Wheeler Real Estate Investment Trust – D Tender Update (NASDAQ:WHLR)

In July, Kingdom Capital published about the merger between Wheeler Real Estate Investment Trust (NASDAQ:WHLR) and the stub from Cedar (CDR). We noted that the properties appear undervalued but given the complicated capital structure, there are numerous risks threatening the realization of shareholder value.

WHLRZ Offer

Wheeler recently launched an attempt to consolidate the securities, offering to exchange all outstanding D Preferred shares (NASDAQ:WHLRD) for new “WHLRZ” 6% notes, with a rate of $16 of note per share. The WHLRD notes traded down since this offer, signaling lack of investor enthusiasm for the deal. At the current $11 WHLRD price, investors are suggesting the new notes would trade around $17 per $25 face value, an 8.8% coupon yield and >10% YTM.

The proposed WHLRZ notes would rank pari-passu with the outstanding 7% WHLRL notes, but without the convertible option retained by those securities (WHLRL face value converts to stock at $6.25/share). Given investors can get over 4% on treasury bonds, it’s not surprising to see expectations that the proposed subordinated 6% note would not trade at face value.

The “twist” is found in the structure of the tender. Currently, WHLRD holders have the right to force conversion of their preferred stock starting in September 2023 for the face value and accrued dividend value, payable in cash or common shares of WHLR. Given this amount is well-north of $100m, WHLR would likely be forced to massively dilute common holders. However, if 2/3rds of WHLRD holders accept the new WHLRZ tender offer, they will be simultaneously voting to remove the existing conversion rights and other provisions from the WHLRD notes:

Concurrently with and as an integral part of the Exchange Offer, we are also soliciting consents (the “Consent Solicitation”) from the Series D Preferred Holders, upon the terms and conditions set forth in this Prospectus/Consent Solicitation, to certain amendments to our charter that will modify the terms of the Series D Preferred Stock (the “Proposed Amendments”) in order to, among other things:

Eliminate provisions relating to cumulative dividend rights;

Eliminate provisions relating to the mandatory redemption of Series D Preferred Stock in the event of the Company’s failure to maintain an asset coverage of at least 200%;

Eliminate the right of the Series D Preferred Holders to cause the Company to redeem any or all of the Series D Preferred Stock;

Eliminate the increases in the dividend rate applicable to the Series D Preferred Stock that would commence on September 21, 2023;

Eliminate the right of the Series D Preferred Holders to elect two directors to the Board of Directors of the Company (the “Board of Directors”) if dividends on the Series D Preferred Stock are in arrears for six or more consecutive quarterly periods;

Provide for the mandatory conversion of Series D Preferred Stock if the 20-trading day volume-weighted average closing price of Common Stock exceeds $10.00 per share;

Eliminate the special redemption rights of the Company and Series D Preferred Holders upon a change of control of the Company or delisting of the Common Stock from a national securities exchange in the United States; and

Provide that the Company shall not be restricted from redeeming, purchasing or otherwise acquiring any shares of the Series D Preferred Stock.

Given this, holders must accept that declining to tender their shares risks being left with a much less powerful security. Given the shares have traded down, I would expect a rejection of the tender in hopes of a better offer.

Cap Structure Update

With the new wrinkle, I’ve updated the cap table from my last article to adjust for Q3 earnings release and illustrate the current tender offer being 100% subscribed:

Cap Structure (Q3-22, adjusted for WHLRZ tender)	# Outstanding (k)	Market Value/Share	Face Value (M)	Trading Value (M)
WHLR Debt/Mortgages	—–	—–	$451	$451
WHLR Convert (NASDAQ:WHLRL)	1,320	$31.00	$33	$41
New WHLRZ	2,017	$17.00	$50	$34
WHLR B’s (NASDAQ:WHLRP)	2,301	$2.80	$59	$12
WHLR A’s (Don’t trade, assume par)	——	——-	$1	$1
CDR B’s (CDR.PRB)	5,000	$10.75	$125	$54
CDR C’s (CDR.PRC)	1,450	$9.50	$35	$14
WHLR Warrants (Assume carrying value)	1,558	——	$7	$7
WHLR Common	9,938	$1.80	$18	$18
Restricted & Non-Restricted Cash	——	——	$54	$54
Total			$725	$579
Pro-Forma NOI Less Overhead			$60	$60
Cap Rate			8.3%	10.4%

Click to enlarge

(Source: WHLR filings and Author Calculations)

Were this tender to go through, the result seems very positive for the common shares, as it removes the 2023 conversion overhang and opens the door for more note exchanges to consolidate their obligations. The ~$150m gap in the face value of securities should then primarily accrue to the common shares (and by virtue of their call option, the WHLRL notes), as the capital structure consolidates.

How Am I Trading It?

In my last writeup, I suggested the WHLRL notes as the way to play this investment. I owned them and received some WHLRP as a dividend over the summer, but after this offer I decided to divest the WHLRL. If the tender for the WHLRD is successful, the option to convert WHLRL at a discount to the lowest price attained by D’s is no longer relevant, removing some of the optionality. Without the WHLRD overhang and a $6.25 call option, the WHLRL could still justify a decent premium, but in that scenario I believe the common shares have better upside.

For now, I’m holding the WHLRP dividends and have added a small position in the WHLRD and common shares for what I expect to be a sweetened offer to get the exchange approved. There are plenty of other appealing ways to get involved, like the CDR preferred staying current after the deal closed, but I remain cautious with other pieces of the capital stack.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.