Wheeler Real Estate Investment Trust, Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Greetings and welcome to Wheeler Real Estate Investment Trust Second Quarter 2015 Earnings 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 my pleasure to turn the conference over to your host, Laura Nguyen, Director of Capital Markets for Wheeler Real Estate Investment Trust. 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 Steven Belote, 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 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. With that, I would now like to turn the call over to Jon Wheeler, Chief Executive Officer of Wheeler Real Estate Investment Trust. Please go ahead, Jon.

[Jon Wheeler:]

Thank you, Laura. Good morning, everyone, and welcome. I’d like to thank you all for joining us for our second quarter 2015 earnings call. We had a very active second quarter making significant process on several key initiatives and I’d briefly like to take a few moments to go through a few of these highlights. I’ll then turn the call over to Steven who will review our financials for the second quarter. We’re pleased to report a solid second quarter 2015 led by strong acquisition and leasing activity. During the quarter, we completed the acquisition of over 377,000 square feet of gross leasable area in addition to signing 22 leases, new and renewals totaling 76,600 square feet with an average positive leasing spread for renewals of approximately 4%. We also went into our first third party lease agreements during the period and was - three were [ph] signed. Under the terms of these agreements, our associates will handle all the leasing responsibilities for these properties and is just another way we’re growing the company and increasing revenues here at Wheeler. The development initiatives we set forth last year have begun to come to fruition in part due to joint venture agreement we entered into with Lightbridge. If you recall, under the agreement, Lightbridge will provide the company with the option to participate in acquisition and development of any potential Lightbridge franchises that have been identified as future sites for its centers. We’re in the due diligence stages now in these potential development projects and hope to launch construction in the months ahead. Since entering the agreement with Lightbridge, we’ve been approached by several other businesses regarding joint venture opportunities and are currently exploring options with well-known franchises that have the potential to be very lucrative for the company and create value of the long term. As many of you are aware, last March, we returned to capital markets raising net proceeds of approximately $84 million and a private placement transaction of Series C convertible preferred stock. We’ve invested more than half these proceeds into accretive assets that will further contribute to the generating stable NOIs for the company and yielding solid returns for investors. As part of the terms of this transaction, in our annual meeting in June, shareholders voted and approved the beneficial conversion of the Series C Preferred into common, which increased the company’s market cap to approximately 117.5 million and 57.9 million shares outstanding as of June 30, 2015. The pipeline is strong for necessity-based retail focused properties located in growing secondary and tertiary markets and the capital raised has allowed us to take advantage of this opportunity. We currently have approximately $68 million under contract with a similar amount under LOIs. We intend to acquire these assets in an average cap rate of 8.65%. And while interest rates have risen slightly over the past few months, we have demonstrated our acquisition strategy as successful and will continue to acquire these assets at above average cap rates generating solid returns to the trust. Also during the second quarter, we entered into a new credit facility agreement with KeyBank to increase our revolving credit facility to $45 million with accordion feature up to $100 million. This new line has a three-year term and the interest rate is very stable based upon LIBOR. As a second quarter end, we have not yet drawn the facility but view this as yet another means to increase our base of capital to acquire NOI driving assets at favorable rates for the company. Let me now turn it over to Steven Belote, our Chief Financial Officer, for a review of our financials. Steven?

[Steven Belote:]

Thank you, Jon, and good morning, everyone. I will begin by reviewing our financial and operational results for the second quarter followed by an update on our balance sheet. Total revenues for the three-month period ended June 30, 2015 were $6.7 million, an increase of approximately 85% when compared to the same quarter last year. Same-store property revenues for the second quarter of 2015 were approximately $3.9 million compared to $3.6 million for the prior year while our property revenues from new stores, which consisted of 12 shopping centers acquired since the beginning of 2014, contributed approximately 40% or $2.6 million of the total property revenues for the period. Property net operating income for the second quarter of 2015 was $4.6 million, an increase of approximately 68% or $1.8 million when compared to NOI of $2.7 million for the same quarter last year. Same stores contributed $2.8 million to the 2015 second quarter NOI while new stores generated $1.7 million of our total NOI. Core funds from operations available to common shareholders and common unit holders for the three-month period ended June 30, 2015, decreased $1.6 million as compared to the 2014 second quarter, primarily due to increases in preferred stock dividends and the internalization of the operating companies. Net loss attributable to Wheeler REIT common shareholders for the three months ended June 30, 2015 were $72.7 million or $4.13 per basic and diluted share compared to a net loss of $2.2 million or $0.31 per basic and diluted shares in the same quarter of last year. The increase in the net loss was primarily attributable to the $59.2 million non-cash deemed dividend related to the beneficial conversion feature on the Series C Preferred stock conversion. Additionally, increases in general and administrative expenses as a result of the internalization of the REIT in October 2014, non-recurring expenses related to acquisitions, capital activities, legal matters and other corporate activities, and increases in depreciation and amortization and preferred stock dividend payments during the quarter contributed to the year-over-year increase in net loss attributable to Wheeler REIT common shareholders. Adjusted earnings before interest, taxes, depreciation and amortization was $2.9 million during the three months ended June 30, 2015, compared to $1.7 million for the prior period. Leasing activity remained positive for the second quarter. Sixteen renewals were signed during the quarter, totaling approximately 67,000 square feet and weighted average increase of $0.32 per square foot, representing an increase of 4.05% over prior rates. Now turning to our balance sheet. Our net investment assets totaled $193 million as of June 30th of this year, with cash and cash equivalents of $49 million. Total assets were $301 million as of June 30, 2015, compared to $205 million at December 31, 2014. Total outstanding debt at June 30, 2015 was $164 million compared to $142 million at December 31, 2014. Our weighted average interest rate on fixed-rate debt at June 30, 2015 was 4.86% with a weighted average term of approximately 6.6 years. Maintaining a strong balance sheet for the healthy debt to total asset ratio quarter-over-quarter is a key priority of the company as we continue to grow. And with that, I would now like to turn the call back over to Jon.

[Jon Wheeler:]

Thank you, Steven. The second quarter of 2015 was a transformational time for the company. We continue to invest in quality assets at a discount to replacement cost secured under favorable terms all while growing the business, returning to capital markets, expand our credit facility and simplifying our balance sheet. We achieved several of our long term goals this past quarter. We’re proud of our accomplishments and myself personally, I’m also proud of the integrity and the diligence of our team. We said we would accomplish certain tasks and we have reached these goals. We will continue to operate on this underlying principle as we adhere to our business model and move forward in our strategic vision. We believe that we are now entering the next phase of our development and growth and are well-positioned. In the months ahead, we will continue to identify, analyze and acquire properties at above average cap rates that generate solid returns to trust while maintaining a healthy lender [ph] value in addition to increasing total revenues for the company through strategic joint venture opportunities and third party agreements that leverage our excellent leasing, property management and development expertise. And are excited about the company’s prospects for the future. We look forward to a successful half of 2015. With that, I am now ready to take any questions you might have. Operator?

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Wilkes Graham from Compass Point. Please proceed with your question.

[Wilkes Graham:]

Hey, good morning, Jon and Steven and Laura.

[Jon Wheeler:]

Good morning, sir. Thanks for joining.

[Wilkes Graham:]

Sure. So a couple of questions or three questions, I guess. One, can you break out - I know you said it will be in the 10Q, but can you break out what the $327,000 of non-recurring expenses were in the G&A?

[Steven Belote:]

Yes. We’ll talk about that here [ph]. This is Steven. Included in that number were some commission expense, one-time commission expense for our co-broker deals that will not recur. We had some marketing type items, promotional. We also had some [indiscernible] cost of about [ph] 52,000 and just really our first year of 404(NYSE

[Wilkes Graham:]

Okay. And those are non-recurring?

[Steven Belote:]

That’s correct.

[Wilkes Graham:]

Okay. Second question is I think the way we calculate is, as you said, you’ve got $68 million of assets under contract, a similar amount under LOI, average 8.65% of cap rate. In our view, if you close all of those, you ought to be pretty close to covering the dividend or you should be covering the dividend with AFFO. I’m curious, if you do all of that - you close the pipeline, you cover the dividend, the stock is not where you want it to be to raise capital, what alternatives do you think about in terms of being able to continue to create value if the stock price is not where you want it?

[Jon Wheeler:]

Well, as you know, we had - this is Jon. You know we have the ability via our own currency with the UPREIT shares. And there are some other remaining Wheeler legacy assets that could come in at the appropriate time. And also, in the past, already we have used UPREIT shares for a portion of the equity with a particular seller. So if in fact that point did come, first and foremost, we would only raise capital in accretive benefit and not below where the current stock price is. But more important, we have our own currency with those UPREIT shares, of course also known as OP units that we could issue to acquire assets.

[Wilkes Graham:]

Okay. And obviously issuing OP units is sort of the same thing as raising capital down to these levels. But I know that - I believe on two assets you’ve distributed about 700,000 shares of OP and it’s made up about 7% of the equity of those assets. So it wasn’t a material amount. But I’m also curious if you’d be interested in - if you have sort of non-core assets that you might sell, number one, to free up a little additional equity and, two, to show the markets sort of what the marketed or the auction cap rate is for your assets.

[Jon Wheeler:]

Absolutely. And you took it exactly where I was going to go with that follow-up comment is that, when we raised the $90 million or net $84 million on the Series C, some of those investors did comment on some of the freestanding assets to, A, test the market on that cap rate discussion, but also, B, to move away from some of those freestanding assets because they weren’t part of a grocery anchored shopping center even though three of those freestanding assets are freestanding grocery stores. So we are investigating that opportunity to do just that. And a matter of fact, we’ll be discussing that tomorrow to our board meeting of what that analysis is. But I think it’s fair to say that those going in cap rates will be much lower going out based on the credit of those tenants. And right now where interest rates are in relationship to the freestanding sale leased back market is very active right now. And again, with the interest rates where they are, it’s a good time to consider that.

[Wilkes Graham:]

Can you comment just in general what you think the cap rate might be on freestanding assets?

[Jon Wheeler:]

Yes. I mean if you look at mostly the average of our sort of 7.75 to maybe 8 cap. And we feel strongly that the exit caps could be in the low 6 as to mid-6s.

[Wilkes Graham:]

Okay. And then just the last question. Can you talk a little bit more about the development program which you’ve mentioned a few times with Lightbridge or with others and when we might expect that to hit the income statement?

[Jon Wheeler:]

Absolutely. So Lightbridge is a good indication of our relationship with retailers and as I mentioned in past calls too, since we have so many retail relationships in our shopping centers and where they are right now on their own capital investment where there’s renovating stores, expanding stores or again, just true net positive freestanding expansion, we see that as a great opportunity for us. Because when we combine on the average of say, an 8.5 cap to a 9 cap, we can build a 10 cap or 11 cap and of course we brought in the development company back in January 14 with that very reason to take advantage of those opportunities with our relationships. So interest only, construction financing is very, very good, very low right now. And it’s like 3.25 at an adjustment above the monthly LIBOR. And of course, your permanent debt would be higher somewhere around 4.25, 4.5. But when you can build it at 10 cap or 11 cap and pick up almost 600 basis point swing in that profitability versus maybe a 300 or 400 basis point swing, that’s very strong and very good and very powerful.

[Wilkes Graham:]

Do you have an expectation for a material amount of equity to go towards that program in the next few quarters?

[Jon Wheeler:]

Well, what’s interesting about when you talk about equity for development, it’s not all outstanding at one time. So if you take a prototypical freestanding builder suit, once your entitlements are in place and you really haven’t spent that much money on the frontend, say, the first 90 days, the next 90 day - it’s going to be the next nine months thereafter, you would have 50% of your equity outstanding at any given time on the average. So if you take a Lightbridge deal, let’s say $2.5 million and you’re putting down 30% or 40%, it’s really not that much equity exposed at any one time on each particular deal. And again, if you assume 50% of it is only exposed at one time, you’re talking about probably $400,000, $500,000 max on a particular deal. And then when you get into a shopping center environment, let’s say it’s a $5 million to $10 million acquisition and once all your entitlement is in place, it might take you 12 to 18 months to build it. And quite frankly, you’re straddling several, multiple quarters and you’re really been struggling, let’s say in this case, 2015 and 2016 for a really large project, it would be 18 months. Now, another thing to bring up on a shopping center development. And this is very important. The freestanding are much easier because there’s one tenant. We wouldn’t start the development until it’s 50% pre-leased. But we also, more importantly, we factor in that we carry 100% total project interest carry for 12 months as if it’s 100% vacant when we deliver it. But of course, we wouldn’t start it until it’s 50% pre-leased. So what that means is, is that if it’s 75% pre-leased, I can carry it for a year and a half. And of course, if it’s 100% leased, I never touch that interest carry number. So from a very conservative development standpoint, 50% pre-leased on the frontend. And then by the time we get finished, our historical is, is that there 75%, 80%, 85% by the time we stabilize and completely stabilize the property. Now, going back to the overall percentage, Wilkes, we’re an acquisition company. And we’re buying stabilized completed cash flow and assets. But we do want to focus a little bit on development that can create the value for the benefit of the investors in the trust. But it’s’ never going to be a significant part of our business.

[Wilkes Graham:]

Okay. Thanks for that detail. I appreciate the answers. And good luck closing the rest of the pipeline.

[Jon Wheeler:]

Thank you, sir. Have a good day.

[Steven Belote:]

Thank you, Wilkes.

[Operator:]

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

[Mitch Germain:]

Good morning, everyone.

[Jon Wheeler:]

Good morning, Mitch.

[Steven Belote:]

Good morning, Mitch.

[Mitch Germain:]

So I’m curious. A couple of the assets acquired this quarter had sub 90% occupancy. Is that a bit of a change in approach in terms of the types of properties that you may be willing to buy, i.e., with a bit more of a value add angle? Or is it just somewhat outliers and there’s not going to be any real major change in the way that you deploy capital?

[Jon Wheeler:]

And that’s a great question because each situation, each location is different. And probably what you’re referring to is Chesapeake Square on the Eastern Shore in Accomack, Virginia, which is in our neck of the woods, literally right across the Chesapeake Bay Bridge. And that was a Wheeler legacy asset that we bought back in 2000. And it’s been a strong performer literally from day one. And when you look at Food Lion and we’re very close to Food Lion. Food Lion controls the Eastern Shore from a grocery standpoint. And it’s almost literally every 20 miles, they have a freestanding or a part of a shopping center Food Lion on the Eastern Shore all the way up to South Berry, Maryland. So that particular asset there, Food Lion does very strong sales. And that store is about 38,000, 40,000-foot store. And from a per square foot standpoint, you’re consistently over $400 a foot on their sales where profitable store for Food Lion is $250. Now, that does have a little bit more vacancy than prototypical. Good point. Because normally if you look at our overall portfolio, including Chesapeake Square, we’re almost 96% leased and occupied. But what’s important about that asset is that the new hospital system up there - Steven, what’s the name of them?

[Steven Belote:]

Riverside.

[Jon Wheeler:]

Riverside Hospital. They’re relocating from a town further south actually closer to Virginia Beach. And that huge infrastructure is under construction right now. And that will be the hospital literally for the entire Eastern Shore which is made up of countless, numerous towns. So that whole draw coming in there will be a benefit to us. And quite frankly, the time that Chesapeake coming in was associated with that. And it’s literally no more than a half mile from our center. But what’s interesting, Mitch, is that we’re already getting calls from doctor groups to occupy some of that vacancy. And if you look at a projection as to when that could be filled, we feel very comfortable over the next 12 months that we’ll be north that 95% leased and occupied.

[Mitch Germain:]

Great. Any ability to capture I’m assuming higher [indiscernible] correct?

[Jon Wheeler:]

Well, that’s another good point too because the doctors, absolutely. And we really don’t put that much money into TI prototypically. And the doctor groups do pay every bit of a 25% to 30% premium of what the current prevailing market rate would be in that market.

[Mitch Germain:]

Great. A bit of a fear of interest rates moving higher obviously in a market. And I’m curious if you’re seeing a change in the amount of properties that are being put up for sale with landlords maybe reacting to some concerns that the higher rates would create a downward pressure in asset pricing.

[Jon Wheeler:]

And that’s another good question because we get asked that a lot of times by analysts in general. Here’s my viewpoint. And this has been our philosophy from day one and I’ve said this before on this call, is that our model is very simple and it’s very one foot in front of the other. It’s what I call 9, 6, 12. And we’re buying on the average on the 9 cap and we’re financing a 6% or less and we’re delivering a 12% return to the trust. Well, that model actually get down, we closed two deals 60 days ago that we’re 3.97 all in the spread above the 10-year swap, fixed for 10 years, interest only for the full 10 years because we put down 45% cash. So that model quickly shifted to 9, 4, 14. And rising interest rates, as they change and they go up and down. A matter of fact, we closed the deal at 4.65 about 30 days ago. And today, we’re getting pricing around 4.35. So it’s bouncing all up and down. But the model stays consistent. And as interest rates change, our model moves up and down. So that 9, 6, 12 became 9, 4, 14. And also if the rates go up, that cap rate is going to adjust because the rates change. So it’s important for us to keep it 300 basis point lower than the cap rate on the interest rate. And that in turn will give us a 300 basis point return above that cap rate. So in essence, we’re beating that model still as interest rates rise. Now, as to product, we’re consistently looking at $75 million to $100 million of assets weekly. And right now, when you get our cue, you’ll see the information in there as to what we have under contract and also what’s under LOI. And quite frankly, as ironic as it may sound, is that the product after is more plentiful right now than I’ve seen really prior to 2008. And that goes back to CNBS maturities coming due in ‘15, ‘16 and ‘17. They all have 10-year bullets. And quite frankly, the market is very good and very strong for us product-wise. And I’ve said this before, Mitch, you’ve heard me say, the positive perfect storm meaning product, equity and the interest rates are all perfectly aligned right now for us to execute our business model.

[Mitch Germain:]

Right. That’s it for me. Thanks, guys.

[Jon Wheeler:]

Thanks, Mitch.

[Operator:]

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

[Kent Engelke:]

Hey, Steve. Hey, Jon. How are all doing?

[Jon Wheeler:]

Hi Kent, how are you doing?

[Kent Engelke:]

I’m fine. You already answered my question on the SG&A. So I want to say, thank you.

[Jon Wheeler:]

Well, thank you for chiming in. Do you have anything else for us today?

[Kent Engelke:]

Oh, I didn’t know how to take myself off queue.

[Kent Engelke:]

Okay. Thank you, Kent. Good to hear from you.

[Kent Engelke:]

Thank you.

[Operator:]

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:]

Absolutely. And thank you all. This is a very important time for us. I would like to personally thank Compass as they really create an opportunity for us to what we call a re-IPO. It was extremely transformational for us, for us to be at the market and raise $90 million and then net $84 million after the selling concessions and expenses and so forth. And it gives us the opportunity to move from a micro-cap to a small cap. When we started this business, literally probably the smallest REIT in the world at 15.8 market cap. And after the conversion of the Series C, the B and the As, on any given day right now, we’re somewhere between $125 million and $130 million market cap. And we see great prospects for the future. We feel very strong in our management. We know how to buy will but I always like to say we know how to lease and manage extremely well. And if you look at our leased and occupancy percentage, it’s 95%, 96%, that has been that way from day one since we’ve been public. And we’d like to say that we’ve only scratched the surface now at 2.5 years of being public and we see the next 2.5, 3, 4 years being exceptional time for us to make money for our investors at the trust. So on behalf of the team here at Wheeler, I would like to thank all those that dialed in for the call. And we look forward to talking with you again in November when we report our third quarter results. Have a nice day. Thank you.

[Operator:]

Thank you. This 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.