Wheeler Real Estate Investment Trust, Inc. (NASDAQ:WHLR) Q3 2018 Earnings Conference Call November 7, 2018 11:00 AM ET
Mary Jensen – IRRealized
Dave Kelly – President and Chief Executive Officer
Matt Reddy – Chief Financial Officer
Andy Franklin – Chief Operating Officer
Kent Engelke – Capital Securities Management
Greetings, ladies and gentlemen, and welcome to the Wheeler Real Estate Investment Trust 2018 Third Quarter Earnings Conference Call. [Operator Instructions] Please note that today’s conference is being recorded, with a webcast replay available for the next 90 days. The dial-in details of the replay can be found in yesterday’s press release and could be obtained from the Investor Relations section of the company’s website at www.whlr.us. [Operator Instructions]
I will now turn the conference over to Mary Jensen of IRRealized. Please go ahead.
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, assumptions made by and information 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 the assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed 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, November 7. Wheeler does not intend and undertakes no duty to update forward-looking statements 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 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 Kelly. Dave?
Thank you, Mary, and thank you everyone for joining us today. In our first quarter call back in May, I discussed a number of objectives we wanted to accomplish in order to restore the proper path of this company going forward. At that time, I said it would be a deliberate, disciplined process that will not be completed overnight. Today, I want to repeat that message and give an update as to what we have accomplished and what we still have to do.
Our objective has not changed. Our vision is to be a grocery-anchored REIT, with sustainable and growing cash flows, a strong and flexible balance sheet that reflects debt obligations that are in line with our peers. And for our shareholders, we want to return to a dividend-paying REIT. All of which are ways to establish our primary goal: maximizing shareholder value. While we intend to return to being a dividend-paying REIT, we will not do so until we can demonstrate sustainable cash flows that support a consistent dividend.
Our first order of business was to realign our organizational chart to make sure we have the right human capital to ensure operational consistency and preserve our underlying NOI. While our total headcount has been reduced across the organization, we are all well-structured to meet the current demands ahead of us, with a team of real estate and financial professionals who possess expertise in their respective areas. Overall, I believe this is the finest group of associates that have ever been employed at WHLR.
Next, we have moved away from our growth-oriented, acquisition-based company to a company intent on maximizing the performance of its current portfolio and strengthening its balance sheet to a systematic debt-reduction activities, which we believe will bring us in line with our peers and solidify our cash flow. To that end, we identified a number of assets we felt were primed for disposition. Some of those were nonincome-producing land parcels with the intention of using the proceeds to pay down property level debt and retire our short-term debt obligations.
Thus far this year, we have sold over $11.5 million in noncore real estate at a blended cap rate of 7%. These dispositions included a Chipotle outparcel in Conyers, Georgia that we sold for $1.3 million at a 5.9% cap; a vacant land parcel in Virginia Beach for $2.8 million; a single tenant net leased property in Virginia Beach for $1.8 million or a 6.9% cap; a non-anchored strip center in Carrollton, Virginia for $5.7 million at an 8% cap rate.
Further, we have two additional assets on the contract and two others with the letters of intent for sale. They include an undeveloped land parcel in Tulsa and an unanchored strip center in South Carolina as well as an undeveloped outparcel in Richmond and an unanchored strip in Tulsa. We anticipate that these combined sales will generate sales proceeds for approximately $9.2 million.
We’ve been working diligently in retiring the $6.8 million Revere Loan that came due on April 30, 2018 and have subsequently been extended to February 20 of 2019. It is our intention to retire this debt sooner. Through a series of cash payments, dispositions and refinancings over the last what nine months, we have reduced the Revere Loan significantly to $1.2 million from $6.8 million at the beginning of the year.
By strategically refinancing assets off the floating rate KeyBanc line for fixed interest debt, we have successfully reduced the KeyBanc credit facility from a $68 million to $52.1 million today. We are on schedule by quarter – the first quarter of 2019 to retire all but $1.4 million of our 2018 and 2019 debt, with an exception that the KeyBanc credit facility matures in December 2019 and which we have the option of extending for one year.
This does not mean that we have simply kicked the can down the road by extending maturities. Overall, we have reduced our debt by over $9.5 million since February 1, 2018. In this market, with rising interest rates, we have and continued to strategically transition our debt away from unpredictable floating rate loans into longer-term fixed rate debt and paying down short-term and property level debt. The weighted average interest rate in our debt remains below 4.8%.
We’ve also maintained leadership at the board level. First by elevating John Sweet to its extensive capital markets and public company experience for the chairman position; and second, bringing on two new members, Andrew Jones, the Founder and Chief Executive Officer of North Star Partners, and Sean Armstrong, who serves as Principal and Portfolio Manager of Westport Capital Partners.
These institutional investors represented by those board members hold almost 15% of our company’s common stock ownership. As a result of feedback received from our shareholders as well as ISS and Glass Lewis during our recent proxy contest, we are actually looking to adopt additional changes to the board to update policies and procedures to be a more shareholder-friendly standard.
With regard to WHLR’s future, we continue to work closer with KeyBanc Capital Markets to implement a business strategy that retains the attributes of our core and real estate portfolio, strengthens our capital structure and helps us reach our stated goal as soon as practical. While we have been working to reposition the company, we were impacted by the bankruptcy of our largest tenants, Southeastern Grocers.
Through a proactive negotiation process, we were able to recapture four locations from – and solidify the status of the remaining 13 leases with them. We re-tenanted with grocery anchors, three of the four recaptures and another draft lease negotiation on the final grocery location. Further, the former BI-LO location in Boiling Springs, South Carolina is on the contract for sale. The sale of this property will remove a vacant anchor to negatively performance center and generate net cash proceeds for approximately $1.3 million and for property debt payoff of approximately $6.2 million.
SEG merchant bankruptcy on May 31, 2018. The overall, impact of their bankruptcy in our portfolio is approximately $1.2 million, pending the execution of the fourth backfilled lease. In addition to the recaptured space, Planet Fitness has backfilled the former BI-LO at the Shoppes at Myrtle Park in Boston, with rent commencing in the fourth quarter of 2018.
In addition to the SEG backfills, we continue to actively manage our real estate portfolio. Tractor Supply took possession of 28,568 square feet in Chesapeake Square, which included 10,000 square feet of previously decommissioned space. We’ve also delivered 20,976 square feet to Harbor Freight at Fort Howard in Rincon, Georgia, a former Fred’s location. At JANAF, we terminated the lease of Uptown Buffet and signed a lease to backfill the outparcel of Aldi, a high credit international grocery operator. Additionally we’ve also signed a lease with Discount Tire to occupy the last remaining vacant JANAF outparcel.
As I noted earlier, we have taken a disciplined approach to external growth and will not be entering of any new acquisition transactions in the foreseeable future. Our focus remains on maximizing our current portfolio and deleveraging our balance sheet. We believe these are significant steps in the right direction and we appreciate your support and patience.
With that, I’ll turn the discussion over to our CFO, Matt Reddy, who will walk you through our third quarter financial highlights. Matt?
Thanks, Dave. Yesterday we reported FFO of $0.12 and AFFO of $0.13 per diluted share for the third quarter of 2018, which compares to FFO of $0.35 and AFFO of $0.43 per diluted share during the third quarter of 2017.
Third quarter total revenue increased 6.7% or $1 million from the same period last year to $16.2 million. This increase can be attributed to the $2.8 million of revenue generated by our 2018 acquisition of JANAF Shopping Center, which was partially offset by the reduction of third-party management, leasing and development fees and same-store revenues year-over-year.
Consistent with our prior quarters – Consistent with our prior quarter results, the decrease in AFFO year-over-year can be attributed to a few key factors. First and as anticipated, asset management fees, leasing commissions and development fees decreased by $649,000 or $0.067 per share. Additionally, the note receivable due from the Sea Turtle Marketplace development has been placed on a non-accrual basis, which accounted for a decrease of interest income of $244,000 or $0.025 per share when compared to the third quarter of 2017. This amount excludes the 4% portion of interest due at loan maturity, which has been excluded from AFFO in previous periods.
Interest expense, net of non-cash loan cost amortization, increased $241,000 or $0.025 per share for same-store operations. This is primarily attributed to increases in variable interest rates tied to the adjustable rate debt across our portfolio. Furthermore, non-property operating expenses impacting AFFO, including expenses associated with non-REIT management and leasing services, increased by $135,000 or $0.014 per share when compared to the same period last year. This increase includes incremental costs associated with the proxy solicitation activities that occurred during the quarter.
During the third quarter, JANAF generated $2 million of NOI, which contributed $950,000 of FFO. Further, JANAF generated a year-over-year decrease in AFFO of $63,000 after considering preferred dividends and a one-time lease termination expense of $250,000, which enticed a previous tenant to vacate in order to make the space available for a newly constructed Aldi that we believe will increase the value of the overall asset. Excluding this lease termination expense, JANAF would have contributed $183,000 or $0.02 of AFFO during the quarter.
Same-store NOI decreased by 12.9% when compared to the third quarter of 2017, which reduced AFFO by $0.18 year-over-year. Same-store NOI during the third quarter 2017 included a one-time lease termination fee of $485,000, earned with a lease termination of BI-LO at Myrtle Park. Excluding this termination fee revenue in the prior year, same-store NOI would have decreased by 8.8% and reduced AFFO by $0.13 per share when compared to the previous quarter last year.
The decrease in same-store NOI can be attributed to the loss of revenue associated with the recent Southeastern Grocery recaptures and rent adjustments and other vacancies that have yet to be backfilled or opened for operation. We expect some of this decrease to be offset in future quarters as the following anchor tenants become fully operational and commence rent. Planet Fitness at Myrtle Park, Harbor Freight at Fort Howard and the recent Piggly Wiggly backfill at St. Matthews, which was one of four previously disclosed SEG recaptures.
As of September 30, 2018, our core portfolio is 90.4% leased and 90% occupied, up 30 and 70 basis points respectively since the quarter ended June 30, 2018. The average rental rate for our portfolio is $9.53 per square foot with an average lease term of over 4.3 years.
During the quarter, we executed 11 new leases totaling over 31,000 square feet at a weighted average rate of $11.24 per square foot. Additionally, we’ve renewed 28 leases, totaling 239,000 square feet at a weighted average increase of $0.46 per square foot and an increase of 6.46% over the previous in-place rates. Rent spreads are calculated based on the average rate per square foot for the renewed or new lease term. We ended the quarter with $3.6 million of cash and $16.7 million of cash restricted for property expenses escrows and future capital expenditures lease commissions and tenant improvement allowances.
During the quarter, we’ve reduced our debt obligations by $5.1 million to $371.5 million at September 30, 2018, including debt associated with assets held for sale when compared to June 30, 2018. Further, we ended the quarter with a weighted average interest rate of 4.78% and 4.5 years weighted average term remaining, including debt associated with assets held for sale. Additional detail in the third quarter financing activities can be found on the press release and supplemental packet we filed yesterday afternoon.
With that, we will be happy to take your questions.
Thank you. The floor is now open for questions. [Operator Instructions] Thank you. Our first question today is coming from Kent Engelke of Capital Securities Management.
Thank you. Gentlemen, can you comment a little bit more about your renewals? You have 30 and 70 basis points respectively as well as your rental income is up, each lease is about, I think, you said 6.46% or something like that. Do you believe that you’re going to continue releasing the properties up at a comfortable not only rate but also with increase in the leases itself?
Hey, Kent, good morning, this is Dave. Good, I’m going to – Andy Franklin is our COO. He’s going to answer that question for you but as far as – thanks for being online and thanks for asking your question.
Hey, no problem. Thanks for taking my question.
Thanks, Kent. To answer your question, it sounds like it’s a little bit of a two-part question. So as it relates to the renewals that we have seen, yes, we continue to see those increases. Some of those are obviously, baked in just with options being exercised, and then the others are with just term extensions where we’re seeing opportunities, we’re seeing sales increase at some of our grocery locations in particular, and we’re taking advantage of those.
And so what I’m hearing you say is that yes, that you will continue to see rental properties being renewed and also a comparable increase in rental revenues itself. Did I hear you correctly there?
That is correct.
So obviously, you could extrapolate that out on a simplistic spreadsheet and figure out that positive FFO run rate. I know you guys don’t project it anymore, but you could make a very rough back of the envelope projection on that if these trends continue.
Yes, Kent, this is Dave. And obviously, you’d be kind of be working with trends. We can’t guarantee that performance going forward, but we look at the history and that is what it tells us yet.
I know you can’t, there’s too many variables coming in. I appreciate your insight. Thank you.
At this time, I’d like to turn the floor back over to Mr. Kelly for closing comments.
Thank you, operator. Thank you again, today for your time. We understand that the market is look and see how we follow through with the plans that we’ve laid out starting back in February. We worked diligently to deliver on that long-term plan. We continue to make strides to becoming the company I described in my opening remarks. So again, thank you for your time this morning and have a good day.
Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time and have a wonderful day.