Wheeler REIT: A View From The Perspective Of A Preferred Investor: Revision
I submitted the following revision, which I believed I owed my followers after I learned that Finviz and Yahoo Finance had not supplied the latest information, which I relied on. Its publishing was denied by the SA editors, who in the same email, informed me that I would no longer be allowed to contribute future articles.
I recently wrote the following Wheeler REIT article unaware of the most recent financial 2016 Q2 results.
According to Wheeler's latest financial press release, it appears to have stopped the bleeding and its fortunes might be on the rise.
However a preferred investment, although potentially lucrative, should be limited to investors with a high tolerance for risk.
For those of you unfamiliar with my preferred investment philosophy, "The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor" will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.
When considering the acquisition of Wheeler Real Estate Investment Trust (WHLR) preferred shares, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to Wheeler. Below is a snapshot of a slice of that page:
A quick review informs us that Wheeler is a tiny REIT that acquires, re-invigorates, and manages small to medium sized shopping centers throughout the East Coast, South and Southwest USA.
Let's click on Find Related Securities to examine any preferreds this company has to offer:
Here we learn that WHLR offers warrants, however, it's the preferred, WHLRP, we are interested in, which was initially offered at the interest rate of 9.0%.
Now let's click on WHLRP itself. Below is the screenshot:
- And now to the thing that intrigued me about this preferred. Notice that it has no call date, something I don't recall ever seeing before. This company has given up its right to ever redeem this preferred. Which means that the holder, if he wants, can hold this issue forever and keep the company on the hook for the 9% coupon rate indefinitely.
- However, after stating that the holder at his option can at any time convert this preferred to common shares of Wheeler at a price equal to $5/share, it goes on to state: "To the extent the 20-trading day volume-weighted average closing price of the common stock exceeding $7.25 per share on the Nasdaq Capital Market, each share of Series B Preferred Stock will, on the date following the record date for their next dividend payment, automatically convert into shares of common stock at an initial conversion price equal to $5.00 per share."
- This could be a very attractive offer, considering the holder would receive five shares of the common for each preferred, which would now be priced at approximately $7.25/ share.
- I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, and consequently, I don't buy them.
- These shares are NOT callable at the company's option at $25.00 plus any accrued interest owed. This means you have forever before the company can call this issue, at which time, the company must pay its par value of $25.00.
- It pays a dividend of $2.25 per share per year, or 0.5625 per quarter, paid on 1/15, 4/15, 7/15, 10/15 of each year. Meaning, 4 times each year, on the dates specified, you will receive 0.5625 per share, which will add up to a total of $2.25 per share payment per year.
- At the time of their IPO, these shares were unrated by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are NOT eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
- As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers and at least marginally understand a company's financial statements and conference calls.
Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder - which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of WHLR.
Above is a screenshot of WHLR's 4-year chart, which, as far as I'm concerned, is the picture of a company whose shares have consistently lost value, falling from $6.00 on 11/26/12 to its current $1.71.
Above is a screenshot taken from a Finviz view of WHLR's present financial highlights. The company's current market value is $117.41 million. It lost $103.80 million on $31.70 million in sales. Over the past year, the stock price has fallen by 10.94%, yet has risen an inexplicable 17.93% during this past half year. It also shows long and short-term debt/equity of 2.52
At the time I wrote the above, I was unaware that Wheeler had issued their 2016 Q2 financial report press release, which I have provided the link to for those interested.
Digging into the numbers, it's apparent that Wheeler's fortunes are on the rise:
- Total revenue from continuing operations increased by 82.27% or $5.0 million.
- Property Net Operating Income ("NOI") from continuing operations increased by 99.76% to approximately $8.0 million.
- Adjusted Funds from Operations ("AFFO") of $0.04 per common share and common unit ("Operating Partnership Unit" or "OP Unit")
- Average rental rate increase on renewals signed during the quarter was 3.57%. Occupancy rate of 93.79% at June 30, 2016, compared to 95.57% at June 30, 2015.
- During the quarter, the Company completed the acquisition of an additional 605,358 square feet of gross leasable area.
However, as far as I'm concerned, one of the most telling and consequential aspects of the report is as follows:
Net loss attributable to Wheeler common shareholders for the three months ended June 30, 2016 was $3.2 million, or $0.05 per basic and diluted share, compared to a net loss of $72.7 million, or $4.13 per basic and diluted share, during the same 2015 period. The decrease in net loss for the three months ended June 30, 2016 was primarily due to the reduction of preferred stock dividends, a one time $59.5 million deemed dividend related to beneficial conversion feature of preferred stock that occurred in the second quarter 2015, and the incremental NOI derived from the twenty-five retail property acquisitions occurring subsequent to June 30, 2015. These amounts were partially offset by additional depreciation, amortization and interest expense.
My bottom line decision is to look at charts of the past few years' performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year.
Therefore, as a preferred investor with a very high tolerance for risk, I was willing to accept that risk, consequently bidding on and purchasing 1000 shares of WHLRP at $21.21/share, which gained me an impressive 10.61% yield in this current low yield, yet yield hungry environment. However, this company is very small and still losing money, which leads me to believe that it remains a risky investment proposition that should be considered carefully and not undertaken if you unable to afford the risk of loss.
Disclosure: I am/we are long WHLRP.