Wheeler Real Estate Investment Trust (NASDAQ:WHLR) is a REIT in transition. WHLR was too small and leveraged to effectively compete with larger peers. $93 million was raised from the 3/19/2015 sale of convertible preferred stockthat was subsequently converted to common stock. The balance sheet was further deleveraged on 7/21/2015 when the majority of the WHLRP and Series A preferred stock issues were voluntarily converted to WHLR common stock. This successful balance sheet cleanup has greatly reduced risk for remaining WHLRP holders.
WHLRP is a par $25 cumulative preferred convertible issue with a 9% coupon. Dividends are paid quarterly and WHLRP now yields 13.2% at a recent price of $17.05. WHLRP may be optionally converted to 5 shares of WHLR. However, the conversion option is of little interest with WHLR trading at just $1.39. WHLRP is a perpetual issue and is not callable. In the rather unlikely event that WHLR eventually rallies to $7.25, the company can force conversion of WHLRP to 5 shares of WHLR. See prospectus for additional details.
Wheeler has been rapidly putting the new equity raised last year to work. Eleven retail shopping centers valued at $86 million were acquired during Q3 2015. An additional 16 properties were acquired on 10/1/2015, 10/2/2015 and 12/2/2015. Q3 Adjusted Funds from Operation ("AFFO") of 2 cents per share is not indicative of future results. Q3 results included only a partial quarter of cash flow from properties acquired during the quarter and no cash flow from the 16 subsequently acquired properties. Transaction related and administrative costs were temporarily elevated due to this rapid pace of acquisitions.
There is now only $18 million par value of WHLRP outstanding with a quarterly dividend obligation of just $0.4 million. Total shareholder's equity of $113 million (including non-controlling interests) is 6.3X as large as WHLRP's outstanding par value. No dividend may be paid on WHLR unless the WHLRP dividend is paid in full. The monthly dividend of $0.0175 cents per share on WHLR totals $3.5 million a quarter. WHLR quarterly dividends are 9X as large as the WHLRP preferred dividend obligation.
How well is the WHLRP dividend covered by AFFO? Even the small $1.4 million of Q3 AFFO was enough to provide 3.5X coverage of the WHLRP dividend. As noted above, Q3 was a transition quarter. AFFO will be substantially higher going forward as more properties contribute to cash flow. The small WHLRP dividend obligation has become only a minor nuisance for Wheeler.
Many REIT investors are concerned about the possibility of a recession. This is less of a concern for Wheeler, given their focus on grocery-anchored centers that account for approximately 90% of properties. Even in a recession, people still need to buy necessities such as groceries. Wheeler also reduces risk by focusing on secondary and tertiary rural markets where there is limited competition from new construction.
My Panick Value Research Report newsletter is focused on high yield preferred stock issues. Risk can be reduced by owning small nuisance preferred stock issues such as WHLRP. It's very comforting for WHLRP holders to be senior to a much larger common stock issue that is controlled by sophisticated institutional investors. The small preferred stock dividend obligation, large recent capital raise and Wheeler's recession resistant business model have greatly reduced risk for WHLRP. My recent NGLS-PA article also highlighted a small preferred dividend obligation that was dwarfed by a much larger common stock dividend. Preferred stock investors should be on the look-out for these nuisance issues.
Disclosure: I am/we are long WHLRP,NGLS-PA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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