Investment Thesis

Based upon an analysis of the information contained in the publicly filed documents of Wheeler Real Estate Investment Trust, Inc. (WHLR), it is clear that the common stock has negative value and is worthless. I attempted to find value for the common shareholders and only by making generous assumptions as to capitalization rates and potential sales was I able to find marginal positive value for the common stock. I do not mean to imply that the company is insolvent but rather that the common shareholders have no remaining equity.

General Description of Company

Wheeler Real Estate Investment Trust, trading on NASDAQ, is a “self-managed commercial real estate company,” per its official description. Its headquarters are in Virginia Beach, Va. According to their website, the company “focuses on acquiring and managing retail properties with a primary focus on grocery anchored centers.” Although the company has 67 properties with 763 tenants located in “Virginia, North Carolina, Florida, Georgia, Kentucky, Tennessee, Alabama, New Jersey, Oklahoma, Pennsylvania and North Virginia,” according to their latest quarterly presentation, available on its website, for the quarter ending June 30, 2020. Almost 75% of their properties are located in Virginia, South Carolina and Georgia. Like other similar REITs, they periodically sell off and buy properties. For the last quarter, they sold off four weaker properties. As contained in its June 30, 2020 presentation, which is extremely detailed with substantial data and available on their website, WHLR has an 11.15% vacancy rate with total square footage of 5,568,934 of expiring leases.

Its top 10 tenants account for 29.68% of occupied space. These top ten tenants are:

  • Food Lion: 5.85%
  • BI-LO: 6.84%
  • Kroger (NYSE:KR): 3.34%
  • Piggly Wiggly: 3.05%
  • Winn Dixie: 2.40%
  • Planet Fitness (NYSE:PLNT): 1.80%
  • Hobby Lobby: 2.05%
  • B.J.’s Wholesale Club (NYSE:BJ): 2.65%
  • Harris Teeter: 0.72%
  • Lowes Food: 0.98%

BI-LO and Winn Dixie are both owned by Southeastern Groceries bringing the percentage to 9.24%. Kroger owns Harris Teeter bring its percentage to 4.06%.

I have relied upon their latest 10-Q for the quarter ending June 30, 2020 for the financial information contained in this article.

The capital structure of WHLR consists of 9,695,899 of common shares with three classes of preferred stock. A brief description of the preferred classes are as follows:

Series A consists of 4,500 shares outstanding with a $1,000 liquidation preference per share with cumulative dividends at 9% with no maturity date. Dividends are current.

Series B has 1,875,748 shares outstanding with a $25 liquidation preference per share bearing interest at 9% and convertible into common at $40 per share. These shares are not cumulative and have no maturity date. Dividends are current.

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Series D consists of 3,600,636 outstanding shares with a $25 liquidation preference per share. Until Sept. 21, 2023 they pay cumulative cash dividends at a rate of 8.75%. Commencing Sept. 21, 2023, the annual dividend rate increases to 8.75% plus 2% of the liquidation preference per annum on each subsequent anniversary thereafter, with a maximum annual dividend of 14%. They are convertible into common at $16.96 per share. The holders have the option of having their shares redeemed at $25 per share on Sept. 21, 2023. On Dec. 20, 2018 dividends were suspended with dividends now accruing at 10.75% as of Jan. 1, 2019.

The company has had a rough time but seems to be improving. According to REFINITIV, the company’s gross margin has been lower than its industry average for the past five years. As of December 2019 its debt to capital ratio was 71.1% as opposed to the industry average of 47.7%, with interest coverage of just 0.3 as compared with an industry average of 2.0 and a gross profit margin of 37.3% as compared with an industry average of 46.7%. As of June 2020, revenue growth has been -6.4% as compared with the industry average of 5.1%, resulting in a net profit margin of -5.2% against the industry average of 18.9%.

In support of WHLR, its new CEO Daniel Khoshaba – with his new Director, Joseph D. Stillwell – continue buying shares, with Koshaba alone owing in excess of 10% of the outstanding shares. The shares have been moving up and are substantially in excess of their 52-week low of $0.64, resulting in a three-month return as of Aug. 28, 2020 of 131.3% – which is impressive.

An Analysis of the Reported Financial Statements

The balance sheet of the company as reported shows that, as of June 30, 2020 in their 10-Q, WHLR had total assets of $477,186,000 with liabilities of $365,562,000, of which $331,615,000 consisted of loans payable of $331,615,000, leaving equity of $111,624,000. The auditors consider the Series D Preferred to be debt, but for this analysis I will include it in equity.

This equity consists of the following:

  • Series A Preferred: $453,000
  • Series B Preferred: $41,131,000
  • Series D Preferred: $92,360,000
  • Total Preferred equity: $133,944,000
  • Equity from latest balance sheet: $111,624,000
  • Less Preferred equity: $133,944,000
  • Common equity: ($22,320,000)
  • Per share equity: ($0.43)
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Based upon its own financial statements the holders of the common shares have negative equity. These figures do not become better when we look at the income statements.

Before I begin, there is a need for a brief academic discussion as to taxable income as opposed to cash flow. I was a real estate lawyer for over 40 years and do know the difference. During my working career depreciation was disregarded as simply a tax benefit bestowed on operators by the Internal Revenue Service and was always considered a tax device rather than anything relating to operations. Buildings did not depreciate; they only appreciated. With respect to retail space, this has been changing for the past few years (prior to covid), and depreciation is becoming a real expense. If you are going to attract new tenants or even maintain existing tenants, common areas and amenities must be constantly improved. If you are going to attract new tenants, a clean white box may no longer be enough with new specified construction for tenant needs. For this reason, I will do my analysis based on taxable income and then on cash flow.

The taxable income statement shows a net loss for the past three months of $3,403,000 or $0.35/share, and a loss for the past six months of $10,709,000, or $1.10/share. This is an actual improvement over 2019 which showed for the same quarter a loss of $8,928,000 or $0.92/share and a loss for the first six months of 2019 of $13,724,000, or $1.42/share. Based upon these results, and even with startling improvements, the negative equity value per share will only continue to increase and the preferred shares will become even more endangered.

Funds from Operations and Adjusted Funds from Operations look only a little better. WHLR showed marginal cash flows of $4,714,000 or $0.12/share for the past three months and $8,262,000 or $0.13/share for the past six months. AFFO was $780,000 or $0.08/share for the past three months and $1,576,000 or $0.13/share for the past six months.

Best-Case Scenario

The assets owned by WHLR are at best mediocre. They deserve at most a capitalization rate of 9% of gross cash flow, should they be fortunate enough to sell any of their properties. I have derived gross cash flow by simply deducting property operating expenses from rental revenue and applying the 9% cap rate. I have used the figures contained in its latest 10-Q.

For the latest quarter, WHLR showed rental revenues of $14,809,000 and the cost of property operations of $4,573,000, leaving gross revenue at $10,236,000. For the full year, that represents gross revenue of $40,944,000, which with a 9% cap rate translates into an asset value of $454,933,333. That is $50,547,333 more than the $404,386,000 showed for investment assets in the balance sheet. After deducting the negative common share equity of $0.43/share, we get a positive figure of $28,227,333 or $0.34/share, which is substantially below the present market price.

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Both revenue and operating costs seem to be fairly stable and do not take into account the loss of a major tenant or the cost of obtaining a new tenant. They also do not take into account the gradual depreciation of the assets and a need at some future date for major renovations to keep or attract tenants. Lastly, in this market, investors are seeking bargains and will not pay full value for properties, especially those being sold off by debt laden entities. Most important, investors wish to be compensated for the online erosion of retail sales.

Conclusion

Although the Preferred shares seem to have value, given the continual losses with the accrual of interest on the Series D, their position will gradually weaken. There are much better opportunities in the retail space to be explored. There is little gain for shareholders in buying the common shares at these prices. They may have value and may be worth speculative risk, but at a much lower price point.

Buying the common shares means that you are betting on a substantial improvement in revenue from the existing properties, as the present market price is far in excess of the value of the common shares. Most retail REITs have experienced a substantial collapse in their market price, with much of their earnings remaining undisturbed. They sell at very low multiples of their present cash flow. You simply need to wait for stabilization. In these times it pays to be a prudent investor rather than incur additional risk on an unforeseen future, that may or may not occur.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.



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