UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35713
WHEELER REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Maryland | | 45-2681082 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
2529 Virginia Beach Blvd., Virginia Beach. Virginia | | 23452 |
(Address of Principal Executive Offices) | | (Zip Code) |
(757) 627-9088
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
Non-accelerated filer | | ý | | Smaller reporting company | | ý |
| | | | Emerging growth company | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | | WHLR | Nasdaq Capital Market |
Series B Convertible Preferred Stock | | WHLRP | Nasdaq Capital Market |
Series D Cumulative Convertible Preferred Stock | | WHLRD | Nasdaq Capital Market |
As of November 6, 2019, there were 9,693,271 common shares, $0.01 par value per share, outstanding.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
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| | Page |
PART I – FINANCIAL INFORMATION | |
| | |
Item 1. | Financial Statements | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II – OTHER INFORMATION | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except par value and share data)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (unaudited) | | |
ASSETS: | | | |
Investment properties, net | $ | 418,338 |
| | $ | 436,006 |
|
Cash and cash equivalents | 5,233 |
| | 3,544 |
|
Restricted cash | 17,294 |
| | 14,455 |
|
Rents and other tenant receivables, net | 5,947 |
| | 5,539 |
|
Notes receivable, net | — |
| | 5,000 |
|
Assets held for sale | 1,756 |
| | 6,118 |
|
Above market lease intangibles, net | 5,678 |
| | 7,346 |
|
Operating lease right-of-use assets | 11,698 |
| | — |
|
Deferred costs and other assets, net | 23,257 |
| | 30,073 |
|
Total Assets | $ | 489,201 |
| | $ | 508,081 |
|
LIABILITIES: | | | |
Loans payable, net | $ | 342,811 |
| | $ | 360,190 |
|
Liabilities associated with assets held for sale | 2,060 |
| | 4,520 |
|
Below market lease intangibles, net | 7,909 |
| | 10,045 |
|
Operating lease liabilities | 11,921 |
| | — |
|
Accounts payable, accrued expenses and other liabilities | 10,592 |
| | 12,116 |
|
Total Liabilities | 375,293 |
| | 386,871 |
|
Series D Cumulative Convertible Preferred Stock (no par value, 4,000,000 shares authorized, 3,600,636 shares issued and outstanding; $99.24 million and $91.98 million aggregate liquidation preference, respectively) | 84,657 |
| | 76,955 |
|
| | | |
EQUITY: | | | |
Series A Preferred Stock (no par value, 4,500 shares authorized, 562 shares issued and outstanding) | 453 |
| | 453 |
|
Series B Convertible Preferred Stock (no par value, 5,000,000 authorized, 1,875,748 shares issued and outstanding; $46.90 million aggregate liquidation preference) | 41,065 |
| | 41,000 |
|
Common Stock ($0.01 par value, 18,750,000 shares authorized, 9,693,271 and 9,511,464 shares issued and outstanding, respectively) | 97 |
| | 95 |
|
Additional paid-in capital | 233,861 |
| | 233,697 |
|
Accumulated deficit | (248,319 | ) | | (233,184 | ) |
Total Shareholders’ Equity | 27,157 |
| | 42,061 |
|
Noncontrolling interests | 2,094 |
| | 2,194 |
|
Total Equity | 29,251 |
| | 44,255 |
|
Total Liabilities and Equity | $ | 489,201 |
| | $ | 508,081 |
|
See accompanying notes to condensed consolidated financial statements.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
REVENUE: | | | | | | | |
Rental revenues | $ | 15,385 |
| | $ | 15,756 |
| | $ | 46,546 |
| | $ | 47,288 |
|
Asset management fees | 16 |
| | 48 |
| | 42 |
| | 220 |
|
Commissions | 18 |
| | 52 |
| | 65 |
| | 102 |
|
Other revenues | 146 |
| | 217 |
| | 439 |
| | 1,697 |
|
Total Revenue | 15,565 |
| | 16,073 |
| | 47,092 |
| | 49,307 |
|
OPERATING EXPENSES: | | | | | | | |
Property operations | 4,967 |
| | 4,687 |
| | 14,288 |
| | 13,804 |
|
Non-REIT management and leasing services | 1 |
| | 23 |
| | 25 |
| | 59 |
|
Depreciation and amortization | 5,066 |
| | 6,045 |
| | 16,169 |
| | 20,943 |
|
Impairment of notes receivable | — |
| | — |
| | 5,000 |
| | — |
|
Impairment of assets held for sale | 400 |
| | — |
| | 1,547 |
| | — |
|
Corporate general & administrative | 1,349 |
| | 1,703 |
| | 4,543 |
| | 6,479 |
|
Other operating expenses | — |
| | 250 |
| | — |
| | 250 |
|
Total Operating Expenses | 11,783 |
| | 12,708 |
| | 41,572 |
| | 41,535 |
|
(Loss) gain on disposal of properties | (81 | ) | | 1,257 |
| | 1,427 |
| | 2,312 |
|
Operating Income | 3,701 |
| | 4,622 |
| | 6,947 |
| | 10,084 |
|
Interest income | 1 |
| | 1 |
| | 2 |
| | 3 |
|
Interest expense | (4,654 | ) | | (5,183 | ) | | (14,394 | ) | | (14,940 | ) |
Net Loss from Continuing Operations Before Income Taxes | (952 | ) | | (560 | ) | | (7,445 | ) | | (4,853 | ) |
Income tax expense | (8 | ) | | (30 | ) | | (23 | ) | | (72 | ) |
Net Loss from Continuing Operations | (960 | ) | | (590 | ) | | (7,468 | ) | | (4,925 | ) |
Income from Discontinued Operations | — |
| | — |
| | — |
| | 903 |
|
Net Loss | (960 | ) | | (590 | ) | | (7,468 | ) | | (4,022 | ) |
Less: Net (loss) income attributable to noncontrolling interests | (1 | ) | | 12 |
| | (100 | ) | | (70 | ) |
Net Loss Attributable to Wheeler REIT | (959 | ) | | (602 | ) | | (7,368 | ) | | (3,952 | ) |
Preferred Stock dividends - declared | — |
| | (3,208 | ) | | — |
| | (9,621 | ) |
Preferred Stock dividends - undeclared | (3,657 | ) | | — |
| | (10,972 | ) | | — |
|
Net Loss Attributable to Wheeler REIT Common Shareholders | $ | (4,616 | ) | | $ | (3,810 | ) | | $ | (18,340 | ) | | $ | (13,573 | ) |
| | | | | | | |
| | | | | | | |
Loss per share from continuing operations (basic and diluted) | $ | (0.48 | ) | | $ | (0.41 | ) | | $ | (1.90 | ) | | $ | (1.58 | ) |
Income per share from discontinued operations | — |
| | — |
| | — |
| | 0.10 |
|
| $ | (0.48 | ) | | $ | (0.41 | ) | | $ | (1.90 | ) | | $ | (1.48 | ) |
| | | | | | | |
Weighted-average number of shares: | | | | | | | |
Basic and Diluted | 9,693,271 |
| | 9,385,666 |
| | 9,664,582 |
| | 9,179,366 |
|
| | | | | | | |
See accompanying notes to condensed consolidated financial statements.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in thousands, except share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Series A | | Series B | | | | | | | | | | Noncontrolling | | |
| Preferred Stock | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Shareholders’ Equity | | Interests | | Total |
| Shares | | Value | | Shares | | Value | | Shares | | Value | | | | | Units | | Value | | Equity |
Balance, December 31, 2018 | 562 |
| | $ | 453 |
| | 1,875,748 |
| | $ | 41,000 |
| | 9,511,464 |
| | $ | 95 |
| | $ | 233,697 |
| | $ | (233,184 | ) | | $ | 42,061 |
| | 235,032 |
| | $ | 2,194 |
| | $ | 44,255 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Issuance of Common Stock under Share Incentive Plan | — |
| | — |
| | — |
| | — |
| | 181,807 |
| | 2 |
| | 164 |
| | — |
| | 166 |
| | — |
| | — |
| | 166 |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,589 | ) | | (2,589 | ) | | — |
| | — |
| | (2,589 | ) |
Net Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 642 |
| | 642 |
| | — |
| | 13 |
| | 655 |
|
Balance, March 31, 2019 (Unaudited) | 562 |
| | 453 |
| | 1,875,748 |
| | 41,022 |
| | 9,693,271 |
| | 97 |
| | 233,861 |
| | (235,131 | ) | | 40,302 |
| | 235,032 |
| | 2,207 |
| | 42,509 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,590 | ) | | (2,590 | ) | | — |
| | — |
| | (2,590 | ) |
Net Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,051 | ) | | (7,051 | ) | | — |
| | (112 | ) | | (7,163 | ) |
Balance, June 30, 2019 (Unaudited) | 562 |
| | 453 |
| | 1,875,748 |
| | 41,044 |
| | 9,693,271 |
| | 97 |
| | 233,861 |
| | (244,772 | ) | | 30,683 |
| | 235,032 |
| | 2,095 |
| | 32,778 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | 21 |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,588 | ) | | (2,588 | ) | | — |
| | — |
| | (2,588 | ) |
Net Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (959 | ) | | (959 | ) | | — |
| | (1 | ) | | (960 | ) |
Balance, September 30, 2019 (Unaudited) | 562 |
| | $ | 453 |
| | 1,875,748 |
| | $ | 41,065 |
| | 9,693,271 |
| | $ | 97 |
| | $ | 233,861 |
| | $ | (248,319 | ) | | $ | 27,157 |
| | 235,032 |
| | $ | 2,094 |
| | $ | 29,251 |
|
See accompanying notes to condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Series A | | Series B | | | | | | | | | | Noncontrolling | | |
| Preferred Stock | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Shareholders’ Equity | | Interests | | Total |
| Shares | | Value | | Shares | | Value | | Shares | | Value | | | | | Units | | Value | | Equity |
Balance, December 31, 2017 | 562 |
| | $ | 453 |
| | 1,875,848 |
| | $ | 40,915 |
| | 8,744,189 |
| | $ | 87 |
| | $ | 226,978 |
| | $ | (204,925 | ) | | $ | 63,508 |
| | 635,018 |
| | $ | 7,088 |
| | $ | 70,596 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Conversion of Series B Preferred Stock to Common Stock | — |
| | — |
| | (100 | ) | | (2 | ) | | 62 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Conversion of operating partnership units to Common Stock | — |
| | — |
| | — |
| | — |
| | 9,706 |
| | — |
| | 64 |
| | — |
| | 64 |
| | (9,706 | ) | | (64 | ) | | — |
|
Issuance of Common Stock under Share Incentive Plan | — |
| | — |
| | — |
| | — |
| | 43,459 |
| | — |
| | 330 |
| | — |
| | 330 |
| | — |
| | — |
| | 330 |
|
Issuance of Common Stock for acquisition of JANAF | — |
| | — |
| | — |
| | — |
| | 150,000 |
| | 2 |
| | 1,128 |
| | — |
| | 1,130 |
| | — |
| | — |
| | 1,130 |
|
Adjustment for noncontrolling interest in operating partnership | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 505 |
| | — |
| | 505 |
| | — |
| | (505 | ) | | — |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,207 | ) | | (3,207 | ) | | — |
| | — |
| | (3,207 | ) |
Net Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,825 | ) | | (1,825 | ) | | — |
| | (47 | ) | | (1,872 | ) |
Balance, March 31, 2018 (Unaudited) | 562 |
| | 453 |
| | 1,875,748 |
| | 40,935 |
| | 8,947,416 |
| | 89 |
| | 229,007 |
| | (209,957 | ) | | 60,527 |
| | 625,312 |
| | 6,472 |
| | 66,999 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Conversion of operating partnership units to Common Stock | — |
| | — |
| | — |
| | — |
| | 311,307 |
| | 3 |
| | 1,151 |
| | — |
| | 1,154 |
| | (311,307 | ) | | (1,154 | ) | | — |
|
Issuance of Common Stock under Share Incentive Plan | — |
| | — |
| | — |
| | — |
| | 83,854 |
| | 1 |
| | 397 |
| | — |
| | 398 |
| | — |
| | — |
| | 398 |
|
Adjustment for noncontrolling interest in operating partnership | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,081 |
| | — |
| | 2,081 |
| | — |
| | (2,081 | ) | | — |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,206 | ) | | (3,206 | ) | | — |
| | — |
| | (3,206 | ) |
Net Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,525 | ) | | (1,525 | ) | | — |
| | (35 | ) | | (1,560 | ) |
Balance, June 30, 2018 (Unaudited) | 562 |
| | 453 |
| | 1,875,748 |
| | 40,957 |
| | 9,342,577 |
| | 93 |
| | 232,636 |
| | (214,688 | ) | | 59,451 |
| | 314,005 |
| | 3,202 |
| | 62,653 |
|
Accretion of Series B Preferred Stock discount | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | 21 |
|
Conversion of operating partnership units to Common Stock | — |
| | — |
| | — |
| | — |
| | 18,455 |
| | — |
| | 80 |
| | — |
| | 80 |
| | (18,455 | ) | | (80 | ) | | — |
|
Issuance of Common Stock under Share Incentive Plan | — |
| | — |
| | — |
| | — |
| | 40,904 |
| | 1 |
| | 165 |
| | — |
| | 166 |
| | — |
| | — |
| | 166 |
|
Adjustment for noncontrolling interest in operating partnership | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 120 |
| | — |
| | 120 |
| | — |
| | (120 | ) | | — |
|
Dividends and distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,208 | ) | | (3,208 | ) | | — |
| | — |
| | (3,208 | ) |
Net Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (602 | ) | | (602 | ) | | — |
| | 12 |
| | (590 | ) |
Balance, September 30, 2018 (Unaudited) | 562 |
| | $ | 453 |
| | 1,875,748 |
| | $ | 40,978 |
| | 9,401,936 |
| | $ | 94 |
| | $ | 233,001 |
| | $ | (218,498 | ) | | $ | 56,028 |
| | 295,550 |
| | $ | 3,014 |
| | $ | 59,042 |
|
See accompanying notes to condensed consolidated financial statements.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net Loss | $ | (7,468 | ) | | $ | (4,022 | ) |
Adjustments to reconcile consolidated net loss to net cash provided by operating activities: | | | |
Depreciation | 8,991 |
| | 9,553 |
|
Amortization | 7,178 |
| | 11,390 |
|
Loan cost amortization | 1,336 |
| | 1,682 |
|
Above (below) market lease amortization, net | (585 | ) | | (421 | ) |
Straight-line expense | 140 |
| | 16 |
|
Share-based compensation | 244 |
| | 727 |
|
Gain on disposal of properties | (1,427 | ) | | (2,312 | ) |
Gain on disposal of properties-discontinued operations | — |
| | (903 | ) |
Credit losses on operating lease receivables | 315 |
| | 412 |
|
Impairment of notes receivable | 5,000 |
| | — |
|
Impairment of assets held for sale | 1,547 |
| | — |
|
Changes in assets and liabilities, net of acquisitions | | | |
Rent and other tenant receivables, net | (520 | ) | | 919 |
|
Unbilled rent | (60 | ) | | (1,037 | ) |
Related party receivables | — |
| | 1 |
|
Deferred costs and other assets, net | (335 | ) | | 71 |
|
Accounts payable, accrued expenses and other liabilities | (1,738 | ) | | 2,466 |
|
Net operating cash flows used in discontinued operations | (2 | ) | | (2 | ) |
Net cash provided by operating activities | 12,616 |
| | 18,540 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Investment property acquisitions, net of restricted cash acquired | (24 | ) | | (23,153 | ) |
Capital expenditures | (1,405 | ) | | (3,846 | ) |
Cash received from disposal of properties | 3,584 |
| | 3,231 |
|
Cash received from disposal of properties-discontinued operations | 19 |
| | 2,747 |
|
Net cash provided by (used in) investing activities | 2,174 |
| | (21,021 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Payments for deferred financing costs | (537 | ) | | (1,192 | ) |
Dividends and distributions paid | — |
| | (11,554 | ) |
Proceeds from sales of Preferred Stock, net of expenses | — |
| | 21,158 |
|
Loan proceeds | 24,165 |
| | 28,487 |
|
Loan principal payments | (33,890 | ) | | (26,282 | ) |
Net financing cash flows used in discontinued operations | — |
| | (76 | ) |
Net cash (used in) provided by financing activities | (10,262 | ) | | 10,541 |
|
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 4,528 |
| | 8,060 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | 17,999 |
| | 12,286 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | 22,527 |
| | $ | 20,346 |
|
Supplemental Disclosures: | | | |
Non-Cash Transactions: | | | |
Debt incurred for acquisitions | $ | — |
| | $ | 58,867 |
|
Conversion of common units to common stock | $ | — |
| | $ | 1,298 |
|
Conversion of Series B Preferred Stock to Common Stock | $ | — |
| | $ | 2 |
|
Issuance of Common Stock for acquisition | $ | — |
| | $ | 1,130 |
|
Accretion of preferred stock discounts | $ | 510 |
| | $ | 509 |
|
Other Cash Transactions: | | | |
Cash paid for taxes | $ | 6 |
| | $ | 39 |
|
Cash paid for interest | $ | 13,218 |
| | $ | 13,084 |
|
| | | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 5,233 |
| | $ | 3,638 |
|
Restricted cash | 17,294 |
| | 16,708 |
|
Cash, cash equivalents, and restricted cash | $ | 22,527 |
| | $ | 20,346 |
|
See accompanying notes to condensed consolidated financial statements.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation and Consolidation
Wheeler Real Estate Investment Trust, Inc. (the "Trust", the "REIT", or "Company") is a Maryland corporation formed on June 23, 2011. The Trust serves as the general partner of Wheeler REIT, L.P. (the “Operating Partnership”), which was formed as a Virginia limited partnership on April 5, 2012. As of September 30, 2019, the Trust, through the Operating Partnership, owned and operated sixty-one centers, one office building and six undeveloped properties in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey, Pennsylvania and West Virginia. Accordingly, the use of the word “Company” refers to the Trust and its consolidated subsidiaries, except where the context otherwise requires.
On October 24, 2014, the Trust, through the Operating Partnership, acquired (i) Wheeler Interests, LLC (“WI”), an acquisition and asset management firm, (ii) Wheeler Real Estate, LLC (“WRE”), a real estate leasing, management and administration firm and (iii) WHLR Management, LLC (“WM” and collectively with WI and WRE the “Operating Companies”), a real estate business operations firm, from Jon S. Wheeler, the Company's then Chairman and CEO, resulting in the Company becoming an internally-managed REIT. Accordingly, the responsibility for identifying targeted real estate investments, the handling of the disposition of real estate investments our Board of Directors chooses to sell, administering our day-to-day business operations, including but not limited to, leasing, property management, payroll and accounting functions, acquisitions, asset management and administration are now handled internally.
The Operating Companies perform property management and leasing functions for certain related and non-related third parties (the “Non-REIT Properties”), primarily through WRE. The Company converted WRE to a Taxable REIT Subsidiary (“TRS”) to accommodate serving the Non-REIT Properties since applicable REIT regulations consider the income derived from these services to be “bad” income subject to taxation. The regulations allow for costs incurred by the Company commensurate with the services performed for the Non-REIT Properties to be allocated to a TRS.
During January 2014, the Company acquired Wheeler Development, LLC (“WD”) and converted it to a TRS. The Company began performing development activities for both REIT Properties and Non-REIT Properties during 2015.
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (the “Form 10-Q”) are unaudited and the results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for future periods or the year. However, amounts presented in the condensed consolidated balance sheet as of December 31, 2018 are derived from the Company’s audited consolidated financial statements as of that date, but do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The Company prepared the accompanying condensed consolidated financial statements in accordance with GAAP for interim financial statements. The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature. All material balances and transactions between the consolidated entities of the Company have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company's 2018 Annual Report filed on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).
2. Summary of Significant Accounting Policies
Investment Properties
The Company records investment properties and related intangibles at fair value upon acquisition. Investment properties include both acquired and constructed assets. Improvements and major repairs and maintenance are capitalized when the repair and maintenance substantially extends the useful life, increases capacity or improves the efficiency of the asset. All other repair and maintenance costs are expensed as incurred. The Company capitalizes interest on projects during periods of construction until the projects reach the completion point that corresponds with their intended purpose.
The Company allocates the purchase price of acquisitions to the various components of the asset based upon the fair value of each component which may be derived from various observable or unobservable inputs and assumptions. Also, the Company may utilize third party valuation specialists. These components typically include buildings, land and any intangible assets related to out-of-market leases, tenant relationships and in-place leases the Company determines to exist. The Company
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
determines fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in the analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases, tenant relationships and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.
The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 5 to 40 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducements and tenant improvements are amortized utilizing the straight-line method over the term of the related lease or occupancy term of the tenant, if shorter.
Amounts allocated to buildings are depreciated over the estimated remaining life of the acquired building or related improvements. The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the underlying leases. The Company also estimates the value of other acquired intangible assets, if any, and amortizes them over the remaining life of the underlying related intangibles.
The Company reviews investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable, but at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. The Company measures any impairment of investment property when the estimated undiscounted future operating income before depreciation and amortization, plus its residual value, is less than the carrying value of the property. Estimated undiscounted operating income before depreciation and amortization includes various level 3 fair value assumptions including renewal and renegotiations of current leases, estimates of new leases on vacant spaces, estimates of operating costs and fluctuating market conditions. The renewal and renegotiations of leases in some cases must be approved by additional third parties outside the control of the Company and the tenant. If such renewed or renegotiated leases are approved at amounts below correct estimates, then impairment adjustments may be necessary in the future. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as operating income, estimated capitalization rates, or multiples, leasing prospects for vacant spaces and local market information. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets Held For Sale and Discontinued Operations
The Company may decide to sell properties that are held for use. The Company records these properties as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell an impairment charge is recognized. The Company estimates fair value, less estimated closing costs based on similar real estate sales transactions. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 2 and 3 inputs. Level 2 inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices.
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company recorded impairment charges of $400 thousand and $1.55 million for the three and nine months ended September 30, 2019, respectively, which resulted from reducing the carrying values of Perimeter Square and St. Matthews for the amounts that exceeded the properties' fair value less estimated selling costs, see Note 3. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 2 inputs.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Assets held for sale are presented as discontinued operations in all periods presented if the disposition represents a strategic shift that has, or will have, a major effect on the Company's financial position or results of operations. This includes the net gain (or loss) upon disposal of property held for sale, the property's operating results, depreciation and interest expense.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank operating accounts and money markets. Financial instruments that potentially subject the Company to concentrations of credit risk include its cash and cash equivalents and its trade accounts receivable. The Company places its cash and cash equivalents with institutions of high credit quality.
Restricted cash represents amounts held by lenders for real estate taxes, insurance, reserves for capital improvements, leasing costs and tenant security deposits.
The Company places its cash and cash equivalents and restricted cash on deposit with financial institutions in the United States, which are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250 thousand. The Company's credit loss in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amounts on deposit. Management monitors the financial institutions credit worthiness in conjunction with balances on deposit to minimize risk.
Tenant Receivables and Unbilled Rent
Tenant receivables include base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit-worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. The Company’s standard lease form considers a rent charge past due after five days. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of September 30, 2019 and December 31, 2018, the Company’s allowance for uncollectible accounts totaled $1.07 million and $1.07 million, respectively. Upon adoption of ASC Topic 842 "Leases," reserves for uncollectible accounts were recorded and reclassified to revenue. Prior to adoption, reserves for uncollectible accounts were recorded as an operating expense, provision for credit losses. The standard also provides guidance on calculating reserves; however, those did not impact the Company. During the three and nine months ended September 30, 2019, the Company recorded a provision for credit losses in the amount of $115 thousand and $315 thousand, respectively, related to tenant receivables that were specifically identified as potentially uncollectible based on an assessment of the tenant’s credit-worthiness. During the three and nine months ended September 30, 2018, the Company recorded a provision for credit losses in the amount of $149 thousand and $412 thousand, respectively. These are included in rental revenues on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2019 and 2018, the Company did not realize any recoveries related to tenant receivables previously written off.
Notes Receivable
Notes receivable represent financing to Sea Turtle Development as discussed in Note 4 for development of the project. The notes are secured by a 2nd deed of trust on the underlying real estate known as Sea Turtle Development. The Company evaluates the collectability of both the interest and principal of the notes receivable based primarily upon the projected fair market value of the project at stabilization. The notes receivable are determined to be impaired when, based upon current information, it is no longer probable that the Company will be able to collect all contractual amounts due from the borrower. The amount of impairment loss recognized is measured as the difference between the carrying amount of the loan and its estimated realizable value.
Above and Below Market Lease Intangibles, net
The Company determines the above and below market lease intangibles upon acquiring a property. Above and below market lease intangibles are amortized over the life of the respective leases. Amortization of above and below market lease intangibles is recorded as a component of rental revenues.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Deferred Costs and Other Assets, net
The Company’s deferred costs and other assets consist primarily of leasing commissions, leases in place, capitalized legal and marketing costs, tenant relationship and ground lease sandwich interest intangibles associated with acquisitions. The Company’s lease origination costs consist primarily of the portion of property acquisitions allocated to lease originations and commissions paid to third parties in connection with lease originations. The Company generally records amortization of lease origination costs on a straight-line basis over the terms of the related leases. Amortization of lease origination costs, leases in place, legal and marketing costs, tenant relationships and ground lease sandwich interest represents a component of depreciation and amortization expense.
Revenue Recognition
Lease Contract Revenue
The Company has two classes of underlying assets relating to rental revenue activity, retail and office space. The Company retains substantially all of the risks and benefits of ownership of these underlying assets and accounts for these leases as operating leases. The Company combines lease and nonlease components in lease contracts, which includes combining base rent and tenant reimbursement revenue.
The Company accrues minimum rents on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. At September 30, 2019 and December 31, 2018, there were $3.37 million and $3.12 million, respectively, in unbilled rent which is included in "rents and other tenant receivables, net." Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements as variable lease income.
The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. These reimbursements are considered nonlease components which the Company combines with the lease component. The Company calculates the tenant’s share of operating costs by multiplying the total amount of the operating costs by a fraction, the numerator of which is the total number of square feet being leased by the tenant, and the denominator of which is the average total square footage of all leasable buildings at the property. The Company also receives escrow payments for these reimbursements from substantially all its tenants throughout the year. The Company recognizes tenant reimbursements as variable lease income. The Company recognizes differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material for the three and nine months ended September 30, 2019 and 2018.
Additionally, the Company has tenants who pay real estate taxes directly to the taxing authority. The Company excludes these Company costs paid directly by the tenant to third parties on the Company’s behalf from both variable revenue payments recognized and the associated property operating expenses. The Company does not evaluate whether certain sales taxes and other similar taxes are the Company’s costs or tenants costs. Instead, the Company accounts for these costs as tenant costs.
The Company recognizes lease termination fees, which is included in "other revenues" on the condensed consolidated statements of operations, in the year that the lease is terminated and collection of the fee is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets.
Asset Management Fees
Asset management fees are generated from Non-REIT Properties. The Non-REIT Properties pay WRE property management and/or asset management fees of 3% and 2% of collected revenues, respectively, for services performed. Revenues are governed by the management fee agreements for the various properties. Obligations under the agreements include and are not limited to: managing of maintenance, janitorial, security, landscaping, vendors and back office (collecting rents,
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
paying bills), etc. Each of the obligations are bundled together to be one service and are satisfied over time. Non-REIT Properties are billed monthly and typically pay monthly for these services.
Commissions
Commissions are generated from Non-REIT Properties. The Non-REIT Properties pay WRE leasing commissions based on the total contractual revenues to be generated under the new/renewed lease agreement (6% for new leases and 3% for renewals). Revenues are governed by the leasing commission agreements for the various properties. Obligations under the agreements include and are not limited to: monitoring upcoming vacancies, new tenant identification, proposal preparation, lease negotiation and document preparation. Each of the obligations are bundled together to be one service as the overall objective of these services is to maintain the overall occupancy of the property. Revenue is recognized and billed upon lease execution.
The below table disaggregates the Company’s revenue by type of service for the three and nine months ended September 30, 2019 and 2018 (in thousands, unaudited):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Minimum rent | $ | 12,169 |
| | $ | 12,704 |
| | $ | 36,604 |
| | $ | 38,187 |
|
Tenant reimbursements - variable lease revenue | 3,262 |
| | 3,150 |
| | 9,999 |
| | 9,337 |
|
Percentage rent - variable lease revenue | 69 |
| | 51 |
| | 258 |
| | 176 |
|
Lease termination fees | — |
| | (15 | ) | | 49 |
| | 1,269 |
|
Commissions | 18 |
| | 52 |
| | 65 |
| | 102 |
|
Asset management fees | 16 |
| | 48 |
| | 42 |
| | 220 |
|
Other | 146 |
| | 232 |
| | 390 |
| | 428 |
|
Subtotal | 15,680 |
| | 16,222 |
| | 47,407 |
| | 49,719 |
|
Credit losses on operating lease receivables | (115 | ) | | (149 | ) | | (315 | ) | | (412 | ) |
Total | $ | 15,565 |
| | $ | 16,073 |
| | $ | 47,092 |
| | $ | 49,307 |
|
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. The TRS' have accrued $30 thousand and $13 thousand, respectively, for federal and state income taxes as of September 30, 2019 and December 31, 2018. If the Company fails to qualify as a REIT, it will be subject to tax at regular corporate rates for the years in which it fails to qualify. If the Company loses its REIT status, it could not elect to be taxed as a REIT for five years unless the Company’s failure to qualify was due to a reasonable cause and certain other conditions were satisfied.
Taxable REIT Subsidiary Cost Allocation
The Company’s overall philosophy regarding cost allocation centers around the premise that the Trust exists to acquire, lease and manage properties for the benefit of its investors. Accordingly, a majority of the Company’s operations occur at the property level. Each property must carry its own weight by absorbing the costs associated with generating its revenues. Additionally, leases generally allow the Company to pass through to the tenant most of the costs involved in operating the property, including, but not limited to, the direct costs associated with owning and maintaining the property (landscaping, repairs and maintenance, taxes, insurance, etc.), property management and certain administrative costs.
Service vendors bill the majority of the direct costs of operating the properties directly to the REIT Properties and Non-REIT Properties and each property pays them accordingly. The Non-REIT Properties pay WRE property management and/
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
or asset management fees of 3% and 2% of collected revenues, respectively. The Non-REIT Properties also pay WRE leasing commissions based on the total contractual revenues to be generated under the new/renewed lease agreement (6% for new leases and 3% for renewals).
Costs incurred to manage, lease and administer the Non-REIT Properties are allocated to the TRS. These costs include compensation and benefits, property management, leasing and other corporate, general and administrative expenses associated with generating the TRS' revenues.
Financial Instruments
The carrying amount of financial instruments included in assets and liabilities approximates fair market value due to their immediate or short-term maturity.
Use of Estimates
The Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported periods. The Company’s actual results could differ from these estimates.
Advertising Costs For Leasing Activities
The Company expenses advertising and promotion costs as incurred. The Company incurred advertising and promotion costs associated with leasing activities of $35 thousand and $198 thousand for the three and nine months ended September 30, 2019, respectively. The Company incurred advertising and promotion costs of $36 thousand and $194 thousand for the three and nine months ended September 30, 2018, respectively.
Corporate General and Administrative Expense
A detail for the "corporate general & administrative" ("CG&A") line item from the condensed consolidated statements of operations is presented below (in thousands, unaudited):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Compensation and benefits | $ | 455 |
| | $ | 554 |
| | $ | 1,562 |
| | $ | 2,001 |
|
Professional fees | 444 |
| | 638 |
| | 1,371 |
| | 2,309 |
|
Corporate administration | 326 |
| | 299 |
| | 934 |
| | 968 |
|
Capital related costs | 4 |
| | 110 |
| | 140 |
| | 408 |
|
Taxes and licenses | 40 |
| | 23 |
| | 172 |
| | 227 |
|
Other | 80 |
| | 168 |
| | 364 |
| | 717 |
|
| 1,349 |
| | 1,792 |
| | 4,543 |
| | 6,630 |
|
Less: Allocation of CG&A to Non-REIT management and leasing services | — |
| | (89 | ) | | — |
| | (151 | ) |
Total | $ | 1,349 |
| | $ | 1,703 |
| | $ | 4,543 |
| | $ | 6,479 |
|
An allocation of professional fees, compensation and benefits, corporate administration and travel is included in Non-REIT management and leasing services on the condensed consolidated statements of operations, which can vary period to period depending on the relative operational fluctuations of these respective services.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Leases Commitments
The Company determines if an arrangement is a lease at inception. Operating leases, in which the Company is the lessee, are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on our condensed consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets include any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend the lease when it is reasonably certain that the company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elects the practical expedient to combine lease and associated nonlease components. The lease components are the majority of its leasing arrangements and the Company accounts for the combined component as an operating lease. In the event the Company modifies existing ground leases or enters into new ground leases, such leases may be classified as finance leases.
Noncontrolling Interests
Noncontrolling interests is the portion of equity in the Operating Partnership not attributable to the Trust. The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, noncontrolling interests have been reported in equity on the condensed consolidated balance sheets but separate from the Company’s equity. On the condensed consolidated statements of operations, the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. Condensed consolidated statements of equity includes beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
The noncontrolling interest of the Operating Partnership common unit holders is calculated by multiplying the noncontrolling interest ownership percentage at the balance sheet date by the Operating Partnership’s net assets (total assets less total liabilities). The noncontrolling interest percentage is calculated at any point in time by dividing the number of units not owned by the Company by the total number of units outstanding. The noncontrolling interest ownership percentage will change as additional units are issued or as units are exchanged for the Company’s common stock $0.01 par value per share (“Common Stock”). In accordance with GAAP, any changes in the value from period to period are charged to additional paid-in capital.
Adoption of ASC Topic 842, “Leases”
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842)”, to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. The Company adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach within ASU 2018-11, which allows for the application date to be the beginning of the reporting period in which the entity first applies the new standard. The Company did not have a cumulative-effect adjustment as of the adoption date. In addition, the Company implemented internal controls to enable the preparation of financial information upon adoption.
The Company elected the package of transition practical expedients where the company is either the lessee or lessor, which among other things, allowed the Company to carry forward the historical lease classifications and use hindsight in determining the lease terms.
The standard had a material impact on the Company's condensed consolidated balance sheets, but did not have a material impact on the condensed consolidated statements of operations. The most significant impact was the recognition of ROU assets and lease liabilities of approximately $11.90 million and $11.99 million, respectively, for operating leases as of January 1, 2019, calculated based on an incremental borrowing rate of 4.84%. The difference between the ROU assets and lease liabilities at adoption represents the accrued straight-line rent liability previously recognized under ASC 840. The standard had no impact on the Company's cash flows.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". This update enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better calculate credit loss estimates. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, such as accounts receivable and loans. The guidance will require that the Company estimate the lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. The Company will also be required to disclose information about how it developed the allowances, including changes in the factors that influenced the Company’s estimate of expected credit losses and the reasons for those changes. In addition, in November 2018 the FASB issued ASU 2018-19, which clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The guidance would be effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of the guidance will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)". This update modifies the disclosure requirements on fair value measurements in Topic 820 with several removals and additions for disclosures. The guidance will add disclosures related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance would be effective for interim and annual reporting periods beginning after December 15, 2019. The Company anticipates that there will be no material impact on its consolidated financial statements upon adoption of the guidance.
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.
Reclassifications
The Company has reclassified certain prior period amounts in the accompanying condensed consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity.
Tenant reimbursements and provision for credit losses were reclassified to rental revenues on the condensed consolidated statements of operations to conform to 2019 presentation as a result of adopting ASU 2016-02, “Leases (Topic 842).” There are two reclassifications within the condensed consolidated statement of cash flows, one pertains to the straight-line expense operating activity adjustment on those leases which the Company is a lessee and the other is the presentation of credit losses on operating lease receivables. These reclassifications did not impact cash provided by (used in) operating, investing, or financing activities.
As of September 30, 2019, it was determined that the six undeveloped Land Parcels (the “Land Parcels”) previously classified as assets held for sale at December 31, 2018 no longer meet the definition of assets held for sale. Management’s intention to sell the parcels has not changed; however, they are in secondary and tertiary markets with minimal land sales and it is not probable they will sell in the next twelve months. Accordingly, the assets and liabilities of the Land Parcels were reclassified to “land and land improvements” within investment properties for all periods presented, see Note 3.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Real Estate
Investment properties consist of the following (in thousands): |
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (unaudited) | | |
Land and land improvements | $ | 100,135 |
| | $ | 101,696 |
|
Buildings and improvements | 365,686 |
| | 374,499 |
|
Investment properties at cost | 465,821 |
| | 476,195 |
|
Less accumulated depreciation | (47,483 | ) | | (40,189 | ) |
Investment properties, net | $ | 418,338 |
| | $ | 436,006 |
|
The Company’s depreciation expense on investment properties was $2.92 million and $8.99 million for the three and nine months ended September 30, 2019, respectively. The Company’s depreciation expense on investment properties was $3.05 million and $9.55 million for the three and nine months ended September 30, 2018, respectively.
A significant portion of the Company’s land, buildings and improvements serve as collateral for its mortgage loans payable portfolio. Accordingly, restrictions exist as to the encumbered property’s transferability, use and other common rights typically associated with property ownership.
Assets Held for Sale
At December 31, 2018, assets held for sale included a 1.28 acre undeveloped land parcel at Harbor Pointe ("Harbor Pointe land parcel"), Graystone Crossing and Jenks Plaza. All three were sold during the nine months ended September 30, 2019. Additionally, in 2019 the Board committed to a plan to sell Perimeter Square and St. Matthews. Perimeter Square sold in July 2019. St. Matthews is classified as assets held for sale as of September 30, 2019.
The Harbor Pointe land parcel sale represents discontinued operations as it is a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the assets and liabilities associated with the Harbor Pointe land parcel have been reclassified for all periods presented.
The impairment charge on assets held for sale was $400 thousand and $1.55 million for the three and nine months ended September 30, 2019, respectively. These impairment charges resulted from reducing the carrying value of St. Matthews during the three months ended September 30, 2019 and Perimeter Square and St. Matthews during the nine months ended September 30, 2019, for the amounts that exceeded the properties' fair value less estimated selling costs. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 2 inputs.
As of September 30, 2019 and December 31, 2018, assets held for sale and associated liabilities, excluding discontinued operations, consisted of the following (in thousands):
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (unaudited) | | |
Investment properties, net | | $ | 1,702 |
| | $ | 4,912 |
|
Rents and other tenant receivables, net | | 52 |
| | 72 |
|
Above market leases, net | | — |
| | 420 |
|
Deferred costs and other assets, net | | 2 |
| | 228 |
|
Total assets held for sale, excluding discontinued operations | $ | 1,756 |
| | $ | 5,632 |
|
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Real Estate (continued)
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (unaudited) | | |
Loans payable | | $ | 1,974 |
| | $ | 3,818 |
|
Accounts payable | | 86 |
| | 240 |
|
Total liabilities associated with assets held for sale, excluding discontinued operations | $ | 2,060 |
| | $ | 4,058 |
|
As of September 30, 2019 and December 31, 2018, assets held for sale and associated liabilities for discontinued operations, consisted of the following (in thousands):
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (unaudited) | | |
Investment properties, net | | $ | — |
| | $ | 486 |
|
Total assets held for sale, discontinued operations | | $ | — |
| | $ | 486 |
|
|
| | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | (unaudited) | | |
Loans payable | | $ | — |
| | $ | 460 |
|
Accounts payable | | — |
| | 2 |
|
Total liabilities associated with assets held for sale, discontinued operations | $ | — |
| | $ | 462 |
|
Dispositions
In May 2019, an approximate 10,000 square foot outparcel at the JANAF property was demolished resulting in a $331 thousand write-off to make way for a new approximate 20,000 square foot building constructed by a new grocer tenant.
The following properties were sold during the nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | |
Disposal Date | | Property | | Contract Price | | Gain (loss) | | Net Proceeds |
| | | | (in thousands, unaudited) |
July 12, 2019 | | Perimeter Square | | $ | 7,200 |
| | $ | (81 | ) | | $ | — |
|
March 18, 2019 | | Graystone Crossing | | 6,000 |
| | 1,452 |
| | 1,744 |
|
February 7, 2019 | | Harbor Pointe Land Parcel (1.28 acres) | | 550 |
| | — |
| | 19 |
|
January 11, 2019 | | Jenks Plaza | | 2,200 |
| | 387 |
| | 1,840 |
|
September 27, 2018 | | Shoppes at Eagle Harbor | | 5,705 |
| | 1,270 |
| | 2,071 |
|
June 19, 2018 | | Laskin Road Land Parcel (1.5 acres) | | 2,858 |
| | 903 |
| | 2,747 |
|
January 12, 2018 | | Chipotle Ground Lease at Conyers Crossing | | 1,270 |
| | 1,042 |
| | 1,160 |
|
The sale of the Chipotle ground lease at Conyers Crossing, Shoppes at Eagle Harbor, Jenks Plaza, Graystone Crossing and Perimeter Square did not represent a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the operating results of these properties remains classified within continuing operations for all periods presented.
JANAF Executive Building
In April 2019, the Company absorbed an approximate 25,000 square foot outparcel at JANAF as a result of an unlawful detainer with a delinquent tenant, Mariner Investments, LTD.
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
4. Notes Receivable
On September 29, 2016, the Company entered into an $11.00 million note receivable for the partial funding of the Sea Turtle Development (“Sea Turtle”) and a $1.00 million note receivable in consideration for the sale of 10.39 acres of land owned by the Company. Sea Turtle was a related party as Jon Wheeler, the Company's former CEO and shareholder of the Company, is the managing member as discussed in Note 11. The rate on the loans is 12% annually. Interest only payments at a rate of 8% are due on the notes at the beginning of every calendar quarter starting October 2016. Interest at a rate of 4% accrues and is due at maturity. The notes mature the earlier of September 29, 2021 or the disposition of the property.
Both promissory notes are subordinated to the construction loans made by the Bank of Arkansas (“BOKF”), totaling $20.00 million.
On or about April 9, 2019, BOKF filed a Verified Complaint in state court in Beaufort County, South Carolina for Sea Turtle’s default on payment of the BOKF construction loans, and for the appointment of a receiver, injunctive relief and accounting records. On May 7, 2019, Sea Turtle filed a Chapter 11 Voluntary Petition for Bankruptcy in the United States Bankruptcy Court for the District of South Carolina in Charleston. The bankruptcy petition automatically stayed BOKF’s suit.
The pleadings in the state court action and the bankruptcy action state that Sea Turtle has been in default on its payments to BOKF since September, 2018. The pleadings further state that the project is $8.00 million over budget as of August 8, 2018. Sea Turtle has retained a broker to try and sell the property. There is a possibility that a judicially approved sale of the property will not bring a price that exceeds what is owed to BOKF on its construction loans. If a sale is not approved through the bankruptcy court in 2019, it is expected that the bankruptcy petition will be dismissed and BOKF will resume its suit in South Carolina state court, possibly leading to a foreclosure on the property. The pending legal proceedings have provided additional uncertainty with regards to the estimated fair market value of the development. As such, the Company recognized $0.00 million and $5.00 million in impairment charges on the notes receivable for the three and nine months ended September 30, 2019, respectively, as the estimated fair value of Sea Turtle is not expected to provide for the cash required to repay the notes receivable in the event of a judicially approved sale. The total impairment charge on the notes receivable is $12.00 million and the carrying value is zero as of September 30, 2019.
The fair market value of Sea Turtle is based on the three-level valuation hierarchy for fair value measurement and represents Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Additionally in 2018, the Company placed the notes receivable on nonaccrual status and during the three and nine months ended September 30, 2019 and 2018 has not recognized $363 thousand and $1.08 million, respectively, of interest income due on the notes.
5. Deferred Costs
Deferred costs, net of amortization and other assets are as follows (in thousands): |
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (unaudited) | | |
Leases in place, net | $ | 16,530 |
| | $ | 21,785 |
|
Tenant relationships, net | 2,481 |
| | 3,764 |
|
Ground lease sandwich interest, net | 2,283 |
| | 2,488 |
|
Lease origination costs, net | 1,166 |
| | 1,261 |
|
Legal and marketing costs, net | 48 |
| | 59 |
|
Other | 749 |
| | 716 |
|
Total deferred costs and other assets, net | $ | 23,257 |
| | $ | 30,073 |
|
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. Deferred Costs (continued)
As of September 30, 2019 and December 31, 2018, the Company’s intangible accumulated amortization totaled $55.36 million and $50.55 million, respectively. During the three and nine months ended September 30, 2019, the Company’s intangible amortization expense totaled $2.14 million and $7.18 million, respectively. During the three and nine months ended September 30, 2018, the Company's intangible amortization expense totaled $2.99 million and $11.39 million, respectively. Future amortization of lease origination costs, leases in place, legal and marketing costs, tenant relationships, and ground lease sandwich interests is as follows (in thousands, unaudited): |
| | | | | | | | | | | | | | | | | | | | | | | |
| Leases In Place, net | | Tenant Relationships, net | | Ground Lease Sandwich Interest, net | | Lease Origination Costs, net | | Legal & Marketing Costs, net | | Total |
For the remaining three months ending December 31, 2019 | $ | 1,358 |
| | $ | 308 |
| | $ | 68 |
| | $ | 54 |
| | $ | 3 |
| | $ | 1,791 |
|
For the years ending: | | | | | | | | | | | |
December 31, 2020 | 4,506 |
| | 860 |
| | 274 |
| | 187 |
| | 11 |
| | 5,838 |
|
December 31, 2021 | 2,810 |
| | 448 |
| | 274 |
| | 174 |
| | 9 |
| | 3,715 |
|
December 31, 2022 | 2,142 |
| | 354 |
| | 274 |
| | 132 |
| | 6 |
| | 2,908 |
|
December 31, 2023 | 1,661 |
| | 227 |
| | 274 |
| | 115 |
| | 6 |
| | 2,283 |
|
December 31, 2024 | 1,147 |
| | 128 |
| | 274 |
| | 100 |
| | 3 |
| | 1,652 |
|
Thereafter | 2,906 |
| | 156 |
| | 845 |
| | 404 |
| | 10 |
| | 4,321 |
|
| $ | 16,530 |
| | $ | 2,481 |
| | $ | 2,283 |
| | $ | 1,166 |
| | $ | 48 |
| | $ | 22,508 |
|
Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Loans Payable
The Company’s loans payable consist of the following (in thousands, except monthly payment):
|
| | | | | | | | | | | | | | | | | |
Property/Description | | Monthly Payment | | Interest Rate | | Maturity | | September 30, 2019 | | December 31, 2018 |
Harbor Pointe (1) | | $ | 11,024 |
| | 5.85 | % | | December 2018 | | $ | — |
| | $ | 460 |
|
Perimeter Square (1) | | Interest only |
| | 6.50 | % | | June 2019 | | — |
| | 6,250 |
|
Perimeter Square construction loan (1) | | Interest only |
| | 6.50 | % | | June 2019 | | — |
| | 247 |
|
Revere Term Loan | | $ | 109,658 |
| | 10.00 | % | | April 2019 | | — |
| | 1,059 |
|
Senior convertible notes | | $ | 234,199 |
| | 9.00 | % | | June 2019 | | — |
| | 1,369 |
|
DF I-Moyock | | $ | 10,665 |
| | 5.00 | % | | July 2019 | | — |
| | 73 |
|
Rivergate | | $ | 144,937 |
| | Libor + 295 basis points |
| | December 2019 | | 21,688 |
| | 22,117 |
|
KeyBank Line of Credit (6) | | $ | 250,000 |
| | Libor + 350 basis points |
| | Various (6) | | 25,991 |
| | 52,102 |
|
Folly Road | | $ | 32,827 |
| | 4.00 | % | | March 2020 | | 5,961 |
| | 6,073 |
|
Columbia Fire Station | | $ | 25,452 |
| | 4.00 | % | | May 2020 | | 4,086 |
| | 4,189 |
|
Shoppes at TJ Maxx | | $ | 33,880 |
| | 3.88 | % | | May 2020 | | 5,394 |
| | 5,539 |
|
First National Bank Line of Credit | | $ | 24,656 |
| | Libor + 300 basis points |
| | September 2020 | | 1,271 |
| | 2,938 |
|
Lumber River | | $ | 10,723 |
| | Libor + 350 basis points |
| | October 2020 | | 1,416 |
| | 1,448 |
|
JANAF Bravo | | $ | 36,935 |
| | 4.65 | % | | January 2021 | | 6,407 |
| | 6,500 |
|
Walnut Hill Plaza | | $ | 26,850 |
| | 5.50 | % | | September 2022 | | 3,787 |
| | 3,868 |
|
Twin City Commons | | $ | 17,827 |
| | 4.86 | % | | January 2023 | | 3,000 |
| | 3,048 |
|
New Market | | $ | 48,747 |
| | 5.65 | % | | June 2023 | | 6,763 |
| | 6,907 |
|
Benefit Street Note (3) | | $ | 53,185 |
| | 5.71 | % | | June 2023 | | 7,414 |
| | 7,567 |
|
Deutsche Bank Note (2) | | $ | 33,340 |
| | 5.71 | % | | July 2023 | | 5,660 |
| | 5,713 |
|
JANAF | | $ | 333,159 |
| | 4.49 | % | | July 2023 | | 51,021 |
| | 52,253 |
|
Tampa Festival | | $ | 50,797 |
| | 5.56 | % | | September 2023 | | 8,116 |
| | 8,227 |
|
Forrest Gallery | | $ | 50,973 |
| | 5.40 | % | | September 2023 | | 8,419 |
| | 8,529 |
|
Riversedge North | | $ | 11,436 |
| | 5.77 | % | | December 2023 | | 1,775 |
| | 1,800 |
|
South Carolina Food Lions Note (5) | | $ | 68,320 |
| | 5.25 | % | | January 2024 | | 11,725 |
| | 11,867 |
|
Cypress Shopping Center | | $ | 34,360 |
| | 4.70 | % | | July 2024 | | 6,297 |
| | 6,379 |
|
Port Crossing | | $ | 34,788 |
| | 4.84 | % | | August 2024 | | 6,063 |
| | 6,150 |
|
Freeway Junction | | $ | 41,798 |
| | 4.60 | % | | September 2024 | | 7,761 |
| | 7,863 |
|
Harrodsburg Marketplace | | $ | 19,112 |
| | 4.55 | % | | September 2024 | | 3,434 |
| | 3,486 |
|
Graystone Crossing (1) | | $ | 20,386 |
| | 4.55 | % | | October 2024 | | — |
| | 3,863 |
|
Bryan Station | | $ | 23,489 |
| | 4.52 | % | | November 2024 | | 4,414 |
| | 4,472 |
|
Crockett Square | | Interest only |
| | 4.47 | % | | December 2024 | | 6,338 |
| | 6,338 |
|
Pierpont Centre | | Interest only |
| | 4.15 | % | | February 2025 | | 8,113 |
| | 8,113 |
|
Alex City Marketplace | | Interest only |
| | 3.95 | % | | April 2025 | | 5,750 |
| | 5,750 |
|
Butler Square | | Interest only |
| | 3.90 | % | | May 2025 | | 5,640 |
| | 5,640 |
|
Brook Run Shopping Center | | Interest only |
| | 4.08 | % | | June 2025 | | 10,950 |
| | 10,950 |
|
Beaver Ruin Village I and II | | Interest only |
| | 4.73 | % | | July 2025 | | 9,400 |
| | 9,400 |
|
Sunshine Shopping Plaza | | Interest only |
| | 4.57 | |