Description

WHLRD

I wrote up WHLRL about 2 years ago and that worked out well. I am going to revisit the capital structure again but in a different spot: I think the WHLRDs are a great set up here. They were last written up by  InfrmtnOverflow in April 2022 and as there is quite a bit going on and the message board seemed stale I felt this was worth a revisit as we are in the “thick of things”.

WHLR is a financial basket case with a multitude of hedge funds playing games and screwing with the capital structure in a real life example of that great GIF of Michael Jackson eating popcorn… (it also happens to be a shopping center REIT for what its worth).

I say the part in parentheses in jest, but frankly…not really. The situation has become so confusing/messy and “unmodelable” that this comes down to more game theory and strategy than it does valuation. I would suggest reading any of the earlier write ups on WHLRL or WHLRD to learn a bit more about the WHLR, business,  set up and situation, but the business is doing just fine.

The most important thing to understand is the WHLR stock is down 97% for the year.  It isn’t rate or business driven, but just crazy dilution that is more usual for the no revenue companies trading on TAM than it is for the REIT world. Share count has increased from ~1mm shares Fully diluted to well north of 20mm; with the possibility of another 5-10x+ increase from here as the WHLRDs convert to equity. It is a death spiral convert, everyone rushing to the exits… a total madhouse, cats and dogs living together.

The Company needs permission to do another reverse split according to exchange rules; they are telling people they can’t convert them into registered shares (they just don’t have enough authorized! Need a vote!) and I think all of this could lead to a global solution as now everyone in all parts of the capital structure feel “stuck” and maybe can finally get just what they need out of the transaction, and if they won’t compromise….well eventually they will be forced to at some point.

So lets go through the setup: The WHLRDs are trading at $13. In 2021 they were offered a 5 year 6% bond with some early takeout provisions (at slight premiums) and ½ a share of stock;

 I anticipate some people will continue to try and swap them out for equity; for those holding on, I think at some point the tender that was offered in 2021 re-appears (I have no special knowledge but later you will see my thought process). The old offer was for a 5 year bond @ 6% for $16 (before treasuries moved up in yield); plus ½ share of stock which would have put the value @ $17; with many thinking the stock would have doubled or higher post exchange, so maybe close to $18-$19 pro-forma for the tender.

The Tender was SOUNDLY rejected by preferreds; who felt that they could wait until September 2023; and convert @ $30+ of par + accrued into equity. Unfortunately, as mentioned earlier, everyone rushed to get out; borrow has gone bananas, stock prices have collapsed and I will bet most shareholders who converted have done worse than the ~$17-$19 they would have received before (between borrow cost and getting their common off)…and only 1/3 of the prefs have been retired!

The WHLRLs are mostly owned by Joe Stilwell and his affiliates; they have a feature I wrote up earlier where they can pay their preferred dividends in WHLRD at their option. I anticipate the board will continue to make payments on the WHLRLs in WHLRD shares at a substantial discount (see my earlier write up) which will continue to lead to an increase in the Ds outstanding; however these will be controlled by Stilwell.

This means every 6 months; Stilwell (who controls the boards) gets a substantial slug of WHLRDs. I think at some point in 2024 it is very realistic that he controls nearly 2/3 of the Ds and can vote through any tender he wants. Currently he owns 13% of the Ds; he owns 1mm shares of the WHLRLs. Assuming each coupon going forward is paid in WHLRDs; he would receive nearly another 250k shares every year of additional D shares. As of the end of November there are ~2.9mm shares of  Ds outstanding;  so continuing the math and assuming NO FURTHER redemptions from any shareholders; by the end of life on  the Ls he will be at the 2/3 threshold to jam through any vote for the Ds that he wants to; however at the pace the Ds are converting I think the writing will be on the wall in 2024; and I think everyone will come to the table to figure out an exchange as the Ds most likely will continue to move towards his control @ 66% as the candle burns on both ends.

The WHLRLs conversion price have been effectively set at a significantly lower strike price; the WHLRDs now know they are “trapped” and the writing on the wall is inevitable; so rationally it makes sense for everyone to try and find a solution at this point; the sooner this is solved the higher the IRR/returns for everyone will be.

I think you buy the WHLRDs at $13; I bet a global recapitalization shows up that is almost identical to what was offered before. Why the same or better? I can’t see the board members selling their Ds and weakening its hand, and I don’t see them trying to jam themselves with a painful exchange that would reduce the value of their holdings so this offering from before they can still say is “fair”) and you end up probably with something that is worth 30%-40% upside in 2024 for a catalyst driven position with little permanent impairment risk. Either the D’s get on board with an exchange quickly, convert some and an exchange happens quickly once Stilwell owns 2/3 or hold out and are forced to convert at some point anyway when Stilwell owns 2/3… all roads lead to an eventual exchange for holdouts so hopefully all sides act rationally.

It seems pretty clear to me this is going to happen and the sooner everyone accepts that the better everyone will be.

Catalyst

Tender Offer