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EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO 9.30.16 - Wheeler Real Estate Investment Trust, Inc.ex3129-30x2016.htm
EX-32 - EXHIBIT 32 CERTIFICATION OF CEO AND CFO 9.30.16 - Wheeler Real Estate Investment Trust, Inc.ex329-30x2016.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO 9.30.16 - Wheeler Real Estate Investment Trust, Inc.ex3119-30x2016.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
 
 
(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, 2016
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., Suite 200
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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨  (do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of November 8, 2016, there were 67,964,916 common shares, $0.01 par value per share, outstanding.

1


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

2


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS:
 
 
 
Investment properties, net
$
292,212,257

 
$
238,764,631

Cash and cash equivalents
35,816,636

 
10,477,576

Restricted cash
10,309,397

 
7,592,984

Rents and other tenant receivables, net
3,235,105

 
2,970,380

Related party receivables
1,365,950

 
482,320

Notes receivable
12,000,000

 

Goodwill
5,485,823

 
5,485,823

Assets held for sale
365,880

 
1,692,473

Above market lease intangible, net
7,718,507

 
6,517,529

Deferred costs and other assets, net
36,098,994

 
35,259,526

Total Assets
$
404,608,549

 
$
309,243,242

LIABILITIES:
 
 
 
Loans payable
$
231,767,262

 
$
184,629,082

Liabilities associated with assets held for sale
1,350,000

 
1,992,318

Below market lease intangible, net
8,718,947

 
7,721,335

Accounts payable, accrued expenses and other liabilities
10,147,839

 
7,533,769

Total Liabilities
251,984,048

 
201,876,504

Commitments and contingencies


 


Series D cumulative convertible preferred stock (no par value, 2,500,000 and 0 shares authorized, 1,600,000 and 0 shares issued and outstanding, respectively)
38,014,257

 

 
 
 
 
EQUITY:
 
 
 
Series A preferred stock (no par value, 4,500 shares authorized, 562 shares issued and outstanding, respectively)
452,971

 
452,971

Series B convertible preferred stock (no par value, 5,000,000 and 3,000,000 shares authorized, 1,871,244 and 729,119 shares issued and outstanding, respectively)
40,710,868

 
17,085,147

Common stock ($0.01 par value, 150,000,000 and 75,000,000 shares authorized, 67,940,487 and 66,259,673 shares issued and outstanding, respectively)
679,404

 
662,596

Additional paid-in capital
222,725,476

 
220,370,984

Accumulated deficit
(160,594,653
)
 
(140,306,846
)
Total Shareholders’ Equity
103,974,066

 
98,264,852

Noncontrolling interests
10,636,178

 
9,101,886

Total Equity
114,610,244

 
107,366,738

Total Liabilities and Equity
$
404,608,549

 
$
309,243,242

See accompanying notes to condensed consolidated financial statements.


3


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
REVENUE:
 
 
 
 
 
 
 
Rental revenues
$
8,590,439

 
$
5,639,218

 
$
23,787,801

 
$
13,743,870

Asset management fees
163,092

 
132,335

 
623,340

 
465,817

Commissions
589,656

 
86,682

 
833,516

 
307,292

Tenant reimbursements and other revenues
2,567,491

 
1,371,311

 
6,887,918

 
3,864,879

Total Revenue
11,910,678

 
7,229,546

 
32,132,575

 
18,381,858

OPERATING EXPENSES:
 
 
 
 
 
 
 
Property operations
3,026,594

 
2,117,237

 
8,498,715

 
5,519,195

Non-REIT management and leasing services
695,542

 
343,393

 
1,351,640

 
999,186

Depreciation and amortization
4,994,572

 
4,881,937

 
15,306,331

 
11,722,164

Provision for credit losses
31,330

 
112,580

 
196,311

 
214,316

Corporate general & administrative
1,495,521

 
4,851,980

 
6,290,460

 
10,615,200

Total Operating Expenses
10,243,559

 
12,307,127

 
31,643,457

 
29,070,061

Operating Income (Loss)
1,667,119

 
(5,077,581
)
 
489,118

 
(10,688,203
)
Interest income
299,239

 
30,407

 
301,378

 
113,738

Interest expense
(3,639,414
)
 
(2,328,476
)
 
(9,801,442
)
 
(6,450,461
)
Net Loss from Continuing Operations
(1,673,056
)
 
(7,375,650
)
 
(9,010,946
)
 
(17,024,926
)
Discontinued Operations
 
 
 
 
 
 
 
Income from discontinued operations
39,114

 
217,234

 
115,463

 
348,083

Gain on disposal of properties
805

 

 
688,824

 

Net Income from Discontinued Operations
39,919

 
217,234

 
804,287

 
348,083

Net Loss
(1,633,137
)
 
(7,158,416
)
 
(8,206,659
)
 
(16,676,843
)
Less: Net loss attributable to noncontrolling interests
(121,892
)
 
(428,702
)
 
(767,679
)
 
(1,331,294
)
Net Loss Attributable to Wheeler REIT
(1,511,245
)
 
(6,729,714
)
 
(7,438,980
)
 
(15,345,549
)
Preferred stock dividends
(1,240,811
)
 
(2,279,907
)
 
(2,263,410
)
 
(13,116,232
)
Deemed dividend related to beneficial conversion feature of preferred stock

 
(13,124,506
)
 

 
(72,644,506
)
Net Loss Attributable to Wheeler REIT Common
Shareholders
$
(2,752,056
)
 
$
(22,134,127
)
 
$
(9,702,390
)
 
$
(101,106,287
)
 
 
 
 
 
 
 
 
Loss per share from continuing operations (basic and diluted):
$
(0.04
)
 
$
(0.35
)
 
$
(0.15
)
 
$
(3.41
)
Income per share from discontinued operations:

 

 
0.01

 
0.01

 
$
(0.04
)
 
$
(0.35
)
 
$
(0.14
)
 
$
(3.40
)
Weighted-average number of shares:
 
 
 
 
 
 
 
Basic and Diluted
67,899,504

 
63,262,408

 
67,155,184

 
29,757,718

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.05

 
$
0.05

 
$
0.16

 
$
0.18

See accompanying notes to condensed consolidated financial statements.


4


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
 (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, 2015
562

 
$
452,971

 
729,119

 
$
17,085,147

 
66,259,673

 
$
662,596

 
$
220,370,984

 
$
(140,306,846
)
 
$
98,264,852

 
4,055,292

 
$
9,101,886

 
$
107,366,738

Proceeds from
issuance of Series B preferred stock, net of expenses

 

 
1,142,225

 
23,384,902

 

 

 

 

 
23,384,902

 

 

 
23,384,902

Accretion of
Series B preferred stock discount

 

 

 
243,319

 

 

 

 

 
243,319

 

 

 
243,319

Conversion
of Series B
preferred stock to common stock

 

 
(100
)
 
(2,500
)
 
500

 
5

 
2,495

 

 

 

 

 

Conversion of senior
  convertible notes to
  common stock

 

 

 

 
1,397,010

1,397,010

13,970

 
1,590,180

 

 
1,604,150

 

 

 
1,604,150

Issuance of
common stock under Share Incentive Plan

 

 

 

 
283,304

 
2,833

 
423,667

 

 
426,500

 

 

 
426,500

Noncontrolling
interest
investments

 

 

 

 

 

 

 

 

 
1,696,616

 
3,499,383

 
3,499,383

Adjustment for
noncontrolling interest in operating partnership

 

 

 

 

 

 
338,150

 

 
338,150

 

 
(338,150
)
 

Dividends and
distributions

 

 

 

 

 

 

 
(12,848,827
)
 
(12,848,827
)
 

 
(859,262
)
 
(13,708,089
)
Net loss

 

 

 

 

 

 

 
(7,438,980
)
 
(7,438,980
)
 

 
(767,679
)
 
(8,206,659
)
Balance,
September 30, 2016 (Unaudited)
562

 
$
452,971

 
1,871,244

 
$
40,710,868

 
67,940,487

 
$
679,404

 
$
222,725,476

 
$
(160,594,653
)
 
$
103,974,066

 
5,751,908

 
$
10,636,178

 
$
114,610,244

See accompanying notes to condensed consolidated financial statements.

5


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
For the Nine Months Ended
September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(8,206,659
)
 
$
(16,676,843
)
Adjustments to reconcile consolidated net loss to net cash from operating activities:
 
 
 
Depreciation
5,751,164

 
3,600,673

Amortization
9,555,167

 
8,121,491

Loan cost amortization
1,464,347

 
938,383

Above (below) market lease amortization
69,209

 
566,646

Share-based compensation
426,500

 
506,000

Gain on sale of disposal of properties
(688,824
)
 

Provision for credit losses
196,311

 
214,316

Changes in assets and liabilities, net of acquisitions:
 
 
 
Rent and other tenant receivables, net
(250,604
)
 
(376,411
)
Unbilled rent
(220,995
)
 
(183,184
)
Related party receivables
(883,630
)
 
85,730

Cash restricted for operating property reserves
(1,256,976
)
 
(1,500,177
)
Deferred costs and other assets, net
1,729,506

 
(393,361
)
Accounts payable, accrued expenses and other liabilities
3,320,861

 
1,996,041

Net operating cash flows provided by discontinued operations
(715
)
 
665,158

Net cash from (used in) operating activities
11,004,662

 
(2,435,538
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Investment property acquisitions
(8,679,750
)
 
(62,027,081
)
Capital expenditures
(1,586,974
)
 
(263,242
)
Issuance of notes receivable
(11,000,000
)
 

Increase in capital property reserves
(622,268
)
 
(1,728,872
)
Increase in cash restricted for property acquisitions
(837,169
)
 

Cash received from disposal of properties
1,385,177

 

Net investing cash flows from discontinued operations

 
914,388

Net cash used in investing activities
(21,340,984
)
 
(63,104,807
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments for deferred financing costs
(3,571,405
)
 
(2,540,415
)
Dividends and distributions paid
(12,653,896
)
 
(10,083,178
)
Proceeds from sales of preferred stock, net of expenses
61,387,058

 
83,415,894

Conversion of preferred stock

 
(25
)
Loan proceeds
20,100,000

 

Loan principal payments
(29,575,012
)
 
(7,230,229
)
Net financing cash flows used in discontinued operations
(11,363
)
 
(80,172
)
Net cash from financing activities
35,675,382

 
63,481,875

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
25,339,060

 
(2,058,470
)
CASH AND CASH EQUIVALENTS, beginning of period
10,477,576

 
9,839,841

CASH AND CASH EQUIVALENTS, end of period
$
35,816,636

 
$
7,781,371

Supplemental Disclosures:
 
 
 
Non-Cash Transactions:
 
 
 
Debt incurred for acquisitions
$
60,320,250

 
$
75,652,464

Noncontrolling interests resulting from the issuance of common units
$
3,499,383

 
$
1,574,551

Conversion of senior convertible debt into Series C preferred stock
$

 
$
3,000,000

Conversion of senior convertible debt into common stock
$
1,600,000

 
$

Accretion of preferred stock discounts
$
255,420

 
$
8,836,695

Deemed dividend for beneficial conversion feature
$

 
$
72,644,506

Note receivable in consideration of land
$
1,000,000

 
$

Other Cash Transactions:
 
 
 
Cash paid for interest
$
8,258,885

 
$
5,979,476

See accompanying notes to condensed consolidated financial statements.

6


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, 2016, the Trust, through the Operating Partnership, owned and operated fifty-five centers, one office building, eight undeveloped properties, and one redevelopment project in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey 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 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.

Prior to being acquired by the Company, the Operating Companies served as the external manager for the Company and its properties (the “REIT Properties”) and performed property management and leasing functions for certain related and non-related third parties (the “Non-REIT Properties”). The Company will continue to perform these services for the Non-REIT Properties through the Operating Companies, primarily through WRE. Accordingly, 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, 2015 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. All material balances and transactions between the consolidated entities of the Company have been eliminated. You should read these condensed consolidated financial statements in conjunction with our 2015 Annual Report filed on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

2. Summary of Significant Accounting Policies
Investment Properties
    
The Company records investment properties and related intangibles at cost or fair value upon acquisition less accumulated depreciation and amortization. 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

7

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)

assets related to out-of-market leases, tenant relationships and in-place leases the Company determines to exist. The Company 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 operating income before depreciation and amortization, plus its residual value, is less than the carrying value of the property. 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 and local market information. The Company may decide to sell properties that are held for use and the sale prices of these properties may differ from their carrying values. The Company did not record any impairment adjustments to its properties during the three and nine months ended September 30, 2016 and 2015.

Cash and Cash Equivalents and Restricted Cash
    
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less or investments easily converted into known amounts of cash to be cash and cash equivalents without a significant cost to the Company. 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 and tenant security deposits. The Company presents changes in cash restricted for real estate taxes, insurance and tenant security deposits as operating activities in the condensed consolidated statement of cash flows. The Company presents changes in cash restricted for capital improvements as investing activities in the condensed consolidated statement of cash flows.
    
The Company places its cash and cash equivalents and restricted cash on deposit with financial institutions in the United States and the amounts are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. 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.


8

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)


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, 2016 and December 31, 2015, the Company’s allowance for uncollectible accounts totaled $419,807 and $411,394, respectively. During the three and nine months ended September 30, 2016, the Company recorded bad debt expenses in the amount of $31,330 and $196,311, 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, 2015, the Company recorded bad debt expenses in the amount of $112,580 and $214,316, respectively. During the three and nine months ended September 30, 2016 and 2015, the Company did not realize any recoveries related to tenant receivables previously written off.

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.
    
Deferred Costs and Other Assets, net
The Company’s deferred costs and other assets consist primarily of leasing commissions, capitalized legal and marketing costs and tenant relationship 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 in connection with lease originations.
Details of these deferred costs, net of amortization, and other assets are as follows:
 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
Lease origination costs, net
$
1,144,027

 
$
1,376,652

Leases in place, net
21,965,889

 
19,091,917

Deposits
366,250

 
2,012,996

Legal and marketing costs, net
106,596

 
129,325

Tenant relationships, net
12,073,312

 
12,060,172

Other
442,920

 
588,464

Total Deferred Costs and Other Assets, net
$
36,098,994

 
$
35,259,526


9

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)

Amortization of lease origination costs, leases in place and legal and marketing costs represents a component of depreciation and amortization expense. As of September 30, 2016 and December 31, 2015, the Company’s intangible accumulated amortization totaled $25,722,802 and $16,595,092, respectively. During the three and nine months ended September 30, 2016, the Company’s intangible amortization expense totaled $2,996,840 and $9,555,167, respectively. During the three and nine months ended September 30, 2015, the Company's intangible amortization expense totaled $3,403,239 and $8,121,491, respectively. Future amortization of lease origination costs, leases in place, legal and marketing costs and tenant relationships is as follows (unaudited):
For the Periods Ending September 30,
Lease
Origination
Costs, net
 
Leases In
Place, net
 
Legal &
Marketing
Costs, net
 
Tenant
Relationships, net
2017
$
315,258

 
$
6,164,707

 
$
26,731

 
$
4,144,113

2018
239,900

 
4,675,925

 
21,281

 
2,940,058

2019
162,301

 
3,287,248

 
17,215

 
1,931,689

2020
113,862

 
2,158,958

 
13,214

 
1,129,893

2021
90,987

 
1,353,786

 
10,260

 
586,277

Thereafter
221,719

 
4,325,265

 
17,895

 
1,341,282

 
$
1,144,027

 
$
21,965,889

 
$
106,596

 
$
12,073,312

Revenue Recognition
    
The Company retains substantially all of the risks and benefits of ownership of the investment properties and accounts for its leases as operating leases. 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. 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. During the three and nine months ended September 30, 2016, the Company recognized percentage rents of $57,682 and $214,225, respectively. During the three and nine months ended September 30, 2015, the Company recognized percentage rents of $27,179 and $63,326, respectively.
    
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). The Company includes these reimbursements, along with other revenue derived from late fees and seasonal events, under the Condensed Consolidated Statements of Operations caption "Tenant reimbursements and other revenues." This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. The Company accrues reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. 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 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 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, 2016 and 2015.

The Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets. During the three and nine months ended September 30, 2016, the Company recognized lease termination fees of $0 and $25,674, respectively. During the three and nine months ended September 30, 2015, the Company recognized lease termination fees of $0 and $0, respectively.

10

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)

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. Thus, the Company made no provision for federal income taxes for the REIT in the accompanying condensed consolidated financial statements. 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 failed 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. As the REIT was formed in November 2012, it is subject to examination by the Internal Revenue Service and state tax authorities from the date of formation.
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/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). Non-REIT properties pay development fees of 5% of hard costs.

Compensation and benefits paid to employees of the Company represent the largest component of costs incurred to acquire, manage, lease and administer the properties. The Company believes that every employee position exists to either directly or indirectly perform these functions. Therefore, the Company allocates compensation and benefits to the various functions of the Company based on an estimate of how each employee spends their time. The Company allocates actual costs attributed to property management costs to the TRS on a pro rata basis based on total property revenues generated by the Non-REIT Properties. The Company allocates actual leasing costs to the TRS on a pro rata basis based on total leasing commissions generated by the Non-REIT Properties. Currently, the TRS does not acquire properties for third parties so the Company does not allocate acquisition related costs to the TRS.
    
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
    
The Company expenses advertising and promotion costs as incurred. The Company incurred advertising and promotion costs of $23,002 and $175,887 for the three and nine months ended September 30, 2016, respectively. The Company incurred advertising and promotion costs of $44,376 and $152,338 for the three and nine months ended September 30, 2015, respectively.




11

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

The Company records assets 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.

Corporate General and Administrative Expense
    
A detail for the "corporate general & administrative" line item from the Condensed Consolidated Statements of Operations is presented below:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Acquisition and development costs
 
$
117,951

 
$
1,733,639

 
$
903,490

 
$
3,167,378

Professional fees
 
390,540

 
274,006

 
1,180,854

 
1,166,279

Compensation and benefits
 
392,008

 
620,749

 
2,439,977

 
2,361,664

Corporate administration
 
301,578

 
247,621

 
806,216

 
806,494

Equity, debt and refinancing costs
 
60,679

 
1,826,240

 
310,547

 
2,447,890

Travel
 
153,199

 
61,993

 
373,741

 
363,803

Advertising
 
23,002

 
44,376

 
175,887

 
152,338

Taxes and licenses
 
56,564

 
43,356

 
99,748

 
149,354

Total
 
$
1,495,521

 
$
4,851,980

 
$
6,290,460

 
$
10,615,200

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 statement 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.

Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU

12

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)

2016-10, "Revenue from contracts with customers (Topic 606): Identifying Performance Obligations and Licensing," which provides further guidance on identifying performance obligations and intellectual property licensing implementation. In June 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which relates to assessing collectability, presentation of sales taxes, noncash consideration and completed contracts and contract modifications in transition. Companies are permitted to adopt the ASUs as early as fiscal years beginning after December 15, 2016, but the adoption is required for fiscal years beginning after December 15, 2017. These new standards will be effective for the Company in the first quarter of the year ended December 31, 2018 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adoption of the new standard on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)." This ASU defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and provides guidance on required financial statement footnote disclosures. This ASU is effective for annual periods ending after December 15, 2016. The Company will adopt this ASU as of December 31, 2016 and use its guidance when evaluating whether there is substantial doubt about the Company's ability to continue as a going concern.
    
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." This new guidance requires the presentation of unamortized debt issuance costs to be shown in the liabilities section of the consolidated balance sheets as a reduction of the principal amount of the associated debt, rather than as an asset. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a retrospective approach by restating prior period comparative consolidated balance sheets. The Company adopted the ASU effective January 1, 2016 and applied it on a retrospective basis for all debt issuance costs, including those pertaining to the Company’s revolving credit facility. As a result, unamortized debt issuance costs of $4.71 million as of December 31, 2015 have been reclassified from other assets and presented as a deduction of indebtedness in the condensed consolidated balance sheet.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." This new guidance requires that the acquirer recognizes adjustments to preliminary acquisition values and account for the cumulative effect of any required adjustments in the period in which they are determined. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a prospective approach for adjustments that occur after the effective date. The Company adopted the ASU effective January 1, 2016.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet the new ASU will require both types of leases (i.e. operating and capital) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The leasing standard will be effective for calendar year-end public companies beginning after December 15, 2018.  Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all companies and organizations upon issuance of the standard. For calendar year-end public companies, this means an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements for 2018 and 2017. Lessees with a large portfolio of leases are likely to see a significant increase in balance sheet assets and liabilities. See Note 8 for the Company’s current lease commitments. The Company is currently evaluating the impact of ASU 2016-02 on its financial statements.

13

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)


In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  This ASU is effective for annual periods beginning after December 15, 2016 and early adoption is permitted.  The new standard can be applied using either a prospective transition method or a retrospective transition method. The Company will adopt this ASU in 2017 and does not expect the adoption of this ASU to materially impact its financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments (a consensus of the Emerging Issues Task Force).” The ASU addresses eight specific cash flow issues in an effort to reduce diversity in practice. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. The new standard is to be applied retrospectively for all period presented.  The Company will adopt this ASU in 2018 and does not expect the adoption to materially impact its condensed consolidated statements of cash flows.

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
    
Certain reclassifications have been made to prior period amounts to make their presentation comparable with the current period. These reclassifications had no impact on net income.  During the first quarter of 2016, the Company identified that in previous filings the change in cash restricted for property reserves and payments for deferred financing costs had been reported as cash flows from operating activities and should have been presented as investing and financing activities, respectively. The Company corrected the previously presented cash flows for these items in the current presentation and in doing so, the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 has been adjusted to increase net cash flows from operating activities by $4.3 million with corresponding decreases in net cash flows from investing and financing activities of $1.7 million and $2.6 million, respectively. The Company has evaluated the effect of the incorrect presentation in prior periods, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor require amendment of, any previously filed annual or quarterly consolidated financial statements.

3. Investment Properties
Investment properties consist of the following:
 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
Land and land improvements
$
71,835,953

 
$
50,777,143

Land held for improvement
11,370,497

 
12,353,963

Buildings and improvements
227,405,802

 
188,338,469

Investment properties at cost
310,612,252

 
251,469,575

Less accumulated depreciation and amortization
(18,399,995
)
 
(12,704,944
)
Investment properties, net
$
292,212,257

 
$
238,764,631

The Company’s depreciation expense on investment properties was $1,997,732 and $5,751,164 for the three and nine months ended September 30, 2016, respectively. The Company's depreciation expense on investment properties was $1,478,698 and $3,600,673 for the three and nine months ended September 30, 2015, respectively.
A significant portion of the Company’s land, buildings and improvements serves 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.

14

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Investment Properties (continued)

Acquisitions
        
On April 12, 2016, the Company completed its acquisition of 14 retail shopping centers located in Georgia and South Carolina (collectively the “A-C Portfolio”) for an aggregate purchase price of $71 million, paid through a combination of cash, debt and the issuance of 888,889 common units in the Operating Partnership. Collectively, the A-C Portfolio properties total 605,358 square feet in leaseable space, and were 92% leased as of the acquisition date by 77 primarily retail tenants. Each property is anchored by either a Bi-Lo, Harris Teeter or Piggly Wiggly grocery store.

The A-C Portfolio consists of the following properties:
Property Name
Location
Square Feet

Darien Shopping Center
Darien, GA
26,001

Devine Street
Columbia, SC
38,464

Folly Road
Charleston, SC
47,794

Georgetown
Georgetown, SC
29,572

Ladson Crossing
Ladson, SC
52,607

Lake Greenwood Crossing
Greenwood, SC
47,546

Lake Murray
Lexington, SC
39,218

Litchfield Market Village
Pawleys Island, SC
86,740

Moncks Corner
Moncks Corner, SC
26,800

Ridgeland
Ridgeland, SC
20,029

Shoppes at Myrtle Park
Bluffton, SC
56,380

South Lake
Lexington, SC
44,318

South Park
Mullins, SC
60,874

St. Matthews
St. Matthews, SC
29,015


The following summarizes the consideration paid and the preliminary fair values of assets acquired and liabilities assumed in conjunction with the acquisitions described above, along with a description of the methods used to determine fair value. In determining fair values, 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. The valuation and purchase price allocation for this acquisition are preliminary, but are expected to be finalized by March 31, 2017.
 
 
 
 
A-C Portfolio
Preliminary fair value of assets acquired and liabilities assumed:
 
 
Investment property (a)
$
58,595,869

 
Lease intangibles and other assets (b)
12,124,143

 
Above market leases (c)
2,942,219

 
Below market leases (c)
(2,662,231
)
 
 
 
 
 
 
Preliminary fair value of net assets acquired:
$
71,000,000

 
 
 
 
 
Purchase consideration:
 
 
 
Consideration paid with cash and debt
$
69,000,000

 
Consideration paid with common units
2,000,000

 
 
 
 
 
 
Total consideration (d)
$
71,000,000


15

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Investment Properties (continued)

a.
Represents the preliminary fair value of the net investment properties acquired which includes land, buildings, site improvements and tenant improvements. The preliminary fair value 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 preliminary fair value of lease intangibles and other assets. Lease intangibles include leasing commissions, in place leases and tenant relationships associated with replacing existing leases. The income approach was used to determine the fair value of these intangible assets which included estimated market rates and expenses. It was determined that carrying value approximated fair value for other asset amounts.
c.
Represents the fair value of above/below market leases. The income approach was used to determine the fair value of above/below market leases using market rental rates for similar properties.
d.
Represents the components of purchase consideration paid.
Unaudited pro forma financial information in the aggregate is presented below for the acquisitions of the A-C Portfolio. The unaudited pro forma information presented below includes the effects of the acquisition as if it had been consummated as of the beginning of the prior fiscal year. The pro forma results include adjustments for depreciation and amortization associated with acquired tangible and intangible assets, straight-line rent adjustments, interest expense related to debt incurred and adjustments attributable to the increase in noncontrolling interests relating to the incremental common units used as consideration in the acquisition of the A-C Portfolio.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Rental revenue
 
$
8,589,194

 
$
7,350,934

 
$
25,685,635

 
$
18,879,018

Net loss from continuing operations
$
(1,597,272
)
 
$
(7,865,805
)
 
$
(9,210,053
)
 
$
(18,495,390
)
Net loss attributable to Wheeler REIT
$
(1,441,117
)
 
$
(7,105,404
)
 
$
(7,572,955
)
 
$
(16,420,232
)
Net loss attributable to Wheeler REIT common shareholders
$
(2,681,928
)
 
$
(22,509,817
)
 
$
(9,836,365
)
 
$
(102,180,970
)
Basic loss per share
 
$
(0.04
)
 
$
(0.36
)
 
$
(0.15
)
 
$
(3.43
)
Diluted loss per share
 
$
(0.04
)
 
$
(0.36
)
 
$
(0.15
)
 
$
(3.43
)
4. Notes Receivable
The Company, through WD, is performing development services for a related party of the Company, for the redevelopment of Pineland Station Shopping Center in Hilton Head, South Carolina to be known in the future as Sea Turtle Marketplace (“Sea Turtle Development”). Sea Turtle Development is a related party as discussed in Note 10.
On September 29, 2016, the Company entered into an $11.0 million note receivable for the partial funding of the Sea Turtle Development and an $1.0 million note receivable in consideration for the sale of 10.39 acres of land owned by the Company. Both promissory notes are collateralized by a 2nd deed of trust on the property and accrue interest at a rate of 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. The balance on the notes receivable at September 30, 2016 is $12.0 million.

16

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)


5. Assets Held for Sale and Discontinued Operations
In August 2015, the Company’s management and Board of Directors committed to a plan to sell Bixby Commons, Jenks Reasors, Harps at Harbor Point, Starbucks/Verizon and the ground leases for Ruby Tuesday’s and Outback Steakhouse at Pierpont Centre (the “Freestanding Properties”) as part of the Company’s continuous evaluation of strategic alternatives. Accordingly, the Freestanding Properties have been classified as held for sale and the results of their operations have been classified as discontinued operations for all periods presented. Management expects that the sale of the Freestanding Properties will occur within one year and the Company will receive no residual cash flows once the Freestanding Properties are disposed. As of September 30, 2016, the only Freestanding Property remaining available for sale was Ruby Tuesday and Outback Steakhouse at Pierpont Centre.
On June 29, 2016, the Company completed its sale of Starbucks/Verizon for a contract price of approximately $2.1 million, resulting in a gain of approximately $689,000.
As of September 30, 2016 and December 31, 2015, assets held for sale consisted of the following:
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Investment properties, net
 
$
216,792

 
$
1,284,888

Rents and other tenant receivables, net
 

 
38,945

Above market lease intangible, net
 
2,616

 
2,616

Deferred costs and other assets, net
 
146,472

 
366,024

Total assets held for sale
 
$
365,880

 
$
1,692,473

As of September 30, 2016 and December 31, 2015, liabilities associated with assets held for sale consisted of the following:
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Loans payable
 
$
1,350,000

 
$
1,966,806

Below market lease intangible, net
 

 
14,758

Accounts payable, accrued expenses and other liabilities

 
10,754

Total liabilities associated with assets held for sale
$
1,350,000

 
$
1,992,318


The condensed consolidated statements of operations reflect reclassifications of rental revenue, property operating expenses, corporate general and administrative expenses and interest expense from continuing operations to income from discontinued operations for all periods presented. All interest expense disclosed below is directly related to the debt incurred to acquire the Freestanding Properties.
    

17

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

5. Assets Held for Sale and Discontinued Operations (continued)


The following is a summary of the income from discontinued operations for the three and nine months ended September 30, 2016 and 2015:

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Revenues
 
$
53,939

 
$
607,379

 
$
249,439

 
$
1,827,238

Expenses
 
508

 
174,218

 
78,013

 
789,157

Operating income
 
53,431

 
433,161

 
171,426

 
1,038,081

Interest expense
 
14,317

 
215,927

 
55,963

 
689,998

Gain on disposal of properties
 
805

 

 
688,824

 

Income from discontinued operations
 
$
39,919

 
$
217,234

 
$
804,287

 
$
348,083


18

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:
 
 
 
 
 
 
 
 
 
 
Property/Description
Monthly Payment
 
Interest
Rate
 
Maturity
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
(unaudited)
 
 
Shoppes at Eagle Harbor
$
25,100

 
4.34
%
 
March 2018
 
$
3,528,895

 
$
3,634,085

Monarch Bank Building
$
9,473

 
4.15
%
 
December 2017
 
1,334,241

 
1,376,452

Perimeter Square
Interest only

 
4.06
%
 
August 2026
 
4,500,000

 
4,166,406

Riversedge North
$
8,802

 
6.00
%
 
January 2019
 
926,444

 
962,281

Walnut Hill Plaza
$
24,273

 
5.50
%
 
July 2017
 
3,464,362

 
3,535,606

Twin City Commons
$
17,827

 
4.86
%
 
January 2023
 
3,184,056

 
3,225,473

Shoppes at TJ Maxx
$
33,880

 
3.88
%
 
May 2020
 
5,951,648

 
6,081,272

Bank Line of Credit
Interest only

 
4.25
%
 
September 2017
 
3,000,000

 

Bank Line of Credit
Interest only

 
3.01
%
 
May 2018
 
46,127,250

 
6,873,750

Forrest Gallery
$
50,973

 
5.40
%
 
September 2023
 
8,834,660

 
8,926,712

Tampa Festival
$
50,797

 
5.56
%
 
September 2023
 
8,534,790

 
8,627,294

Winslow Plaza
Interest only

 
4.82
%
 
December 2025
 
4,620,000

 
4,620,000

Cypress Shopping Center
$
34,360

 
4.70
%
 
July 2024
 
6,609,876

 
6,625,000

Harrodsburg Marketplace
$
19,112

 
4.55
%
 
September 2024
 
3,632,616

 
3,677,501

Port Crossing
$
34,788

 
4.84
%
 
August 2024
 
6,396,584

 
6,471,636

LaGrange Marketplace
$
15,065

 
5.50
%
 
February 2024
 
2,381,726

 
2,418,212

Freeway Junction
$
31,265

 
4.60
%
 
September 2024
 
8,150,000

 
8,150,000

DF I-Edenton
$
250,000

1 
3.75
%
 
September 2016
 

 
650,000

DF I-Moyock
$
10,665

 
5.00
%
 
July 2019
 
337,169

 
418,538

Graystone Crossing
$
15,672

 
4.55
%
 
October 2024
 
4,000,000

 
4,000,000

Bryan Station
Interest only

 
4.52
%
 
November 2024
 
4,625,000

 
4,625,000

Crockett Square
Interest only

 
4.47
%
 
December 2024
 
6,337,500

 
6,337,500

Harbor Point
$
11,024

 
5.85
%
 
December 2016
 
664,864

 
732,685

Pierpont Centre
Interest only

 
4.15
%
 
February 2025
 
8,450,000

 
8,450,000

Alex City Marketplace
Interest only

 
3.95
%
 
April 2025
 
5,750,000

 
5,750,000

Butler Square
Interest only

 
3.90
%
 
May 2025
 
5,640,000

 
5,640,000

Brook Run Shopping Center
Interest only

 
4.08
%
 
June 2025
 
10,950,000

 
10,950,000

Beaver Ruin Village I and II
Interest only

 
4.73
%
 
July 2025
 
9,400,000

 
9,400,000

Columbia Fire Station
Interest only

 
8.00
%
 
December 2017
 
477,788

 
450,053

Sunshine Shopping Plaza
Interest only

 
4.57
%
 
August 2025
 
5,900,000

 
5,900,000

Barnett Portfolio
Interest only

 
4.30
%
 
September 2025
 
8,770,000

 
8,770,000

Grove Park Shopping Center
Interest only

 
4.52
%
 
October 2025
 
3,800,000

 
3,800,000

Parkway Plaza
Interest only

 
4.57
%
 
October 2025
 
3,500,000

 
3,500,000

Conyers Crossing
Interest only

 
4.67
%
 
October 2025
 
5,960,000

 
5,960,000

Fort Howard Shopping Center
Interest only

 
4.57
%
 
October 2025
 
7,100,000

 
7,100,000

Chesapeake Square
$
23,857

 
4.70
%
 
August 2026
 
4,594,760

 

Revere Loan
Interest only

 
8.00
%
 
April 2017
 
7,450,000

 

Senior convertible notes
Interest only

 
9.00
%
 
December 2018
 
1,400,000

 
3,000,000

Senior non-convertible notes
Interest only

 
9.00
%
 
January 2016
 

 
2,160,000

South Carolina Food Lions note
$
68,320

 
5.25
%
 
January 2024
 
12,266,906

 
12,375,000

Total Principal Balance
 
 
 
 
 
 
238,551,135

 
189,340,456

Unamortized debt issuance cost
 
 
 
 
 
 
(6,783,873
)
 
(4,711,374
)
Total Loans Payable
 
 
 
 
 
 
$
231,767,262

 
$
184,629,082

(1)$250,000 plus accrued interest paid quarterly until maturity.

19

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Loans Payable (continued)


KeyBank Credit Agreement

On May 29, 2015, the Operating Partnership entered into a $45.0 million revolving credit line (the "Credit Agreement") with KeyBank National Association ("KeyBank"). Pursuant to the Credit Agreement, outstanding borrowings accrue monthly interest which is paid at a rate of the one-month London Interbank Offer Rate ("LIBOR") plus a margin ranging from 1.75% to 2.50% depending on the Company's consolidated leverage ratio.  On April 12, 2016, the Operating Partnership entered into a First Amendment and Joinder Agreement (“First Amendment”) to the Credit Agreement. The First Amendment increased the $45.0 million revolving credit line with KeyBank to $67.2 million and the Company utilized this additional borrowing capacity to acquire the A-C Portfolio. Pursuant to the terms of the First Amendment, the monthly interest of the increased credit facility is adjusted to LIBOR plus a margin of 5.00% until such time that the Company can meet certain repayment and leverage conditions. The Company used Series B proceeds to reduce its borrowings under the Credit Agreement to $46.1 million and the margin reduced back to the stated range of the original Credit Agreement on August 15, 2016. The unutilized amounts available to the Company under the Credit Agreement accrue fees which are paid at a rate of 0.30%.

As of September 30, 2016, the Company has borrowed $46.1 million under the Credit Agreement, which is collateralized by the A-C Portfolio acquired on April 12, 2016. At September 30, 2016, the outstanding borrowings are accruing interest at 3.01%. The Credit Agreement contains certain financial covenants that the Company must meet, including minimum leverage, fixed charge coverage and debt service coverage ratios as well as a minimum tangible net worth requirement. The Company was in compliance with the financial covenants as of September 30, 2016. The Credit Agreement also contains certain events of default that if they occur may cause KeyBank to terminate the Credit Agreement and declare amounts owed to become immediately payable. As of September 30, 2016, the Company has not incurred an event of default.
Senior Subordinated Debt

On January 29, 2016, the Company paid off $2.16 million in senior subordinated debt.
Revere Loan Agreement
In connection with the closing of the A-C Portfolio, the Operating Partnership, as borrower, and Revere High Yield Fund, LP, a Delaware limited partnership (“Revere”), as lender, entered into a Term Loan Agreement dated as of April 8, 2016 (“Revere Term Loan”) in the principal amount of $8.0 million. The Revere Term Loan has a maturity date of April 30, 2017 and an interest rate of 8% per annum. The Company and certain of its subsidiaries serve as guarantors under the Revere Term Loan. The proceeds of the Revere Term Loan were used as partial consideration for the purchase of the A-C Portfolio. A warrant (“Warrant”) to purchase an aggregate of 6,000,000 shares of the Company’s common stock (under circumstances described below under the section “Revere Warrant Agreement”) serves as collateral for the Revere Term Loan. As of September 30, 2016, the remaining outstanding amount under the Revere Term Loan is $7.45 million.
Revere Warrant Agreement
In connection with the Revere Term Loan, the Company and Revere entered into a Warrant Agreement dated as of April 8, 2016 (“Revere Warrant Agreement”), pursuant to which the Company agreed to issue the Warrant to Revere. The terms of the Revere Warrant Agreement provide that solely in the event of an Event of Default (as defined in the Revere Term Loan) under the Revere Term Loan, Revere shall have the right to purchase an aggregate of up to 6,000,000 shares of the Company’s common stock for an exercise price equal to $0.0001 per share. The Warrant is exercisable at any time and from time to time during the period starting on April 8, 2016 and expiring on April 30, 2017 at 11:59 p.m., Virginia Beach, Virginia time, solely in the event of an Event of Default under the Revere Term Loan. The Company will not receive any proceeds from the issuance of the Warrant; rather the Warrant serves as collateral for the Revere Term Loan, the proceeds of which were used as partial consideration for the A-C Portfolio. The issuance of the Warrant is exempt from registration pursuant to the exemption provided by Rule 506 of Regulation D under the Securities Act of 1933, as amended based upon the above facts, because Revere is an accredited investor and because the issuance of the Warrant was a private transaction by the Company and did not involve any public offering. The Warrant is treated as embedded equity and separate disclosure is not necessary.


20

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Loans Payable (continued)


Senior Convertible Notes Amendment
Effective as of April 28, 2016, the Company and certain investors: Calapasas West Partners, L.P.; Full Value Partners, L.P.; Full Value Special Situations Fund, L.P.; MCM Opportunity Partners, L.P.; Mercury Partners, L.P.; Opportunity Partners, L.P.; Special Opportunities Fund, Inc.; and Steady Gain Partners, L.P. (collectively the “Bulldog Investors”) amended the convertible 9% senior notes (“Amended Convertible Notes”) to purchase shares of the Company’s common stock. Prior to the amendment, the aggregate principal amount of the Convertible Notes ("Convertible Notes") was $3,000,000.

Pursuant to the terms of the Amended Convertible Notes, upon thirty (30) calendar days’ notice (“Notice”), the Company may prepay any portion of the outstanding Principal Amount and accrued and unpaid interest, if any, without penalty. In addition, upon Notice the Bulldog Investors may now exercise their right to convert all or any portion of the outstanding Principal Amount and any accrued but unpaid interest into shares of common stock any time prior to the repayment in full of the Amended Convertible Notes. The maximum number of shares of common stock issuable upon conversion of the Amended Convertible Notes is 1,417,079 shares. As of September 30, 2016, the Bulldog Investors converted approximately $1,600,000 of principal amount into 1,397,010 shares of the Company's common stock.

Certain of the Company’s loans payable have covenants with which the Company is required to comply. As of September 30, 2016, the Company believes it is in compliance with all applicable covenants.

Chesapeake Square Refinance

On July 11, 2016, the Company executed a promissory note for $4.6 million to refinance the Chesapeake Square collateralized portion of the KeyBank Credit Agreement totaling $3.9 million. The new loan matures on August 1, 2026 with principal due at maturity and bears interest at 4.70%.

Perimeter Square Refinance

On July 29, 2016, the Company executed a promissory note for $4.5 million to refinance the Perimeter promissory note totaling $4.1 million. The new loan matures on August 6, 2026 with principal due at maturity and bears interest at 4.06%.

Debt Maturity
The Company’s scheduled principal repayments on indebtedness as of September 30, 2016 are as follows:
 
For the Periods Ending September 30,
 
 
(unaudited)
2017
$
16,396,168

2018
53,068,183

2019
4,004,712

2020
9,217,251

2021
1,748,540

Thereafter
154,116,281

Total principal maturities
$
238,551,135

 











21


7. Rentals under Operating Leases

Future minimum rentals to be received under noncancelable tenant operating leases for each of the next five years and thereafter, excluding Common Area Maintenance and percentage rent based on tenant sales volume, as of September 30, 2016 are as follows: 
 
For the Periods Ending September 30,
 
(unaudited)
2017
$
32,959,649

2018
28,486,921

2019
22,194,366

2020
16,887,034

2021
11,526,744

Thereafter
30,255,139

Total minimum rentals
$
142,309,853

8. Equity
Earnings per share
Basic earnings per share for the Company’s common shareholders is calculated by dividing income (loss) from continuing operations, excluding amounts attributable to preferred stockholders and the net loss attributable to noncontrolling interests, by the Company’s weighted-average shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income (loss) attributable to common shareholders, excluding amounts attributable to preferred shareholders and the net loss attributable to noncontrolling interests, by the weighted-average number of common shares including any dilutive shares.
As of September 30, 2016, 4,055,292 of the Operating Partnership’s common units outstanding to noncontrolling interests are eligible to be converted into shares of common stock, on a one-to-one basis. Additionally, 1,871,244 shares of Series B Convertible Preferred Stock, without par value ("Series B Preferred Stock"), and 1,600,000 shares of Series D Cumulative Convertible Preferred Stock, without par value ("Series D Preferred Stock"), and $1,400,000 of senior convertible debt are eligible to be converted into 28,244,214 shares of the Company's common stock and warrants to purchase 2,635,025 shares of the Company's common stock were outstanding at September 30, 2016. In addition, 6,000,000 shares of the Company's common stock may be issued upon exercise of a warrant, solely in the event of a default under a loan agreement in which we serve as a guarantor. The common units, convertible preferred stock, cumulative convertible preferred stock, senior convertible debt and warrants have been excluded from the Company’s diluted earnings per share calculation because their inclusion would be antidilutive.
Dividends
Dividends were declared to holders of common units, common shares and preferred shares as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Common unit and common shareholders
 
$
3,867,061

 
$
3,683,804

 
$
11,444,679

 
$
6,099,075

Preferred shareholders
 
1,240,811

 
2,279,907

 
2,263,410

 
13,116,232

Total
 
$
5,107,872

 
$
5,963,711

 
$
13,708,089

 
$
19,215,307

 

On September 19, 2016, the Company declared a $0.0175 per share dividend payable on or about October 31, 2016 to shareholders and unitholders of record as of September 30, 2016. Accordingly, the Company has accrued $1,289,617 as of September 30, 2016 for this dividend.

22

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

8. Equity (continued)

During the three months ended September 30, 2016, the Company declared quarterly dividends of $1,162,442 to preferred shareholders of record as of September 30, 2016 to be paid on October 15, 2016. Accordingly, the Company has accrued $1,162,442 as of September 30, 2016 for this dividend.

2015 Long-Term Incentive Plan

On June 4, 2015, the Company's shareholders approved the 2015 Long-Term Incentive Plan (the "2015 Incentive Plan"). The 2015 Incentive Plan allows for issuance of up to 1,000,000 shares of the Company's common stock to employees, directors, officers and consultants for services rendered to the Company.

Equity Issuances under 2015 Incentive Plan

During the nine months ended September 30, 2016, the Company issued 283,304 shares to consultants and employees for services rendered to the Company. The market value of these shares at the time of issuance was approximately $426,500. As of September 30, 2016, there are 473,804 shares available for issuance under the Company’s 2015 Incentive Plan.
2016 Long-Term Incentive Plan

On June 15, 2016, the Company's shareholders approved the 2016 Long-Term Incentive Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan allows for issuance of up to 5,000,000 shares of the Company's common stock to employees, directors, officers and consultants for services rendered to the Company. There were no issuances under the 2016 Incentive Plan in 2016.

2016 Series B Preferred Stock Offering

On July 7, 2016 the Company filed a shelf registration statement relating to the potential issuance of up to $50 million of our Series B Preferred Stock. On July 21, 2016, the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") with a third party agent to sell such securities. As of September 30, 2016, the Company has issued 1,142,225 shares of Series B Preferred Stock pursuant to the Equity Distribution Agreement in addition to the 729,119 shares that were currently issued and outstanding. The Series B Preferred Stock has no redemption rights. However, the Series B Preferred Stock is subject to a mandatory conversion once the 20-trading day volume-weighted average closing price of our common stock, 0.01 par value per share, exceeds $7.25 per share; once this weighted average closing price is met, each share of our Series B Preferred Stock will automatically convert into shares of our common stock at a conversion price equal to $5.00 per share. In addition, holders of our Series B Preferred Stock also have the option, at any time, to convert shares of our Series B Preferred Stock into shares of our common stock at a conversion price of $5.00 per share of common stock. Upon any voluntary or involuntary liquidation, dissolution or winding up of our company, the holders of shares of our Series B Preferred Stock shall be entitled to be paid out of our assets a liquidation preference of $25.00 per share, plus an amount equal to all accumulated, accrued and unpaid dividends to and including the date of payment. The Series Preferred B Stock has no maturity date and will remain outstanding indefinitely unless subject to a mandatory or voluntary conversion as described above. Net proceeds from the Series B Preferred Stock offering totaled $23.4 million which includes the impact of the underwriters’ selling concessions and legal, accounting and other professional fees.

2016 Series D Preferred Stock Offering- Redeemable Preferred Stock

In September 2016, the Company, issued and sold 1,600,000 shares of Series D Preferred Stock, liquidation value $25.00 per share (the “Series D Preferred Stock”), in a public offering. Each share of Series D Preferred Stock was sold to investors at an offering price of $25.00 per share. Until September 21, 2023, the holders of the Series D Preferred Stock are entitled to receive cumulative cash dividends at a rate of 8.75% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual amount of $2.1875 per share) (the “Initial Rate”). Commencing September 21, 2023, the holder’s will be entitled to cumulative cash dividends at an annual dividend rate of the Initial Rate increased by 2% of the liquidation preference per annum on each subsequent anniversary thereafter, subject to a maximum annual dividend rate of 14%. Dividends are payable quarterly in arrears on or before January 15th, April 15th, July 15th and October 15th of each year. On or after September 21, 2021, the Company, may at its option, redeem the Series D Preferred Stock, for cash at a redemption price of $25 per share, plus an amount equal to all accrued and unpaid dividends, if any, to and including the redemption date.

23

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

8. Equity (continued)

The holder of the Series D Preferred Stock may convert shares at any time into shares of the Company’s common stock at an initial conversion rate of $2.12 per share of common stock. On September 21, 2023, the holders of the Series D Preferred Stock may, at their option, elect to cause the Company to redeem any or all of their shares at a redemption price of $25 per share, plus an amount equal to all accrued and unpaid dividends, if any, to and including the redemption date, payable in cash or in shares of common stock, or any combination thereof, at the holder’s option. The Series D Preferred Stock requires the Company maintain asset coverage of at least 200.00%.

Net proceeds from the public offering totaled $38 million, which includes the impact of the underwriters' selling commissions and legal, accounting and other professional fees. Accretion of Series D Preferred Stock discount was $12 thousand for the nine months ended September 30, 2016.

9. Commitments and Contingencies
Lease Commitments
As of September 30, 2016, the Amscot property is subject to a ground lease which terminates in 2045. The ground lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred ground lease expense of $4,539 and $13,617 for the three and nine months ended September 30, 2016, respectively, compared to $4,539 and $13,510 for the three and nine months ended September 30, 2015, respectively.
    
As of September 30, 2016, the Beaver Ruin Village property is subject to a ground lease which terminates in 2054. The ground lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred ground lease expense of $11,428 and $34,284 for the three and nine months ended September 30, 2016, respectively, compared to $11,428 for the three and nine months ended September 30, 2015.

As of September 30, 2016, the Beaver Ruin Village II property is subject to a ground lease which terminates in 2056. The ground lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred ground lease expense of $4,463 and $13,389 for the three and nine months ended September 30, 2016, respectively, compared to $4,463 for the three and nine months ended September 30, 2015.

As of September 30, 2016, the Company leases office space in Charleston, South Carolina, subject to a lease that terminates in 2019. The lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred lease expense of $25,524 and $66,832 for the three and nine months ended September 30, 2016, respectively, compared to $24,910 and $84,709 for the three and nine months ended September 30, 2015, respectively.

As of September 30, 2016, the Moncks Corner property is subject to a ground lease which terminates in 2040. The ground lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred ground lease expense of $30,327 and $56,940 for the three and nine months ended September 30, 2016, respectively.

As of September 30, 2016, the Devine Street property is subject to a ground lease which terminates in 2035. The ground lease requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options. The Company incurred ground lease expense of $62,500 and $117,361 for the three and nine months ended September 30, 2016, respectively.












24

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

9. Commitments and Contingencies (continued)

Future minimum lease payments due under the operating leases, including applicable automatic extension options, are as follows (unaudited):
 
 
For the Years Ended September 30,
2017
$
518,974

2018
523,140

2019
518,166

2020
425,924

2021
465,785

Thereafter
10,131,026

 
$
12,583,015


Insurance
    
The Company carries comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in its portfolio under a blanket insurance policy, in addition to other coverages, such as trademark and pollution coverage that may be appropriate for certain of its properties. Additionally, the Company carries a directors’, officers’, entity and employment practices liability insurance policy that covers such claims made against the Company and its directors and officers. The Company believes the policy specifications and insured limits are appropriate and adequate for its properties given the relative risk of loss, the cost of the coverage and industry practice; however, its insurance coverage may not be sufficient to fully cover its losses.

Concentration of Credit Risk
    
The Company is subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for tenants and customers, changes in tax laws, interest rates, the availability of financing and potential liability under environmental and other laws.
    
The Company’s portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in the Northeast, Mid-Atlantic, Southeast and Southwest, which markets represented approximately 2%, 20%, 75% and 3%, respectively, of the total annualized base rent of the properties in its portfolio as of September 30, 2016. The Company’s geographic concentration may cause it to be more susceptible to adverse developments in those markets than if it owned a more geographically diverse portfolio. Additionally, the Company’s retail shopping center properties depend on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.
        
Regulatory and Environmental
    
As the owner of the buildings on our properties, the Company could face liability for the presence of hazardous materials (e.g., asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in its buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if the Company does not comply with such laws, it could face fines for such noncompliance. Also, the Company could be liable to third parties (e.g., occupants of the buildings) for damages related to exposure to hazardous materials or adverse conditions in its buildings, and the Company could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in its buildings. In addition, some of the Company’s tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject the Company or its tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to the Company, and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect the Company’s operations. The Company is not aware of any material contingent liabilities, regulatory matters or environmental matters that may exist.

25

Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

9. Commitments and Contingencies (continued)


Litigation
    
The Company is involved in various legal proceedings arising in the ordinary course of its business, including, but not limited to commercial disputes. The Company believes that such litigation, claims and administrative proceedings will not have a material adverse impact on its financial position or its results of operations. The Company records a liability when it considers the loss probable and the amount can be reasonably estimated.

10. Related Party Transactions
The amounts disclosed below reflect the activity between the Company and Mr. Wheeler's affiliates.
 
September 30,
 
2016
 
2015
 
(unaudited)
Amounts paid to affiliates
$
114,817

 
$
831,777

Amounts received from affiliates
$
784,510

 
$
671,334

Amounts due from affiliates
$
1,365,950

 
$
377,601

Notes receivable
$
12,000,000

 
$

As discussed in Note 4, the Company has loaned $11.0 million for the partial funding of Pineland Station Shopping Center in Hilton Head, South Carolina to be known in the future as Sea Turtle Development and loaned $1.0 million for the sale of land to be used in the development. The Company is performing development, leasing, property and asset management services for Sea Turtle Development. Development fees of 5% of hard costs incurred are paid to the Company. Leasing, property and asset management fees are consistent with those charged for services provided to non-related properties. Amounts due from affiliates include $294 thousand in accrued interest on the notes receivable and $169 thousand in development fees.


26


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Form 10-Q, along with the consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2015 Form 10-K for the year ended December 31, 2015. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the unaudited condensed consolidated financial statements included in this Form 10-Q.
This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions, although not all forward-looking statements include these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of our Registration Statement on Form S-3 (as amended) filed with the Securities and Exchange Commission (“SEC”) on August 24, 2016.
Executive Overview
The September 30, 2016 three and nine month periods include the combined operations of all properties owned at December 31, 2015 as described in our 2015 Form 10-K and approximately two quarters for the fourteen A-C Portfolio properties. Conversely, the September 30, 2015 three and nine month periods include the combined operations of all properties owned at December 31, 2014 as described in our 2014 Annual Report on Form 10-K for the year ended December 31, 2014 ("2014 Form 10-K"), and approximately nine months of operations for Pierpont Centre, six months for Alex City Marketplace, a full quarter of operations for Butler Square and Brook Run and a partial quarter of operations for Beaver Ruin Village I and II, Chesapeake Square, Sunshine Plaza, Barnett Portfolio, Grove Park, Parkway Plaza, Fort Howard Square and Conyers Crossing. In providing the following discussion and analysis of our results of operations, we have separately identified the activities of properties owned for the entire 2015 annual and 2016 three and nine month periods (collectively referred to as “same stores”) and of those properties acquired after December 31, 2014 (collectively referred to as “new stores”). This illustrates the significant impact these acquired properties acquired during 2015 had on our results of operations.
Leasing Activity
Renewals during the three months ended September 30, 2016 were comprised of fifteen deals totaling 41,374 square feet with a weighted-average increase of $0.92 per square foot, representing an increase of 7.48% over prior rates. The rates on negotiated renewals resulted in a weighted-average increase of $1.21 per square foot on eleven renewals and no changes per square foot on four renewals. Four renewals represented options being exercised. Additionally, we signed nineteen new leases totaling 46,745 square feet with weighted-average rents of $10.01 per square foot during the three months ended September 30, 2016.
Renewals during the nine months ended September 30, 2016 were comprised of forty-one deals totaling 150,191 square feet with a weighted-average increase of $0.64 per square foot, representing an increase of 5.58% over prior rates. The rates on negotiated renewals resulted in a weighted-average increase of $0.99 per square foot on thirty-one renewals and no changes per square foot on ten renewals. Fifteen renewals represented options being exercised. Additionally, we signed thirty-eight new leases totaling 91,414 square feet with weighted-average rents of $14.15 per square foot during the nine months ended September 30, 2016.

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Approximately 8.31% of our gross leasable area is subject to leases that expire during the twelve months ending September 30, 2017 that have not already been renewed. Based on recent market trends, we believe that these leases will be renewed at amounts and terms comparable to existing lease agreements.
Acquisitions
        
On April 12, 2016, the Company completed its acquisition of 14 retail shopping centers located in Georgia and South Carolina (collectively the “A-C Portfolio”) for an aggregate purchase price of $71 million, paid through a combination of cash, debt and the issuance of 888,889 common units in the Operating Partnership. Collectively, the A-C Portfolio total 605,358 square feet in leaseable space, and were 92% leased as of the acquisition date by 77 primarily retail tenants. Each property is anchored by either a Bi-Lo, Harris Teeter or Piggly Wiggly grocery store.

The A-C Portfolio consists of the following properties:
Property Name
Location
Square Feet

Darien Shopping Center
Darien, GA
26,001

Devine Street
Columbia, SC
38,464

Folly Road
Charleston, SC
47,794

Georgetown
Georgetown, SC
29,572

Ladson Crossing
Ladson, SC
52,607

Lake Greenwood Crossing
Greenwood, SC
47,546

Lake Murray
Lexington, SC
39,218

Litchfield Market Village
Pawleys Island, SC
86,740

Moncks Corner
Moncks Corner, SC
26,800

Ridgeland
Ridgeland, SC
20,029

Shoppes at Myrtle Park
Bluffton, SC
56,380

South Lake
Lexington, SC
44,318

South Park
Mullins, SC
60,874

St. Matthews
St. Matthews, SC
29,015


Critical Accounting Policies

In preparing the condensed consolidated financial statements, we have made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results may differ from these estimates. A summary of our critical accounting policies is included in our 2015 Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to these policies during the nine months ended September 30, 2016. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 of the condensed consolidated financial statements included in this Form 10-Q.
















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Three and Nine Months Ended September 30, 2016 Compared to the Three and Nine Months Ended September 30, 2015
Results of Operations
The following table presents a comparison of the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, respectively.
 
Three Months Ended 
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended Changes
 
Nine Months Ended Changes
 
2016
 
2015
 
2016
 
2015
 
Change
 
% Change
 
Change
 
% Change
PROPERTY DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties owned and operated at period end(1)
55

 
45

 
55

 
45

 
10

 
22.22
 %
 
10

 
22.22
 %
Aggregate gross leasable area at period end(1)
3,750,976

 
3,338,858

 
3,750,976

 
3,338,858

 
412,118

 
12.34
 %
 
412,118

 
12.34
 %
Ending occupancy rate at period end (1)
93.90
%
 
94.25
%
 
93.90
%
 
94.25
%
 
(0.35
)%
 
(0.37
)%
 
(0.35
)%
 
(0.37
)%
FINANCIAL DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental revenues
$
8,590,439

 
$
5,639,218

 
$
23,787,801

 
$
13,743,870

 
$
2,951,221

 
52.33
 %
 
$
10,043,931

 
73.08
 %
Asset management fees
163,092

 
132,335

 
623,340

 
465,817

 
30,757

 
23.24
 %
 
157,523

 
33.82
 %
Commissions
589,656

 
86,682

 
833,516

 
307,292

 
502,974

 
580.25
 %
 
526,224

 
171.25
 %
Other non-property income
169,145

 

 
169,145

 

 
169,145

 
 %
 
169,145

 
 %
Tenant reimbursements and other revenues
2,398,346

 
1,371,311

 
6,718,773

 
3,864,879

 
1,027,035

 
74.89
 %
 
2,853,894

 
73.84
 %
Total Revenue
11,910,678

 
7,229,546

 
32,132,575

 
18,381,858

 
4,681,132

 
64.75
 %
 
13,750,717

 
74.81
 %
EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
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