Wheeler Real Estate Investment Trust, Inc.
Q4 2017 Earnings Call Transcript

Published: 7 Mar 2018

[Operator:]

Greetings, ladies and gentlemen, and welcome to the Wheeler 2017 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] 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 yesterday's press release and can be obtained from the Investor Relations section of Wheeler's website at www.whlr.us. [Operator Instructions] I will now turn the conference call over to Mary Jensen, of IRRealized. Please go ahead.

[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 be making forward-looking statements. These forward-looking statements are based on the beliefs of assumption 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 could 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 March 7, 2018. Wheeler Real 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 on this call such as FFO and AFFO can be found in the company's quarterly reports which can also 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 and annual 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.

[Dave Kelly:]

Thank you, Mary, and thank you everyone for joining us today. Yesterday we reported our 2017 fourth quarter and year-end financial and operating results which Matt will discuss later in his remarks. Today I want to discuss what I think is weighing on everyone's minds. To start, there have been a lot of changes in the C-suite over the past month. Matt, Andy and I are pleased to be here today as a new leadership team it is here to ensure that our organization's interest are well aligned with the stakeholders' interest. A month ago we issued a letter to shareholders outlining our priorities and how we plan to do this. Going forward we intend to be more efficient with the reporting our business activities with metrics that are clear indicators of our progress. One question is often asked is, what does the future hold for Wheeler. To help to answer that question last week the Board of Directors retained KeyBanc Capital Markets to evaluate a full range of strategic alternatives. We believe this is a major first step to follow a path that generates the best possible value for our shareholders and an appropriate choice based on KeyBanc extensive knowledge of the real estate and REIT industry, as well as knowledge of our organization. KeyBanc will be instrumental in helping establish a clear strategy and a business model that will be our guidepost going forward. Although we believe we have a solid core portfolio, we know that there are few items pertaining to our portfolio that has been in question. First, both of you are familiar with the speculation surrounding Southeastern Grocers the parent company of our largest tenant BI-LO. We understand that there are significant questions surrounding these various news articles as soon as there is any definitive news from SEC, we will share our plan on mitigating any potential risk. At this time we cannot comment on speculation or roamers, however, it is routine and a normal course of business for us to be in ongoing discussions with our tenants particularly our largest tenant. For these discussions we seek to identify potential events that could impact our portfolio and find solutions. This is indicative or active portfolio of management and something Andy and his team are intently focused on. One thing we can say is that Southeastern Grocers is current - in their current ramp at this time and we continue to monitor that situation closely. Second, the acquisition of our JANAF property on January 18 and its future performance. JANAF Shopping Yard is an iconic shopping center located in North of Virginia with irreplaceable real estate that we acquired for $85.6 million at a 9.4 cap based on annualized in place rents at the time of acquisition. The property is performing as expected but our operation team is working diligently on incorporating it into our portfolio. Adding JANAF to our portfolio diversifies our tenant exposure and creates many future opportunities which we believe will deliver long-term value and immediate revenue generation. Following this acquisition, we’ll not be entering into any new acquisition transactions for the foreseeable future. Our focus will be maximizing our current portfolio and deleveraging our balance sheet. Part of this strategy will be the repurposing of certain associates within our acquisitions department to work in other corporate capacities. Third, we have management leasing agreement on some legacy assets that have been or in the process of being terminated. The development agreement associated with Sea Turtle marketplace project has been terminated and we have taken one-time $5.3 million impairment on notes receivable, as well as a $2.4 million reserve on receivables due from Sea Turtle third-party and other legacy assets. The company has no ownership position in any of these legacy assets and will not be providing any asset management or leasing services going forward. This is a one-time hit to total operating expenses for the quarter and a year. It's our intention to review and pursue all options available to us to recover these receivables. Matt will expand more on this in his remarks. On a positive note, corporate G&A was just under 31% lower for the fourth quarter and almost 26% lower for the full year. Going forward, we expect G&A expenses to remain flat to slightly up from last year. This increase is due to the reassignment of acquisition associates which will now be absorbed during the corporate overhead. Overall, non-property operating expenses should continue to trend downward. As we have discussed before we have been actively reducing non-property expenses and have identified approximately $900,000 on an annualized basis of potential savings across the company. Roughly, $300,000 of the savings will come from the closing of our Charleston, South Carolina regional office and a significant reductions in our conference, advertising and marketing expenses. However, we expect some onetime costs associated with KeyBanc strategic analysis which will be significantly outweighed by these expense savings. Now I’d like to discuss our balance sheet and the plan to reduce our debt burden. First, the Board of Directors has suspended the common dividend for the remainder of 2018 which makes available approximately $9 million of cash to operate the business and to pay down debt. As previously announced, we are actively marketing several land parcels in select non-core stabilized assets for sale. We're negotiating a $2.5 million offer for a 1.5 acre parcel Virginia Beach at a sales price significantly above the acquisition cost. In addition, KeyBanc is assisting us in further analyzing the portfolio and developing a disposition strategy for prudent asset sales. The company expects to utilize the proceeds from these sales to reduce debt. In addition, the company amended and restated the terms of its KeyBanc agreement in December. The new terms extend the maturity date of the revolving credit facility by two years with the borrower option for a third year, which increases the borrowing limit to $52.5 million from $50 million increase of the accordion from $150 million from $100 million. This in turn, extend the date by which the company must repay the current outstanding balance of $15.5 million to July 1, 2018. We remain confident in our ability to meet this timetable and we are making progress in refinancing the $6.9 million of debt with Revere that matures in April, 2018. We're equally optimistic about retiring this debt on/or before the maturity date. We believe these are significant steps in the right direction and we appreciate your support and patience. With that, I'll turn things over to Matt who will walk you through our fourth quarter financial highlights. Matt?

[Matt Reddy:]

Thanks Dave. Yesterday we reported AFFO of $0.18 per common share for the fourth quarter, falling short of our fourth quarter guidance range of $0.35 to $0.40. For the year, AFFO was $1.31 per share compared to our previously presented annual guidance range of $1.48 to $1.53. The primary driver in the shortfall is a $2.36 million reserve for related party receivables of which $1.47 million directly impacted AFFO as this portion of the reserve relates to amounts other than interest due at maturity which has historically been excluded from AFFO. The amounts reserved include charges due for asset management services, leasing commissions, development fees, and interest due on a $12 million note receivable. Excluding this onetime impact, AFFO for the fourth quarter and full year would have been $0.34 per diluted share and $1.47 per diluted share respectively, which is more in line with the low end of our guidance of $0.35 and $1.48 per diluted share. In addition to the onetime reserve taken against related party receivables, we realized that $5.3 million impairment during the quarter on a $12 million note receivable due from the Sea Turtle marketplace development in Hilton Head, South Carolina. These charges are calculated based on factors known by the company today including cost to complete the project, financing and other sources available to fund these costs, executed leases, projected NOI, and the anticipated fair value of the project at stabilization resulting from assumed cap rates. These factors can change in the future and could result in an increase or decrease of the impairment. Turning to our same store results, we generated 1.27% same-store NOI growth on a year-over-year basis. This increase was primarily driven by a 3.86% reduction in same-store operating expenses and offset by 0.20% loss of same store revenue, which can be attributed to reduce tenant reimbursements associated with lower property expenses, as well as revenue losses associated with Career Point at Perimeter Square which has been discussed in prior quarters. This is partially offset by positive leasing spreads. Moving onto our operating results. Our core portfolio is performing as expected at 90% occupied and 93% leased at December 31. During 2017, we executed 112 lease renewals totaling 570,461 square feet at a weighted-average increase of $0.29 per square foot and an increase of 3.1% over the prior rates. During the same period, we signed 55 new leases totaling 160,341 square feet with a weighted average rate of $11.87 per square foot. During the fourth quarter we renewed 22 leases for 77,498 square feet at a weighted-average increase of $0.41 over prior rates representing a 2.99% increase. In addition to these renewals, 11 new leases were signed for 41,906 square feet at an average rent per square foot of $8.89. These new leases were offset by 17 tenants that did not renew for a total square footage of 84,391 who were previously leasing space at an average ABR of $9.85 per square foot. Overall as of December 31, the portfolio had an ABR of $9.53 per square foot compared to $9.66 per square foot in the prior year. I would now like to discuss our new guidance policy. While we worked through this current transition and the KeyBanc strategic planning process, the company will not be issuing earnings guidance. However, in an effort to remain transparent, we will keep you apprised of major business activities as appropriate. To that end, I would like to discuss a few items which should help with your analysis of the company. First, as stated earlier our management and leasing agreements associated with the third party legacy assets that were outstanding at December 31, 2017 have been or are in the process of being terminated. Further, the agreement with Sea Turtle Development has been terminated. Therefore, we are not assuming any meaningful revenue resulting from third-party asset management, leasing or development services in 2018. Additionally, we will not recognize interest income from the Sea Turtle net going forward as a result of putting the $12 million net receivable on a non-accrual basis. Second, the time and resources spent providing property management and leasing services to these legacy assets would now be transitioned to our core portfolio and maximizing the value in our recent chain of acquisition. And third, in an effort to put this in perspective the related party assets generated approximately $1.6 million of 2017 AFFO comprised of asset management, leasing commissions, development services and the 8% portion of interest on the note receivable. Net reserves for these amounts expense during the year. This represents about $0.17 of 2017 AFFO that is not expected to occur in 2018. However, our recently acquired Virginia property should generate revenue to partially offset revenues lost from these prior sources. Finally, as Dave mentioned we're working daily to ensure we are first meeting our obligations to pay down and/or refinance our near-term debt obligations including KeyBanc and Revere. Additionally, we are working with KeyBanc to identify strategies to strengthen the balance sheet through prudent deleveraging. With that, we will be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question today comes from Craig Kucera of B. Riley. Please go ahead.

[Craig Kucera:]

I think the market was expecting some sort of a dividend cut given the noise around Southeastern Grocers' but as the Board consider you know the spending it versus cutting it maybe to something comparable to peers or even more significant cuts, so you aren't forcing a lot of change from the various funds, how was that considered?

[Dave Kelly:]

Certainly that was considered, the Board did quite a bit of deliberation on the decision but the choice was - the choice we made because we just dismount and we saw our cash position was going year-over-year. We just felt the proceeds of the savings will get from the dividend cut was better served helping us delever the balance sheet. So it real was as simple as that.

[Craig Kucera:]

I had other questions about Sea Turtle but you did cover them in your commentary. But I feel like in the past you said you thought you'd be able to strip out some G&A. It sounds like, you're going to be reallocating some of those folks to corporate G&A and we should be looking for a flattish to modestly increase G&A for this year?

[Dave Kelly:]

Well as Matt pointed out, we're going be - typically in the past we have been able to capitalize the acquisitions associates towards those acquisitions. Since we will not be doing acquisitions going forward, we're going to roll those associates into different roles within the company and you and they are going to then fall into these G&A budget. But the overall operating expenses should still be trending downward based on the savings that we outlined in the script, closure of our Charleston office, cut back on our advertising, our ICSC conventions those kind of discretionary expenses so that the overall savings to the bottom line number should be significant while G&A will probably stay relatively flat.

[Craig Kucera:]

I know you said you can't formally comment on Southeastern Grocers, I feel like in the past you said that you had hoped to at least somewhat encapsulate what the impact might be. Can you give us a broad sense at this point of what you might think the impact would be to cash flow as we stand today and you're looking at where you underwrote those properties to a large extent several years ago?

[Dave Kelly:]

At this point because Southeastern Grocers have not filed anything, it just wouldn't be appropriate for us to speculate on what they're going to do with any announcement. So I can't anticipate or I can't speculate on what they may do. But as soon as they make any kind of announcement, we are prepared to then discuss what our process is going to be going forward. Of course we have been in discussions with, as kind of normal course of business. We’re in discussions with all our tenant, especially BI-LO being our largest. So we have had several conversations with them but it just isn't appropriate this time until they make their announcement, it is not really appropriate for us to speculate what that announcement might be.

[Craig Kucera:]

And can you give us a broad brush picture of what strategic alternatives the firm is considering at this point in time?

[Dave Kelly:]

Well, the point of us bringing KeyBanc was we wanted to take a robust strategic alternate review for all the total options. So at that point all options are on the table. It is inappropriate right now for us to comment on what options are being reviewed because frankly all of them are being reviewed. There's no such timeframe on this, but it is a full comprehensive review and KeyBanc is really just kind of kicking into this right now. So the process is pretty early.

[Operator:]

Our next question is from Steve Manaker of Compass Point. Please go ahead.

[Steve Manaker:]

Quick question on the review alone, just kind of wondering from a liquidity standpoint, how you will be able to repay that? And also from the - the next question is going to be, maybe just more about the disposition strategy, do you have any assets teed up, how fast do you think you can sell some of these assets? Thanks.

[Dave Kelly:]

On the review line, we have a number of assets that we can refinance currently that will allow us to pay down the Revere line and we are significantly along in discussions to do that. I can't right now disclose exactly who it is that’s going to be stepping into that position. But we have been deeply into discussions on that one and we're confident we'll have - that loan paid off prior to maturity on April 30. With regard to the disposition strategy, again kind of back to my answer on KeyBanc's involvement, they are just starting into this review and part of their review is going to be looking at a balanced disposition strategy that may encompass some currently NOI producing properties, non-core properties. But we've also put on the market our land holdings right now and we're negotiating an offer on 1.5 acre parcel here in Virginia Beach right now. So those non income producing properties will be moving immediately on. And then we'll be working with KeyBanc to kind of determine what that decision and strategy is going to look like going forward on the income producing assets.

[Steve Manaker:]

Quick follow up on the Revere loan, just when you re-file some of those loans, are you going to be - will they be first mortgages or second mortgages?

[Dave Kelly:]

Those will be first mortgages.

[Operator:]

Your next question is from James Williams of Newbridge Securities. Please go ahead.

[James Williams:]

I got a question for you, a minute ago you stated that cutting a dividend was just as simple as that, let me ask some - I don’t see that being just as simple as that because most of your investors on the street and a lot of them are retired people or people that look for income and that's the only reason they buy it. So since you cut the dividend and if I look at the numbers here you say the AFFO will be still be somewhere around the neighborhood of $1.30 again, if you put in the new property and take out what you’re cutting out on the management side. Why in the world wouldn’t you at least leave something out there on the dividend so income people could still want to buy your investment on the street because people buy REITs retail investors because they get a dividend. So if there is a no dividend on it, why in the world would they want to buy it I guess you could paint this picture of a value play but that might not last when all of sudden Southeastern Grocers comes out and says, okay, we’ve taken out three or four of your stores. Once again the things are going to get crushed again. What's your thought process on that not leaving at least something for income people that buy it?

[Dave Kelly:]

Well the thing we had to do and tell was basically we think the long-term value of the company is better enhanced by correcting - by deleveraging our balance sheet, and this gives us the opportunity to generate the liquidity we need to continue running the companies operated as a real estate company would operate, and then give us the opportunity to further delever which using funds not only from the dividend cut but also from asset sales. So, we’re looking at the longer term picture of - we think that is the longer term strategy is better for the long-term holders of the stock then the immediate dividend proceeds.

[James Williams:]

So basically - and correct if I’m wrong, we’re basically in such crisis mode right now I guess which I didn't believe when we were buying this over the last year we were in on your other reports so we’re in such dire crisis mode right now, we have to cut the dividend a 100% just to be able to meet these obligations that are coming up is that basically what you are saying?

[Dave Kelly:]

We have suspended the dividend. For the remainder of the year we will review it again at the beginning of 2019 but we are not in crisis mode. We think this is a long-term prudent decision that will again allow us to operate the company as a ongoing real estate company used to operate. And then also allow us to use assets sales and savings from the dividend to be able to delever the company which will then provide us opportunities to review the dividend at the end of the year.

[James Williams:]

So that's at the point - one other question real quick it says here, your borrowing capacity was increased from $50 million to $52.5 million. How much have you borrowed off that line right now?

[Dave Kelly:]

Right now we have a balance of $68 million and as we stated – we're bringing that balance down by $15.5 million by July 1 of this year and we're in the process of doing that. So, we got $68 million balance and we'll bring that down to $52.5 million by July 1.

[Operator:]

That's all the time we have for questions today. I’ll turn the call back over to Mr. Kelly for closing remarks.

[Dave Kelly:]

Okay, thank you very much, and I want to thank every one of the investors that we have reached out over the past 30 days. We have a great deal of work ahead of us and with us sole focus on restoring shareholder value and this won’t be an overnight correction but a disciplined and steady process with as much transparency as possible. So thank you for joining us today and hope you have a great week.

[Operator:]

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