Wheeler Real Estate Investment Trust, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate

Real Estate

12 Months Ended

Dec. 31, 2018

Investment properties consist of the following (in thousands):



	December 31,
	2018			2017
Land and land improvements	$	98,846		$	91,108
Land held for development	—			2,305
Buildings and improvements	374,485			312,831
Investment properties at cost	473,331			406,244
Less accumulated depreciation	(40,189		)	(31,045		)
Investment properties, net	$	433,142		$	375,199

The Company’s depreciation expense on investment properties was $12.66 million, $10.59 million and $7.88 million for the years ended December 31, 2018, 2017 and 2016, 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.

JANAF Acquisition

On January 18, 2018, the Company acquired JANAF, a retail shopping center located in Norfolk, Virginia, for a purchase price of $85.65 million, paid through a combination of cash, restricted cash, debt assumption and the issuance of 150,000 shares of Common Stock at $7.53 per share. The shopping center, anchored by BJ's Wholesale Club, totals 810,137 square feet and was 94% leased at the acquisition date.

The following summarizes the consideration paid and the purchase allocation of assets acquired and liabilities assumed in conjunction with the acquisition described above in accordance with ASU 2017-01, along with a description of the methods used to determine the purchase price allocation (in thousands, unaudited). In determining the purchase price allocation, the Company considered many factors including, but not limited to, cash flows, market cap rates, location, occupancy rates, appraisals, other acquisitions and management’s knowledge of the current acquisition market for similar properties.



Purchase price allocation of assets acquired:
	Investment property (a)	$	75,123
	Lease intangibles and other assets (b)	10,718
	Above market leases (d)	2,019
	Restricted cash (c)	2,500
	Below market leases (d)	(4,710		)
	Net purchase price allocation of assets acquired:	$	85,650

Purchase consideration:
	Consideration paid with cash	$	23,153
	Consideration paid with restricted cash (c)	2,500
	Consideration paid with assumption of debt (e)	58,867
	Consideration paid with common stock	1,130

	Total consideration (f)	$	85,650


a.	Represents the purchase price allocation of the net investment properties acquired which includes land, buildings, site improvements and tenant improvements. The purchase price allocation was determined using following approaches:


i.	the market approach valuation methodology for land by considering similar transactions in the markets;


ii.	a combination of the cost approach and income approach valuation methodologies for buildings, including replacement cost evaluations, “go dark” analyses and residual calculations incorporating the land values; and


iii.	the cost approach valuation methodology for site and tenant improvements, including replacement costs and prevailing quoted market rates.


b.	Represents the purchase price allocation of lease intangibles and other assets. Lease intangibles includes in place leases and ground lease sandwich interests associated with replacing existing leases. The income approach was used to determine the allocation of these intangible assets which included estimated market rates and expenses.


c.	Represents the purchase price allocation of deleveraging reserve (the “Deleveraging Reserve”) released upon the maturity or earlier payment in full of the loan or until the reduction of the principal balance of the loan to $50,000,000.


d.	Represents the purchase price allocation of above/below market leases. The income approach was used to determine the allocation of above/below market leases using market rental rates for similar properties.


e.	Assumption of $53.71 million of debt at a rate of 4.49%, maturing July 2023 with monthly principal and interest payments of $333,159 and assumption of $5.16 million of debt at a rate of 4.95%, maturing January 2026 with monthly principal and interest payments of $29,964.


f.	Represents the components of purchase consideration paid.

Assets Held for Sale

In 2018, the Company’s management and Board of Directors committed to a plan to sell the seven undeveloped land parcels (the “Land Parcels”), along with the Monarch Bank Building, Shoppes at Eagle Harbor, Graystone Crossing and Jenks Plaza. Accordingly, these properties have been classified as held for sale.

The sale of the Land Parcels 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 Land Parcels have been reclassified for all periods presented. See Note 6, for disclosure of operating results of discontinued operations.

As of December 31, 2018 and 2017, assets held for sale and associated liabilities, excluding discontinued operations, consisted of the following (in thousands):



	December 31, 2018		December 31, 2017

Investment properties, net	$	4,912	$	—
Rents and other tenant receivables, net	72		—
Above market lease, net	420		—
Deferred costs and other assets, net	228		—
Total assets held for sale, excluding discontinued operations	$	5,632	$	—



	December 31, 2018		December 31, 2017

Loans payable	$	3,818	$	—
Accounts payable	240		—
Total liabilities associated with assets held for sale, excluding discontinued operations	$	4,058	$	—

As of December 31, 2018 and 2017, assets held for sale and associated liabilities for discontinued operations, consisted of the following (in thousands):



	December 31, 2018		December 31, 2017

Investment properties, net	$	3,350	$	9,135
Total assets held for sale, discontinued operations	$	3,350	$	9,135



	December 31, 2018		December 31, 2017

Loans payable	$	533	$	747
Accounts payable	41		45
Total liabilities associated with assets held for sale, discontinued operations	$	574	$	792

Dispositions



	Property	Contract Price		Gain/(Loss)			Net Proceeds
		(in thousands)
October 22, 2018	Monarch Bank Building	$	1,750	$	151		$	299
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
June 27, 2017	Carolina Place Land Parcel (2.14 acres)	250		(12		)	238
June 26, 2017	Steak n' Shake outparcel at Rivergate (1.06 acres)	2,250		1,033			2,178
February 28, 2017	Ruby Tuesday's and Outback at Pierpont	2,285		1,502			1,871
June 29, 2016	Starbucks/Verizon	2,128		688			1,385

The sale of the Chipotle ground lease at Conyers Crossing, Shoppes at Eagle Harbor, Monarch Bank Building, Steak n' Shake outparcel at Rivergate and the land parcel at Carolina Place 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. See Note 6 for discontinued operation disclosures for the sales of Laskin Road, Ruby Tuesday's and Outback at Pierpont and Starbuck/Verizon.

Impairment of Investment Properties and Assets Held for Sale

The annual review of investment properties for impairment performed for the year ended December 31, 2018 resulted in no impairment adjustment for the Company's properties in continuing operations.

During 2018, the Company made the strategic decision to sell the undeveloped land parcels as opposed to holding for development purposes. Upon this determination the properties were classified as held for sale. Based on recent real estate sales transactions for undeveloped land within the surrounding markets it was determined that the carrying value of the properties exceeded the fair value, less estimated selling costs by $3.94 million; accordingly, an impairment loss of that amount was recognized and is included in the loss from discontinued operations in the consolidated statement of operations, see Note 6. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 3 inputs.