Description

HoneyBadger outlines the investment thesis on WHLR Ls in his post about this security. WHLR also caught my attention as some of the properties are very close to me, I drive by them regularly and see a good amount of activity. While WHLR Ls are arguably the better security, WHLR Ds have a bit more volume and are almost as interesting. There is about $75MM outstanding in WHLR Ds and should also benefit from significant tailwinds over the next several months.

Wheeler itself is a reasonably healthy REIT with a capital structure that is a bit too complex for a $22MM market cap company. Preferreds are now at $176MM and net debt stands at $350MM gross minus $22MM cash. As HoneyBadger outlined, NOI stands at $42MM so a 7.5% cap rate justifies a $560MM EV, a 10% cap rate a $420MM EV.

There is a potential equity overhang from the impending conversion of the WHLR Ds and WHLR Ls. As WHLR Ds accrue the cumulative interest if they aren’t paid, they are owed $26MM in accrued interest in addition to the unpaid principal balance. As such total preferred shares outstanding and convertible are really $176MM vs a $20MM equity market cap. At a 7.5% cap rate equity ends up being in the money, at a 10% cap rate it clearly isn’t and even the preferred shares would be impaired. In addition, the company is engaged in multiple litigations with other its preferred shareholders.

This has kept us away from WHLR prefs until recently. What changed? WHLR was gifted a portfolio of mall assets when Cedar Realty Trust (CDR) was sold to DRA Advisors and KPR Centers for $840 million. In order to close the transaction, CDR took the assets that DRA and KPR did not want, and effectively gifted them to WHLR. Why gifted? The transaction between WHLR and CDR is described as a “All-cash merger transaction that values the assets at $291.3 million”. In truth WHLR is getting the CDR entity, including all remaining assets and preferred shares. WHLR is receiving $161 million of preferred shares and borrowing another $130 million from Keybank to pay CDR shareholders $130 million in cash. In addition, WHLR has the ability to not pay any dividends on the CDR preferred shares which could save them up to $10.8 million in annual dividends. At this point we don’t know what the NOI contribution from the CDR assets. For simplicity, we can assume that the CDR asset value is equal to the value of the CDR preferreds plus the Keybank facility (implying Keybank was willing to lend on them at a 45% LTV). With these conservative assumptions, I come up with the following for combined CDR + WHLR EV:

$420 million WHLR EV + $160 million CDR EV - $330 million WHLR Net Debt - $130 million CDR Debt = $120 million MV of Equity - $30 million WHLR L - $100 million (WHLR D Preferreds) = $-10 million WHLR Equity value. I am not counting the $161 million CDR preferreds or the $50 million WHLR 9s (which have already been turned off) towards the enterprise value of the combined company as they have essentially become “free equity”. The company can leave them turned off for a long time, essentially creating a free option on the value of the CDR properties. Under this conserative calculation, the WHLR preferreds have a recovery value closer to par.

Previously, WHLR tendered for the WHLR preferreds at $15.50. Currently WHLR Ds are trading around $14-15. Although WHLR Ds have a par value of $25 and another $9 in cumulative accrued interest, I don’t expect the full $34 to be realizable. WHLR Ds are putable by holders on September 2023 and WHLR Ls will convert off the back of the D conversion and can be converted into equity or cash at the choice of the company. I expect WHLR to attempt to tender for the WHLR Ds at a discount again before September 2023. It is possible that holders will accept a cash offer in the low 20s, in which case WHLR Ds would have about 40-50% upside over 5 months from here. If the equity holders’ offer fails, WHLR D and WHLR L holders will elect to convert. As WHLR does have enough money for a cash conversion, WHLR Ds and WHLR Ls would become the majority owners of the company. In this case WHLR Ds would receive shares in the underlying company for up to $34 per preferred (assuming a $2 conversion price, 17 shares of equity per preferred). However, I would also expect WHLRs stock price to fall meaningfully (maybe -30-40%) if a full conversion were to take place. This would still give holders upside to $21-24.

I expect WHLR Ds to have meaningful upside from $14-15 under both a tender and conversion scenario. 

Risks include a protracted battle between equity and preferred holders that eats up what little enterprise value there is in legal fees. It really is in both classes interest to come to an agreement to provide a way forward for the company here. Other risks include a deep recession, the priming of the preferreds through the issuance of a new instruments higher up in the capital structure and the cancellation of the sale of CDR’s properties.

Catalyst

Conversion of or tender for Ls and Ds