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EX-32 - EXHIBIT 32 CERTIFICATION OF CEO AND CFO 3.31.20 - Wheeler Real Estate Investment Trust, Inc.ex32q12020.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO 3.31.20 - Wheeler Real Estate Investment Trust, Inc.ex312q12020.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO 3.31.20 - Wheeler Real Estate Investment Trust, Inc.ex311q12020.htm
EX-4.4 - EXHIBIT 4.4 DESCRIPTION OF SECURITIES 3.31.20 - Wheeler Real Estate Investment Trust, Inc.ex44descriptionofsecurities.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, 2020
OR
 ¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35713
 
WHEELER REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter) 
Maryland
 
45-2681082
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
2529 Virginia Beach Blvd.
Virginia Beach. Virginia
 
23452
(Address of Principal Executive Offices)
 
(Zip Code)
 (757) 627-9088
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
Name of each exchange on which registered
 Common Stock, $0.01 par value per share
 
WHLR
Nasdaq Capital Market
 Series B Convertible Preferred Stock
 
WHLRP
Nasdaq Capital Market
 Series D Cumulative Convertible Preferred Stock
 
WHLRD
Nasdaq Capital Market

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.

1


Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
ý
  
Smaller reporting company
 
ý
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes  ¨    No  ý
As of May 11, 2020, there were 9,694,284 common shares, $0.01 par value per share, outstanding.

2


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.
 

3


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except par value and share data)

 
March 31, 2020
 
December 31, 2019
 
(unaudited)
 
 
ASSETS:
 
 
 
Investment properties, net
$
406,815

 
$
416,215

Cash and cash equivalents
6,695

 
5,451

Restricted cash
16,543

 
16,140

Rents and other tenant receivables, net
6,126

 
6,905

Assets held for sale
6,258

 
1,737

Above market lease intangibles, net
4,832

 
5,241

Operating lease right-of-use assets
11,603

 
11,651

Deferred costs and other assets, net
20,277

 
21,025

Total Assets
$
479,149

 
$
484,365

LIABILITIES:
 
 
 
Loans payable, net
$
336,277

 
$
340,913

Liabilities associated with assets held for sale
4,049

 
2,026

Below market lease intangibles, net
6,035

 
6,716

Operating lease liabilities
11,920

 
11,921

Accounts payable, accrued expenses and other liabilities
9,513

 
9,557

Total Liabilities
367,794

 
371,133

Series D Cumulative Convertible Preferred Stock (no par value, 4,000,000 shares authorized, 3,600,636 shares issued and outstanding; $104.08 million and $101.66 million aggregate liquidation preference, respectively)
89,792

 
87,225

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

 
453

Series B Convertible Preferred Stock (no par value, 5,000,000 authorized, 1,875,748 shares issued and outstanding; $46.90 million aggregate liquidation preference)
41,109

 
41,087

Common Stock ($0.01 par value, 18,750,000 shares authorized, 9,694,284 shares issued and outstanding)
97

 
97

Additional paid-in capital
233,870

 
233,870

Accumulated deficit
(256,037
)
 
(251,580
)
Total Shareholders’ Equity
19,492

 
23,927

Noncontrolling interests
2,071

 
2,080

Total Equity
21,563

 
26,007

Total Liabilities and Equity
$
479,149

 
$
484,365

See accompanying notes to condensed consolidated financial statements.


4


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
REVENUE:
 
 
 
Rental revenues
$
15,355

 
$
15,770

Other revenues
219

 
225

Total Revenue
15,574

 
15,995

OPERATING EXPENSES:
 
 
 
Property operations
4,723

 
4,726

Non-REIT management and leasing services

 
23

Depreciation and amortization
4,799

 
5,816

Impairment of assets held for sale
600

 

Corporate general & administrative
1,872

 
1,814

Total Operating Expenses
11,994

 
12,379

(Loss) gain on disposal of properties
(26
)
 
1,839

Operating Income
3,554

 
5,455

Interest income
1

 
1

Interest expense
(4,400
)
 
(4,793
)
Other expense
(1,024
)
 

Net (Loss) Income Before Income Taxes
(1,869
)
 
663

Income tax expense
(8
)
 
(8
)
Net (Loss) Income
(1,877
)
 
655

Less: Net (loss) income income attributable to noncontrolling interests
(9
)
 
13

Net (Loss) Income Attributable to Wheeler REIT
(1,868
)
 
642

Preferred Stock dividends - undeclared
(3,657
)
 
(3,657
)
Net Loss Attributable to Wheeler REIT Common Shareholders
$
(5,525
)
 
$
(3,015
)
 
 
 
 
 
 
 
 
Loss per share:


 


Basic and Diluted
$
(0.57
)
 
$
(0.31
)
 
 
 
 
Weighted-average number of shares:
 
 
 
Basic and Diluted
9,694,284

 
9,606,249

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(in thousands, except share data)
 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A
 
Series B
 
 
 
 
 
 
 
 
 
Noncontrolling
 
 
 
Preferred Stock
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
Shareholders’ Equity
 
Interests
 
Total
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
 
 
 
Units
 
Value
 
Equity
Balance,
December 31, 2019
562

 
$
453

 
1,875,748

 
$
41,087

 
9,694,284

 
$
97

 
$
233,870

 
$
(251,580
)
 
$
23,927

 
234,019

 
$
2,080

 
$
26,007

Accretion of Series B Preferred
  Stock discount

 

 

 
22

 

 

 

 

 
22

 

 

 
22

Dividends and distributions

 

 

 

 

 

 

 
(2,589
)
 
(2,589
)
 

 

 
(2,589
)
Net Loss

 

 

 

 

 

 

 
(1,868
)
 
(1,868
)
 

 
(9
)
 
(1,877
)
Balance,
March 31, 2020 (Unaudited)
562

 
$
453

 
1,875,748

 
$
41,109

 
9,694,284

 
$
97

 
$
233,870

 
$
(256,037
)
 
$
19,492

 
234,019

 
$
2,071

 
$
21,563

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A
 
Series B
 
 
 
 
 
 
 
 
 
Noncontrolling
 
 
 
Preferred Stock
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
Shareholders’ Equity
 
Interests
 
Total
 
Shares
 
Value
 
Shares
 
Value
 
Shares
 
Value
 
 
 
 
Units
 
Value
 
Equity
Balance,
December 31, 2018
562

 
$
453

 
1,875,748

 
$
41,000

 
9,511,464

 
$
95

 
$
233,697

 
$
(233,184
)
 
$
42,061

 
235,032

 
$
2,194

 
$
44,255

Accretion of Series B Preferred
  Stock discount

 

 

 
22

 

 

 

 

 
22

 

 

 
22

Issuance of Common Stock
  under Share Incentive Plan

 

 

 

 
181,807

 
2

 
164

 

 
166

 

 

 
166

Dividends and distributions

 

 

 

 

 

 

 
(2,589
)
 
(2,589
)
 

 

 
(2,589
)
Net Income

 

 

 

 

 

 

 
642

 
642

 

 
13

 
655

Balance,
March 31, 2019 (Unaudited)
562

 
$
453

 
1,875,748

 
$
41,022

 
9,693,271

 
$
97

 
$
233,861

 
$
(235,131
)
 
$
40,302

 
235,032

 
$
2,207

 
$
42,509



See accompanying notes to condensed consolidated financial statements.

6


Wheeler Real Estate Investment Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
For the Three Months Ended
March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (Loss) Income
$
(1,877
)
 
$
655

Adjustments to reconcile consolidated net loss to net cash provided by operating activities:
 
 
 
Depreciation
2,938

 
3,187

Amortization
1,861

 
2,629

Loan cost amortization
310

 
392

Above (below) market lease amortization, net
(273
)
 
(226
)
Straight-line expense
46

 
47

Share-based compensation

 
90

Loss (gain) on disposal of properties
26

 
(1,839
)
Credit losses on operating lease receivables
154

 
90

Impairment of assets held for sale
600

 

Net changes in assets and liabilities:
 
 
 
Rent and other tenant receivables, net
639

 
251

Unbilled rent
11

 
(155
)
Deferred costs and other assets, net
(1,163
)
 
(625
)
Accounts payable, accrued expenses and other liabilities
(49
)
 
(1,797
)
Net operating cash flows used in discontinued operations

 
(2
)
Net cash provided by operating activities
3,223

 
2,697

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(326
)
 
(285
)
Cash received from disposal of properties
1,665

 
3,584

Cash received from disposal of properties-discontinued operations

 
19

Net cash provided by investing activities
1,339

 
3,318

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments for deferred financing costs
(326
)
 
(28
)
Loan proceeds
13,350

 

Loan principal payments
(15,939
)
 
(5,381
)
Net cash used in financing activities
(2,915
)
 
(5,409
)
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
1,647

 
606

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
21,591

 
17,999

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
23,238

 
$
18,605

Supplemental Disclosures:
 
 
 
Non-Cash Transactions:
 
 
 
Accretion of preferred stock discounts
$
170

 
$
170

Other Cash Transactions:
 
 
 
Cash paid for interest
$
4,100

 
$
4,430

 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
6,695

 
$
4,159

Restricted cash
16,543

 
14,446

Cash, cash equivalents, and restricted cash
$
23,238

 
$
18,605

See accompanying notes to condensed consolidated financial statements.

7



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, 2020, the Trust, through the Operating Partnership, owned and operated sixty centers, one office building and six undeveloped properties in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey, Pennsylvania and West Virginia. Accordingly, the use of the word “Company” refers to the Trust and its consolidated subsidiaries, except where the context otherwise requires.

On October 24, 2014, the Trust, through the Operating Partnership, acquired (i) Wheeler Interests, LLC (“WI”), an acquisition and asset management firm, (ii) Wheeler Real Estate, LLC (“WRE”), a real estate leasing, management and administration firm and (iii) WHLR Management, LLC (“WM” and collectively with WI and WRE the “Operating Companies”), a real estate business operations firm 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, administering our day-to-day business operations, including but not limited to, leasing, property management, payroll and accounting functions, acquisitions, asset management and administration are now handled internally.

The Operating Companies perform property management and leasing functions for certain non-related third parties (the “Non-REIT Properties”), primarily through WRE. The Company converted WRE to a Taxable REIT Subsidiary (“TRS”) to accommodate serving the Non-REIT Properties since applicable REIT regulations consider the income derived from these services to be “bad” income subject to taxation. The regulations allow for costs incurred by the Company commensurate with the services performed for the Non-REIT Properties to be allocated to a TRS.

During January 2014, the Company acquired Wheeler Development, LLC (“WD”) and converted it to a TRS. The Company began performing development activities for both REIT Properties and Non-REIT Properties during 2015.

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (the “Form 10-Q”) are unaudited and the results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for future periods or the year. However, amounts presented in the condensed consolidated balance sheet as of December 31, 2019 are derived from the Company’s audited consolidated financial statements as of that date, but do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The Company prepared the accompanying condensed consolidated financial statements in accordance with GAAP for interim financial statements. The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented, and all such adjustments are of a normal recurring nature. All material balances and transactions between the consolidated entities of the Company have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company's 2019 Annual Report filed on Form 10-K for the year ended December 31, 2019 (the “2019 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

8

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 at fair value as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.
    
The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 5 to 40 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducements and tenant improvements are amortized utilizing the straight-line method over the term of the related lease or occupancy term of the tenant, if shorter.
 
Amounts allocated to buildings are depreciated over the estimated remaining life of the acquired building or related improvements. The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the underlying leases. The Company also estimates the value of other acquired intangible assets, if any, and amortizes them over the remaining life of the underlying related intangibles.
    
The Company reviews investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable, but at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. The Company measures any impairment of investment property when the estimated undiscounted future operating income before depreciation and amortization, plus its residual value, is less than the carrying value of the property. Estimated undiscounted operating income before depreciation and amortization includes various Level 3 fair value assumptions including renewal and renegotiations of current leases, estimates of new leases on vacant spaces, estimates of operating costs and fluctuating market conditions. The renewal and renegotiations of leases in some cases must be approved by additional third parties outside the control of the Company and the tenant. If such renewed or renegotiated leases are approved at amounts below correct estimates, then impairment adjustments may be necessary in the future. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as operating income, estimated capitalization rates, or multiples, leasing prospects for vacant spaces and local market information. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets Held For Sale and Discontinued Operations
    
The Company may decide to sell properties that are held for use. The Company records these properties as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell an impairment charge is recognized. The Company estimates fair value, less estimated closing costs based on similar real estate sales transactions. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 2 and 3 inputs. Level 2 inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices.
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. See Note 3 for additional details on impairment of assets held for sale for the three months ended March 31, 2020 and 2019.


9

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

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

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

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

Tenant Receivables and Unbilled Rent

Tenant receivables include base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit-worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. The Company’s standard lease form considers a rent charge past due after five days. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of March 31, 2020 and December 31, 2019, the Company’s allowance for uncollectible accounts totaled $1.14 million. During the three months ended March 31, 2020 and 2019, the Company recorded a provision for credit losses on operating lease receivables in the amount of $154 thousand and $90 thousand, respectively, related to tenant receivables that were specifically identified as potentially uncollectible based on an assessment of the tenant’s credit-worthiness. These are included in rental revenues on the condensed consolidated statements of operations. During the three months ended March 31, 2020 and 2019, the Company did not realize any recoveries related to tenant receivables previously written off.

Above and Below Market Lease Intangibles, net

The Company determines the above and below market lease intangibles upon acquiring a property. Above and below market lease intangibles are amortized over the life of the respective leases. Amortization of above and below market lease intangibles is recorded as a component of rental revenues.

Deferred Costs and Other Assets, net
    
The Company’s deferred costs and other assets consist primarily of leasing commissions, leases in place, capitalized legal and marketing costs, tenant relationships and ground lease sandwich interest intangibles associated with acquisitions. The Company’s lease origination costs consist primarily of the portion of property acquisitions allocated to lease originations and commissions paid to third parties in connection with lease originations. The Company generally records amortization of lease origination costs on a straight-line basis over the terms of the related leases. Amortization of lease origination costs, leases in place, legal and marketing costs, tenant relationships and ground lease sandwich interest represents a component of depreciation and amortization expense.





10

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

Revenue Recognition

Lease Contract Revenue

The Company has two classes of underlying assets relating to rental revenue activity, retail and office space. The Company retains substantially all of the risks and benefits of ownership of these underlying assets and accounts for these leases as operating leases. The Company combines lease and nonlease components in lease contracts, which includes combining base rent and tenant reimbursement revenue.

The Company accrues minimum rents on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. At March 31, 2020 and December 31, 2019, there were $3.47 million and $3.41 million, respectively, in unbilled rent which is included in "rents and other tenant receivables, net." Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements as variable lease income.

The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. These reimbursements are considered nonlease components which the Company combines with the lease component. The Company calculates the tenant’s share of operating costs by multiplying the total amount of the operating costs by a fraction, the numerator of which is the total number of square feet being leased by the tenant, and the denominator of which is the average total square footage of all leasable buildings at the property. The Company also receives monthly payments for these reimbursements from substantially all its tenants throughout the year. The Company recognizes tenant reimbursements as variable lease income. The Company recognizes differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material for the three months ended March 31, 2020 and 2019.

Additionally, the Company has tenants who pay real estate taxes directly to the taxing authority. The Company excludes these Company costs paid directly by the tenant to third parties on the Company’s behalf from both variable revenue payments recognized and the associated property operating expenses. The Company does not evaluate whether certain sales taxes and other similar taxes are the Company’s costs or tenants costs. Instead, the Company accounts for these costs as tenant costs.

The Company recognizes lease termination fees, which is included in "other revenues" on the condensed consolidated statements of operations, in the year that the lease is terminated and collection of the fee is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets.

The below table disaggregates the Company’s revenue by type of service for the three months ended March 31, 2020 and 2019 (in thousands, unaudited):

 
Three Months Ended
March 31,
 
2020
 
2019
 
 
 
 
Minimum rent
$
12,113

 
$
12,461

Tenant reimbursements - variable lease revenue
3,288

 
3,287

Percentage rent - variable lease revenue
108

 
112

Lease termination fees
62

 
49

Other
157

 
176

     Total
15,728

 
16,085

Credit losses on operating lease receivables
(154
)
 
(90
)
     Total
$
15,574

 
$
15,995


11

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

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. The TRS' have accrued $30 thousand and $22 thousand, respectively, for federal and state income taxes as of March 31, 2020 and December 31, 2019. 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 reasonable cause and certain other conditions were satisfied.

Management has evaluated the effect of the guidance provided by GAAP on Accounting for Uncertainty of Income Taxes and has determined that the Company had no uncertain income tax positions.

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 particular property 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).

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

Use of Estimates

The Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported periods. The Company’s actual results could differ from these estimates.

Corporate General and Administrative Expense
    
A detail for the "corporate general & administrative" ("CG&A") line item from the condensed consolidated statements of operations is presented below (in thousands, unaudited):

12

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

 
Three Months Ended
March 31,
 
2020
 
2019
 
 
 
 
Professional fees
$
1,026

 
$
599

Compensation and benefits
407

 
676

Corporate administration
331

 
305

Advertising costs for leasing activities
31

 
49

Taxes and licenses
18

 
62

Other
59

 
123

    Total
$
1,872

 
$
1,814

    
Other Expenses

Other expenses represent expenses which are non-operating in nature.  Other expenses during the three months ended March 31, 2020 include $585 thousand in legal settlement costs, see Note 9 for additional details, and $439 thousand for reimbursement of 2019 proxy costs to a current board member as approved by the Company's Board of Directors in March 2020, see Note 10 for additional details.  As of March 31, 2020, $924 thousand of other expenses are accrued and unpaid.

Leases Commitments

The Company determines if an arrangement is a lease at inception. Operating leases, in which the Company is the lessee, are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on our condensed consolidated balance sheets.

ROU assets represent the right to use an underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets include any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend the lease when it is reasonably certain that the company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company elected the practical expedient to combine lease and associated nonlease components. The lease components are the majority of its leasing arrangements and the Company accounts for the combined component as an operating lease. In the event the Company modifies existing ground leases or enters into new ground leases, such leases may be classified as finance leases.

Noncontrolling Interests

Noncontrolling interests is the portion of equity in the Operating Partnership not attributable to the Trust. The ownership interests not held by the parent are considered noncontrolling interests. Accordingly, noncontrolling interests have been reported in equity on the condensed consolidated balance sheets but separate from the Company’s equity. On the condensed consolidated statements of operations, the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. Condensed consolidated statements of equity includes beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
    
The noncontrolling interest of the Operating Partnership common unit holders is calculated by multiplying the noncontrolling interest ownership percentage at the balance sheet date by the Operating Partnership’s net assets (total assets less total liabilities). The noncontrolling interest percentage is calculated at any point in time by dividing the number of units not owned by the Company by the total number of units outstanding. The noncontrolling interest ownership percentage will change

13

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

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 June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This update enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better calculate credit loss estimates. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, such as accounts receivable and loans. The guidance will require that the Company estimate the lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. The Company will also be required to disclose information about how it developed the allowances, including changes in the factors that influenced the Company’s estimate of expected credit losses and the reasons for those changes. The guidance would be effective for interim and annual reporting periods beginning after December 15, 2022, per FASB's issuance of ASU 2019-10, "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates". The Company is currently in the process of evaluating the impact the adoption of the guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)". This update modifies the disclosure requirements on fair value measurements in Topic 820 with several removals, modifications and additions for disclosures, which includes both prospective and retrospective disclosures. The guidance adds prospective disclosures related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements including measurement uncertainty disclosures to communicate the uncertainty in the measurement as of the reporting date. The Company adopted this ASU as of January 1, 2020. The adoption did not have material impact on its consolidated financial statements upon adoption of the guidance and there were no retrospective disclosures necessary.
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances.  The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company at the time of entering into such concessions.

Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.

Reclassifications

The Company has reclassified certain prior period amounts in the accompanying condensed consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity. The revenue from asset management fees and commissions were reclassified to other revenues on the condensed consolidated statements of operations for consistency with current period presentation.


14

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


3. Real Estate

Investment properties consist of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
 
(unaudited)
 
 
Land and land improvements
$
98,957

 
$
100,599

Buildings and improvements
360,620

 
366,082

Investment properties at cost
459,577

 
466,681

Less accumulated depreciation
(52,762
)
 
(50,466
)
    Investment properties, net
$
406,815

 
$
416,215


The Company’s depreciation expense on investment properties was $2.94 million and $3.19 million for the three months ended March 31, 2020 and 2019, respectively.

A significant portion of the Company’s land, buildings and improvements serve as collateral for its mortgage loans. Accordingly, restrictions exist as to the encumbered property’s transferability, use and other common rights typically associated with property ownership.

Assets Held for Sale

At March 31, 2020 and December 2019 assets held for sale included Columbia Fire Station and St. Matthews, respectively as the Board committed to a plan to sell each property.

The Company recorded an impairment charge on assets held for sale of $600 thousand for the three months ended March 31, 2020 resulting from reducing the carrying value of Columbia Fire Station for the amount that exceeded the property's fair value less estimated selling costs. The valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 2 inputs. No impairment charges were recorded for the three months ended March, 31, 2019.

As of March 31, 2020 and December 31, 2019, assets held for sale and associated liabilities consisted of the following (in thousands):
 
 
March 31, 2020
 
December 31, 2019
 
 
(unaudited)
 
 
Investment properties, net
 
$
6,189

 
$
1,651

Rents and other tenant receivables, net
 
9

 
77

Deferred costs and other assets, net
 
60

 
9

Total assets held for sale
$
6,258

 
$
1,737

 
 
March 31, 2020
 
December 31, 2019
 
 
(unaudited)
 
 
Loans payable
 
$
4,004

 
$
1,974

Accounts payable, accrued expenses and other liabilities
 
45

 
52

Total liabilities associated with assets held for sale
$
4,049

 
$
2,026











15

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

The following properties were sold during the three months ended March 31, 2020 and 2019:
Disposal Date
 
Property
 
Contract Price
 
Gain (loss)
 
Net Proceeds
 
 
 
 
(in thousands, unaudited)
January 21, 2020
 
St. Matthews
 
$
1,775

 
$
(26
)
 
$
1,665

March 18, 2019
 
Graystone Crossing
 
6,000

 
1,452

 
1,744

February 7, 2019
 
Harbor Pointe Land Parcel (1.28 acres)
 
550

 

 
19

January 11, 2019
 
Jenks Plaza
 
2,200

 
387

 
1,840

    
The Harbor Pointe land parcel sale represents discontinued operations as it was a strategic shift that had a major effect on the Company's financial position or results of operations.
    
The sale of Jenks Plaza, Graystone Crossing and St. Matthews did not represent a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the operating results of these properties remains classified within continuing operations for all periods presented.

4. Deferred Costs
Deferred costs and other assets, net of amortization are as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
 
(unaudited)
 
 
Leases in place, net
$
13,571

 
$
14,968

Ground lease sandwich interest, net
2,146

 
2,215

Tenant relationships, net
1,891

 
2,173

Lease origination costs, net
971

 
1,038

Legal and marketing costs, net
31

 
43

Other
1,667

 
588

    Total deferred costs and other assets, net
$
20,277

 
$
21,025

As of March 31, 2020 and December 31, 2019, the Company’s intangible accumulated amortization totaled $57.55 million and $57.15 million, respectively. During the three months ended March 31, 2020 and 2019, the Company’s intangible amortization expense totaled $1.86 million and $2.63 million, respectively. Future amortization of lease origination costs, leases in place, legal and marketing costs, tenant relationships and ground lease sandwich interests is as follows (in thousands, unaudited):
 
Leases In
Place, net
 
Ground Lease Sandwich Interest, net
 
Tenant
Relationships, net
 
 Lease
Origination
Costs, net
 
Legal &
Marketing
Costs, net
 
Total
For the remaining nine months ending December 31, 2020
$
3,182

 
$
205

 
$
580

 
$
126

 
$
8

 
$
4,101

December 31, 2021
2,766

 
274

 
448

 
158

 
8

 
3,654

December 31, 2022
2,119

 
274

 
354

 
116

 
6

 
2,869

December 31, 2023
1,638

 
274

 
227

 
98

 
5

 
2,242

December 31, 2024
1,124

 
274

 
128

 
83

 
3

 
1,612

December 31, 2025
799

 
274

 
62

 
63

 

 
1,198

Thereafter
1,943

 
571

 
92

 
327

 
1

 
2,934

 
$
13,571

 
$
2,146

 
$
1,891

 
$
971

 
$
31

 
$
18,610



16

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


5. 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, 2020
 
December 31,
2019
 KeyBank Credit Agreement (6)
 
$
350,000

 
LIBOR + 350 basis points

 
Various (6)
 
$
9,300

 
$
17,879

 Rivergate
 
$
127,267

 
LIBOR + 295 basis points

 
March 2020
 
21,402

 
21,545

 Columbia Fire Station (1)
 
$
25,452

 
4.00
%
 
May 2020
 
4,015

 
4,051

 Tuckernuck
 
$
33,880

 
3.88
%
 
May 2020
 
5,294

 
5,344

 First National Bank Line of Credit (7)
 
$
24,656

 
LIBOR + 300 basis points

 
September 2020
 
1,156

 
1,214

 Lumber River
 
$
10,723

 
LIBOR + 350 basis points

 
October 2020
 
1,390

 
1,404

 JANAF Bravo
 
$
36,935

 
4.65
%
 
January 2021
 
6,336

 
6,372

 Walnut Hill Plaza
 
$
26,850

 
5.50
%
 
September 2022
 
3,730

 
3,759

 Litchfield Market Village
 
$
46,057

 
5.50
%
 
November 2022
 
7,418

 
7,452

 Twin City Commons
 
$
17,827

 
4.86
%
 
January 2023
 
2,966

 
2,983

 New Market
 
$
48,747

 
5.65
%
 
June 2023
 
6,663

 
6,713

 Benefit Street Note (3)
 
$
53,185

 
5.71
%
 
June 2023
 
7,308

 
7,361

 Deutsche Bank Note (2)
 
$
33,340

 
5.71
%
 
July 2023
 
5,624

 
5,642

 JANAF
 
$
333,159

 
4.49
%
 
July 2023
 
50,173

 
50,599

 Tampa Festival
 
$
50,797

 
5.56
%
 
September 2023
 
8,038

 
8,077

 Forrest Gallery
 
$
50,973

 
5.40
%
 
September 2023
 
8,342

 
8,381

 Riversedge North
 
$
11,436

 
5.77
%
 
December 2023
 
1,758

 
1,767

 South Carolina Food Lions Note (5)
 
$
68,320

 
5.25
%
 
January 2024
 
11,624

 
11,675

 Cypress Shopping Center
 
$
34,360

 
4.70
%
 
July 2024
 
6,239

 
6,268

 Port Crossing
 
$
34,788

 
4.84
%
 
August 2024
 
6,002

 
6,032

 Freeway Junction
 
$
41,798

 
4.60
%
 
September 2024
 
7,690

 
7,725

 Harrodsburg Marketplace
 
$
19,112

 
4.55
%
 
September 2024
 
3,398

 
3,416

 Bryan Station
 
$
23,489

 
4.52
%
 
November 2024
 
4,373

 
4,394

 Crockett Square
 
Interest only

 
4.47
%
 
December 2024
 
6,338

 
6,338

 Pierpont Centre
 
$
39,435

 
4.15
%
 
February 2025
 
8,100

 
8,113

 Shoppes at Myrtle Park
 
$
33,180

 
4.45
%
 
February 2025
 
5,988

 

 Folly Road
 
$
41,482

 
4.65
%
 
March 2025
 
7,350

 
5,922

 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 (4)
 
 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
 
$
41,482

 
4.82
%
 
December 2025
 
4,603

 
4,620

 JANAF BJ's
 
$
29,964

 
4.95
%
 
January 2026
 
4,929

 
4,957

 Chesapeake Square
 
$
23,857

 
4.70
%
 
August 2026
 
4,336

 
4,354

 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 Village
 
$
45,336

 
4.93
%
 
January 2027
 
8,494

 
8,516

 Village of Martinsville
 
$
89,664

 
4.28
%
 
July 2029
 
16,258

 
16,351

 Laburnum Square
 
Interest only

 
4.28
%
 
September 2029
 
7,665

 
7,665

Total Principal Balance (1)
 
 
 
 
 
 
 
344,470

 
347,059

Unamortized debt issuance cost (1)
 
 
 
 
 
 
 
(4,189
)
 
(4,172
)
Total Loans Payable, including assets held for sale
 
 
 
 
 
 
 
340,281

 
342,887

Less loans payable on assets held for sale, net loan amortization costs
 
 
 
 
4,004

 
1,974

Total Loans Payable, net
 
 
 
 
 
 
 
$
336,277

 
$
340,913

(1) Includes loans payable on assets held for sale, see Note 3.
(2) Collateralized by LaGrange Marketplace, Ridgeland and Georgetown.
(3) Collateralized by Ladson Crossing, Lake Greenwood Crossing and South Park.
(4) Collateralized by Cardinal Plaza, Franklinton Square, and Nashville Commons.
(5) Collateralized by Clover Plaza, South Square, St. George, Waterway Plaza and Westland Square.
(6) Collateralized by Darien Shopping Center, Devine Street, Lake Murray, Moncks Corner and South Lake. The various maturity dates are disclosed below within Note 5 under the KeyBank Credit Agreement.
(7) Collateralized by Surrey Plaza and Amscot Building.

17

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


KeyBank Credit Agreement
 
As of March 31, 2020, the Company has borrowed $9.30 million under the Amended and Restated Credit Agreement ("KeyBank Credit Agreement") with KeyBank National Association ("KeyBank"), which is collateralized by five properties. At March 31, 2020, the outstanding borrowings are accruing interest at 4.46%.

The KeyBank Credit Agreement had the following activity during the three months ended March 31, 2020:
Entered into the Second Amendment to the KeyBank Credit Agreement (the "Second Amendment") on January 24, 2020, effective December 21, 2019, and the Company began making monthly principal payments of $350 thousand on November 1, 2019. The Second Amendment, among other provisions, requires a pledge of additional collateral of $15.00 million in residual equity interests. Additionally, the Second Amendment provided that the outstanding balance on the KeyBank Credit Agreement shall be reduced to $10.00 million by January 31, 2020, $2.00 million by April 30, 2020 and fully matures on June 30, 2020. Although the Company has made and continues to make the required monthly principal payments, the Company did not meet the April 30, 2020 required outstanding balance paydown. The Company remains in negotiations with KeyBank to extend the maturity date to December 31, 2020. Additionally, KeyBank has agreed to allow the Company to retain the $1.26 million in proceeds received from the Folly Road refinance during negotiations. As of May 12, 2020, the balance on the KeyBank Credit Agreement is $8.60 million.
The following collateralized portions of the KeyBank Credit Agreement had principal paydowns associated with each property’s refinancing or sale as noted below:
$1.78 million paydown from St. Matthews sale proceeds on January 21, 2020; and
$5.75 million paydown from Shoppes at Myrtle Park refinancing proceeds on January 23, 2020.

Shoppes at Myrtle Park Refinance

On January 23, 2020, the Company refinanced the Shoppes at Myrtle Park collateralized portion of the KeyBank Credit Agreement for $6.00 million at a fixed interest rate of 4.45%, resulting in a paydown of $5.75 million on the KeyBank Credit Agreement. The loan matures in February 2025 with monthly principal and interest payments of $33 thousand.

Rivergate Extension

On January 30, 2020, effective December 21, 2019, the Company and Synovus Bank agreed to extend the loan maturity to March 20, 2020. Subsequent to March 31, 2020 the Company entered into a Second Amendment with Synovus Bank to the Rivergate Loan which extends the maturity date to June 20, 2020.

Folly Road Refinance

On March 23, 2020, the Company executed a promissory note for $7.35 million for the refinancing of Folly Road at a rate of 4.65%. The loan matures in March 2025 with monthly principal and interest payments of $41 thousand.

Debt Maturity

The Company’s scheduled principal repayments on indebtedness as of March 31, 2020, including assets held for sale, are as follows (in thousands, unaudited):
For the remaining nine months ended December 31, 2020
$
46,171

December 31, 2021
11,394

December 31, 2022
15,848

December 31, 2023
85,537

December 31, 2024
44,240

December 31, 2025
91,426

Thereafter
49,854

    Total principal repayments and debt maturities
$
344,470

 


18

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


The Company has considered its short-term (one year or less) liquidity needs and the adequacy of its estimated cash flows from operating activities and other expected financing sources to meet these needs. In particular, the Company has considered its scheduled debt maturities for the twelve months ending March 31, 2021 of $53.78 million. The Company plans to pay this obligation through a combination of refinancings, dispositions and operating cash. All loans due to mature are collateralized by properties within the portfolio. Additionally, the Company expects to meet the short-term liquidity requirements, through a combination of the following:

suspension of Series A Preferred, Series B Preferred and Series D Preferred dividends;
available cash and cash equivalents;
cash flows from operating activities;
refinancing of maturing debt;
loan forbearance;
possible sale of six undeveloped land parcels; and
sale of additional properties, if necessary.

Management is currently working with lenders to refinance certain properties off of the KeyBank Credit Agreement in an effort to reduce the balance prior to maturity. 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.

6. Rentals under Operating Leases

Future minimum rents to be received under noncancelable tenant operating leases, excluding rents on assets held for sale properties, for each of the next five years and thereafter, excluding CAM and percentage rent based on tenant sales volume, as of March 31, 2020 are as follows (in thousands, unaudited): 
For the remaining nine months ended December 31, 2020
$
34,113

December 31, 2021
40,412

December 31, 2022
33,910

December 31, 2023
27,437

December 31, 2024
20,676

December 31, 2025
14,842

Thereafter
36,634

    Total minimum rents
$
208,024


7. Equity and Mezzanine Equity

Series A Preferred Stock
    
At March 31, 2020 and December 31, 2019, 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 or accumulated 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, 2020 and December 31, 2019, the Company had 1,875,748 shares 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

19

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

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.

Series D Preferred Stock - Redeemable Preferred Stock

At March 31, 2020 and December 31, 2019, the Company had 3,600,636 issued and 4,000,000 authorized shares of Series D Cumulative Convertible Preferred Stock, without par value ("Series D Preferred") with a $25.00 liquidation preference per share, or $104.08 million and $101.66 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.

Dividends on the Series D Preferred cumulate from the end of the most recent dividend period for which dividends have been paid. Dividends on the Series D Preferred cumulate whether or not (i) we have earnings, (ii) there are funds legally available for the payment of such dividends and (iii) such dividends are authorized by our Board of Directors or declared by us. Dividends on the Series D Preferred Stock do not bear interest. If the Company, fails to pay any dividend within three (3) business days after the payment date for such dividend, the then-current dividend rate increases following the payment date by an additional 2.0% of the $25.00 stated liquidation preference per share, or $0.50 per annum, until we pay the dividend, subject to our ability to cure the failure. On December 20, 2018, the Company suspended the Series D Preferred dividend. As such, the Series D Preferred shares began accumulating dividends at 10.75% beginning January 1, 2019 and will continue to accumulate dividends at this rate until all accumulated dividends have been paid.

Holders of shares of the Series D Preferred have no voting rights. Pursuant to the Company’s Articles Supplementary, if dividends on the Series D Preferred are in arrears for six or more consecutive quarterly periods (a “ Preferred Dividend Default”), the number of directors on our Board of Directors will automatically be increased by two, and holders of shares of the Series D Preferred and the holders of Series A Preferred and Series B Preferred (the Series A Preferred and Series B Preferred together, being the “Parity Preferred Stock”), shall be entitled to vote for the election of two additional directors (the “Series D Preferred Directors”). A Preferred Dividend Default occurred on April 15, 2020. The election of such directors will take place upon the written request of the holders of record of at least 20% of the Series D Preferred Stock and Parity Preferred Stock. The Board of Directors is not permitted to fill the vacancies on the Board of Directors as a result of the failure of the holders of 20% of the Series D Preferred Stock and Parity Preferred Stock to deliver such written request for the election of the Series D Preferred Directors. The Series D Preferred Directors may serve on our Board of Directors, until all unpaid dividends on such Series D Preferred and Parity Preferred Stock, if any, have been paid or declared and a sum sufficient for the payment thereof set apart for payment.

The changes in the carrying value of the Series D Preferred for the three months ended March 31, 2020 and 2019 is as follows (in thousands, unaudited):


20

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

 
Series D Preferred
 
(unaudited)
Balance December 31, 2019
$
87,225

   Accretion of Preferred Stock discount
148

   Undeclared dividends
2,419

Balance March 31, 2020
$
89,792

 
Series D Preferred
 
(unaudited)
Balance December 31, 2018
$
76,955

   Accretion of Preferred Stock discount
148

   Undeclared dividends
2,419

Balance March 31, 2019
$
79,522


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 income (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 income (loss) attributable to noncontrolling interests, by the weighted-average number of common shares including any dilutive shares.

As of March 31, 2020, the below shares are able to be converted to Common Stock. The common units, convertible preferred stock and cumulative convertible preferred stock have been excluded from the Company’s diluted earnings per share calculation because their inclusion would be antidilutive.
 
 
March 31, 2020
 
 
Outstanding shares
 
Potential Dilutive Shares
 
 
(unaudited)
Common units
 
234,019

 
234,019

Series B Preferred Stock
 
1,875,748

 
1,172,343

Series D Preferred Stock
 
3,600,636

 
5,307,541


Dividends

The following table summarizes the preferred stock dividends (unaudited, in thousands except for per share amounts):
    
 
 
Series A Preferred
 
Series B Preferred
 
Series D Preferred
Record Date/Arrears Date
 
Arrears
Per Share
 
Arrears
Per Share
 
Arrears
Per Share
For the three months ended March 31, 2020
 
$
13

22.50

 
$
1,055

0.56

 
$
2,419

0.67

For the three months ended March 31, 2019
 
$
13

22.50

 
$
1,055

0.56

 
$
2,419

0.67


The total cumulative dividends in arrears for Series A Preferred (per share $135.00), Series B Preferred (per share $3.36) and Series D Preferred (per share $3.91) as of March 31, 2020 is $20.47 million.
 



21

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

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. The 2015 Incentive Plan replaced the 2012 Stock Incentive Plan.

As of March 31, 2020, there are 41,104 shares available for issuance under the Company’s 2015 Incentive Plan. There were no shares issued during the three months ended March 31, 2020 and 2019.


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.
For the Three Months Ended March 31,
 
Shares Issued
 
Market Value
 
 
(in thousands except for share amounts, unaudited)
2019
 
181,807

 
166


As of March 31, 2020, there are 132,707 shares available for issuance under the Company’s 2016 Incentive Plan. There were no shares issued during the three months ended March 31, 2020.

8. Leases Commitments

The Company has ground leases that are accounted for as operating leases. The Charleston, SC lease ended August 31, 2019 and was accounted for as an operating lease. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 5 to 50 years. As of March 31, 2020 and 2019, the weighted average remaining lease term of our leases is 35 and 36 years, respectively. The following properties are subject to leases which require the Company to make fixed annual rental payments and variable lease payments, which are immaterial and include escalation clauses and renewal options as follows (unaudited, in thousands):
 
Three Months Ended March 31,
 
 
2020
 
2019
Expiration Year
Amscot
$
6

 
$
6

2045
Beaver Ruin Village
14

 
14

2054
Beaver Ruin Village II
6

 
6

2056
Leased office space Charleston, SC

 
25

2019
Moncks Corner
30

 
30

2040
Devine Street (1)
99

 
99

2051
JANAF (2)
71

 
67

2069
    Total ground leases
$
226

 
$
247

 
(1) Lease options are exercised through 2035 with options which are reasonably certain to be exercised through 2051.
(2) Includes $34 thousand and $30 thousand in variable percentage rent, during the three months ended March 31, 2020 and 2019, respectively.







22

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


Supplemental information related to leases is as follows (in thousands, unaudited):
 
Three Months Ended
March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
146

 
$
170

Leased assets obtained in exchange for new operating lease liabilities
$

 
$
11,904


Undiscounted cash flows of our scheduled obligations for future minimum lease payments due under the operating leases, including applicable automatic extension options and options reasonably certain of being exercised, as of March 31, 2020 and a reconciliation of those cash flows to the operating lease liabilities at March 31, 2020 are as follows (in thousands, unaudited):
For the remaining nine months ended December 31, 2020
$
437

December 31, 2021
637

December 31, 2022
640

December 31, 2023
642

December 31, 2024
644

December 31, 2025
648

Thereafter
22,460

    Total minimum lease payments (1)
26,108

Discount
(14,188
)
    Operating lease liabilities
$
11,920

(1) Operating lease payments include $7.54 million related to options to extend lease terms that are reasonably certain of being exercised.

9. Commitments and Contingencies

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

Concentration of Credit Risk
    
The Company is subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for tenants and customers, changes in tax laws, interest rates, the availability of financing and potential liability under environmental and other laws.
    
The Company’s portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in the Northeast, Mid-Atlantic and Southeast, which markets represented approximately 4%, 35% and 61% respectively, of the total annualized base rent of the properties in its portfolio as of March 31, 2020. 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.




23

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

9. Commitments and Contingencies (continued)

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. In addition, the below are in process.

JCP Investment Partnership LP, et al v. Wheeler Real Estate Investment Trust, Inc., Circuit Court for Baltimore County, Maryland. This was an action brought by a large minority shareholder of the Company alleging that in 2018, the Company breached an asset coverage ratio covenant, so as to require the Company to buy back a portion of its Series D Preferred. The Company defended this suit on the grounds it validly amended the Articles Supplementary through the Certificate of Correction filed with the Maryland Department of Taxation on or about May 3, 2018, curing any alleged breach of the covenant. After discovery was completed, JCP filed a motion for summary judgment, which the Court denied on January 29, 2020. In February 2020, the parties reached a settlement and JCP dismissed the lawsuit without prejudice.

Jon Wheeler v. Wheeler Real Estate Investment Trust, Inc., Circuit Court for the City of Virginia Beach, Virginia. Jon Wheeler v. Wheeler Real Estate Investment Trust, Inc., Circuit Court for the City of Virginia Beach, Virginia. Former CEO, Jon Wheeler, alleges that his employment was improperly terminated and that he is owed severance and bonus payments pursuant to his Employment Agreement. Altogether, his alleged damages total approximately $1.00 million. The Company is defending the action on the grounds that Mr. Wheeler’s employment was properly terminated for cause, including for his failure to properly apprise the Board of Directors of critical information, and placing his own personal interests above the Company's, including contacting counsel about filing suit on his behalf against the Company and the Board of Directors while he was still CEO and Chairman of the Board. The Company filed a Counterclaim against Mr. Wheeler for approximately $150 thousand for reimbursement of personal expenses the Company paid, but that Mr. Wheeler should have borne. Trial of this action was held on December 17-20, 2019. Post-trial briefs were submitted on January 31, 2020. On March 10, 2020, the Court held a hearing to announce its rulings. The Court found in favor of Jon Wheeler on his claim that his employment was terminated without cause and awarded him $475 thousand for a severance payment and the cash value of applicable benefits. The Court denied Mr. Wheeler’s claims for a bonus and that his termination of employment was wrongful as a violation public policy. A hearing will be conducted to determine the award of attorneys’ fees and costs to Jon Wheeler and to the Company as prevailing parties on their claims, as well as whether pre-judgment interest should be included on the damage awards. A hearing date has not been set. Accordingly, in March 2020, the Company recorded $485 thousand on the Company's condensed consolidated statements of operations under the line "other expenses" and is accrued and unpaid as of March 31, 2020.

BOKF, NA v. WD-I Associates, LLC, Wheeler Real Estate, LLC and Jon S. Wheeler, Court of Common Pleas, Beaufort County, South Carolina. BOKF (“Bank of Arkansas”), filed an action on April 9, 2019 in Beaufort County, South Carolina, for foreclosure of the mortgage it held on the real property and improvements comprising Sea Turtle

24

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

9. Commitments and Contingencies (continued)

Marketplace Shopping Center (“Sea Turtle”) which was owned by WD-I Associates, LLC (“WD-I”), and Jon S. Wheeler had guaranteed the debt. Bank of Arkansas sought the appointment of a receiver to take possession and control of Sea Turtle pending the completion of the foreclosure action. In response, WD-I filed for relief under Chapter 11 of the United States Bankruptcy Code on May 7, 2019. The bankruptcy filing stayed the foreclosure action in State Court.

Bank of Arkansas asserted a claim in the bankruptcy as the first mortgage on Sea Turtle. The Company’s subsidiaries held a second mortgage on Sea Turtle and in addition were creditors of WD-I . On January 30, 2020, the Bankruptcy Court approved a sale price of $18.75 million. The Company will share in the $200 thousand set aside for unsecured creditors, pro rata with other unsecured creditors. Given the amount of the indebtedness owed to the Company, we will receive the largest portion of the funds. On May 1, 2020, the Bankruptcy Court granted the dismissal of the WD-I bankruptcy case upon the provisions for payment of the $200 thousand to creditors. The Company is to receive an aggregate payment of approximately $196 thousand, which the Company has not recorded as of March 31, 2020.

Jon Wheeler v. Wheeler Real Estate Investment Trust, Inc. and David Kelly, Individually, Circuit Court for the City of Virginia Beach, Virginia. In September, 2018, former Chief Executive Officer and President Jon S. Wheeler filed claims for defamation and tortious interference with contract expectancy, prospective business relationships and economic advantage in the Circuit Court for the City of Virginia Beach, Virginia, asserting his successor, immediate past Chief Executive Officer and President David Kelly, defamed him in communications with an industry association. In February, 2019, Jon Wheeler’s counsel amended the suit to add the Company as a Defendant, but dropped all but the defamation claims. Mr. Kelly and the Company are defending the lawsuit. Trial is set for June 10, 2020. At this juncture, the outcome of the matter cannot be predicted.

In addition, on April 13, 2020, the Company terminated the employment of the Company’s then chief executive officer and president, David Kelly, with immediate effect. On April 15, 2020, the Company received a letter from Mr. Kelly’s counsel requesting additional information relating to the termination of Mr. Kelly’s employment.  This matter is in its early stages. While no legal proceeding is in process at this time, there can be no assurance that this matter will not develop into a potential legal proceeding or be resolved in such a manner as to avoid litigation.

Harbor Pointe Tax Increment Financing

On September 1, 2011, the Grove Economic Development Authority issued the Grove Economic Development Authority Tax Increment Revenue Note, Taxable Series 2011 in the amount of $2.42 million, bearing a variable interest rate of 2.29%, not to exceed 14% and payable in 50 semi-annual installments. The proceeds of the bonds were to provide funding for the construction of public infrastructure and other site improvements and to be repaid by incremental additional property taxes generated by development. Harbor Pointe Associates, LLC, then owned by an affiliate of Jon Wheeler, entered into an Economic Development Agreement with the Grove Economic Development Authority for this infrastructure development and in the event the ad valorem taxes were insufficient to cover annual debt service, Harbor Pointe Associates, LLC would reimburse the Grove Economic Development Authority (the “Harbor Pointe Agreement”). In 2014, Harbor Pointe Associates, LLC was acquired by the Company.
 
The total debt service shortfall over the life of the bond is uncertain as it is based on ad valorem taxes, assessed property values, property tax rates, LIBOR and future potential development ranging until 2036. The Company’s future total principal obligation under the Harbor Pointe Agreement will be no more than $2.23 million, the principal amount of the bonds, as of March 31, 2020. In addition, the Company may have an interest obligation on the note based on the principal balance and LIBOR rates in effect at future payment dates. During the three months ended March 31, 2020 and 2019, the Company did not fund any debt service shortfalls. No amounts have been accrued for this as of March 31, 2020 as a reasonable estimate of future debt service shortfalls cannot be determined based on variables noted above.

10. Related Party Transactions

The following summarizes related party activity for the three months ended March 31, 2020 and 2019. The amounts disclosed below reflect the activity between the Company and its affiliates (in thousands).

25

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


 
Three Months Ended March 31,
 
2020
 
2019
 
(unaudited)
Amounts paid to affiliates
$
9

 
$

Amounts received from affiliates
$

 
$
6


Reimbursement of Proxy Solicitation Expenses

On October 29, 2019, Stilwell Value Partners VII, L.P., Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Value LLC, and Joseph Stilwell (collectively, the “Stilwell Group”), the beneficial owner of 9.8% of our common stock, filed a proxy statement with the SEC in connection with the Company’s 2019 annual meeting (the “Stilwell Solicitation”). Current director Joseph Stilwell is the owner and managing member of Stilwell Value LLC, which is the general partner of Stilwell Activist Investments, L.P. At the 2019 annual meeting, our stockholders elected three nominees designated by the Stilwell Group to the Board of Directors. The Stilwell Group disclosed in the Stilwell Solicitation that it intended to seek reimbursement of the expenses it incurred in connection with such solicitation. The Company has agreed to reimburse the Stilwell Group for the approximate $439 thousand of expenses it incurred in connection with the Stilwell Solicitation.  This reimbursement was accrued at March 31, 2020 and recorded on the condensed consolidated statements of operations as “other expenses.”

11. Subsequent Events

Columbia Fire Station Extension
    
On May 4, 2020, the Company extended the $4.02 million Columbia Fire Station promissory note ("Columbia Fire Station Loan") to September 3, 2020, with principal and interest payments due monthly starting on July 3, 2020 in the amount of $26 thousand. The loan continues to bear interest at 4.00%.

Tuckernuck Extension

The Company entered into a non-binding term sheet (the "Term Sheet") to extend the $5.29 million Tuckernuck promissory note ("Tuckernuck Loan") to August 1, 2020. The Term Sheet is not a binding commitment and will be superseded by a formal contract amendment, subject to customary closing conditions.

Paycheck Protection Program Loan

On April 27, 2020, the Company received loan proceeds of $552 thousand (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
 
The Loan, which was in the form of a promissory note, dated April 24, 2020 (the “Promissory Note”), between the Company and KeyBank as the lender, matures on April 24, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing seven months from the note date. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, mortgage interest, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the Loan in whole or in part.

COVID-19

The Company is closely monitoring the impact of COVID-19 on all aspects of its business and geographies, including how it will impact its tenants and business partners. While the Company did not incur significant disruptions during the three months ended March 31, 2020 from COVID-19, it is unable to predict the impact that COVID-19 will have on its financial condition, results of operations and cash flows due to numerous uncertainties.  

In April, the Company received certain rent relief requests, most often in the form of rent deferral requests, as a result of COVID-19. The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements.

26

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



Additionally, as a result of COVID-19 the Company has been granted forbearance on 8 loans resulting in deferral of approximately $928 thousand in principal and interest payments. 



27


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 2019 Form 10-K for the year ended December 31, 2019. 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.

When used in this discussion and elsewhere in this Form 10-Q, the words “believes,” “should,” “estimates,” “expects,” and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and in Section 21F of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. 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.

Important factors that we think could cause our actual results to differ materially from those expressed or forecasted in the forward-looking statement are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the novel coronavirus (COVID-19), on the U.S., regional and global economies, the U.S. retail market and the broader financial markets.

New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally, uncertainty regarding the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity.

Important factors, among others, that may affect our actual results include:

negative impacts from continued spread of COVID-19, including on the U.S. or global economy or on our business, financial position or results of operations;
the level of rental revenue we achieve from our assets;
the market value of our assets and the supply of, and demand for, retail real estate in which we invest;
the state of the U.S. economy generally, or in specific geographic regions;
the impact of economic conditions on our business;
the conditions in the local markets in which we operate and our concentration in those markets, as well as changes in national economic and market conditions;
consumer spending and confidence trends;
our ability to enter into new leases or to renew leases with existing tenants at the properties we own;
our ability to anticipate changes in consumer buying practices and the space needs of tenants;
the competitive landscape impacting the properties we own and their tenants;
our relationships with our tenants and their financial condition and liquidity;
our ability to continue to qualify as a real estate investment trust for U.S. federal income tax (a “REIT”);
our use of debt as part of our financing strategy and our ability to make payments or to comply with our loan covenants;
the level of our operating expenses;
changes in interest rates that could impact the market price of our common stock and the cost of our borrowings; and
legislative and regulatory changes (including changes to laws governing the taxation of REITs).



28


We caution that the foregoing list of factors is not all-inclusive. Moreover, we operate in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of all such factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All subsequent written and oral forward-looking statements concerning us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We caution not to place undue reliance upon any forward-looking statements, which speak only as of the date made. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

Company Overview

As of March 31, 2020, the Trust, through the Operating Partnership, owned and operated sixty retail shopping centers, one office building and six undeveloped properties in Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Oklahoma, Tennessee, Kentucky, New Jersey, Pennsylvania and West Virginia. Accordingly, the use of the word “Company” refers to the Trust and its consolidated subsidiaries, except where the context otherwise requires.

Recent Trends and Activities

There have been several significant events in 2020 that have impacted our company. These events are summarized below.

Impact of COVID-19

The following discussion is intended to provide stockholders with certain information regarding the impacts of the COVID-19 pandemic on the Company’s business and management’s efforts to respond. Unless otherwise specified, the statistical and other information regarding the Company’s portfolio and tenants are estimates based on information available to the Company. As a result of the rapid development, fluidity and uncertainty surrounding this situation, the Company expects that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on the Company’s business, operations, cash flows and financial condition for the second quarter of 2020 and future periods.

The United States of America has been subject to significant economic disruption caused by the onset of COVID-19. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders. These containment measures, which generally do not apply to businesses designated as “essential,” are affecting the operations of different categories of the Company’s base to varying degrees with, for example, grocery stores and pharmacies generally permitted to remain open and operational, restaurants generally limited to take-out and delivery services only, and non-essential businesses generally forced to close. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past.

As of March 31, 2020 our portfolio was approximately 89.2% leased. The properties are geographically located in the Southeast, Mid-Atlantic and Northeast, which markets represented approximately 61%, 35% and 4%, respectively, of the total annualized base rent of the properties in our portfolio as of March 31, 2020. Our operating portfolio contains retail shopping centers with a particular emphasis on grocery-anchored retail centers; grocers represent approximately 27% of total annualized base rent as of March 31, 2020. We generally lease our properties to national and regional retailers.

The Company’s portfolio and tenants have been impacted as follows:

The Company’s sixty retail shopping centers are open and operating in compliance with federal, state and local COVID-19 guidelines and mandates. All of the Company’s shopping centers feature necessity-based tenants, with forty-five of the sixty properties anchored by grocery and/or drug stores.

Approximately 86% of the Company’s tenants are open and operating.


29


The Company has received payment of approximately 72% of contractual base rent and tenant reimbursement billed for the month of April.

Of those with April rent in arrears, 38% are considered to be national retailers.

The Company has taken a number of proactive measures to maintain the strength of its business and manage the impact of COVID-19 on the Company’s operations and liquidity, including the following:

Along with the Company’s tenants and the communities they and the Company together serve, the health and safety of the Company’s employees and their families is a top priority. The Company has adapted its operations to protect employees, including by implementing a work from home policy, and the Company’s IT systems have enabled its team to work seamlessly.

The Company is in constant communication with its tenants and is assisting tenants in identifying local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief, and Economic Security Act of 2020.

To enhance its liquidity position and maintain financial flexibility, the Company has been granted forbearance on eight loans resulting in deferral of approximately $928 thousand in principal and interest payments.

The Company currently has approximately $6.70 million in cash and cash equivalents and an additional $16.54 million in restricted cash.

There is currently no construction underway at the Company’s properties. Further, the Company expects that the only material capital expenditures at the Company’s properties will be tenant improvements and/or other leasing costs associated with existing and new leases.

Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on the Company’s business, and in order to preserve its liquidity position, the Company has continued its suspension of any dividend distributions.

The Company derives revenues primarily from rents received from tenants under leases at the Company’s properties. The Company’s operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic impacts the businesses of the Company’s tenants, and the Company’s operations and financial condition, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and such containment measures, among others. While the extent of the outbreak and its impact on the Company, its tenants and the U.S. retail market is uncertain, a prolonged crisis could result in continued disruptions in the credit and financial markets, a continued rise in unemployment rates, decreases in consumer confidence and consumer spending levels and an overall worsening of global and U.S. economic conditions. The factors described above, as well as additional factors that the Company may not currently be aware of, could materially negatively impact the Company’s ability to collect rent and could lead to termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at the Company’s properties, difficulties in accessing capital, impairment of the Company’s long-lived assets and other impacts that could materially and adversely affect the Company’s business, results of operations, financial condition and ability to pay distributions to stockholders.

The comparability of the Company’s results of operations for the three months ended March 31, 2020 to future periods may be significantly impacted by the effects of the outbreak of the COVID-19 pandemic.

Dispositions
Disposal Date
 
Property
 
Contract Price
 
Gain (loss)
 
Net Proceeds
 
 
 
 
(in thousands, unaudited)
January 21, 2020
 
St. Matthews, St. Matthews, SC
 
$
1,775

 
$
(26
)
 
$
1,665


Assets Held for Sale

In 2020, the Company committed to a plan to sell Columbia Fire Station. The Company recorded a $600 thousand impairment charge for three months ended March 31, 2020 to reduce the carrying value of the property for the amounts that exceeded the property's fair value less estimated selling costs.     

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KeyBank Credit Agreement

On January 24, 2020, the Company and KeyBank entered into a Second Amendment to the KeyBank Credit Agreement (the "Second Amendment"), effective December 21, 2019. Pursuant to the Second Amendment, the Company began making monthly principal payments of $350 thousand on November 1, 2019. The Second Amendment, among other provisions, requires a pledge of additional collateral of $15.00 million in residual equity interests. Additionally, the Second Amendment provided that the outstanding balance on the KeyBank Credit Agreement shall be reduced to $10.00 million by January 31, 2020, $2.00 million by April 30, 2020 and fully matures on June 30, 2020. Additionally, the Company has made principal payments of $1.05 million during the three months ended March 31, 2020. Although the Company has made and continues to make the required monthly principal payments, the Company did not meet the April 30, 2020 required outstanding balance paydown. The Company remains in negotiations with KeyBank to extend the maturity date to December 31, 2020. Additionally, KeyBank has agreed to allow the Company to retain the $1.26 million in proceeds received from the Folly Road refinance during negotiations. As of May 12, 2020, the balance on the KeyBank Credit Agreement is $8.60 million.

The following collateralized portions of the KeyBank Credit Agreement had principal paydowns associated with each property’s refinancing as noted below:

$1.78 million paydown from St. Matthews sale proceeds on January 21, 2020; and
$5.75 million paydown from Shoppes at Myrtle Park refinancing proceeds on January 23, 2020.



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New Leases, Leasing Renewals and Expirations

The following table presents selected lease activity statistics for our properties.
 
Three Months Ended March 31,
 
2020
 
2019
Renewals(1):
 
 
 
Leases renewed with rate increase (sq feet)
137,599

 
90,858

Leases renewed with rate decrease (sq feet)
26,980

 
27,656

Leases renewed with no rate change (sq feet)
20,578

 
2,400

Total leases renewed (sq feet)
185,157

 
120,914

 
 
 
 
Leases renewed with rate increase (count)
30

 
19

Leases renewed with rate decrease (count)
5

 
7

Leases renewed with no rate change (count)
6

 
2

Total leases renewed (count)
41

 
28

 
 
 
 
Option exercised (count)
5

 
3

 
 
 
 
Weighted average on rate increases (per sq foot)
$
1.70

 
$
0.71

Weighted average on rate decreases (per sq foot)
$
(2.20
)
 
$
(2.11
)
Weighted average rate on all renewals (per sq foot)
$
0.94

 
$
0.05

 
 
 
 
Weighted average change over prior rates
8.60
%
 
0.63
%
 
 
 
 
New Leases(1) (2):
 
 
 
New leases (sq feet)
27,622

 
31,200

New leases (count)
14

 
8

Weighted average rate (per sq foot)
$
13.89

 
$
12.77

 
 
 
 
Gross Leasable Area ("GLA") expiring during the next 9 months, including month-to-month leases
9.33
%
 
5.75
%
(1)
Lease data presented is based on average rate per square foot over the renewed or new lease term.
(2)
The Company does not include ground leases entered into for the purposes of new lease sq feet and weighted average rate (per sq foot) on new leases.


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Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

Results of Operations

The following table presents a comparison of the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively.
 
Three Months Ended March 31,
 
Three Months Ended Changes
 
2020
 
2019
 
Change
 
% Change
PROPERTY DATA:
 
 
 
 
 
 
 
Number of properties owned and leased at period end (1)
60

 
62

 
(2
)
 
(3.23
)%
Aggregate gross leasable area at period end (1)
5,564,882

 
5,675,581

 
(110,699
)
 
(1.95
)%
Ending leased rate at period end (1) (2)
89.2
%
 
89.1
%
 
0.1
%
 
0.11
 %
FINANCIAL DATA:
 
 
 
 
 
 
 
Rental revenues
$
15,355

 
$
15,770

 
$
(415
)
 
(2.63
)%
Other revenues
219

 
225

 
(6
)
 
(2.67
)%
Total Revenue
15,574

 
15,995

 
(421
)
 
(2.63
)%
OPERATING EXPENSES:
 
 
 
 
 
 
 
Property operations
4,723

 
4,726

 
(3
)
 
(0.06
)%
Non-REIT management and leasing services

 
23

 
(23
)
 
(100.00
)%
Depreciation and amortization
4,799

 
5,816

 
(1,017
)
 
(17.49
)%
Impairment of assets held for sale
600

 

 
600

 
100.00
 %
Corporate general & administrative
1,872

 
1,814

 
58

 
3.20
 %
Total Operating Expenses
11,994

 
12,379

 
(385
)
 
(3.11
)%
(Loss) gain on disposal of properties
(26
)
 
1,839

 
(1,865
)
 
(101.41
)%
Operating Income
3,554

 
5,455

 
(1,901