Description

Wheeler

This is a small illiquid opportunity mostly meant for PAs (unless you can source size or you want to play in another part of the capital structure). As it is small and simple, so shall be the writeup. 

Equity Market cap ~17mm; preferred face value  ~150mm, Total debt: ~350mm (of which ~315mm is property level debt)

WHLRLs were a subordinated bond issued as part of a rights offering that was mostly purchased by Joe Stillwill and other shareholders through an over subscription backstop of a rights offering too all shareholders. The issue size for the tranche specifically here is $33mm (again, it isn’t for funds).

Wheeler is a southeastern focused grocery anchored shopping REIT with a complicated capital structure that has created all sorts of interesting possible permutations. It seems that looking at market pricing for all of the securities that value of the assets should be substantially lower than the TEV; we believe value is in excess of the TEV however it how that value will be divvied up is very much an exercise in game theory.

We aren't smart enough to know how this game ends but we think the WHLRLs are interesting with great upside/downside features. It is worth noting that there is currently no corporate holdco debt except for this sub note and the debt is all property level debt with limited recourse and little in the way of cross collateralization.

The current CEO is an operator with 20+ years of experience focused on repositioning the portfolio and pairing down debt/driving NOI higher.

Keeping it simple NOI on the portfolio should annualize to ~$42mm; using a blended 7.5% Cap rate would imply $560mm of value.; with the prefs trading at deep discounts and at the moment the only holdco debt being the sub bonds it seems there should be real value that makes its way to equity and the prefs over time.

The WHLRLs are subordinated convertible notes due in ~10 years with a 7% coupon and all sorts of odd bits and pieces such as:

1) The coupon can be paid in either the WHLRD or WHLRP at a 45% discount to the then trading price of either security; this would then imply that if that discount could be captured that the coupon is now closer to 10%+

2) The WHLRL are convertible into equity @$6.25; however if the WHLRD convert to equity (they have the option to convert to equity through a put mechanism starting in 2023); the whlrl strike price will reset at the lowest price and WHLRD converts into at a 45% discount

(The Notes are convertible, in whole or in part, at any time, at the option of the Holders thereof, into shares of Common Stock at a conversion price of $6.25 per share of Common Stock (the “Conversion Price”) (4 common shares for each $25.00 of principal amount of the Notes being converted (the “Conversion Rate”)); provided, however, that if at any time after September 21, 2023 holders of Series D Preferred Stock have required the Company to redeem (payable in cash or stock) in the aggregate at least 100,000 shares of Series D Preferred Stock, then the Conversion Price shall be adjusted to the lower of (i) 55% of the Conversion Price or (ii) a 45% discount to the lowest price at which any Series D Preferred Stock was converted by a Holder thereof into the Company’s Common Stock.)

3)Change of control: The stock will convert into common stock @ a 45% Discount to the vwap of the trading day prior to the change of control

The notes are due in 2031 and are well covered (at current NOI would need to see north of a 11%+ cap rate before impairment) and as the members of the board own north of 50% of the issue; and that it is worth more than the market cap of the company, it seems likely they will look to make sure these notes are never in harms way. 

The first interest payment was paid in the WHLRDs; it seems logical that this note will pay somewhere between a 5%-8%+ yield however the optionality is interesting. 

Currently the D's trade at a substantial discount to their face value and it seems as though they should be entitled to a value well above their current trading price. The Company has bought back the D's through various tenders and there are two paths: Either they strike a deal with the "Ds" and some of the discount could be captured leading to a significant increase in price appreciation for the equity giving value to the 6.25 strike on the converts (a 9+ year option!). If the prefs are taken out at 50 cents on the dollar it would rocket the equity close to strike price on the convertible; if no one strikes a deal and the preferreds convert to equity then in theory the subs will move to being a 7% payor with a strike price that is immediately in the money. 

It is a very interesting/odd security which is hard to acquire and the game theory here is quite difficult but over the next 9 years one of these three things is bound to happen for this tiny undersized REIT:

1) A deal with the prefs is struck to convert to equity at a discount to par

2) The prefs convert and the strike resets

3) The company gets sold.

Catalyst

1) A global deal is struck with the prefs

2) The company is sold

3) The D's convert