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Edited Transcript of WHLR earnings conference call or presentation 27-Feb-19 3:00pm GMT

Q4 2018 Wheeler Real Estate Investment Trust Inc Earnings Call

VIRGINIA BEACH Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Wheeler Real Estate Investment Trust Inc earnings conference call or presentation Wednesday, February 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Kelly

Wheeler Real Estate Investment Trust, Inc. - CEO, President & Director

* Mary Jensen

IRRealized LLC - Principal

* Matthew Thomas Reddy

Wheeler Real Estate Investment Trust, Inc. - CFO

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Wheeler Real Estate Investment Trust's 2018 Fourth Quarter Earnings Conference Call.

(Operator Instructions) Please note that today's conference call is being recorded with a webcast replay available for the next 90 days. The dial-in details for the replay can be found in yesterday's press release and can be obtained from the Investor Relations section of the company's website at www.whlr.us. (Operator Instructions)

I will now turn the call over to Mary Jensen of IRRealized.

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Mary Jensen, IRRealized LLC - Principal [2]

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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 make forward-looking statements. These statements -- forward-looking statements are based on the beliefs of, assumptions made by and information currently 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 that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect. Therefore, our actual 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 on the Investor Relations sections of our website.

All information presented on this call is current as of today, February 27, 2019. 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 sections 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 and year-end 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?

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David Kelly, Wheeler Real Estate Investment Trust, Inc. - CEO, President & Director [3]

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Thank you, Mary, and thank you, everyone, for joining us today.

2018 was a game-changing year for WHLR. As each of for our prior 4 earnings call have touched on consistent themes, I want to briefly focus on what we've accomplished over the last 12 months and talk primarily about our portfolio.

As we've consistently stated in the past, our objective is to be a grocery-anchored dividend-paying REIT. We believe that this is the surest path to restoring 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.

We're making solid strides in this effort. We still have ground to cover. But the vision is clear. We know our destination. With that being said, we'll not be making the first quarter of 2019 preferred dividend payments previously scheduled for April of this year, and the common dividend will be continued to be suspended until further notice. We, along with our Board of Directors, will continue to assess this policy each quarter taking into consideration the sustainability of these dividends as it coincides with our underlying cash flows.

To that end, we've utilized the cash saved from the suspended dividend payments to significantly reduce our overall debt by $9,435,000. We've achieved this through a combination of factors, such as generating operating cash flows through our real estate portfolio, strategically refinancing short-term debt and opportunistic asset sales. Please keep in mind that this debt reduction was after the JANAF debt assumption in January 2018.

Further, we have reduced our KeyBanc line from $68 million to $52 million. Our Revere loan balance stands at approximately $500,000. We expect to have this loan completely paid off by April 1, 2019.

As of today, we've reduced our Bulldog investors senior convertible notes to $919,000 and plan to pay these notes off in June of this year. Just as vital, we have focused on maintaining and enhancing the appeal of our real estate portfolio through prudent reinvestment activities, which we believe will preserve and sustain the underlying cash flows generated by these properties.

In 2018, we invested approximately $5 million in capital expenditures, representing an increase of 28% compared to the prior year. This included, among other things, 8 roof replacements, 3 parking lot lighting upgrades and 12 parking lot overlays. We believe these reinvestment activities help to secure a longer-term, more stabilized rents, resulting in a 6% weighted average rent spread compared to a 3.95% spread reported in 2017.

We currently have over $14.5 million of restricted cash sitting in lender reserves to be used on TI, leasing and capital improvements. It is our intention to continue to put that money to work at the property level.

With these investments and our leasing team's continued focus on tenant relations and proactively managing the portfolio, the quality of our lease renewals executed in 2018 improved significantly. 78% of the expiring square feet that renewed did so with rate increases compared to 49% the prior year. Over the next 12 months, our square footage expirations have decreased by roughly 230 basis points from 9.39% of square feet expiring to 7.08%.

In addition, our annualized base rent expirations decreased from over 16.5% to less than 9.5%, representing a 44% decrease.

Stability in our property revenue improved as well, supported by a stronger tenant base. For example, our credit for provisional loss was less than 1% in 2018. Excluding the Southeastern Grocers' bankruptcy, which we have discussed in detail in previous calls, only 4 leases totaling 49,500 square feet were impacted by bankruptcy filings in 2018.

Same-store NOI fell 4% in 2018, which is primarily impacted by the Southeastern Grocers' bankruptcy. If we omit Southeastern Grocers from our same-store results, same-store net operating income remained flat compared to the previous year.

Recently, we received final lender approval on the remaining Southeastern Grocers' backfill at Tampa Festival in Tampa, Florida, replacing approximately 61% of the prior Southeastern Grocers' rental income and only 44% of the square footage. We're currently in negotiations with a national fitness operator to lease the remaining 22,800 square feet. We're in the final lease negotiations with a regional fitness operator to occupy the 19,470 square foot anchor space at Perimeter Square located in Tulsa, Oklahoma. As a result, we have placed that property back on the market for disposition.

As part of our ongoing real estate portfolio evaluation, we've decided to take a write-down of $3.9 million on multiple undeveloped land parcels that have been in the portfolio for a number of years. We feel these new valuations better reflect the current market value of the properties and have made the necessary adjustments.

We've also taken an additional $1.7 million reserve on the loan on the Sea Turtle project located in Hilton Head. While we continue to work with the Bank of Arkansas to seek opportunities to maximize our position, we feel the new valuation more accurately reflects the current market conditions.

Our goal is and remains to create value for our shareholders by maintaining a strong real estate portfolio that provides consistent cash flows that will support future sustainable dividends. The executive team and the Board are working together to ensure this occurs in a rational fashion.

Before I turn the call over to Matt, I'd like to mention that while we continue to work diligently in concert with our Board of Directors to identify strategic alternatives, we do not have anything definitive to report at this time.

With that, I'll turn the discussion over to our CFO, Matt Reddy, who will walk you through our fourth quarter financial highlights. Matt?

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Matthew Thomas Reddy, Wheeler Real Estate Investment Trust, Inc. - CFO [4]

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Thanks, Dave. Yesterday, we reported FFO of negative $0.05 and AFFO of $0.15 per diluted share for the fourth quarter of 2018, which compares to FFO of negative $0.56 and AFFO of $0.18 per diluted share during the fourth quarter 2017.

Fourth quarter total revenue increased 12.4% or $1.8 million from the same period last year to $16.1 million. This increase can be attributed to the $2.8 million of revenue generated by our 2018 acquisition, 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 quarter results, the decrease in AFFO year-over-year can be attributed to a few key factors. First, asset management fees, leasing commissions and development fees that decreased by $623,000 or $0.027 per share.

Additionally, the note receivable from the Sea Turtle marketplace development has been placed on a nonaccrual basis, which accounted for a decrease of interest income of $242,000 or $0.025 per share when compared to the fourth quarter of 2017. This amount excludes the 4% portion of interest due at loan maturity, which has been excluded from AFFO in previous periods.

Further, AFFO for the fourth quarter 2018 increased by $0.14 when compared to the fourth quarter of 2017 as related party receivables were reserved by $1.59 million in the prior period, which was partially offset by an increase in the provision for credit loss for trade receivables.

Interest expense, net of noncash loan amortization, increased $275,000 or $0.028 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, nonproperty operating expenses impacting AFFO, including expenses associated with non-REIT management and leasing services, increased by $239,000 or $0.025 per share when compared to the same period last year. This increase includes incremental costs associated with the ongoing litigation the company is currently a party to as some residual expenses relating to the company's Annual Shareholder Meeting that occurred in early October.

During the fourth quarter, JANAF generated $1.9 million of cash NOI, which contributed $1.15 million of FFO. Further, JANAF generated a period-over-period increase in AFFO of $398,000 after considering preferred dividends or $0.041 of AFFO during the quarter.

Same-store cash NOI decreased by 10.6% when compared to the fourth quarter 2017, which reduced AFFO by $0.10 year-over-year. The decrease in same-store NOI can be attributed to the loss of revenue associated with the recent Southeastern Grocers' recaptures and rent adjustments and other vacancies that have yet to be backfilled or reopened for operation.

We expect some of this decrease to be offset in future quarters as rent commences in currently leased space and we backfill the remaining vacant anchors.

As of December 31, 2018, our core portfolio is 89.4% leased and 89.1% occupied, down 190 basis points, respectively, since the quarter-end of September 30, 2018. The average rental rate for our portfolio is $9.67 per square foot with an average lease term of over 4.17 years.

During the quarter, we executed 8 new leases totaling over 56,000 square feet at a weighted average rate of $10.38 per square foot. Additionally, we renewed 29 leases totaling 131,000 square feet at a weighted average increase of $0.53 per square foot and an increase of 4.83% over the previous in-place rates. Rent spreads are calculated based on the average rate square foot for the renewed or new lease term.

We ended the quarter with $3.54 million of cash and $14.46 of restricted cash for property expense escrows and future capital expenditures, lease commissions and tenant improvement allowances.

During the quarter, we reduced our debt obligations by $1.9 million to $369.6 million at December 31, 2018, including debt associated with assets held for sale when compared to September 30, 2018.

As part of our annual goodwill impairment analysis, it was determined that the fair market value of our sole reporting unit based on our market capitalization was significantly less than the carrying value on our balance sheet. This resulted in the full impairment of our goodwill balance of $5.49 million.

Additionally, we have had our land parcels available for sale since early 2018. And after having success with the sale of Laskin Road and a parcel at Harbor Pointe, we are still pursuing the sale of our remaining land assets going forward. After listing and pursuing the sale of these land assets in these specific markets, it was determined that a write-down of $3.9 million was necessary to align our book value with the most likely fair value of the individual assets given the various range of potential uses.

As mentioned by Dave, we are still pursuing our interest in the notes receivable related to the Sea Turtle development and have further reserved our position by $1.7 million at December 31, 2018, as we work to recover amounts due.

Further, we ended the quarter with a weighted average interest rate of 4.84% and 4.31 years' weighted average term remaining. Additional detail on fourth quarter financing activities can be found in the press release and supplemental package we filed yesterday afternoon.

With that, we will be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Ladies and gentlemen, at this point I would like to turn the call back to Mr. Kelly for his closing remarks.

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David Kelly, Wheeler Real Estate Investment Trust, Inc. - CEO, President & Director [2]

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Thank you, operator, and thank you, everyone, for joining us today. I appreciate your time, and I hope you have a good rest of your day. Thank you. Bye-bye.

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Operator [3]

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That concludes today's call. You may now disconnect.