U.S. Markets open in 2 hrs 15 mins

Edited Transcript of WHLR earnings conference call or presentation 9-May-18 2:00pm GMT

Q1 2018 Wheeler Real Estate Investment Trust Inc Earnings Call

VIRGINIA BEACH May 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Wheeler Real Estate Investment Trust Inc earnings conference call or presentation Wednesday, May 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Kelly

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

* Mary Jensen

Wheeler Real Estate Investment Trust, Inc. - IR Contact

* Matthew Thomas Reddy

Wheeler Real Estate Investment Trust, Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Lawrence D. Raiman

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Wheeler Real Estate Investment Trust 2018 First 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 detail 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 conference over to Mary Jensen of IRRealized.

--------------------------------------------------------------------------------

Mary Jensen, Wheeler Real Estate Investment Trust, Inc. - IR Contact [2]

--------------------------------------------------------------------------------

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 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 future results can be expected to differ from our expectations and those differences may be material.

For a 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 May 9, 2018. 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 in this call such as FFO and AFFO can be found in the company's quarterly reports, which also can 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, you may proceed.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Mary. And thank you, everyone for joining us today. As of today, it has been exactly 100 days since our company began a vital and necessary transformation. One that we feel will ultimately improve transparency and create a better operating platform capable of generating consistent cash flows.

While we're pleased with the profitable performance, our financial results for the first quarter do not represent where we ultimately want to be.

Our vision is to be a grocery anchored REIT with sustainable and growing cash flows that has a strong and flexible balance sheet with 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.

We believe the best way to realize this vision, is to first, solidify our cash position. Suspending the dividend was a difficult decision, but it was a necessary step to maintain the cash we need to shore up our balance sheet. Paying an unsustainable dividend hampered our ability to pay down debt and led to expensive refinancing deals.

By paying down our debt through the disposition of select noncore properties and land parcels, we're committed to bring our debt to levels that are in line with our well-respected REIT peers. To that end, we've been working diligently on the $6.8 million Revere Loan, which came due on April 30.

While we had the option to enter into a long-term refinance, we have instead extended this loan through May 15, while we finalize the terms to pay this debt off within 6 months through select asset dispositions. These dispositions coupled with the associated property level debt and Revere debt service payoff will actually increase cash flows. Right now, we're under contract to sell a 1.5-acre parcel in Virginia Beach, at a price above the acquisition cost.

We are working through the external evaluation process on 2 noncore Virginia assets and 3 other noncore properties outside our immediate geography.

Our disposition focus is on properties which have maximized their value or do not fit our core strategy, while minimizing the impact to our cash flows.

As you may recall, last quarter, we announced that we amended and restated the terms to our KeyBanc line of credit. The amendment extended the date by which the company must repay current outstanding balance of $15.5 million to July 1, 2018.

We'll continue to pay down this debt by refinancing properties on the KeyBanc line, the first of which is expected to close next week.

As Matt will explain later, we anticipate refinancing some of the properties that were previously impacted by the uncertainty, surrounding Southeastern grocers.

We are working closely with KeyBanc Capital Markets to implement a business strategy that retains the attributes of our core portfolio, strengthens our capital structure and helps us reach our stated goals as soon as practical.

We continue to leverage the experience and knowledge of our Board of Directors. John Sweet, who has served on the WHLR board since 2016, has more than 40 years of public company in capital markets experience, was recently elected to the Chairman of Board.

In addition, the board appointed 2 new directors and accepted the retirement of 2 existing board members.

Andrew Jones, who is the Founder and Chief Executive Officer of North Star Partners; and Sean Armstrong, who serves as Principal and Portfolio Manager of Westport Capital Partners, are well aligned with the investment community as fellow investors in WHLR and will bring their unique experience to the table.

Moving on to operations. Our JANAF property, which we acquired on January 18, has performed as expected with strong leasing activity and a sound tenant roster.

This is an iconic shopping center in Norfolk, Virginia, with irreplaceable real estate that we acquired for $85.65 million at a 9.4% cap rate, based on annualized in-place rents at the time of acquisition.

This asset diversifies our tenant exposure and creates future opportunities, which we expect will deliver long-term value and sustainable cash flows.

As we stated in the last quarter, we're taking a very disciplined approach for external growth and will not be entering into any new acquisition transactions for the foreseeable future.

Our focus remains on maximizing our current portfolio and deleveraging our balance sheet.

As you may recall on March 15, 2018, Southeastern Grocers, the parent company of our largest tenant, BI-LO, filed for pre-packaged Chapter 11 bankruptcy. Due to our proactive outreach with the tenant, we were able to modify 13 leases prior to the bankruptcy announcement.

The lease modifications included a combination of increases and decreases to rental rates and lease term as well some deferred landlord contributions for remodels.

This placed us in a better position to find suitable new tenants, which minimized the impact on our ABR.

We recaptured 3 BI-LOs and 1 Harveys location as part of our overall portfolio discussions.

I am pleased to announce that we have signed 2 leases related to these recaptures. We expect to sign a third later week and a fourth is in the last stages of negotiation.

As a result, this improves tenant quality and better diversifies our portfolio, while stabilizing a significant portion of the rental income and reducing our exposure to this single tenant from 12.4% to 7.6%.

I'd like to note that these backfill leases are not subject to any approval by the state bankruptcy court.

Initially, we estimated that the base rent impact to these modifications are recaptured would be approximately $2.5 million without the consideration for lease in the recaptured spaces. This also included the loss revenue associated with the BI-LO at Cypress lease, which expired on March 31, 2018.

We now expect this impact to decrease to approximately $1.2 million, once the new leases are executed at the recaptured locations.

In addition to the recaptured space, we're now on schedule to deliver Planet Fitness to backfill the former BI-LO at the Shoppes at Myrtle Park in Bluffton, South Carolina, with rent commencement occurring in the fourth quarter of 2018.

In addition to the SEG backfills, we have delivered space to Aspire Fitness in Perimeter Square, with rents expected to come as early in the third quarter. Tractor Supply is taking possession of 28,568 square feet, at Chesapeake Square, which included 10,000 square feet of previously decommissioned space. We are in final negotiations on another backfill, former Fred space at Fort Howard. We will release more details once that lease is signed. We believe these are significant steps in the right direction. We appreciate your support and patience.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Dave. Yesterday, we reported FFO of $0.16 and AFFO of $0.21 per diluted share for the first quarter of 2018, which compares to FFO $0.15 and AFFO of $0.31 per diluted share, during the first quarter of 2017.

Overall, we are pleased with how our core real estate portfolio performed during the quarter. Total revenue increased almost 14% from the same period last year to $16.3 million.

However, as mentioned on our previous earnings call, we did expect certain revenue items to decrease going into 2018, which impacted our financial 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 relating to our third-party services decreased $351,000 or $0.037 per share from the same period last year, resulting from the canceled management agreements associated with certain properties as previously noted.

Additionally, during the first quarter of 2018, we placed the note receivable due from Sea Turtle Marketplace development on a nonaccrual basis going forward, which resulted in a loss of interest income of $235,000 or $0.025 per share. 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 noncash loan cost amortization increased $177,000 or $0.018 per share for same-store operations.

This is primarily attributed to increases in variable interest rates tied to approximately $97.4 million of adjustable rate debt across our portfolio.

Furthermore, expenses associated with professional fees increased by $294,000 or $0.03 per share when compared to the same period last year. Most of this increase is associated with legal and advisory services that have been incurred in recent months to facilitate the company's recent transition efforts.

We believe some of these expenses will continue through the end of the second quarter, as we execute on our plans, but believe they are primarily nonrecurring in nature and expect them to decrease during the second half of the year.

These year-over-year reductions to AFFO were partially offset by the JANAF acquisition that occurred on January 18, 2018. We have spent the past few months on-boarding the property and we are excited about this performance.

During the first quarter, JANAF generated $1.65 million of NOI, which contributed $1 million in FFO and $296,000 of AFFO after considering preferred dividends. We are looking forward to the long-term benefits we believe this asset will provide.

Turning to our same-store results. On a GAAP basis, our portfolio generated a 2.5% increase in same-store NOI from the prior year. On a cash basis, our portfolio generated a 1.6% increase in same-store NOI. Same-store results were driven in part by $246,000 in lease termination fees on Southeastern Grocers recaptures as well as a decrease of 61% in tenant provision for credit losses, primarily resulting from increased collections on accounts receivable, while property revenues and expenses remained relatively flat.

Moving on to our operating results.

Our core portfolio is currently 92% leased and 91% occupied. The average rental rate for our portfolio is $9.78 per square foot, with an average lease term of over 4 years.

During the quarter, we executed 15 new leases totaling over 72,000 square feet at a weighted average rate of $8.08 per square foot. In addition, we executed on 26 lease renewals totaling 154,000 square feet at a weighted average decrease of $0.29 per square foot and a decrease of 3.42% over the prior rates. These amounts include an anchor lease that was renewed at a rate decrease of $1.83 per square foot. Excluding this one renewal, we would have reported an overall increase of $0.09 per square foot or a 0.95% increase on 124,000 square feet.

These amounts do not include any lease modifications associated with Southeastern Grocers, as the lease amendments will not go into effect until approved by the bankruptcy court.

Moving on to our balance sheet. We ended the quarter with $5.1 million of cash at March 31, 2018.

This compares to $3.67 million of cash at December 31, 2017. Regarding our debt obligations. We are currently in the process of working through the refinancing of $6.8 million loan with Revere that was scheduled to mature on April 30, 2018. Both the company and Revere have agreed to extend the maturity date to May 15, 2018, as we finalize the terms to pay off this debt within 6 months.

Furthermore, we are actively refinancing the underlying debt on multiple properties to meet our commitment to KeyBanc to reduce the line of credit balance from $68 million to below $52.5 million by July 1, 2018.

We are working through the refinancing of New Market, which is expected to be finalized this month and should be -- and should reduce the balance on the line by approximately $6 million.

Additionally, we have made progress on this front by securing backfills of the BI-LO recaptures at Ladson Crossing and South Park, which gives us the flexibility to remove these assets from our lines of credit.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Our first question comes from the line of Larry Raiman with LDR.

--------------------------------------------------------------------------------

Lawrence D. Raiman, [2]

--------------------------------------------------------------------------------

A question on how you're going to balance everything going forward from your capital sources and deployment. I know you have an agenda to reduce debt obligations, to get in line with peers, Dave, as you mentioned earlier, and get your balance sheet back in order, particularly, the KeyBanc line for one and then other debt obligations for two. How do you do that and not dilute the earnings level and balance everything out? Because I would presume some of the debt obligations you may be reducing, come at a pretty low cost relative to the source of funds of, asset sales, which would be at pretty high cap rate?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, that is -- and I mentioned in my script that our criteria for choosing disposition properties is going to be properties that we think we've maximized value on already or that no longer fit our strategy. But also that the disposition transaction won't significantly impact cash flow. And so just take for instance the parcel of land that we have for sale here in Virginia Beach. Obviously, that's not an income-producing asset. So the sale and then the pay-down of that associated debt, obviously, won't dilute our earnings. But on the other 2 Virginia transactions we're contemplating right now, and paying down with the Revere debt. The Revere debt is a significantly higher interest rate than we typically have on the property level loans. So the goal here is on the refi -- or the pay down of Revere, the ending result will actually be positive cash flow. As the properties net cash flow after debt, after the property level debt, actually is less than the corresponding debt service with Revere Bank -- with Revere. So that paydown is actually going to stimulate a little bit of more cash flow. And that's going to be outlook going forward. We're looking to strategically dispose of assets. We're not on a wholesale asset disposition, we are looking for assets that just don't fit the strategy going forward, whether geography or as I said, maximizing value. But again, we're not looking at a whole lot of dispositions here. It is just strategic and that is certainly one of the considerations is the ending cash flow.

--------------------------------------------------------------------------------

Lawrence D. Raiman, [4]

--------------------------------------------------------------------------------

So as you do some strategic transactions, just one final question to maybe tweak down your leverage, doesn't sound like there is a mass wholesale disposition program. How are you thinking about overhead costs for the entity relative to the overall organization? By my calc, it was 25% of NOI, which is certainly quite high relative to, most other companies in the universe. So is there a way to work that down to create some cost efficiencies and free cash flow to work in other uses for the business?

--------------------------------------------------------------------------------

David Kelly, Wheeler Real Estate Investment Trust, Inc. - CEO & President [5]

--------------------------------------------------------------------------------

Yes, we have been aggressively paring down our cost structure over the past couple of years and particularly, in last several months. And it -- some of it may sound like nickels and dimes, but they're adding up. I mean, for instance, our participation in ICSC events, our advertising, our operation office in Charleston in South Carolina. We're looking to make significant changes to that cost basis. On kind of the general operating basis to the company, we have, at this point, we are at a pretty lean, I think, pretty lean rate on personnel. And while we'll do some of these dispositions, we don't think it is going to significantly impact the amount of personnel, for instance, property managers, leasing administration, accounting, that is going to be required to manage those. So I don't see any significant changes in that end. But as I said, there is some room here for us to pare back expenses on basically on discretionary spending, which we have pulled back considerably on. And I think you'll see that, not so much here in the first quarter because we haven't had a whole lot of time, the first quarter to implement that, but going forward you'll see kind of a gradual decrease in those operating expenses. So to answer your question, I agree with you, our costs are too high, and we are working to bring those down to more into line with our peers.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

There are no further questions at this time. I'd like to turn the floor back to Dave Kelly for closing comments.

--------------------------------------------------------------------------------

David Kelly, Wheeler Real Estate Investment Trust, Inc. - CEO & President [7]

--------------------------------------------------------------------------------

Thank you, everybody, for taking a little time out this morning to join us. I look forward to talking to you again, and as events occur, we will be releasing more information and keeping you abreast on our progress. So thank you, again. Have a good day.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.