Wheeler Real Estate Investment Trust, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Greetings, and welcome to the Wheeler Real Estate Investment Trust First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Nguyen, Director of Capital Markets for Wheeler. Please go ahead, Ms. Nguyen.

[Laura Nguyen:]

Good morning, everyone, and thank you for joining us. On the call today will be Jon Wheeler, Chairman and CEO of 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 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 information 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 Web site. With that, I'd now like to turn the call over to Jon Wheeler, Chief Executive Officer and Chairman of Wheeler Real Estate Investment Trust. Please go ahead, Jon.

[Jon Wheeler:]

Thank you, Laura. Good morning, everyone, and welcome to the 2016 first quarter earnings call for Wheeler Real Estate Investment Trust. The Company, now in its fourth year in the public markets, continues to deliver long-term profitability to shareholders as we execute on our strategy of acquiring defensive, stable, necessity-based, mainly grocery-anchored retail shopping centers in the secondary and tertiary markets. I'm pleased with our first quarter financial results, and we'll review those and other highlights on our call today. As we've stated previously, our primary focus remains to cover our $0.21 per share dividend with AFFO starting in the second half of 2016. We have made great strides in attaining this goal by maintaining a strict adherence and execution of cost containment initiatives, such as reducing the Company's cash, general, and administrative expenses, and lowering our overall cost of capital through debt refinancing and prudent capital raises, acquiring accretive assets in high-growth secondary and tertiary markets, leveraging the strengths and expertise of our leasing and property management teams, monetizing non-core assets, and lastly, strategically aligning our management team for continued growth while efficiently growing operations internally. At this time, I'd like to highlight our acquisition, the A-C portfolio, our progress towards the dividend, and some highlights for the quarter before turning the call over to Wilkes for an overall review of the financials. Subsequent to the quarter end, we completed the acquisition of the A-C portfolio consisting of 14 properties located in South Carolina and Georgia. The portfolio, purchased off-market, consists of 603,142 gross leasable square feet, with the gross [indiscernible] of properties located in the progressive, secondary, and tertiary markets. With a total combined occupancy of 92%, this portfolio fits our acquisition criteria perfectly, and will allow us to create value through leasing opportunities. Total acquisition value of the 14 properties was approximately $71 million, or $117.72 per leasable square foot, which we consider equal to 50% of replacement cost in our markets. We have already identified additional NOI in the portfolio post-closing relative to our underwriting, and can now say that our expected first year cap rate on the acquisition is 8.85%, up from 8.77% previously. Additionally, we have the opportunity for a phase two expansion of approximately 6,200 square feet at the Folly Road Crossing Shopping Center, anchored by Harris Teeter, located in Charleston, South Carolina. This is just another good example of generating unscheduled specialty and ancillary income in our parking fields that will increase NOI and shareholder value. Following our successful acquisition of this portfolio, we are closer than ever to dividend coverage, but we also recognize that we are cash-constrained, and incentivized by our lender covenants to find de-levering capital as soon as possible. Wilkes will discuss our balance sheet and capital needs later in this call, but I will say that, while we are pleased with the recent positive momentum in our stock price, we continue to view our stock as undervalued relative to both our earnings potential and NAV, and are not interested in raising common equity at current levels. At a minimum, we believe we can raise cash in the near-term via dispositions of select non-core income producing assets, outparcels, and development parcels. In 2015, we listed eight of our freestanding assets for sale, and have seen benefits from the cap rate compression and the net leased space. To date, we have sold three of those assets for an average of 7.2% cap rate versus the purchase average cap rate of 7.7%, and have another three under contract for sale at an average of 5.96% cap rate versus the purchase cap rate average of 7.9%. Moving to our operations, our portfolio fundamentals remain strong. And while same-store results were muted given an already high 95.1% occupancy rate in the 1.7 million square feet for same-store portfolio, we continue to see strong leasing momentum across the balance of the portfolio. Our leasing team remains active, and during the quarter executed 10 renewals that totaled over 32,000 square feet at a weighted average increase of $0.93 per square foot, almost a 7.4% increase over prior year rates. We signed 10 new leases during the three months ended March 31, 2016, totaling approximately 18,900 square feet at a weighted average of $14.03 per square foot. We continue to lease up and strategically position retailers in our centers, take into consideration co-tenancy and cross-shopping trends, and the overall traffic flow to drive sales and profitability for our tenants, who we consider our partners. Our portfolio is geographically and credit tenant diverse and we have not been subject to, nor do we feel that we will be, affected by some of the recently announced foreclosures that retailers are facing due to the shift in patron shopping habits. While we are seeing new groceries in our more markets, others start to enter new territory geographically, and the potential merger of Ahold and Delhaize, we feel confident that the grocery tenants in our centers are the number one and number two store in their domain and are not subject to competition or closure. Last quarter we discussed our focus on lowering our G&A run rate in 2016 as a reminder, excluding acquisition and capital costs, we spent approximately $7 million in 2015 on cash G&A, of which over a little $1 million was nonrecurring in nature. On our last conference call, we guided to the second half of 2016 cash G&A run rate of less than 5 million. First quarter 2016 recurring cash G&A, excluding acquisition and capital costs, all of which were related to the AC portfolio and inclusive of hiring Wilkes Graham as our CFO, totaled 1.4 million, or 5.6 million on an annualized basis. Subject to quarter end, we closed the AC portfolio, which has allowed us to move approximately $400,000 of our G&A over to our property portfolio in the form of property and asset management fees, which are partly reimbursed by our tenants. Further, we have remained steadfast in our approach to maximize our human capital, and with additional cost containment initiatives announced earlier this week, we have now reduced compensation and benefits by over $800,000 since mid January and on track for a cash G&A run rate in the second half of 2016 of less than 4.5 million. One of these initiatives was eliminating the Chief Operating Officer position, and we announced that our current COO, Steven Belote, will be leaving the company on July 31 to pursue other interests. Steven has been an invaluable associate for us since he joined us five years ago prior to our IPO, and is a dear friend, and we wish him all the best in his future endeavors. I will now turn the call over to Wilkes Graham, our Chief Financial Officer, for a review of our financials for the first quarter. Wilkes?

[Wilkes Graham:]

Thank you, Jon, and good morning, everyone. I will begin by reviewing our financial and operational results for the first quarter, followed by a balance sheet update and a recap of our AFFO guidance for the second quarter of 2016. Total revenues from continuing operations for the three month period ending March 31, 2016 increased 77% to $9.1 million when compared to the same quarter last year. Same-store property revenues accounted for $4.7 million, while property revenues from new stores, which consists of the 14 shopping centers acquired since March 31, 2015, contributed 46%, or approximately $4 million of our total property revenues for the period. Property net operating income, or NOI, from continuing operations for the first quarter increased to $6 million compared to NOI of $3.3 million for the same quarter last year. Same-stores contributed $3.1 million to the 2016 first quarter NOI, while new stores generated 2.9 million. Same-store NOI year-over-year growth of 0.7% on a GAAP basis and 2% on a cash basis was driven by flat occupancy of 95.1% and 2.3% increases in weighted average rents. As Jon mentioned, we were pleased with our occupancy levels in the same-store portfolio, and continue to see upside potential in both occupancy and rental rates among the two million square feet we've acquired since the beginning of last year. FFO available to common shareholders and common unit holders for the first quarter of 2016 was $1.3 million, or $0.02 per share, or $0.07 per share on an annualized basis, which compares to a loss of $0.08 per share, or a loss of $0.31 per share on an annualized basis in the first quarter of 2015. Adjusted funds from operations available to common shareholders and common unit holders, or AFFO, for the first quarter was $1.9 million, or $0.03 per common share and common unit, which equates to $0.11 per share on an annualized basis. This compares to a loss of $928,000 or a loss of $0.08 per share over the first quarter of 2015, which equates to a loss of $0.33 per share on an annualized basis. This also compares to our guidance for the first quarter of $0.11 to $0.12 in annualized AFFO. I'll now move to the company's balance sheet as of March 31, 2016. The company's net investment assets, including assets held for sale, totaled $237.5 million, with cash and cash equivalents of $7.6 million. Total assets were approximately 301.9 million for the first quarter of 2016 as compared to 309 million at December 31, 2015. Total outstanding debt at March 31, 2016, including debt related to assets held for sale, was $185 million and remains relatively flat when compared to December 31, 2015. The weighted average interest rate on fixed rate debt at March 31, 2016 was 4.7%, with a weighted average term of approximately 7.4 years. The only material financing transactions we executed during the quarter were the drawdown of our $3 million line of credit with VantageSouth at 4.25% interest, and the payoff of $2.16 million of our 9% senior notes, leaving a balance of $3 million. Earlier this week, we amended the remaining $3 million notes to give both the investor the option to convert up to the 1.4 million shares that they can convert to, and to give us the option to prepay any non-converted portion of the note. These senior notes represent our highest cost of debt on our balance sheet, and we are pleased to have the option to pay these notes off should any capital become available to us. Our debt to gross asset value, which prior to the acquisition of the A-C portfolio needed to remain under KeyBanc’s leverage covenant of 65%, was 61.6% at March 31, 2016. Subsequent to quarter-end, we secured a new $8 million line of credit with Revere at 8% interest. The Revere line was secured in order to replace the $6.16 million of our 9% senior notes that we've paid down since December 2015. The Revere line is principally collateralized by our land parcels, as well as six million warrants that are exercisable only in the case of default. Now I'll walk through the steps we took to finance the A-C portfolio, as well as our pro forma leverage ratio. To fund the $71 million portfolio, including all relevant costs, we issued 888,889 OP units at an 83% premium to the stock price on April 12th, or $2.25 a share, to fund $2 million of the purchase price, and we used $12 million of cash. Finally, we utilized our longstanding relationship with KeyBanc to finance 85% of the value of the A-C portfolio. As a reminder, we ended 2015 with, and continue to have $6.8 million sitting on our $45 million KeyBanc line at 65% LTV and LIBOR plus 250 basis points, collateralized by Chesapeake Square and Lumber River. Recall that we have an accordion of up to $100 million with this facility. With the A-C transaction, KeyBanc agreed to establish a new $60.35 million facility within our overall $100 million accordion at LIBOR plus 500 basis points that is collateralized by 85% of the value of the A-C portfolio. KeyBanc also agreed to increase our debt to gross asset value covenant to 70% until March 31, 2017 before it reverts back to 65%, and they agreed to lower our minimum cash requirement to $2.5 million from $5 million for the same timeframe. Finally, we are required within the next 90 days to perm out the current $6.8 million balance on the original line to lower the balance on this new facility to below $49.95 million by March 31, 2017, and to lower our overall debt to gross asset value ratio, which currently stands at approximately 68%, to below 65% by March 31, 2017. Once these three events are executed, the balance of the new facility will move back over to the original line at LIBOR plus 250. Clearly, with the KeyBanc funding structure in place, we are incentivized to execute on these de-levering mechanisms, and we are currently evaluating various capital sources. We will reiterate again that we have no desire or intention to raise common equity at these levels, and we remain committed to lowering our overall cost of capital as we move forward. Now, let me discuss our second quarter 2016 AFFO guidance. Now, as we previously disclosed, when we closed the A-C portfolio on April 12th, we were guiding to $0.16 to $0.17 per share of annualized AFFO for the second quarter. As we've said previously, this guidance assumes flat occupancy rates, renewal spreads, and interest rates, as well as no further acquisitions or capital raising during the quarter. It's important to note that this guidance does include approximately $200,000 of third-party leasing and development fees, about half of which is dependent on us finding third-party equity for an off-balance sheet development in Hilton Head, South Carolina. This $200,000 is a portion of the $1 million in third-party development and leasing fees in 2016 that we have previously identified as being part of our path to dividend coverage in the second half of 2016. We continue to expect to generate the remaining $800,000, or $0.02 per share on an annualized basis, in the second half of 2016, but the majority of these fees are, again, dependent on our ability to find third-party joint venture equity partners for off-balance sheet developments. We will update our guidance for third quarter 2016 on our next conference call in August, but today we continue to see a path to dividend coverage in the second half of 2016 via an improved operational efficiency at both the corporate and property level. With that, I'll turn the call back over to Jon for his final comments. Jon?

[Jon Wheeler:]

Thank you, Wilkes. Now, I'm proud of the portfolio we've been able to establish and in our ability to consistently improve our financial results quarter-over-quarter and year-over-year. We have experienced significant growth, and I am confident that our shareholders will continue to be pleased with their investment over the long-term as our positive trajectory continues. Our team is motivated and aligned to deliver profitability, and we are poised for success if we continue to see positive trends in our results, quality assets in our markets, and favorable debt terms. While we are still waiting for the capital markets to stabilize, and we are disappointed in their slow recovery, I stand by my statement on that we will not issue equity at the current levels, and we are focused on growth internally and at the property level. I would like to thank all of our shareholders for their continued support. And with that, I am now ready to take any questions you might have, operator?

[Operator:]

Thank you. [Operator Instructions] Our first question today is coming from Mitch Germain from JMP Securities. Please proceed with your question.

[Peter Martin:]

A quick question so, on the eight assets that you guys had teed up for sale, you've got three under contract today. Just want to see kind of where you think the timing kind of stands on those. And is there a willingness to pursue more sales, including some of the land parcels, today?

[Laura Nguyen:]

Sure. Hey, Peter, it's Laura. How are you?

[Peter Martin:]

Good, thanks.

[Laura Nguyen:]

Good. So, there is a timeframe on the three that are under contract. One we just reinstated the contract, and we expect to close that, an outside closing date of June 15th. That is the Starbucks Verizon property. And the other two will close in February of 2017. They have some CMBS debt on them that, due to the new CMBS regulations, had to be held until February of 2017. And as we look at our portfolio now, and as we underwrite new properties, we are carving out outparcels that either have income on them or that could be developed down the road so that they are not either collateralized against the shopping center as a whole, or we only have to hold them for the two year CMBS required period before we can sell them. We're also looking at some of our land parcels, as well, as potential sales in the future.

[Peter Martin:]

And then, also, we saw the G&A up in 1Q relative to 4Q, and I guess the guidance kind of seems full year flat from 1Q. We're just trying to understand how the expense printing's working its way into the P&L.

[Wilkes Graham:]

Hi, Peter, this is Wilkes. I guess we tried to explain it in the call, but you started the quarter with hiring me, so that's an addition to G&A. We began pruning G&A, I would say, in February and March. It's continued through this week. We did have, as you saw, a little over $200,000 of nonrecurring expenses in the quarter. Some of that was employee separation cost some of it was ending third party contracts that we had from last year that carried over. So, we continue to work on G&A. As we've said, we've guided to less than $4.5 million of cash G&A in the second half of this year. We're on track for that right now. So, I think it should imply that you'll see a lot of progress on G&A in the second quarter, and then obviously going into the second half of the year.

[Operator:]

[Operator Instructions] Our next question is coming from Steve Shaw from Compass Point. Please proceed with your question.

[Steve Shaw:]

Just want to get back to the nonrecurring G&A real quickly. I know last call you mentioned that the accounting charges and the recruiting costs wouldn't carry over, but then you guys mentioned I know at least the recruiting costs. So, did some of that flow through to the first quarter nonrecurring G&A?

[Wilkes Graham:]

Yes. There was a recruiting fee that was paid in January that was, again ending a contract that carried over from last year. I think it was about $50,000. So, that carried over. And then, the rest of it, majority of it was employee separation costs.

[Steve Shaw:]

Okay. And then, Jon had mentioned I think it was $800,000 in comp and benefit cuts since mid January. What else was there besides the COO role?

[Wilkes Graham:]

Yes. I mean, there was at least was it six other positions?

[Laura Nguyen:]

Six other positions.

[Jon Wheeler:]

Yes, through natural attrition, relocations and so forth. Yes, that $800,000 is mixed up of a couple things like that.

[Wilkes Graham:]

In other words, Steve, it's the COO position, and then it's I mean, that's all comp and benefits from personnel.

[Steve Shaw:]

And then, lastly, getting to the third party development fees, I know you talked about that previously ramping up in the second half, but that sort of just nothing there this quarter. How can we look at that spread out over this year?

[Wilkes Graham:]

Well, we talked in the script about $200,000 this quarter, and then $800,000 in the back half of the year. But again, the majority of those fees are dependent on us finding third party equity partners for off balance sheet developments. So, we're working hard on that, and we have the fees identified, the assets identified. Some of those fees, I'd say about $200,000 in total of the $1 million that we've guided to for this year, are just straight third party leasing fees that our leasing team has identified as being able to execute on, and those are in our sights. So, hopefully that helps.

[Steve Shaw:]

So, would you be able to say if that $200,000 for this quarter is a little firmer, given that we're halfway through?

[Wilkes Graham:]

I would say I think as we said, I would say about half of it is very firm, and the rest we're working on.

[Operator:]

[Operator Instructions] Our next question is coming from Kent Engelke from Capitol Securities Management. Please proceed with your question.

[Kent Engelke:]

Really appreciate your dividend guidance and the like. Quick question in regards to re-leasing, congratulations that at 7.3%, increase on rental rates there, that's about 100 basis points higher than what I've been reading on national average there. You're saying that, at this juncture, you're 95.1% occupied on the 1S on all the properties for the exception of the A-C properties, which is about 92%. What is your rental renewals look like going into 2016 and 2017?

[Jon Wheeler:]

Back in 2014, we were 100% on the renewals. I think we had 33 renewals back then, and we had a rent spread of about 6.9%. And then, in 2015, all renewals, including several anchors as well, and I think that was, like, a 6.8% rent spread. And one thing we're very proud of is our same-store NOI in 2015 was almost close to 7%. It was about 6.9%, as well, where the industry average is about 3.4%. So, one thing that we're very proud of is, in these secondary and tertiary markets, we have high occupancy, and we have continued renewals, and we have rent spreads that arguably could be compared to more core markets with how we're increasing and how we're doing our leasing and management.

[Kent Engelke:]

On a percentage basis, what is coming up in 2016 and 2017? And obviously I could find this out on the Q, but what is the percent coming up in 2016 and 2017?

[Wilkes Graham:]

Well, first, to correct your statement earlier, our occupancy is 95.1% for everything that we owned as of a year ago, and we've bought about 150 million of assets since then that are at about 92% occupancy. So number one, we see nice upside potential in just the occupancy on about half of our portfolio that we've acquired in the past year. For lease expirations, this is in the supplemental, as you said. For the next 12 months ending March 31, 2017, we have 8.6% of our leases expiring. That's on a square footage basis 9.7% of our base rents. And those are at $9.78. In 2018 we have 19% expiring, also at $9.78. We believe that, on average, our portfolio remains below market, and I think that's been evidenced by what Jon said, and that we've seen 6.6%, 6.8%, and now 7.3% increases in our renewals.

[Jon Wheeler:]

Kent, what's important to point out as well, when Dave Kelly on his acquisition team -- when we acquire something, we use an Argus financial software projecting out 10 years, and we always factor in a 5% vacancy out of the NOI on small shops exclusive of anchors. So, we're right there, that 94%, 95%, 96% has a good consistent average, and we're right there as to what our financial projections are.

[Operator:]

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Management for any further or closing comments.

[Jon Wheeler:]

On behalf of the team here at Wheeler, I would like to thank all of those that dialed in for the call, and we look forward to talking with you again in August when we report our second quarter results. Thank you all, and you all have a great day.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.