook Run property located in Richmond, Virginia. The lease term runs until August 2020, and we're actively marking up to the potential backfill tenants. Our leasing team is laser focused on the backfills these anchor spaces and the remaining of approximately 157,000 square feet that expires during the remainder of 2017. Please note, we’re not naive to think there will not be any other tenants in our portfolio that face hardships, as more retailers announced store closures, more retailers declared bankruptcy and better and lower pricing is offered via different channels of distribution. That being said, we are currently negotiations since with two separate tenants with regard to their past fee rents, some of which we have record is bad debt expense this quarter. Wilkes will discuss in more detail, but I feel confident there will be a positive resolution for both the tenants and the company. Wilkes will cover in detail our expenses this quarter, relative to the miss in the first quarter. But overall expenses of both the property and corporate level came under or in line with budget. We will continue to maintain strict in adherence to our cost containment strategy established in 2016, and improve upon operating efficiencies of both the property and corporate levels. Our fee income stream via third-party leasing and management services and interest income from the $12 million loan to the Sea Turtle Marketplace redevelopment project have been significant sources of income for us. Development fees from Sea Turtle Marketplace project remain as budgeted and space is now being delivered to the tenants. We are still on track to have the project fully stabilized in 2018 and will continue to receive the leasing commissions, development and management fees, and to the sale or refinance the center. Our own balance sheet redevelopment, the Columbia Fire House project is progressing nicely with construction commencing about six weeks ago. The first floor was totaled 14,000 square feet of the 21,000 square foot project is 100% leased and the entire second floor is currently begin to be negotiated with a complementary fill space user. The State newspaper recently covered the project and never see numerous company messages about the excitement of the repurposed building. There are several other specialty in ancillary development opportunities within the portfolio that we have identified and we look to finance those projects either from current lender escrows or new construction loans. Other fee income is derived from Non-REIT owned manage assets, some of which of the managed by the company holds in interest. We expect that the substance entire portion of these fees that come from assets and which management has an interest to wind down this year, as the assets are sold. We will continue to manage non-owned assets and our goal is to replace any loss fee income with NOI from new leasing in 2018. Additionally, we remain optimistic about the underlying real estate of our centers and our confident of business strategy of acquiring well-located dominant retail centers and secondary and tertiary markets. These markets are highly insulated from e-commerce exposure and the centers provide necessary services for the surrounding community. I like to take a moment to address the 13D’s that were filed in the past two months by two of our larger shareholders. First and most importantly both the company and the board are dedicated to do what is in the best interest of the shareholders. Any response to these filings would come from our board and while we cannot speculate on activities within our board. Management continues to work hard to maximize value via protecting our cash flows and de-risking our balance sheet as much as possible. I’ll now turn the call over to Wilkes for his review and update on guidance and then we'll close the call with few general comments and our outlook for the second half of the year. Wilkes?

[Wilkes Graham:]

Thank you, Jon and good morning everyone. I’ll begin by touching on some of the financial highlights of the second quarter of 2017. I’ll then address guidance followed by our review of our balance sheet. We reported second quarter 2017 AFFO per share of $0.40, which came in the low end our guidance of $0.40 to $0.42 for the second quarter. Second quarter results also compared to our newly established $0.34 per share quarterly dividend rate which represents an 85% AFFO payout ratio for the quarter. Following the first quarter’s higher than expected expenses, that both the property and corporate level, we were determined to rectify budget variance as going forward. To that end, we can announce that retail to our internal budgets for the second quarter, property operating expenses were more than $0.01 under – excuse men, more than $0.01 per share under budget, while total corporate G&A came within $5,000 of our overall budget for the quarter. Now I'd like to highlight the contributing factors to our second quarter AFFO, which can be divided in the five categories

[Jon Wheeler:]

Thank you, Wilkes. I'll close the call with a few general comments and we'll move to question-and-answers. We remain steadfast, protecting current cash flows to this challenging operating environment. Just as the retailers are adapting, so is our real estate, as we entertain new uses for our centers, where growth for competition has increased. I'm extremely pleased with the team's efforts to backfill anchor spaces and increase the tenant quality for the portfolio. We are growing the portfolio internally through our parcel developments and taken advantage of the cap rate compression that still exists. When you can sell asset in the secondary tertiary market for a 6% cap or less, it is solidifies our business and acquisition strategies are sound. Retail will constantly evolve as consumers are offered more convenience, better or lower pricing and competition increases amongst retailers. Our retailer will adapt as the consumer trends are established. As evidenced by the grocers in our properties, we're 28% now offer online ordering and the point of sale is still at the physical store, bricks and mortar stores are adapting, and we're adapting with them. We believe that real estate, not any specific retailer will ultimately, prevail. Moving forward, we will continue to look for ways to increase shareholder value to improve operating metrics, reducing the risk and leverage the balance sheet and smarter growth through our owned portfolio. With that, I would like to thank you all for your time, and operator, I would like to turn it over to you for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from Craig Kucera with FBR. Please proceed with your question.

[Craig Kucera:]

Hi, good morning, guys. Can you asses with what the total CapEx budgeted to Columbia Fire Station as you complete that project?

[Jon Wheeler:]

See – I don't have that right in front of me, the total. Wilkes will pull that up real quick. Hold on for one second, please.

[Craig Kucera:]

That's okay. I guess to ask another one, while you take a look at it. With the liquidity with some constraints there, with a line coming down and you guys having raised the money or refinance things in the CMBS market or otherwise, are there other assets in the portfolio that maybe aren't currently cash flowing that you might look to monetize?

[Jon Wheeler:]

Yes. I think a very good question, and we're always focused on the land parcels. Very similar again, going back to Columbia Fire House giving that into our redevelopment stages but there are eight land parcels that we're constantly focusing on either disposition or ground lease, or build to suits, so that will be the first and foremost.

[Craig Kucera:]

Got it. And have you had any positive conversations there, any real movement there?

[Jon Wheeler:]

The answer is yes. It's very similar to anything else that you can imagine from the standpoint of activities going back and forth, remember, on the land parcel, we sold the one track that was a former Steak n' Shake at Macon, Georgia for a very, very strong number, north of $2 million, for a site that was 1.6 acres and we close on that in 20 days. And the other one was Chesapeake Square that we refer to as Carolina place, there was a 2.14 acre parcel up there on the Eastern shore, that we recently sold as well. And going back Craig, to we pulled up the numbers here, the total development costs about $5.9 million for Columbia Fire House.

[Craig Kucera:]

Okay, great. What's in the guidance? Is there any events or any change related to the two tenants that you didn't disclose, that are currently past-due, is that sort of assuming things continue with AR or recovery or some other? Something Wilkes?

[Wilkes Graham:]

I mentioned we sort of built-in, I think it’s difficult to talk about too many details on it, as we are in discussions with them. But we built-in various scenarios with them, I don't think, I can disclose a lot more than that.

[Jon Wheeler:]

But I can say, Craig, this is Jon. That we’re in good active conversations with them and hopefully, it will be a good resolution centre.

[Craig Kucera:]

Okay. That’s it from me, thank you.

[Jon Wheeler:]

Thanks Craig.

[Operator:]

Our next question comes from Brian Dobson with Nomura. Please proceed with your question.

[Brian Dobson:]

Hi, guys. Do you think just touching again on potential dispositions? Could you talk about what you're seeing out there in terms of demand for properties that you have marketed recently? And how that may be hence changed over the past, call it six months to a year. Are you still seeing a positive demand environment for these assets?

[Jon Wheeler:]

Well. From the WHLR standpoint, just the two that we just referenced the Steak n' Shake and the raw land up on the Eastern shore, remember we had two dispositions in West Virginia in the past as well, with Outback and Ruby Tuesday's that were below six caps. So the answer is yes, and fortunately the 1031 market that was dormant, back in 2008, 2009, and 2010 is very active now. And of course, coupled with where our interest rates are today, the answer is yes. But other than those four, which were two operating restaurants, one vacant restaurant and then one vacant parcel, those have only dispositions that we've had recently here now. It's fair to say, specially down in Macon, Georgia, Rivergate, there could be other dispositions there, as well as we go down and finish out the year.

[Brian Dobson:]

Right. If the public-private I guess, cap rate valuation GAAP persists, would you look to monetize additional assets?

[Jon Wheeler:]

We could, and I think that will be case-by-case basis. Again, we're here to create value and at the best value is to sell an asset based upon whether it's selling it to a private owner or selling to a 1031 situation with a group of doctors whomever. The answer is always yes. As a matter of fact, as we referenced with the fee income, third-party related assets, that are non-WHLR assets, some of the assets that we have sold are just add to 1031 buyers, thus the reference for reducing third-party fee income at WHLR.

[Brian Dobson:]

All right. Great, thank you.

[Jon Wheeler:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Michael Finkelberg with Snow Park. Please proceed with your question.

[Unidentified Analyst:]

Hi, guys. Congrats on the coverage this quarter and great to see in your progress. Obviously, KeyBank downsizing costs of liquid that little bit. The CMBS sounds like a great plan, obviously, it's been kind of choppy in the CMBS for this year. I guess what the contingency plan, if CMBS strategy doesn't work and what's the capacity to issue more of the series B to potentially raise liquidity, if that kind of comes to head in October? Thank you.

[Jon Wheeler:]

Sure. And that was Jeff by the way, not Michael. Good morning Jeff.

[Unidentified Analyst:]

Good morning. Thanks for taking the call. A - Jon Wheeler Yes. So I think again, it's left right center, and you're constantly going left right center, not reacting, but addressing what the changes are in the market. Yes, the CMBS has been, could be spongy and up-and-down with rates and so forth and we see rates change every as you can imagine, every 30 to 60 days increments to amount of changes. Let's not forget the on-book financing or the national regional banks or community banks that we do business with. They’re rates our phenomenal. So I think absence of CMBS, we can still be at long-term money to the life companies, that quite frankly can be just as good or more competitive in a better pricing than the CMBS. So I think as you normally look at it 360, Jeff. And I think also, when you have a debt maturity, you have to know when you look at the refinancing, which you have to look, it also had – you’ve maximize the business plan, have you increased the rents as best as you can, have you built up that center to 100% and in essence if its 100% full quite frankly, you’re below market because you can't push rates, that would tell you it's time to sell the asset. So I think it's a little bit of left right center and based upon each situation, you can have different criteria that is implemented at that point in time on a particular asset.

[Wilkes Graham:]

Jeff, I’ll just add that. We can put up to 65% LTV of individual asset on the Key line. Our strategy has been as we buy assets, we put some of them online and we do ultimately see to as we improve the quality of assets to move from the line in the more permanent financing, whether that’s bank or CMBS. This was part of our strategy, get the Key line back below $50 million. And the unfunded line costs on that on $25 million would be – between $0.005 and $0.01 a share, if we want to reduce the capacity, so that's an agreement we have with Key below $50 million. And as we said, we expect, once we have successfully refinanced these assets off the line, to immediately begin conversations with Key, to extend the line past the maturity next year and discuss what capacity of the line is at that time.

[Unidentified Analyst:]

So that we shouldn't read into this as some kind of points apart from the company, this was more of a one-off point to reduced this particular loan and kind of put a short fuse on it just because you guys have a strategy that paid of us. Is that the right way to think about this?

[Jon Wheeler:]

I think that's a fair statement. And that's very concise and true, yes.

[Unidentified Analyst:]

All right. Great, thanks again, guys. And congrats on the coverage this quarter.

[Jon Wheeler:]

Thanks Jeff.

[Unidentified Analyst:]

We talk more offline. Thanks, guys.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Jon Wheeler for closing comments.

[Jon Wheeler:]

Thank you, sir. On behalf of the team here at Wheeler, I'd like to thank all of those that dialed in for the call and we look forward to talking to you again in November when we report third quarter 2017 results. Have a nice day. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.