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EX-32 - EXHIBIT 32 CERTIFICATION OF CEO AND CFO 3.31.18 - Wheeler Real Estate Investment Trust, Inc.ex323312018.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO 3.31.18 - Wheeler Real Estate Investment Trust, Inc.ex3123312018.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO 3.31.18 - Wheeler Real Estate Investment Trust, Inc.ex3113312018.htm
EX-10.35 - EXHIBIT 10.35 BORROWERS CERTIFICATE - Wheeler Real Estate Investment Trust, Inc.ex1035borrowerscertificati.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 March 31, 2018
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 or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨  (do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of May 7, 2018, there were 9,056,723 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
(in thousands, except par value and share data)

 
March 31, 2018
 
December 31, 2017
 
(unaudited)
 
 
ASSETS:
 
 
 
Investment properties, net
$
448,555

 
$
384,334

Cash and cash equivalents
5,148

 
3,677

Restricted cash
12,198

 
8,609

Rents and other tenant receivables, net
4,621

 
5,619

Notes receivable, net
6,739

 
6,739

Goodwill
5,486

 
5,486

Assets held for sale
9,134

 

Above market lease intangible, net
9,862

 
8,778

Deferred costs and other assets, net
41,010

 
34,432

Total Assets
$
542,753

 
$
457,674

LIABILITIES:
 
 
 
Loans payable, net
$
373,047

 
$
308,122

Liabilities associated with assets held for sale
708

 

Related party payables, net
5

 

Below market lease intangible, net
13,382

 
9,616

Accounts payable, accrued expenses and other liabilities
11,033

 
10,624

Dividends payable
3,037

 
5,480

Total Liabilities
401,212

 
333,842

Series D Cumulative Convertible Preferred Stock (no par value, 4,000,000 shares authorized, 3,600,636 and 2,237,000 shares issued and outstanding; $90.02 million and $55.93 million aggregate liquidation preference, respectively)
74,542

 
53,236

 
 
 
 
EQUITY:
 
 
 
Series A Preferred Stock (no par value, 4,500 shares authorized, 562 shares issued and outstanding)
453

 
453

Series B Convertible Preferred Stock (no par value, 5,000,000 authorized, 1,875,748 and 1,875,848 shares issued and outstanding, respectively; $46.90 million aggregate liquidation preference)
40,935

 
40,915

Common Stock ($0.01 par value, 18,750,000 shares authorized, 8,947,416 and 8,744,189 shares issued and outstanding, respectively)
89

 
87

Additional paid-in capital
229,007

 
226,978

Accumulated deficit
(209,957
)
 
(204,925
)
Total Shareholders’ Equity
60,527

 
63,508

Noncontrolling interests
6,472

 
7,088

Total Equity
66,999

 
70,596

Total Liabilities and Equity
$
542,753

 
$
457,674

See accompanying notes to condensed consolidated financial statements.


3


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
REVENUE:
 
 
 
Rental revenues
$
12,697

 
$
11,129

Asset management fees
48

 
162

Commissions
14

 
115

Tenant reimbursements
3,222

 
2,680

Development and other revenues
333

 
236

Total Revenue
16,314

 
14,322

OPERATING EXPENSES:
 
 
 
Property operations
4,599

 
3,994

Non-REIT management and leasing services
36

 
271

Depreciation and amortization
7,476

 
6,400

Provision for credit losses
21

 
252

Corporate general & administrative
2,508

 
2,232

Total Operating Expenses
14,640

 
13,149

Gain on disposal of properties
1,055

 

Operating Income
2,729

 
1,173

Interest income
1

 
356

Interest expense
(4,577
)
 
(4,177
)
Net Loss from Continuing Operations Before Income Taxes
(1,847
)
 
(2,648
)
Income tax expense
(25
)
 
(41
)
Net Loss from Continuing Operations
(1,872
)
 
(2,689
)
Discontinued Operations
 
 
 
Income from discontinued operations

 
16

Gain on disposal of properties

 
1,513

Net Income from Discontinued Operations

 
1,529

Net Loss
(1,872
)
 
(1,160
)
Less: Net loss attributable to noncontrolling interests
(47
)
 
(41
)
Net Loss Attributable to Wheeler REIT
(1,825
)
 
(1,119
)
Preferred stock dividends
(3,207
)
 
(2,483
)
Net Loss Attributable to Wheeler REIT Common
Shareholders
$
(5,032
)
 
$
(3,602
)
 
 
 
 
Loss per share from continuing operations (basic and diluted)
$
(0.57
)
 
$
(0.59
)
Income per share from discontinued operations

 
0.17

 
$
(0.57
)
 
$
(0.42
)
Weighted-average number of shares:
 
 
 
Basic and Diluted
8,900,416

 
8,554,304

 
 
 
 
Dividends declared per common share
$

 
$
0.42

See accompanying notes to condensed consolidated financial statements.

4


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
(in thousands, except share data)
 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A
 
Series B
 
 
 
 
 
 
 
 
 
Noncontrolling
 
 
 
Preferred Stock
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
Shareholders’ Equity
 
Interests
 
Total
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
 
 
 
Units
 
Value
 
Equity
Balance,
December 31, 2017
562

 
$
453

 
1,875,848

 
$
40,915

 
8,744,189

 
$
87

 
$
226,978

 
$
(204,925
)
 
$
63,508

 
635,018

 
$
7,088

 
$
70,596

Accretion of Series B Preferred
  Stock discount

 

 

 
22

 

 

 

 

 
22

 

 

 
22

Conversion
of Series B
Preferred Stock to Common
  Stock

 

 
(100
)
 
(2
)
 
62

 

 
2

 

 

 

 

 

Conversion of operating
  partnership units to Common
  Stock

 

 

 

 
9,706

 

 
64

 

 
64

 
(9,706
)
 
(64
)
 

Issuance of Common Stock
  under Share Incentive Plan

 

 

 

 
43,459

 

 
330

 

 
330

 

 

 
330

Issuance of Common Stock for
  acquisition of JANAF

 

 

 

 
150,000

 
2

 
1,128

 

 
1,130

 

 

 
1,130

Adjustment for noncontrolling
  interest in operating partnership

 

 

 

 

 

 
505

 

 
505

 

 
(505
)
 

Dividends and distributions

 

 

 

 

 

 

 
(3,207
)
 
(3,207
)
 

 

 
(3,207
)
Net loss

 

 

 

 

 

 

 
(1,825
)
 
(1,825
)
 

 
(47
)
 
(1,872
)
Balance,
March 31, 2018 (Unaudited)
562

 
$
453

 
1,875,748

 
$
40,935

 
8,947,416

 
$
89

 
$
229,007

 
$
(209,957
)
 
$
60,527

 
625,312

 
$
6,472

 
$
66,999

See accompanying notes to condensed consolidated financial statements.

5


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
For the Three Months Ended
March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(1,872
)
 
$
(1,160
)
Adjustments to reconcile consolidated net loss to net cash from operating activities
 
 
 
Depreciation
3,173

 
2,671

Amortization
4,303

 
3,729

Loan cost amortization
379

 
763

Above (below) market lease amortization, net
(22
)
 
193

Share-based compensation
419

 
377

Gain on disposal of properties
(1,055
)
 

Gain on disposal of properties-discontinued operations

 
(1,513
)
Provision for credit losses
21

 
252

Changes in assets and liabilities, net of acquisitions
 
 
 
Rent and other tenant receivables, net
978

 
546

Unbilled rent
(83
)
 
(185
)
Related party receivables
84

 
(110
)
Deferred costs and other assets, net
(197
)
 
(786
)
Accounts payable, accrued expenses and other liabilities
346

 
1,683

Net operating cash flows provided by discontinued operations

 
32

Net cash provided by operating activities
6,474

 
6,492

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Investment property acquisitions
(23,153
)
 

Capital expenditures
(1,472
)
 
(494
)
Cash received from disposal of properties
1,160

 

Cash received from disposal of properties-discontinued operations

 
1,871

Net cash (used in) provided by investing activities
(23,465
)
 
1,377

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments for deferred financing costs
(128
)
 
(163
)
Dividends and distributions paid
(5,480
)
 
(6,193
)
Proceeds from sales of Preferred Stock, net of expenses
21,158

 
(18
)
Loan proceeds
7,403

 
6,181

Loan principal payments
(902
)
 
(6,516
)
Net financing cash flows used in discontinued operations

 
(1,687
)
Net cash provided (used in) by financing activities
22,051

 
(8,396
)
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
5,060

 
(527
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
12,286

 
14,515

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
17,346

 
$
13,988

Supplemental Disclosures:
 
 
 
Non-Cash Transactions:
 
 
 
Debt assumed for acquisition
$
58,867

 
$

Conversion of common units to common stock
$
64

 
$

Conversion of Series B Preferred Stock to Common Stock
$
2

 
$

Conversion of senior convertible debt into common stock
$

 
$
31

Issuance of Common Stock for acquisition
$
1,130

 
$

Accretion of preferred stock discounts
$
170

 
$
195

Other Cash Transactions:
 
 
 
Cash paid for taxes
$

 
$
107

Cash paid for interest
$
3,911

 
$
3,309

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 March 31, 2018, the Trust, through the Operating Partnership, owned and operated sixty-five centers, one office building, seven undeveloped properties, and one redevelopment project in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey, Pennsylvania and West Virginia. Accordingly, the use of the word “Company” refers to the Trust and its consolidated subsidiaries, except where the context otherwise requires.
On October 24, 2014, the Trust, through the Operating Partnership, acquired (i) Wheeler Interests, LLC (“WI”), an acquisition and asset management firm, (ii) Wheeler Real Estate, LLC (“WRE”), a real estate leasing, management and administration firm and (iii) WHLR Management, LLC (“WM” and collectively with WI and WRE the “Operating Companies”), a real estate business operations firm, from Jon S. Wheeler, the Company's then Chairman and CEO, resulting in the Company becoming an internally-managed REIT. Accordingly, the responsibility for identifying targeted real estate investments, the handling of the disposition of real estate investments our Board of Directors chooses to sell, administering our day-to-day business operations, including but not limited to, leasing, property management, payroll and accounting functions, acquisitions, asset management and administration are now handled internally.

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, 2017 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 2017 Annual Report filed on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

2. Summary of Significant Accounting Policies
Investment Properties
    
The Company records investment properties and related intangibles at fair value upon acquisition. Investment properties include both acquired and constructed assets. Improvements and major repairs and maintenance are capitalized when the repair and maintenance substantially extends the useful life, increases capacity or improves the efficiency of the asset. All other repair and maintenance costs are expensed as incurred. The Company capitalizes interest on projects during periods of construction until the projects reach the completion point that corresponds with their intended purpose.
    
The Company allocates the purchase price of acquisitions to the various components of the asset based upon the fair value of each component which may be derived from various observable or unobservable inputs and assumptions. Also, the Company may utilize third party valuation specialists. These components typically include buildings, land and any intangible assets related to out-of-market leases, tenant relationships and in-place leases the Company determines to exist. The Company

7

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

determines fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in the analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to out-of-market leases, tenant relationships and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.
    
The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 5 to 40 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducements and tenant improvements are amortized utilizing the straight-line method over the term of the related lease or occupancrey 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. Estimated undiscounted operating income before depreciation and amortization includes various level 3 fair value assumptions including renewal and renegotiations of current leases, estimates of operating costs and fluctuating market conditions. The renewal and renegotiations of leases in some cases must be approved by additional third parties outside the control of the Company and the tenant. If such renewed or renegotiated leases are approved at amounts below correct estimates, then impairment adjustments may be necessary in the future. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as operating income, estimated capitalization rates, or multiples, leasing prospects 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 months ended March 31, 2018 and 2017.

Cash and Cash Equivalents and Restricted Cash
    
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank operating accounts and money markets. Financial instruments that potentially subject the Company to concentrations of credit risk include its cash and cash equivalents and its trade accounts receivable. The Company places its cash and cash equivalents with institutions of high credit quality.

Restricted cash represents amounts held by lenders for real estate taxes, insurance, reserves for capital improvements and tenant security deposits.
    
The Company places its cash and cash equivalents and restricted cash on deposit with financial institutions in the United States, which are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250 thousand. The Company's credit loss in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amounts on deposit. Management monitors the financial institutions credit worthiness in conjunction with balances on deposit to minimize risk.


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 March 31, 2018 and December 31, 2017, the Company’s allowance for uncollectible accounts totaled $723 thousand and $705 thousand, respectively. During the three months ended March 31, 2018 and 2017, the Company recorded bad debt expenses in the amount of $98 thousand and $252 thousand, respectively, related to tenant receivables that were specifically identified as potentially uncollectible based on an assessment of the tenant’s credit-worthiness. During the three months ended March 31, 2018 and 2017, the Company did not realize any recoveries related to tenant receivables previously written off.

Notes Receivable

Notes receivable represent financing to Sea Turtle Development as discussed in Note 4 for development of the project. The notes are secured by the underlying real estate known as Sea Turtle Development. The Company evaluates the collectability of both the interest on and principal of the notes receivable based primarily upon the projected fair market value of the project at stabilization. The notes receivable are determined to be impaired when, based upon current information, it is no longer probable that the Company will be able to collect all contractual amounts due from the borrower. The amount of impairment loss recognized is measured as the difference between the carrying amount of the loan and its estimated realizable value.

Goodwill        
    
Goodwill is deemed to have an indefinite economic life and is not subject to amortization. Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. To test for impairment, the Company first assesses qualitative factors, such as current macroeconomic conditions and our overall financial and operating performance, to determine the likelihood that the fair value of a reporting unit is less than its carrying amount. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company proceeds with the two-step approach to evaluating impairment. First, the Company estimates the fair value of the reporting unit and compares it to the reporting unit’s carrying value. If the carrying value exceeds fair value, the Company proceeds with the second step, which requires us to assign the fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied value of goodwill and is used to determine the amount of impairment. The Company would recognize an impairment loss to the extent the carrying value of goodwill exceeds the implied value. As of March 31, 2018 and December 31, 2017, no adjustments were made to goodwill.

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, leases in place, capitalized legal and marketing costs, tenant relationship and ground lease sandwich interest intangibles associated with acquisitions. The Company’s lease origination costs consist primarily of the portion of property acquisitions allocated to lease originations and commissions paid in connection with lease originations.

9

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

Details of these deferred costs, net of amortization, and other assets are as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
 
(unaudited)
 
 
Leases in place, net
$
30,010

 
$
25,118

Tenant relationships, net
5,830

 
6,804

Ground lease sandwich interest
2,694

 

Other
1,171

 
810

Lease origination costs, net
1,070

 
1,077

Deposits
163

 
547

Legal and marketing costs, net
72

 
76

    Total Deferred Costs and Other Assets, net
$
41,010

 
$
34,432

Amortization of lease origination costs, leases in place, legal and marketing costs, tenant relationships and ground lease sandwich interest represents a component of depreciation and amortization expense. As of March 31, 2018 and December 31, 2017, the Company’s intangible accumulated amortization totaled $45.36 million and $41.83 million, respectively. During the three months ended March 31, 2018 and 2017, the Company’s intangible amortization expense totaled $4.30 million and $3.73 million, respectively. As of March 31, 2018, the Company's annual amortization for its lease origination costs, leases in place, legal and marketing costs tenant relationships, and ground lease sandwich interests is as follows (in thousands):
 
Leases In
Place, net
 
Tenant
Relationships, net
 
Legal &
Marketing
Costs, net
 
Ground Lease Sandwich Interest
 
Lease
Origination
Costs, net
 
Total
For the remaining nine months ended December 31, 2018
$
7,413

 
$
2,028

 
$
13

 
$
205

 
$
190

 
$
9,849

December 31, 2019
6,635

 
1,581

 
14

 
274

 
195

 
8,699

December 31, 2020
4,735

 
874

 
11

 
274

 
151

 
6,045

December 31, 2021
2,964

 
458

 
9

 
274

 
134

 
3,839

December 31, 2022
2,277

 
364

 
6

 
274

 
93

 
3,014

December 31, 2023
1,762

 
235

 
6

 
274

 
75

 
2,352

Thereafter
4,224

 
290

 
13

 
1,119

 
232

 
5,878

 
$
30,010

 
$
5,830

 
$
72

 
$
2,694

 
$
1,070

 
$
39,676

Revenue Recognition
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
As detailed in “Recent Accounting Pronouncements”, the Company adopted Topic 606, Revenue from Contracts with Customers on January 1, 2018 with the cumulative effect of initially applying the standard recognized on this date. As a result, the Company has changed its accounting policies for revenue recognized on non-real estate lease contracts. As of adoption, non-lease revenue streams are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Lease Contract Revenue
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. At March 31, 2018 and December 31, 2017, there were $2.42 million and $2.34 million in unbilled rent which is included in "rents and other tenant receivables, net." Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’

10

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

sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements.
The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. 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 average total square footage of all leasable buildings at the property. The Company also receives escrow payments for these reimbursements from substantially all its tenants throughout the year. The Company recognizes differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material for the three months ended March 31, 2018 and 2017.
The Company recognizes lease termination fees in the year that the lease is terminated and collection of the fee is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets.
Asset Management Fees
Asset management fees are generated from Non-REIT properties. The Non-REIT Properties pay WRE property management and/or asset management fees of 3% and 2% of collected revenues, respectively for services performed. Revenues are governed by the management fee agreements for the various properties. Obligations under the agreements include and are not limited to: managing of maintenance, janitorial, security, landscaping, vendors, back office (collecting rents, paying bills), etc. Each of the obligations are bundled together to be one service and are satisfied over time. Non-REIT Properties are billed monthly and typically pay monthly for these services.
Commissions
Commissions are generated from Non-REIT properties. The Non-REIT Properties pay WRE leasing commissions based on the total contractual revenues to be generated under the new/renewed lease agreement (6% for new leases and 3% for renewals). Revenues are governed by the leasing commission agreements for the various properties. Obligations under the agreements include and are not limited to: monitoring upcoming vacancies, new tenant identification, proposal preparation, lease negotiation, document preparation, etc. Each of the obligations are bundled together to be one service as the overall objective of these services is to maintain the overall occupancy of the property. Revenue is recognized and billed upon lease execution.
Development Income
Non-REIT properties pay development fees of 5% of hard costs. Revenues are governed by the development agreements for each development. Obligations under the agreements include overseeing the development of the project. The Company’s performance creates or enhances the project that the Non-REIT property controls as such this revenue is recognized over time. The projects are billed monthly and typically pay monthly for these services.






11

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

The below table disaggregates the Company’s revenue by type of service for the three months ended March 31, 2018 and 2017 (unaudited, in thousands):
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
 
Minimum rent
 
$
12,610

 
$
11,042

Tenant reimbursements
 
3,222

 
2,680

Lease termination fees
 
246

 

Percentage rent
 
87

 
87

Asset management fees
 
48

 
162

Commissions
 
14

 
115

Development income
 

 
136

Other
 
87

 
100

Total
 
$
16,314

 
$
14,322


Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. The TRS' have accrued $98 thousand and $15 thousand for federal and state income taxes as of March 31, 2018 and December 31, 2017. If the Company fails to qualify as a REIT, it will be subject to tax at regular corporate rates for the years in which it fails to qualify. If the Company loses its REIT status, it could not elect to be taxed as a REIT for five years unless the Company’s failure to qualify was due to a reasonable cause and certain other conditions were satisfied.
Taxable REIT Subsidiary Cost Allocation

The Company’s overall philosophy regarding cost allocation centers around the premise that the Trust exists to acquire, lease and manage properties for the benefit of its investors. Accordingly, a majority of the Company’s operations occur at the property level. Each property must carry its own weight by absorbing the costs associated with generating its revenues. Additionally, leases generally allow the Company to pass through to the tenant most of the costs involved in operating the property, including, but not limited to, the direct costs associated with owning and maintaining the property (landscaping, repairs and maintenance, taxes, insurance, etc.), property management and certain administrative costs.

Service vendors bill the majority of the direct costs of operating the properties directly to the REIT Properties and Non-REIT Properties and each property pays them accordingly. The Non-REIT Properties pay WRE property management and/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.

Costs incurred to manage, lease and administer the Non-REIT Properties are allocated to the TRS. These costs include compensation and benefits, property management, leasing and other corporate, general and administrative expenses associated with generating the TRS' revenues.
    
Financial Instruments
    
The carrying amount of financial instruments included in assets and liabilities approximates fair market value due to their immediate or short-term maturity.

12

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


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 $43 thousand and $60 thousand for the three months ended March 31, 2018 and 2017, respectively.

Assets Held For Sale and Discontinued Operations

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.

Assets held for sale are presented as discontinued operations in all periods presented if the disposition represents a strategic shift that has, or will have, a major effect on the Company's financial position or results of operations. This includes the net gain (or loss) upon disposal of property held for sale, the property's operating results, depreciation and interest expense.


Corporate General and Administrative Expense
    
A detail for the "Corporate General & Administrative" line item from the Condensed Consolidated Statements of Operations is presented below (in thousands):
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
 
Professional fees
 
$
931

 
$
637

Compensation and benefits
 
903

 
683

Corporate administration
 
336

 
257

Taxes and Licenses
 
165

 
49

Travel
 
70

 
66

Capital related costs
 
53

 
220

Advertising
 
43

 
60

Acquisition costs
 
7

 
260

    Total Corporate General & Administrative
 
$
2,508

 
$
2,232

An allocation of professional fees, compensation and benefits, corporate administration and travel is included in Non-REIT management and leasing services on the statements of operations, which can vary period to period depending on the relative operational fluctuations of these respective services.
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 Company 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

13

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

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 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. In December 2016, the FASB issued 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which clarifies or corrects unintended application of the standard. 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. In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition (Topic 605)," "Revenue from Contracts with Customers (Topic 606)," "Leases (Topic 840)," and "Leases (Topic 842)." These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)."
On January 1, 2018, the Company adopted Topic 606 retrospectively with the cumulative effect of initially applying the standard as of this date to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The majority of the Company’s revenue is based on real estate lease contracts which are not within the scope of this ASU.  The Company has identified its non-lease revenue streams and adoption of this standard does not have a material impact on our financial position or results of operations. The Company has increased disclosures around revenue recognition in the notes to condensed consolidated financial statements to comply with the standard.
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

14

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

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.

In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition (Topic 605)," "Revenue from Contracts with Customers (Topic 606)," "Leases (Topic 840)," and "Leases (Topic 842)," which provides additional implementation guidance on the previously issued ASU 2016-02. "Leases (Topic 842)."
    
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. The accounting for leases under which we are the lessor remains largely unchanged. Lessees with a large portfolio of leases are likely to see a significant increase in balance sheet assets and liabilities. While we are currently assessing the impact of the standard on our financial position and results of operations we expect the primary impact to be on those ground leases which we are the lessor. The new standard will result in the recording of right of use assets and lease obligations. See Note 9 for the Company’s current lease commitments. The Company continues to evaluate the impact of ASU 2016-02 on its financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” The ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows in an effort to reduce diversity in practice. The standard requires a reconciliation of total cash, cash equivalents and restricted cash in the cash flow statement or in the notes to the financial statements. 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 periods presented.  The Company adopted this ASU as of January 1, 2018 and applied retrospectively. The adoption resulted in a reduction of $329 thousand in net cash from operating activities and $1 thousand increase in net cash from investing activities for the three months ended March 31, 2017 on the Condensed Consolidated Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805):  Clarifying the Definition of a Business.” The ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  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 prospectively. The adoption of this standard will most likely result in less real estate acquisitions qualifying as businesses and, accordingly, acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The Company adopted this ASU as of January 1, 2018. As a result of this adoption, the acquisition costs associated with the purchase of JANAF were capitalized as a cost of the asset.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350):  Simplifying the test for Goodwill Impairment.” The amendments in ASU 2017-04 eliminate the current two-step approach used to test goodwill for impairment and require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted on testing dates after January 1, 2017. The new standard is to be applied prospectively. The Company will adopt this ASU in 2020 and does not expect the adoption to materially impact its financial position or results of operations.

In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20):  Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This amendment provides guidance for partial sales of nonfinancial assets. This ASU is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. The standard is to be applied retrospectively or modified retrospectively. The Company adopted this ASU as of January 1, 2018. The adoption did not have a material impact on the financial position or results of operations.


15

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

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This updates clarifies when modification accounting guidance in Topic 718 should be applied to a change in terms or conditions of a share-based payment award. This ASU is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The new standard is to be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU as of January 1, 2018. The adoption did not have a material impact on the financial position or results of operations.
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.
3. Investment Properties
Investment properties consist of the following (in thousands):
 
March 31, 2018
 
December 31, 2017
 
(unaudited)
 
 
Land and land improvements
$
99,313

 
$
91,108

Land held for improvement
2,305

 
11,228

Buildings and improvements
381,137

 
313,043

Investment properties at cost
482,755

 
415,379

Less accumulated depreciation
(34,200
)
 
(31,045
)
    Investment properties, net
$
448,555

 
$
384,334

The Company’s depreciation expense on investment properties was $3.17 million and $2.67 million for the three months ended March 31, 2018 and 2017, 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.
Disposition
On January 12, 2018, the Company completed the sale of the Chipotle ground lease at Conyers Crossing for a contract price of $1.27 million, resulting in a gain of $1.06 million with net proceeds of $1.16 million.
The sale of the Chipotle ground lease at Conyers Crossing did not represent a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the operating results of this property remains classified within continuing operations for all periods presented.
JANAF Acquisition
On January 18, 2018, the Company acquired JANAF, a retail shopping center located in Norfolk, Virginia, for a purchase price of $85.65 million, paid through a combination of cash, restricted cash, debt assumption and the issuance of 150,000 shares of Common Stock at $7.53 per share. The shopping center, anchored by BJ's Wholesale Club, totals 810,137 square feet and was 94% leased at the acquisition date.
The following summarizes the consideration paid and the purchase allocation of assets acquired and liabilities assumed in conjunction with the acquisition described above in accordance with ASU 2017-01, along with a description of the methods used to determine the purchase price allocation (in thousands, unaudited). In determining the purchase price allocation, the Company considered many factors including, but not limited to, cash flows, market cap rates, location, occupancy rates, appraisals, other acquisitions and management’s knowledge of the current acquisition market for similar properties.

16

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


Purchase price allocation of assets acquired and liabilities assumed:
 
 
Investment property (a)
$
75,123

 
Lease intangibles and other assets (b)
10,718

 
Above market leases (d)
2,019

 
Restricted cash (c)
2,500

 
Below market leases (d)
(4,710
)
 
Debt assumption (e)
 
 
(58,867
)
 
Net purchase price allocation of assets acquired and liabilities assumed:
$
26,783

 
 
 
 
 
Purchase consideration:
 
 
 
Consideration paid with cash and restricted cash
$
25,653

 
Consideration paid with assumption of debt
58,867

 
Consideration paid with common stock
1,130

 
 
 
 
 
 
Total consideration (f)
$
85,650

a.
Represents the purchase price allocation of the net investment properties acquired which includes land, buildings, site improvements and tenant improvements. The purchase price allocation was determined using following approaches:
i. the market approach valuation methodology for land by considering similar transactions in the markets;
ii. a combination of the cost approach and income approach valuation methodologies for buildings, including replacement cost evaluations, “go dark” analyses and residual calculations incorporating the land values; and
iii.
the cost approach valuation methodology for site and tenant improvements, including replacement costs and prevailing quoted market rates.
b.
Represents the purchase price allocation of lease intangibles and other assets. Lease intangibles includes in place leases and ground lease sandwich interests associated with replacing existing leases. The income approach was used to determine the allocation of these intangible assets which included estimated market rates and expenses.
c.
Represents the purchase price allocation of deleveraging reserve (the “Deleveraging Reserve”) released upon the maturity or earlier payment in full of the loan or until the reduction of the principal balance of the loan to $50,000,000.
d.
Represents the purchase price allocation of above/below market leases. The income approach was used to determine the allocation of above/below market leases using market rental rates for similar properties.
e.
Assumption of $53.71 million of debt at a rate of 4.49%, maturing July 2023 with monthly principal and interest payments of $333,159 and assumption of $5.16 million of debt at a rate of 4.95%, maturing January 2026 with monthly principal and interest payments of $29,964.
f.
Represents the components of purchase consideration paid.
Unaudited pro forma financial information in the aggregate is presented below for the acquisition of JANAF. The unaudited pro forma information presented below includes the effects of the JANAF 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 assumed. The unaudited pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations that would have been achieved if these acquisition had taken place in January 1, 2018 or 2017.

17

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


 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands, unaudited)
Rental revenues
$
13,007

 
$
13,178

Net loss from continuing operations
$
(1,874
)
 
$
(3,135
)
Net loss attributable to Wheeler REIT
$
(1,827
)
 
$
(1,549
)
Net loss attributable to Wheeler REIT common shareholders
$
(5,034
)
 
$
(4,778
)
Basic loss per share
$
(0.57
)
 
$
(0.56
)
Diluted loss per share
$
(0.57
)
 
$
(0.56
)

4. Notes Receivable
On September 29, 2016, the Company entered into an $11.00 million note receivable for the partial funding of the Sea Turtle Development and a $1.00 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. As of December 31, 2017, the Company recognized a $5.26 million impairment charge on the notes receivable reducing the carrying value to $6.74 million as of March 31, 2018 and December 31, 2017. The Company placed the notes receivable on nonaccrual status and has not recognized $355 thousand of interest income due on the notes for the three months ended March 31, 2018.
As of March 31, 2018, the Company believes the estimated fair market value of the development upon stabilization at a future date will provide for the cash required to repay the $6.74 million carrying value of the notes receivable due the Company in the event of a sale. The Company’s estimated fair value of the project is based upon cash flow models that include development costs to date, anticipated cost to complete, executed leases, and financing available to complete and stabilize the project. Capitalization rates utilized in these models are based upon rates that the Company believes to be within a reasonable range of current market rates for the respective project. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. If the holder of the 1st deed of trust proceeds to foreclosure, this may have an adverse effect on assumptions used in the Company's fair value analysis leading to further impairment.
5. Assets Held for Sale
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. On February 28, 2017, the Company completed its sale of the last remaining Freestanding Properties, Ruby Tuesday’s and Outback Steakhouse at Pierpont Centre, for a contract price of approximately $2.29 million, resulting in a gain of $1.51 million.
In February 2018, the Company’s management and Board of Directors committed to a plan to sell the seven undeveloped land parcels (the “Land Parcels”) as part of Company’s strategic initiative. Accordingly, the Land Parcels have been classified as held for sale.

As of March 31, 2018 and December 31, 2017, assets held for sale consisted of the following (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Investment properties, net
 
$
9,134

 
$

Total assets held for sale
 
$
9,134

 
$


18

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


As of March 31, 2018 and December 31, 2017, liabilities associated with assets held for sale consisted of the following (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Loans payable
 
$
693

 
$

Accounts payable
 
15

 

Total liabilities associated with assets held for sale
$
708

 
$


The condensed consolidated statements of operations reflect reclassifications of revenues, 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.

The following is a summary of the income from discontinued operations for the three months ended March 31, 2018 and 2017 (in thousands):
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
 
Revenues
 
$

 
$
26

Expenses
 

 
1

Operating income
 

 
25

Interest expense
 

 
9

Income from discontinued operations before gain on disposal of properties
 

 
16

Gain on disposal of properties
 

 
1,513

Net Income from discontinued operations
 
$

 
$
1,529


19

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


6. Loans Payable

The Company’s loans payable consist of the following (in thousands except monthly payment):
Property/Description
 
Monthly Payment
 
Interest
Rate
 
Maturity
 
March 31, 2018
 
December 31, 2017
 Revere Loan (2)
 
Interest only

 
8.00
%
 
April 2018
 
$
6,808

 
$
6,808

 Lumber River
 
$
10,723

 
Libor + 295 basis points

 
June 2018
 
1,485

 
1,500

 Bank Line of Credit
 
Interest only

 
Libor + 300 basis points

 
June 2018
 
3,000

 
3,000

 KeyBank Line of Credit
 
Interest only

 
Libor + 250 basis points

 
July 2018
 
15,532

 
15,532

 Senior convertible notes
 
Interest only

 
9.00
%
 
December 2018
 
1,369

 
1,369

 Harbor Point
 
$
11,024

 
5.85
%
 
December 2018
 
(1)

 
553

 Perimeter Square
 
Interest only

 
5.50
%
 
December 2018
 
5,691

 
5,382

 Riversedge North
 
$
8,802

 
6.00
%
 
January 2019
 
849

 
863

 Monarch Bank Building
 
$
7,340

 
4.85
%
 
June 2019
 
1,259

 
1,266

 DF I-Moyock
 
$
10,665

 
5.00
%
 
July 2019
 
(1)

 
194

 Rivergate
 
$
127,217

 
Libor + 295 basis points

 
December 2019
 
22,546

 
22,689

 KeyBank Line of Credit
 
Interest only

 
Libor + 250 basis points

 
December 2019
 
52,500

 
52,500

 LaGrange Marketplace
 
$
15,065

 
Libor + 375 basis points

 
March 2020
 
2,305

 
2,317

 Folly Road
 
Interest only

 
4.00
%
 
March 2020
 
6,181

 
6,181

 Columbia Fire Station construction loan
 
Interest only

 
4.00
%
 
May 2020
 
4,014

 
3,421

 Shoppes at TJ Maxx
 
$
33,880

 
3.88
%
 
May 2020
 
5,681

 
5,727

 JANAF Bravo
 
Interest only

 
4.65
%
 
January 2021
 
6,500

 

 Walnut Hill Plaza
 
Interest only

 
5.50
%
 
September 2022
 
3,903

 
3,903

 Twin City Commons
 
$
17,827

 
4.86
%
 
January 2023
 
3,095

 
3,111

 Shoppes at Eagle Harbor
 
$
26,528

 
5.10
%
 
March 2023
 
3,316

 
3,341

 JANAF
 
$
333,159

 
4.49
%
 
July 2023
 
53,436

 

 Tampa Festival
 
$
50,797

 
5.56
%
 
September 2023
 
8,332

 
8,368

 Forrest Gallery
 
$
50,973

 
5.40
%
 
September 2023
 
8,633

 
8,669

 South Carolina Food Lions Note
 
$
68,320

 
5.25
%
 
January 2024
 
12,004

 
12,050

 Cypress Shopping Center
 
$
34,360

 
4.70
%
 
July 2024
 
6,458

 
6,485

 Port Crossing
 
$
34,788

 
4.84
%
 
August 2024
 
6,234

 
6,263

 Freeway Junction
 
$
41,798

 
4.60
%
 
September 2024
 
7,961

 
7,994

 Harrodsburg Marketplace
 
$
19,112

 
4.55
%
 
September 2024
 
3,536

 
3,553

 Graystone Crossing
 
$
20,386

 
4.55
%
 
October 2024
 
3,912

 
3,928

 Bryan Station
 
$
23,489

 
4.52
%
 
November 2024
 
4,528

 
4,547

 Crockett Square
 
Interest only

 
4.47
%
 
December 2024
 
6,338

 
6,338

 Pierpont Centre
 
 Interest only

 
4.15
%
 
February 2025
 
8,113

 
8,113

 Alex City Marketplace
 
 Interest only

 
3.95
%
 
April 2025
 
5,750

 
5,750

 Butler Square
 
 Interest only

 
3.90
%
 
May 2025
 
5,640

 
5,640

 Brook Run Shopping Center
 
 Interest only

 
4.08
%
 
June 2025
 
10,950

 
10,950

 Beaver Ruin Village I and II
 
 Interest only

 
4.73
%
 
July 2025
 
9,400

 
9,400

 Sunshine Shopping Plaza
 
 Interest only

 
4.57
%
 
August 2025
 
5,900

 
5,900

 Barnett Portfolio
 
 Interest only

 
4.30
%
 
September 2025
 
8,770

 
8,770

 Fort Howard Shopping Center
 
 Interest only

 
4.57
%
 
October 2025
 
7,100

 
7,100

 Conyers Crossing
 
 Interest only

 
4.67
%
 
October 2025
 
5,960

 
5,960

 Grove Park Shopping Center
 
 Interest only

 
4.52
%
 
October 2025
 
3,800

 
3,800

 Parkway Plaza
 
 Interest only

 
4.57
%
 
October 2025
 
3,500

 
3,500

 Winslow Plaza
 
Interest only

 
4.82
%
 
December 2025
 
4,620

 
4,620

 JANAF BJ's
 
$
29,964

 
4.95
%
 
January 2026
 
5,141

 

 Chesapeake Square
 
$
23,857

 
4.70
%
 
August 2026
 
4,486

 
4,507

Berkley/Sangaree/Tri-County
 
Interest only

 
4.78
%
 
December 2026
 
9,400

 
9,400

 Riverbridge
 
Interest only

 
4.48
%
 
December 2026
 
4,000

 
4,000

 Franklin
 
Interest only

 
4.93
%
 
January 2027
 
8,516

 
8,516

Total Principal Balance (1)
 
 
 
 
 
 
 
378,452

 
313,778

Unamortized debt issuance cost
 
 
 
 
 
 
 
(5,405
)
 
(5,656
)
Total Loans Payable
 
 
 
 
 
 
 
$
373,047

 
$
308,122

(1) Excludes loans payable on assets held for sale, see Note 5.
(2) Subsequent to March 31, 2018, the Company extended the Revere Loan to May 15, 2018.


20

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



KeyBank Credit Agreement

On December 21, 2017, the Company entered into an Amended and Restated Credit Agreement to the KeyBank Credit Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for an increase in borrowing capacity from $50.00 million to $52.50 million and also increases the accordion feature by $50.00 million to $150.00 million. Additionally, the Amended and Restated Credit Agreement provides for an extension of the requirement to reduce the outstanding borrowings under the facility from $68.03 million to $52.50 million by July 1, 2018. The revolving facility will mature on December 21, 2019, but may be extended at the Company’s option for an additional one year period, subject to certain customary conditions. The interest rate remains the same at LIBOR plus 250 basis points based on the Company’s Consolidated Leverage Ratio (as defined in the Amended and Restated Credit Agreement). The unutilized amounts available to the Company under the Credit Agreement accrue fees which are paid at a rate of 0.25%.
    
On March 2, 2018, KeyBank reduced the liquidity requirement from $5.00 million to $3.50 million through March 31, 2018. The liquidity requirement reverts back to $5.00 million subsequent to March 31, 2018 until such time as the Total Commitment (as defined in the Amended and Restated Credit Agreement) has been reduced to $52.50 million and $3.50 million at all times thereafter.

As of March 31, 2018, the Company has borrowed $68.03 million under the Credit Agreement, which is collateralized by 16 properties. At March 31, 2018, the outstanding borrowings are accruing interest at 4.38%. The Amended and Restated 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 March 31, 2018. The Amended and Restated Credit Agreement also contains certain events of default that if they occur may cause KeyBank to terminate the Amended and Restated Credit Agreement and declare amounts owed to become immediately payable. As of March 31, 2018, the Company has not incurred an event of default.

Bank Line of Credit Renewal

On January 10, 2018, the Company extended the $3.00 million bank line of credit ("Bank Line of Credit") to June 15, 2018 with interest only payments due monthly at a rate of Libor + 3.00% with a floor of 4.25%.

JANAF

On January 18, 2018, the Company executed a promissory note for $53.71 million for the purchase of JANAF at a rate of 4.49%. The loan matures in July 2023 with monthly principal and interest payments of $333,159.

JANAF - BJ's

On January 18, 2018, the Company executed a promissory note for $5.16 million for the purchase of JANAF at a rate of 4.95%. The loan matures in January 2026 with monthly principal and interest payments of $29,964.

JANAF - Bravo

On January 18, 2018, the Company executed a promissory note for $6.50 million for the purchase of JANAF at a rate of 4.65%. The loan matures in January 2021 with interest due monthly.

Eagle Harbor Renewal

On March 11, 2018, the Company renewed the promissory note for $3.32 million on Eagle Harbor for five years. The loan matures on March 2023 with monthly principal and interest payments of $26,528. The loan bears interest at 5.10%.





21

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


Loan Covenants

Certain of the Company’s loans payable have covenants with which the Company is required to comply. As of March 31, 2018, the Company has received a waiver through loan maturity for the debt to tangible net worth ratio on the Bank Line of Credit and a waiver on the debt service coverage ratio. As of March 31, 2018, the Company believes it is in compliance with all other applicable covenants.

Debt Maturity

The Company’s scheduled principal repayments on indebtedness as of March 31, 2018, including assets held for sale, are as follows (in thousands, unaudited):
For the remaining nine months ended December 31, 2018
$
37,561

December 31, 2019
80,641

December 31, 2020
21,249

December 31, 2021
10,236

December 31, 2022
7,736

December 31, 2023
67,722

Thereafter
154,000

    Total principal repayments and debt maturities
$
379,145

 

The Company has considered our short-term (one year or less) liquidity needs and the adequacy of our estimated cash flows from operating activities and other expected financing sources to meet these needs. In particular, we have considered our scheduled debt maturities and principal payments for the nine months ended December 31, 2018 of $37.56 million, which includes the $15.53 million maturity of the KeyBank line of credit. Management is in the process of refinancing properties off the KeyBank line of credit to reduce the line to under $52.50 million prior to July 1, 2018 in accordance with the Amended and Restated Credit Agreement. Management is in the process of refinancing the $6.81 million Revere Loan. All loans due to mature are collateralized by properties within our portfolio. Additionally, the Company expects to meet the short-term liquidity requirements, through a combination of the following:

available cash and cash equivalents;
cash flows from operating activities;
refinancing of maturing debt; and
intended sale of seven undeveloped land parcels and sale of additional properties, if necessary.

Management is currently working with lenders to refinance the loans noted above. The loans are expected to have customary interest rates similar to current loans. They are subject to formal lender commitment, definitive documentation and customary conditions.

















22

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


7. Rentals under Operating Leases

Future minimum rents to be received under noncancelable tenant operating leases for each of the next five years and thereafter, excluding CAM and percentage rent based on tenant sales volume, as of March 31, 2018 are as follows (in thousands, unaudited): 
For the remaining nine months ended December 31, 2018
$
36,782

December 31, 2019
43,641

December 31, 2020
35,556

December 31, 2021
27,176

December 31, 2022
21,078

December 31, 2023
15,448

Thereafter
44,183

    Total minimum rents
$
223,864


23

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


8. Equity and Mezzanine Equity
Series A Preferred Stock
    
At March 31, 2018 and December 31, 2017, the Company had 562 shares of Series A Preferred Stock, without par value (“Series A Preferred”) issued and outstanding and 4,500 shares authorized with a $1,000 liquidation preference per share, or $562 thousand in aggregate. The Series A Preferred accrues cumulative dividends at a rate of 9% per annum, which is paid quarterly. The Company has the right to redeem the 562 shares of Series A Preferred, on a pro rata basis, at any time at a price equal to 103% of the purchase price for the Series A Preferred plus any accrued but unpaid dividends.

Series B Preferred Stock

At March 31, 2018 and December 31, 2017, the Company had 1,875,748 and 1,875,848 shares, respectively, and 5,000,000 shares of Series B Convertible Preferred Stock, without par value (“Series B Preferred”) issued and authorized with a $25.00 liquidation preference per share, or $46.90 million in aggregate. The Series B Preferred bears interest at a rate of 9% per annum. The Series B Preferred has no redemption rights. However, the Series B Preferred is subject to a mandatory conversion once the 20-trading day volume-weighted average closing price of our Common Stock, exceeds $58 per share; once this weighted average closing price is met, each share of our Series B Preferred will automatically convert into shares of our Common Stock at a conversion price equal to $40.00 per share of Common Stock. In addition, holders of our Series B Preferred also have the option, at any time, to convert shares of our Series B Preferred into shares of our Common Stock at a conversion price of $40.00 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 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 B Preferred has no maturity date and will remain outstanding indefinitely unless subject to a mandatory or voluntary conversion as described above.

In conjunction with the 2014 issuance of Series B Preferred, 1,986,600 warrants were issued. Each warrant permits investors to purchase 0.125 share of Common Stock at an exercise price of $44 per share of Common Stock, subject to adjustment. The warrants expire in April 2019.

Series D Preferred Stock - Redeemable Preferred Stock

In January 2018, the Company, issued and sold 1,363,636 shares of no par value Series D Cumulative Convertible Preferred Stock, without par value (“Series D Preferred”), in a public offering. Each share of Series D Preferred Stock was sold to investors at an offering price of $16.50 per share. Net proceeds from the public offering totaled $21.16 million, which includes the impact of the underwriters' selling commissions and legal, accounting and other professional fees.

At March 31, 2018 and December 31, 2017, the Company had 3,600,636 and 2,237,000 shares of Series D Preferred issued and authorized with a $25.00 liquidation preference per share, or $90.02 million and $55.93 million in aggregate, respectively. Until September 21, 2023, the holders of the Series D Preferred 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 holders 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, for cash at a redemption price of $25.00 per share, plus an amount equal to all accrued and unpaid dividends, if any, to and including the redemption date. The holder of the Series D Preferred may convert shares at any time into shares of the Company’s Common Stock at an initial conversion rate of $16.96 per share of Common Stock. On September 21, 2023, the holders of the Series D Preferred may, at their option, elect to cause the Company to redeem any or all of their shares at a redemption price of $25.00 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.

Accretion of Series D Preferred was $148 thousand for the three months ended March 31, 2018.



24

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

8. Equity and Mezzanine Equity (continued)

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 March 31, 2018, the below shares are able to be converted to Common Stock. The common units, convertible preferred stock, cumulative convertible preferred stock, and warrants have been excluded from the Company’s diluted earnings per share calculation because their inclusion would be antidilutive. In addition to the below, 750,000 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.
 
 
March 31, 2018
 
 
Outstanding shares
 
Potential Dilutive Shares
 
 
(unaudited)
Common units
 
625,312

 
625,312

Series B Preferred Stock
 
1,875,748

 
1,172,343

Series D Preferred Stock
 
3,600,636

 
5,307,541

Warrants to purchase Common Stock
 
 
 
329,378


Dividends
Dividends were declared to holders of common units, common shares and preferred shares as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
 
 
(unaudited)
Common unit and common shareholders
 
$

 
$
3,917

Preferred shareholders
 
3,207

 
2,483

Total
 
$
3,207

 
$
6,400

 
During the three months ended March 31, 2018, the Company declared quarterly dividends of $3.04 million to preferred shareholders of record as of March 31, 2018 to be paid on April 15, 2018. Accordingly, the Company has accrued $3.04 million as of March 31, 2018 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 125,000 shares of the Company's Common Stock to employees, directors, officers and consultants for services rendered to the Company.

During the three months ended March 31, 2018, the Company issued no shares to employees for services rendered to the Company under the 2015 Incentive Plan. As of March 31, 2018, there are 41,104 shares available for issuance under the Company’s 2015 Incentive Plan.



25

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

8. Equity and Mezzanine Equity (continued)

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 625,000 shares of the Company's Common Stock to employees, directors, officers and consultants for services rendered to the Company.

During the three months ended March 31, 2018, the Company issued 43,459 shares to directors for services rendered to the Company under the 2016 Incentive Plan. The market value of these shares at the time of issuance was approximately $330 thousand. As of March 31, 2018, there are 477,413 shares available for issuance under the Company’s 2016 Incentive Plan.
9. Commitments and Contingencies
Lease Commitments
The following properties are subject to ground leases which requires the Company to make a fixed annual rental payment and includes escalation clauses and renewal options as follows (unaudited, in thousands):
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Expiration Year
Amscot
$
5

 
$
5

 
2045
Beaver Ruin Village
11

 
11

 
2054
Beaver Ruin Village II
5

 
5

 
2056
Leased office space Charleston, SC
25

 
25

 
2019
Moncks Corner
30

 
30

 
2040
Devine Street
63

 
63

 
2035
JANAF
60

 

 
2069
    Total Ground Leases
$
199

 
$
139

 
 
    
JANAF ground lease expense of $60 thousand for the three months ended March 31, 2018 includes $24 thousand in percentage rent.

Future minimum lease payments due under the operating leases, including applicable automatic extension options, as of March 31, 2018 are as follows (in thousands, unaudited):
 
For the remaining nine months ended December 31, 2018
$
507

December 31, 2019
644

December 31, 2020
583

December 31, 2021
635

December 31, 2022
638

December 31, 2023
640

Thereafter
16,063

    Total minimum lease payments
$
19,710


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

26

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

9. Commitments and Contingencies (continued)

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 3%, 20%, 76% and 1%, respectively, of the total annualized base rent of the properties in its portfolio as of March 31, 2018. 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.

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.
 
March 31,
 
2018
 
2017
 
(unaudited, in thousands)
Amounts paid to affiliates
$
8

 
$
9

Amounts received from affiliates
$
87

 
$
471


27

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


 
March 31,
 
December 31,
 
2018
 
2017
 
(unaudited, in thousands)
Amounts payable to affiliates
$
5

 
$

Notes receivable
$
6,739

 
$
6,739

As discussed in Note 4, the Company loaned $11.00 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 $1.00 million for the sale of land to be used in the development. At December 31, 2017, the Company recognized a $5.26 million impairment charge on the note receivable as discussed in greater detail in Note 4. The Company has placed the notes receivable on nonaccrual status and has not recognized $355 thousand of interest income due on the notes for the three months ended March 31, 2018. In February 2018, the Company's agreement to perform development, leasing, property and asset management services for Sea Turtle Development was terminated. Prior to the termination of the agreements, development fees of 5% of hard costs incurred were paid to the Company. Leasing, property and asset management fees were consistent with those charged for services provided to non-related properties.
The Company recovered $77 thousand in amounts due from related parties for the three months ended March 31, 2018 which were previously reserved. The recovery is included in “provision for credit losses” on the condensed consolidated statements of operations. The total allowance on related party receivables at March 31, 2018 and December 31, 2017 is $2.77 million and $2.36 million, respectively. These amounts are included in "related party payables, net" on the condensed consolidated balance sheets.
Amounts due from Sea Turtle Development are reserved due to uncertainty surrounding the collectability given the information currently available to the Company. Amounts due from other non-REIT properties have been reserved based on available cash flows at the respective properties and payment history. The management agreements for these properties have been terminated.
11. Subsequent Events
Series D Preferred Stock - Redeemable Preferred Stock

On May 3, 2018, the Company filed a Certificate of Correction (the “Certificate of Correction”) with the State Department of Assessments and Taxation of Maryland (the “SDAT”) correcting an inadvertently omitted reference to “accumulated amortization” in “Section 10(a) (Mandatory Redemption for Asset Coverage)” of the Articles Supplementary for the Series D Preferred that was previously filed with SDAT on September 16, 2016.

The Certificate of Correction became effective upon filing.

Revere Loan
    
On May 3, 2018, the Company extended the $6.81 million Revere Loan to May 15, 2018.
    



28


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 2017 Form 10-K for the year ended December 31, 2017. 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 in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2018.
Executive Overview
As of March 31, 2018, the Trust, through the Operating Partnership, owned and operated sixty-five centers, one office building, seven undeveloped properties, and one redevelopment project in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey, Pennsylvania and West Virginia. Accordingly, the use of the word “Company” refers to the Trust and its consolidated subsidiaries, except where the context otherwise requires.
JANAF Acquisition
On January 18, 2018, the Company acquired JANAF, a retail shopping center located in Norfolk, Virginia, for a
purchase price of $85.65 million, paid through a combination of cash, restricted cash and debt assumption and the issuance of 150,000 shares of Common Stock at $7.53 per share. The shopping center, anchored by BJ's Wholesale Club, totals 810,137 square feet and was 94% leased at the acquisition date.

Disposition
On January 12, 2018, the Company completed the sale of the Chipotle ground lease at Conyers Crossing for a contract price of $1.27 million, resulting in a gain of $1.06 million with net proceeds of $1.16 million.
Assets Held for Sale
In February 2018, the Company’s management and Board of Directors committed to a plan to sell the Land Parcels as part of Company’s strategic initiative. Accordingly, the Land Parcels have been classified as held for sale.







29


New Leases, Leasing Renewals and Expirations
The following table presents selected lease activity statistics for our properties.
 
Three Months Ended March 31,
 
2018
 
2017
Renewals:
 
 
 
Leases renewed with rate increase (sq feet)
35,393

 
92,223

Leases renewed with rate decrease (sq feet)
38,480

 
16,804

Leases renewed with no rate change (sq feet)
80,567

 
70,094

Total leases renewed (sq feet)
154,440

 
179,121

 
 
 
 
Leases renewed with rate increase (count)
16

 
22

Leases renewed with rate decrease (count)
5

 
3

Leases renewed with no rate change (count)
5

 
8

Total leases renewed (count)
26

 
33

 
 
 
 
Option exercised (count)
7

 
12

 
 
 
 
Weighted average on rate increases (per sq foot)
$
0.77

 
$
0.70

Weighted average on rate decreases (per sq foot)
$
(1.86
)
 
$
(0.60
)
Weighted average rate (per sq foot)
$
(0.29
)
 
$
0.30

Weighted average change over prior rates
(3.42
)%
 
3.50
%
 
 
 
 
New Leases:
 
 
 
New leases (sq feet)
72,076

 
54,279

New leases (count)
15

 
18

Weighted average rate (per sq foot)
$
8.08

 
$
13.92

 
 
 
 
Gross Leasable Area ("GLA") expiring during the next 9 months
8.44
 %
 
4.71
%
Anchor Lease Modifications
During the three months ended March 31, 2018, the Company modified thirteen leases with Southeastern Grocer anchor tenants and recaptured four locations. These modifications include a combination of term adjustments, rent adjustments (decreases and increases), deferred landlord contributions for remodels, and adjusted lease language. The Company has elected to recapture Ladson Crossing, St. Matthews, South Park, and Tampa Festival in the second quarter of 2018. The Cypress Shopping Center lease expired on March 31, 2018. As part of the negotiated recaptures the Company received $246 thousand in termination fees during the three months ended March 31, 2018. The remaining thirteen lease modifications remain subject to Southeastern Grocer's bankruptcy court approval. The initial annualized base rent impact of these modifications and recaptures, including the Cypress lease expiration, is approximately $2.50 million.








30


Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017
Results of Operations
The following table presents a comparison of the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017, respectively.
 
Three Months Ended March 31,
 
Three Months Ended Changes
 
2018
 
2017
 
Change
 
% Change
PROPERTY DATA:
 
Number of properties owned and leased at period end (1)
65

 
64

 
1

 
1.56
 %
Aggregate gross leasable area at period end (1)
5,743,073

 
4,906,511

 
836,562

 
17.05
 %
Ending occupancy rate at period end (1)
90.8
%
 
93.0
%
 
(2.20
)%
 
(2.37
)%
FINANCIAL DATA:
 
 
 
 
 
 
 
Rental revenues
$
12,697

 
$
11,129

 
$
1,568

 
14.09
 %
Asset management fees
48

 
162

 
(114
)
 
(70.37
)%
Commissions
14

 
115

 
(101
)
 
(87.83
)%
Tenant reimbursements
3,222

 
2,680

 
542

 
20.22
 %
Development income

 
136

 
(136
)
 
(100.00
)%
Other revenues
333

 
100

 
233

 
233.00
 %
Total Revenue
16,314

 
14,322

 
1,992

 
13.91
 %
EXPENSES:
 
 
 
 
 
 
 
Property operations
4,599

 
3,994

 
605

 
15.15
 %
Non-REIT management and leasing services
36

 
271

 
(235
)
 
(86.72
)%
Depreciation and amortization
7,476

 
6,400

 
1,076

 
16.81
 %
Provision for credit losses
21

 
252

 
(231
)
 
(91.67
)%
Corporate general & administrative
2,508

 
2,232

 
276

 
12.37
 %
Total Operating Expenses
14,640

 
13,149

 
1,491

 
11.34
 %
Gain on disposal of properties
1,055

 

 
1,055

 
100.00
 %
Operating Income
2,729

 
1,173

 
1,556

 
(132.65
)%
Interest income
1

 
356

 
(355
)
 
(99.72
)%
Interest expense
(4,577
)
 
(4,177
)
 
(400
)
 
(9.58
)%
Net Loss from Continuing Operations Before Income Taxes
(1,847
)
 
(2,648
)
 
801

 
30.25
 %
Income tax expense
(25
)
 
(41
)
 
16

 
39.02
 %
Net Loss from Continuing Operations
(1,872
)