Wheeler Real Estate Investment Trust, Inc.
Q3 2014 Earnings Call Transcript

Published: 15 Nov 2014

[Operator:]

Greetings, and welcome to the Wheeler Real Estate Investment Trust Third Quarter 2014 Earnings Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure introduce your host Terry Downs with The Equity Group. Please go ahead.

[Terry Downs:]

Good morning everyone and thank you for joining us. On the call today will be Jon Wheeler, our Chairman and CEO of Wheeler Real Estate Investment Trust and Steven Belote, Chief Financial Officer of Wheeler. Following management’s discussion, there will be a question-and-answer session which is open for all participants on the call. On today’s call management’s prepared remarks and answers of 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 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 obligation 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, available to the company’s Web site. And with that, I’d now like to turn the call over to Jon Wheeler, Chief Executive Officer of Wheeler Real Estate Investment Trust. Jon?

[Jon Wheeler:]

Thank you Terry. Good morning everyone. I would like to thank you all for joining us for out third quarter 2014 earnings conference call. We are pleased with our results and accomplished several key initiatives during the quarter. I would like to mention a few of the highlights followed by Steven who will review our financial and operational results and I'll conclude the call with subsequent activity and our outlook for the remainder of this year and early 2015. We will then open up the call for any questions you all might have. This quarter we increased Wheeler’s GLA, Gross Leasable Area by almost 461,300 square feet maintaining occupancy levels of 95.2%, opened our first regional office and raised gross proceeds of over $20 million in additional capital. The third quarter was off to a great start in July when we closed on four properties which include Cypress Shopping Center, Harrodsburg Marketplace, Port Crossing and LaGrange Marketplace. These four properties are grocery-anchored shopping centers leased by nationally and regionally known tenants with higher than average occupancy rates and are located in growing secondary interest rate markets. Also I'm proud to say that with the acquisition of Harrodsburg Marketplace we established the Company’s presence in the Commonwealth of Kentucky. With our progress of a three month period we remained focused on our gross strategy and well into acquiring additional five properties. These acquisitions included three undeveloped parcels of land that combined 56.1 acres that will become future development projects of Wheeler development. The remaining two assets which were acquired in September, Freeway Junction and Graystone Crossing are all a necessity based shopping centers and perfectly adhere to our acquisition criteria. Freeway Junction has an occupancy rate of 98% while Graystone Crossing is 100% leased. These shopping major tenants include Goodwill, Northern Tool, T-Mobile and Edible Arrangements and are located in Stockbridge, Georgia and Tega Cay, South Carolina. At the end of the third quarter these acquisitions brought our property count to 32 locations in 10 states and a total gross leasable area of around 1.8 million square feet. This equates to a 78% increase when compared to 16 properties in six states that we owned at end of the third quarter last year. At September 30, 2014 our property portfolio was 95.2% leased. Wheeler has consistently maintained above average occupancy rates demonstrated by slight increase in GLA lease from 9/30 last year with an occupancy rate of 95%. On September 2nd we opened our first regional office in Charleston, South Carolina. We are excited about the launch of this office and believe it will provide the same excellent leasing and property management services as our headquarters office in Virginia Beach, Virginia. In fact five of the Company’s key employees were relocated to help with the office. This new office will enable to focus our efforts solely on Wheeler properties as well as any future potential acquisitions that are located in the Southeast region paying close attention to those properties in Alabama, Georgia, Kentucky, North Carolina and South Carolina. This is the region we are quite familiar with and believe the expansion will provide another area for growth. Lastly the Company successfully completed its follow on offering and sale of Series B Preferred Stock at the end of the third quarter. Upon completion of the transaction we are pleased to learn that our underwriters had exercised our over-allotment option which increased our total gross proceeds over $20 million. We have already begun to deploy a portion of these proceeds which I'll provide further details later in the call. And with that I would like to turn the call over to Steven Belote our Chief Financial Officer. Steven?

[Steven Belote:]

Thank you Jon, and good morning everyone. I will begin by reviewing our financial and operational results for the third quarter, followed by a brief overview of our financing activities during the period and conclude with an update on our balance sheet. We also released nine month results which are noted in the press release issued yesterday and our 10-Q which has been filed with the SEC. Total revenue for the three months period ended September 30, 2014 was $4.2 million, an increase of approximately 110% when compared to the same quarter last year. Same store revenues for the third quarter 2014 remained flat at approximately $1.6 million while revenues from new stores, which consists of the 21 properties acquired since the beginning of 2013 contributed approximately 63% or $2.6 million to our total revenues for the period. Property net operating income for the third quarter of 2014 was $3 million, an increase of over 89% or $1.4 when compared to NOI of $1.6 million for the same quarter last year. Same stores contributed $1.2 million to the 2014 third quarter NOI while our new stores represented $1.8 million of total our NOI. Funds from operations available to common shareholders and common unit holders for the third quarter of 2014 decrease by $1.2 million. FFO available to common shareholders and common unit holders was impacted by the additional preferred stock dividends resulting from the April and September 2014 preferred stock offerings including a full quarter of dividends worth the preferred shares issued in September. FFO was also affected by direct acquisition cost totaling approximately $1.5 million and other expenses associated with growing the Company almost $15 million during the 2014 third quarter. Net loss attributable to Wheeler REIT common shareholders for the three months ended September 30, 2014 was $4.6 million or $0.62 per basic and diluted share. This compares to a net loss of $1.8 million or $0.38 per basic and diluted shares in the same quarter of last year. The rise in net loss is largely attributed to increases in depreciation, amortization and interest expense associated with the 17 acquisitions made in the trailing 12 months. Additional interest expense associated with the senior-notes issued during the December 2013 and January 2014 and as mentioned the preferred stock dividend related to the April and September preferred stock offerings. Earnings before interest taxes, depreciation and amortization was negative 76,000 million during the three months ended September 30, 2014, representing an improvement of approximately $974,000 million over the negative $1 million of EBITDA generated in the three months period ended September 30, 2013. Recent activity remained positive for the third quarter. Seven leases were renewed during the period, totaling approximately 30,600 square feet at a weighted average increase of $0.36 per square foot. Also there were four new leases signed during the quarter that totaled approximately 17,000 square feet at a weighted average rate of $12.21 per square foot. As Jon note, we completed a follow on offering of Series B convertible preferred stock and warrants during the third quarter. The preferred stock pays 9% annual dividend and each share proffered stock is convertible into five shares of our common stock based on the $5 conversion price. The preferred stock was sold in units with each unit including warrants to purchase fixed shares of our common stock at an exercise price of $5.50 per share. Net proceeds from the offering totaled approximately $18.6 million with a portion of the proceeds being used toward the three acquisitions that were closed on since the offering. We expect to use the remainder of these filings towards future acquisitions as well as for general working capital. Now turning to our balance sheet; our net investment assets totaled $137.5 million as of September 30th of this year with cash and cash equivalents of $19.9 million at the end of the period. Total assets were $188.3 million at September 30, 2014 compared to $125.4 million at December 31, 2013 and $99.1 million at September 30, 2013. The growth in assets is primarily a result of the 17 properties acquired since the September 2013 and the proceeds from the September 2014 preferred stock offering. Total outstanding debt at September 30th was $129.8 million compared to $94.5 million at December 31st. Our weighted average interest rate on fixed-rate debt for the third quarter was 5.18% with a weighted average term of approximately 5.9 years. And with that, I will now turn the call back over to Jon.

[Jon Wheeler:]

Thank you, Steven. As you can see significant progress was made in the third quarter and 2014 will be a transitional year for the company. As noted in our recent press releases we assumed the contracts of Bryan Station and Crockett Square and close on these acquisitions subsequent to the end of the third quarter. These two properties increase the Company’s total GLA by additional 156,000 square feet. Also subsequent to the quarter end, we completed the transition to a fully internalized self-managed REIT in late October with the acquisition of the operating assets of Wheeler Interest, LLC and WHLR Management, LLC. Both entities which are privately owned and the Company paid for these acquisitions solely through the issuance of $6.75 million in upgrade shares. As mentioned on our last call, we had expected to accomplish this goal by year and are pleased to have reached the significant milestone ahead of schedule. WHLR how has development, redevelopment, acquisition, leasing and property management services all in house. We expect the impact from the increase in operating cost to the additional staff to be offset by the savings recognized from these services being internalized. In the months ahead we will continue to preserve assets and are currently conducting due diligence on several potential acquisitions. We believe the pipeline of necessity based service and retail for those properties is strong throughout the secondary and tertiary markets, expressly with influx of commercial mortgage backed securities coming due in the year ahead. We expect to continue to see these properties available to discount replacement cost that would generate higher level return and offer immediate accretive cash flow benefit to the trust. Currently we’re exploring new opportunities for the growth throughout third party use of our internal management, development leasing services as well as evaluating passport joint venture opportunities that would potentially fuel future growth and increase value for our shareholders. With that, I’d now like to take any questions you might have. Operator?

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question today is coming from Kevin Rugby [ph] from Capital Securities. Please proceed with you question.

[Unidentified Analyst:]

Quick question. In regards to dividend sustainability, how close are you to actually earning the dividend itself?

[Jon Wheeler:]

Well, as you know that’s always a main topic for us Ken and you and I and the capital folks have talked about that since day one. And that’s something we pursue a step fast every day. And I would like to answer this way is that, that is at the fore front of our mind, constant focus and as each month passes and each acquisition comes in we get closer and closer. I think, I believe by the introduction inclusion of the operating companies, Wheeler Interest and WHLR Management, that alone with those two companies coming in will really save the trust about $4 million a year in expenses, mainly in acquisition fees and advisory management fees. We go by the way aside and [indiscernible] shares which we will payout somewhere around $630,000 in dividend. So with everything that we're doing we get closer and closer. We do have five other assets in addition to the 11 that we have already purchased. Nine in the third quarter, two subsequent to the close of quarter and those five have been in the books and been announced in different offerings and are coming in by year-end. So you know, I know every asset that comes in our goal is to have a $100,000 credit benefit for each acquisition. And I think we're getting closer and closer and quite frankly very close.

[Unidentified Analyst:]

When I'm hearing you say, you're not willing go out publically and say a potential timeline, when it would be a earning the dividend time. Of course like I could trip down and back out all these expenses and everything else and just too easy to do it, but at this juncture not willing to come out and make a statement in regards to when you think it will be dividend sustainable?

[Jon Wheeler:]

I feel that’s true yes. I don’t want to give a hard date or forward looking information. But I can say this. I'm not trying to be lucid about this conversation because I know it’s an important concept and that’s something we look on every day. We are getting very close and everything that we're doing kind of checking all the boxes by the inclusion of the operating companies, they internally manage -- all those things are very important. $4 million swing. That's significant. So we are getting close.

[Unidentified Analyst:]

[indiscernible] because obviously you and I both know that the moment that it becomes, hey well these people are not raising in order to payout continually dividend, the moment that is given and sustainable, I think you and I will both agree that without doing any math that will automatically close to [indiscernible] considerably without having to sit down and do the arduous task of backing out all these acquisition expenses and the like.

[Jon Wheeler:]

Absolutely and you know with my -- comment investment on the common shares and my operating investments on the other side, I had a significant position in the Company and there is nobody that would serve as well me personally. So I have a vested interest in sooner than the later.

[Steven Belote:]

Hey Jon, but we've heard there's no interest on self-interest.

[Operator:]

[Operator Instructions]. Our next question is coming from David [indiscernible] from Raymond James. Please proceed with your question.

[Unidentified Analyst:]

You may have provided this someplace and I can never find it because I am just a regular retail broker. Like your acquisitions with Bryan Station and Crockett Square, you mentioned here the occupancy and the cost but is there a place that serves the kind of yield you're getting and all kind of cash flow that’s generating like on Bryan Station you paid 6.1 million. What’s the cash flow that’s generating?

[Jon Wheeler:]

Thank you for calling in. And our typical prototypical model, if you've heard our calls before.

[Unidentified Analyst:]

I have not, this is the first time I have been on one.

[Jon Wheeler:]

Our basic model, bear are with me, it's what I call 9, 6, 12. On the average we're buying assets a non-cap. We're financing them at 6% or less and we're generating a 12% return to the trust. Now what that does is that’s about a 50% of what real costs are. Cost to replacement are about to $2.25 a foot. We are buying consistently $100 a foot or less. And in our cases it’s is in the 60s and 70s. So using that formula, as the interest rates go up, those cap rates will go up and down but you keep that same spread. So for example Freeway Junction that we closed and that was a Phillips Edison sale to us, a peer group competitor, which I always like to say, now we're buying from our competitors, when we put down a contract, we projected rates to be 5.75 a quarter. We actually locked the rate and closed it with Camp Fitzgerald. It was 452. We projected the initial return we put under contract with nothing changed at the property level to be around almost 12%, just shy under 12 while when we closed it was just shy of 14%. So that’s our model and quite frankly one of the deals we brought back in 2013 in June was [indiscernible]. We paid 7.25 cap for that but the rate was so low by the bank of Arkansas, it was 2.77%. That return to the trust was 13.65%. So what that’s translates into as the rates move up and down our cap rates move up and down and for example if rates went to 7% our cap projections will be on average of 10% and then delivering a 13% return. So I always wanted to have our rate 300 basis points below our cap, and our return at 300 basis points above our cap.

[Operator:]

Thank you. Our next question come from Andrew Cohen with from [indiscernible] University. Please proceed with you question.

[Unidentified Analyst:]

Jon, one question maybe to help get clarity. Obviously you report now in FFO, which of course includes a lot of all your cost and depreciation a lot of that in there. Do you ever consider or are you going to find -- do it in AFFO basis or toward FAD [ph] basis, that we kind of can see going forward about where the real income coming in?

[Jon Wheeler:]

Let me defer to Steven on that. Steven is our CFO. Steven?

[Steven Belote:]

Yes Andrew, this is Steven. Actually we do show an adjusted FFO and core FFO in our supplement as well as in our 10-Q, which backside -- obviously FFO with backside depreciation anyway but it also the AFFO backsides some of the acquisition cost, the direct acquisition cost that we incurred during the quarter. So yes that is reported in it's -- I think it's like Page 7 of the supplement, if you want to look at some more detail there.

[Jon Wheeler:]

And that would also help. Right now what people can see as what your real income is going forward?

[Steven Belote:]

Right and just keep in mind that as I mentioned in my prepared remarks the September range we paid a full quarter of dividend on those before we even invested the money. So that was that obviously had an impact during the quarter too. That was approximately $460,000 of dividend that we paid for the third quarter, just related to that range. So keep that in mind too. There's 5 reflected in anything that we have out there. I mean that showing separately.

[Unidentified Analyst:]

And then one last. Jon, when do you expect -- you just combine the companies so you could start saving that $4 million. Do you have any timeline on that?

[Jon Wheeler:]

Well, that internalization has already been completed, is that your question?

[Unidentified Analyst:]

Yes because obviously that’s going to make a huge difference going forward. So that's already been completed?

[Jon Wheeler:]

Yes, that three [indiscernible] ago if I'm correct we completed that. So just like when you’re bringing an acquisition you see the real benefit each quarter thereafter and then a full benefit at the end of 12 months. So each quarter going forward we’ll realize the benefit of those cost savings. And again we’re saving around $4 million and paying out around $6.30 for the upper each share. So you got a really nice positive net there, what is that $3 million, $3 million something that will immediately hit the bottom line, and again we're not given out forward-looking information. That’s a significant cost savings that will lead to benefit of trust. So as each month passes by you’re going to see that benefit.

[Operator:]

Thank you [Operator Instructions]. Our next question today is coming from Matt [indiscernible] Real Estate. Please proceed with your question.

[Unidentified Analyst:]

Jon, just wanted to you refer the land projects that you have. What is your goal with the development on those? Do you guys plan to develop them now and flip them or develop then and hold them in the REIT?

[Jon Wheeler:]

Good question. And past life, private life we’re pretty active prior to the recession in ’08,’09 and ’10 on developments. And the way I like to couch that view that -- say that as we buy value at the 9 caps we want to create value at the 10, 11 and 12 caps. And the four initial assets of PNN [ph] on the land side, we’ll be doing that just there and there is various prospects that we’re talking to and there’ll be other announcements in the future as well. But we’ll focus on other joint venture opportunities and those things of the alike. But really when you can create the value and the interest rates are so low today, construction interest rates, we can borrow right now at 3.25%, in some cases even below 3%. Obviously the 10 year swap of the spreads or that lastly we talked about, Freeway Junction, that was at 452, and we feel, I being an economist, I feel rates are going to be modestly low still going forward unless something major happens. But I think it’s a good time to factor in a certain percentage or GLA, Gross Leasable Area for development activities but when you can create the value and then internally for the trust it sort of benefit the trust and I think that we’re going to have a conflict of interest if I was building outside the trust and then selling at lower cap rate to the trust. And that’s another thing too. We’ve really focused on everything being fully benefit to trust going forward especially with internalization of the operating companies.

[Unidentified Analyst:]

Okay. I got one more question for you. With the -- on the dividend topic, do you anticipate the company being source of additional capital to continue those dividends before the Company becomes cash flow positive?

[Jon Wheeler:]

I don’t believe so. I think with everything that we got going on right now with the acquisitions, with the five that are in queue and then with the remaining investment dollars that we have to deploy, I think we’re in a good position and I think again go back and to reiterate the inclusion of the operating companies, everything we’re doing, checking off all these boxes. And quite frankly we knew starting off day -- one we knew that we did adjusted yield and we knew that the efficiencies wouldn’t be there but everyday we’re streamlining those efficiencies are getting better.

[Operator:]

Thank you. Our next question today is coming from Michael Diana from Maxim Group. Please proceed with your question.

[Michael Diana:]

Actually you touched on this in your answer to the first question. I just want to reconfirm in it relates to all the dividend discussion as well. And that is every time you’re looking at an acquisition, one of your criteria is that it be accretive to core FFO, is that right?

[Jon Wheeler:]

That is correct. On the average we would like that accretive benefit to be around a $100,000 and using Freeway Junction is a good example. The brings $200,000 on that one acquisition. If we look this Digsby [ph] research that I talked about earlier, that free and available cash flow, it's north of $500,000. So on the average to the cap rate that could grow on our acquisitions. On the average it's 100,000 that we’re looking for.

[Operator:]

[Operator Instruction] Our next question is coming from John DeMaio from Newbridge Securities. Please proceed with your question.

[John DeMaio:]

Question. The I had, had to do with the office you have in South Carolina. I know you manage, when I'm looking at it, 10 properties. Will you ever get to a point -- just seeing the future you have 30 properties and that would be enough for that location and you would consider opening up other locations?

[Jon Wheeler:]

Well this goes back to our core values and our beliefs and we called them touches. The answer is yes and its case year case. So for example with a property contract and have a 60 day review period, the tenant said we’ve seen more in 60 days than we’ve seen the owners in six years and that’s just a fact and we continue with those touches. And as our presence grows in any one area, we would always look at some type of office environment. Now I will tell you in 15 years of business although private and public now, this is the first true regional office we’ve had. We’ve had associated working out of house, from travelling down to Florida and New York and so forth but this was time to make an investment. We moved five people down to Charleston and we felt it was the right thing to do. We looked at Hilton head, Charleston, Jacksonville and so what's the closest proximity within a two mile radius, how many assets do we have, that could be acquisition target candidates but there will pool [ph] of a third party and we pick Charleston for that very central reason. In the future do we have a regional office elsewhere in the Southwest? Maybe. But it's all going to be product driven and there will be a business plan and a reason to support it.

[Operator:]

Thank you. We've reach end of our question and answer session. Now let’s turn the call back over to Mr. Wheeler for any further of closing comments.

[Jon Wheeler:]

Thank you sir. Thank you operator. On behalf of the team Wheeler invite to thank always those who have dialed in for the call and we look forward to talking with you again in March when we report our fourth quarter results. Thank you very much. These calls are very important to us and hopefully we directly answered your questions. You have a good day.

[Operator:]

Thank you for attending today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation for today.