Wheeler Real Estate Investment Trust, Inc. 10-K

Item 7. 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 audited consolidated financial statements and the notes thereto included in this Form 10-K. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the audited consolidated financial statements included in this Form 10-K. Company Overview We are a Maryland corporation focused on owning, leasing and operating income producing grocery-anchored centers, neighborhood centers, community centers and free-standing retail properties. We have targeted properties located within developed areas, commonly referred to as in-fill, that are surrounded by communities that have strong demographics and dynamic, diversified economies that will continue to generate jobs and future demand for commercial real estate. Our primary target markets include the Mid-Atlantic, Southeast and Northeast. Our portfolio is comprised of seventy-five retail shopping centers and four undeveloped land parcels. Twenty-one of these properties are located in South Carolina, twelve in Georgia, ten in Virginia, eight in Pennsylvania, six in North Carolina, four in Massachusetts, four in New Jersey, three in Florida, three in Connecticut, two in Kentucky, two in Tennessee, one in Alabama, one in Maryland, one in West Virginia, and one in Oklahoma. The Company’s portfolio had total gross rentable space of approximately 8,173,000 square feet and a leased level of approximately 92.9% at December 31, 2022. Impact of COVID-19 The spread of COVID-19 had a significant impact on the global economy, the U.S. economy, the economies of the local markets in which the Company’s properties are located, and the broader financial markets. Local, state and federal authorities took preventative measures to alleviate the public health crisis primarily in 2020 and those preventative measures affected the operations of the Company’s tenant base to varying degrees depending on the category and location of the tenant. While substantially all of the limitations and restrictions imposed during the onset of the pandemic have been lifted and/or eased and people have largely resumed pre-pandemic activities, economic conditions continue to negatively impact the financial health of certain retail stores. The COVID-19 pandemic or variants or future outbreaks of other highly infectious diseases could impact the Company’s ability to collect rent and could lead to increases in rent relief requests from tenants, 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. Recent Trends and Activities There have been several significant events in 2022 that have impacted our Company. These events are summarized below. Acquisition of Cedar Realty Trust On August 22, 2022 (the “Cedar Closing Date”), the Company consummated transactions contemplated by that certain Agreement and Plan of Merger, dated as of March 2, 2022 (as amended, the “Merger Agreement”), by and among the 11 Company, WHLR Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub I”), WHLR OP Merger Sub LLC, a wholly owned subsidiary of Merger Sub I (“Merger Sub II”), Cedar , and Cedar Realty Trust Partnership, L.P., the operating partnership of Cedar (“Cedar OP”). Pursuant to the Merger Agreement, on the Cedar Closing Date, Merger Sub II merged with and into Cedar OP, with Cedar OP being the surviving limited partnership resulting from such merger, and immediately following such merger, Merger Sub I merged with and into Cedar, with Cedar being the surviving company resulting from such merger (together, the “Cedar Acquisition”). Each outstanding share of common stock of Cedar and outstanding common unit of Cedar OP held by persons other than Cedar immediately prior to the merger were cancelled and converted into the right to receive a cash payment of $9.48 per share or unit. As a result of the Cedar Acquisition, the Company acquired all of the outstanding shares of Cedar’s common stock, which ceased to be publicly traded on the NYSE. Cedar’s 7.25% Series B Preferred Stock and 6.50% Series C Preferred Stock remain outstanding and continue to trade on the NYSE. As a result, Cedar became a subsidiary of the REIT. In connection with the consummation of the Cedar Acquisition , the Company entered into a Guaranty of the obligations of Cedar OP under a Loan Agreement (the “ KeyBank-Cedar Loan Agreement ”) by and between the Borrower, KeyBanc Capital Markets, as Lead Arranger and Bookrunner, and KeyBank National Association, as administrative agent and as lender, and under the other loan documents executed in connection with the KeyBank-Cedar Loan Agreement. By virtue of the Cedar Acquisition, the Company acquired 19 shopping centers (the majority of which are grocery-anchored), consisting of approximately 2.9 million square feet of gross leasable area and increased the Company’s presence in the Northeast. The consolidated financial statements included in this Form 10-K (the “Form 10-K”) include Cedar starting from the date of acquisition. We have determined that this acquisition is not a variable interest entity, as defined under the consolidation topic of the Financial Accounting Standards Board (the "FASB"), Accounting Standards Codification, or ASC, and we evaluated such entity under the voting model and concluded we should consolidate the entity. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting rights and that other equity holders do not have substantive participating rights. KeyBank-Cedar Loan Agreement On August 22, 2022, Cedar entered into the KeyBank-Cedar Loan Agreement for $130.00 million with interest-only payments due monthly through maturity, August 22, 2023. The interest rate on this term loan consisted of the Secured Overnight Financing Rate plus 0.10% plus an applicable margin of 2.5% through February 2023, at which time increases to 4.0% and was collateralized by 19 properties. The obligations under the KeyBank-Cedar Loan Agreement were satisfied in full with the proceeds of the loans under the Guggenheim-Cedar Loan Agreement (as defined below) entered into on October 28, 2022 and the Patuxent Crossing/Coliseum Marketplace Loan Agreement (as defined below) entered into on December 21, 2022. Exchange Offer and Consent Solicitation O n November 22, 2022, the Company commenced an exchange offer for its outstanding shares of Series D Preferred (the “Exchange Offer”). As subsequently amended, the terms of the Exchange Offer provided for the exchange of up to 2,112,103 outstanding shares of Series D Preferred, representing 67% of the outstanding shares of Series D Preferred, for (i) 6.00% Subordinated Convertible Notes due 2028, and (ii) Common Stock, in each case to have been newly issued by the Company, and related consents (the “Consent Solicitation”) from the holders of the Series D Preferred (the “Series D Preferred Holders”) to certain amendments to the Company’s charter that would have modified the terms of the Series D Preferred (the “Proposed Amendments”). The consummation of the Exchange Offer and Consent Solicitation was subject to, and was conditional upon, the satisfaction of certain conditions, including the condition that the holders of at least 66 2/3% of the outstanding shares of Series D Preferred (i) validly tender their Series D Preferred into the Exchange Offer, and do not validly withdraw such Series D Preferred, on or prior to the expiration date of the Exchange Offer, and (ii) consent to the Proposed Amendments. 12 As of the expiration of the Exchange Offer on January 20, 2023, 864,391 shares of Series D Preferred (representing 26.8 % of the total outstanding Series D Preferred) had been validly tendered (and not validly withdrawn) in the Exchange Offer. A ccordingly, the condition that the holders of at least 66 2/3% of the outstanding shares of Series D Preferred (i) validly tender their Series D Preferred into the Exchange Offer, and not validly withdraw such Series D Preferred, and (ii) consent to the Proposed Amendments, had not been satisfied, and the Exchange Offer expired on January 20, 2023. As a result, the Series D Preferred remains outstanding with no change to its terms. Assets Held for Sale and Dispositions At December 31, 2022, there were no assets held for sale. At December 31, 2021, assets held for sale included Walnut Hill Plaza, which was sold in 2022. Impairment expenses on assets held for sale are a result of reducing the carrying value 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. Impairment expense was $760 thousand for the year ending December 31, 2022, resulting from reducing the carrying value of Harbor Pointe Land Parcel. Impairment expense was $2.30 million for the year ending December 31, 2021, resulting from $100 thousand on Walnut Hill Plaza and $2.20 million on Columbia Fire Station reducing the carrying value for the amounts that exceeded the property's fair value less estimated selling costs. The following properties were sold during the year ended December 31, 2022 (in thousands): Disposal Date Property Contract Price Gain (loss) Net Proceeds December 9, 2022 Butler Square $ 9,250 $ 2,619 $ 8,723 January 11, 2022 Walnut Hill Plaza 1,986 (15) 1,786 In conjunction with the Walnut Hill Plaza sale, the Company made a $1.79 million principal paydown on the Walnut Hill Plaza loan and on February 17, 2022 the Company paid the remaining loan balance of $1.34 million in full. On December 9, 2022, the Company made a $5.64 million principal payment on the Butler Square loan in conjunction with the sale of the Butler Square property. Guggenheim Loan Agreement On June 17, 2022, the Company entered into a loan agreement (the “Guggenheim Loan Agreement”) with Guggenheim Real Estate, LLC, for $75.00 million at a fixed rate of 4.25% with interest-only payments due monthly. Commencing on August 10, 2027, until the maturity date of July 10, 2032, monthly principal and interest payments will be made based on a 30-year amortization schedule calculated based on the principal amount as of that time. The Guggenheim Loan Agreement is collateralized by twenty-two properties and loan proceeds were used to refinance eleven loans including paying $1.46 million in defeasance. JANAF Loan Agreement On July 6, 2022, the Company entered into a loan agreement (the “JANAF Loan Agreement”) with CITI Real Estate Funding Inc. for $60.00 million at a fixed interest rate of 5.31% with interest-only payments due monthly through maturity, July 6, 2032. The JANAF Loan Agreement proceeds were used to refinance three loans including paying $1.16 million in defeasance. Guggenheim-Cedar Loan Agreement On October 28, 2022, Cedar entered into a loan agreement (the “Guggenheim-Cedar Loan Agreement”) with Guggenheim Real Estate, LLC, for $110.00 million at a fixed rate of 5.25% with interest-only payments due monthly through November 2027. Wheeler REIT, L.P. provided a guarantee in connection with such loan. Commencing on December 10, 2027, until the maturity date of November 10, 2032, monthly principal and interest payments will be made based on a 30-year amortization schedule calculated based on the principal amount as of that time. The Guggenheim-Cedar Loan Agreement 13 proceeds were used to refinance a portion of Cedar’s property portfolio that were previously collateralized by the KeyBank-Cedar Loan Agreement. Patuxent Crossing/Coliseum Marketplace Loan Agreement On December 21, 2022, Cedar entered into a loan agreement (the "Patuxent Crossing/Coliseum Marketplace Loan Agreement”) with CITI Real Estate Funding, Inc. for $25.00 million at a fixed rate of 6.35% with interest-only payments due monthly through maturity, January 6, 2033. The Patuxent Crossing/Coliseum Marketplace Loan Agreement proceeds were used to satisfy the remaining obligations of the KeyBank-Cedar Loan Agreement and, accordingly, the remaining collateral was released. Interest Payments on Convertible Notes The Company’s 7.00% subordinated convertible notes due 2031 (the “Convertible Notes”) bear interest at a rate of 7.00% per annum. Interest on the Convertible Notes is payable semi-annually in arrears on June 30 and December 31 of each year, commencing on December 31, 2021. Interest payments on the Convertible Notes were made as follows (in thousands, except for share values): For the years ended December 31, Series B Preferred number of shares Series D Preferred number of shares Convertible Note Interest at 7% Fair value adjustment Paid-in-kind Interest Expense 2021 — 113,709 $ 885 $ 725 $ 1,610 2022 1,511,541 — $ 2,310 $ 1,429 $ 3,739 Preferred Dividends At December 31, 2022, the Company had accumulated undeclared dividends of $34.63 million to holders of shares of our Series D Preferred of which $8.47 million is attributable to the year ended December 31, 2022. 14 New Leases, Leasing Renewals and Expirations The following table presents selected lease activity statistics for our properties. Years Ended December 31, 2022 (3) 2021 Renewals (1) : Leases renewed with rate increase (sq feet) 676,814 402,875 Leases renewed with rate decrease (sq feet) 62,771 67,743 Leases renewed with no rate change (sq feet) 284,461 148,542 Total leases renewed (sq feet) 1,024,046 619,160 Leases renewed with rate increase (count) 104 104 Leases renewed with rate decrease (count) 11 11 Leases renewed with no rate change (count) 28 23 Total leases renewed (count) 143 138 Option exercised (count) 18 22 Weighted average on rate increases (per sq foot) $ 1.29 $ 0.85 Weighted average on rate decreases (per sq foot) $ (1.17) $ (2.18) Weighted average rate (per sq foot) $ 0.78 $ 0.32 Weighted average change over prior rates 8.29 % 3.05 % New Leases (1) (2) : New leases (sq feet) 374,149 436,170 New leases (count) 79 76 Weighted average rate (per sq foot) $ 11.27 $ 8.30 Gross Leasable Area ("GLA") expiring during the next 12 months, including month-to-month leases 6.77 % 6.16 % (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. (3) Includes lease data for the Cedar Portfolio for the six months ended December 31, 2022. Critical Accounting Estimates The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 15 The critical accounting estimates and policies summarized in this section are discussed in further detail in the notes to the consolidated financial statements appearing elsewhere in this Form 10-K. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. The following accounting estimates are considered critical because they are particularly dependent on management’s judgment about matters that have a significant level of uncertainty at the time the accounting estimates are made, and changes to those estimates could have a material impact on our financial condition or operating results. Revenue Recognition Principal components of our total revenues include base and percentage rents and tenant reimbursements. The Company combines lease and nonlease components in lease contracts, which includes combining base rent and tenant reimbursement revenue. We accrue minimum (base) rent 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. Certain lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent) which we recognize when the tenants achieve the specified targets as defined in their lease agreements. Although we periodically review the valuation of the asset/liability resulting from the straight-line accounting treatment of our leases in light of any changes in lease terms, financial condition or other factors concerning our tenants, they are subject to uncertainty. These assessments are inherently sensitive as they are based on the judgment of management and information available at the time of evaluation. Rents and Other Tenant Receivables We record a tenant receivable for amounts due from tenants such as base rents, tenant reimbursements and other charges allowed under the lease terms. We periodically review tenant receivables for collectability and determine the need for an allowance for the uncollectible portion of accrued rents and other accounts receivable based upon customer creditworthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. We consider a receivable past due once it becomes delinquent per the terms of the lease; our 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. Acquired Properties and Lease Intangibles We allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired out-of-market leases, tenant relationships, the value of in-place leases and ground. We determine 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. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Such amounts are based on estimates and forecasts which, by their nature, are highly subjective and may result in future changes in the event forecasts are not realized. Impairment of Long-Lived Assets We periodically review 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, with an evaluation performed at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. We measure 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. To the extent impairment has occurred, we charge to income the excess of carrying value of the property over its estimated fair value. We estimate fair value using unobservable data such as operating income, estimated capitalization rates or multiples, leasing prospects 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. The Company may decide to sell properties. 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 expense is recognized. The Company estimates fair value, less estimated closing costs, based on 16 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. Derivative Financial Instruments The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including stock purchase warrants and convertible notes, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statement of operations. The assumptions used in these fair value estimates 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. Liquidity and Capital Resources At December 31, 2022, our consolidated cash, cash equivalents and restricted cash totaled $55.87 million compared to consolidated cash, cash equivalents and restricted cash of $40.42 million at December 31, 2021. Cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2022 and 2021 are as follows (in thousands): Years Ended December 31, Year Over Year Change 2022 2021 $ % Operating activities $ 30,758 $ 17,041 $ 13,717 80.49 % Investing activities $ (133,512) $ 5,101 $ (138,613) (2,717.37) % Financing activities $ 118,200 $ (24,491) $ 142,691 582.63 % Operating Activities Our cash flows from operating activities were $30.76 million and $17.04 million during the year ended December 31, 2022 and 2021, representing an increase of 80.49% or $13.72 million. Net cash provided by operating activities, before net changes in operating assets and liabilities, was $19.71 million and $16.54 million for 2022 and 2021, respectively. The increase was primarily a result of an increase in non-same store net operating income ("NOI") of $5.91 million, primarily a result of the Cedar Acquisition and an increase in same store NOI of $1.23 million, partially offset by an increase in cash paid for interest expense and corporate general and administrative expenses. Investing Activities Our cash flows used in investing activities were $133.51 million during the year ended December 31, 2022, compared to cash flows from investing activities of $5.10 million during the year ended December 31, 2021, representing a decrease of (2,717.37)% or $138.61 million primarily due to costs related to the Cedar Acquisition described in Note 3 included in this Form 10-K and an increase in capital expenditures paid of $2.10 million. Financing Activities Our cash flows from financing activities were $118.20 million during the year ended December 31, 2022, compared to cash flows used in financing activities of $24.49 million for the year ended December 31, 2021, respectively, representing an increase of 582.63% or $142.69 million due to the following: • $302.35 million increase in loan proceeds a result of the KeyBank-Cedar Loan Agreement, Guggenheim-Cedar Loan Agreement, Guggenheim Loan Agreement, JANAF Loan Agreement and Patuxent Crossing/Coliseum Marketplace Loan Agreement, partially offset by the 2021 refinancing activity including the Wilmington Financing Agreement; • $8.34 million decrease as a result of 2021 preferred stock redemptions made in the Company's tender offers; partially offset by 17 • $4.87 million increase in deferred financing costs primarily related to the KeyBank-Cedar Loan Agreement, Guggenheim-Cedar Loan Agreement, Guggenheim Loan Agreement JANAF Loan Agreement and Patuxent Crossing/Coliseum Marketplace Loan Agreement, partially offset by 2021 refinancing activity including the Wilmington Financing Agreement; • $158.51 million increase in loan principal payments primarily a result of the KeyBank-Cedar Loan Agreement payoff, eleven loans paid associated with the Guggenheim Loan Agreement, the three loans paid associated with the JANAF Loan Agreement and the 2022 Walnut Hill Plaza and Butler Square payoffs, partially offset by the 2021 Powerscourt Financing Agreement payoff, the 2021 refinancing activities and the loans paid down as a result of 2021 property sales; • $1.93 million increase in prepayment penalties related to defeasance associated with the Guggenheim Loan Agreement and JANAF Loan Agreement, partially offset by the Berkley/Sangaree/Tri-County loan payoff; and • $2.69 million increase in dividend and distributions paid on noncontrolling interests. The Company continues to endeavor to manage its debt prudently with the objective of achieving a conservative capital structure and minimizing leverage within the Company. Our debt balances, excluding unamortized debt issuance costs, consisted of the following (in thousands) : December 31, 2022 2021 Fixed-rate notes (1) $ 482,447 $ 344,177 Adjustable-rate mortgages — 2,085 Total debt $ 482,447 $ 346,262 (1) Includes portion attributable to liabilities held for sale, see Note 3 included in this Form 10-K. The weighted average interest rate and term of our fixed-rate debt including liabilities held for sale are 4.99% and 7.43 years, respectively, at December 31, 2022. We have no debt maturing during the year ending December 31, 2023. While we anticipate being able to refinance all the loans at reasonable market terms upon maturity, our inability to do so may materially impact our financial position and results of operations. See Note 5 included in this Form 10-K for additional mortgage indebtedness details. Material Cash Requirements, Contractual Obligations and Commitments Our expected material cash requirements for the year ended December 31, 2022 and thereafter are comprised of (i) contractually obligated expenditures; (ii) other essential expenditures; and (iii) opportunistic expenditures. The primary liquidity needs of the Company, in addition to the funding of our ongoing operations, at December 31, 2022 are $2.34 million in principal and regularly scheduled payments due in the year ended December 31, 2023 as described in Note 5 on this Form 10-K. In addition to liquidity required to fund debt payments we may incur some level of capital expenditures during the year for our existing properties that cannot be passed on to our tenants. To meet these future liquidity needs, the Company: • had $28.49 million in cash and cash equivalents at December 31, 2022; • had $27.37 million held in lender reserves for the purpose of tenant improvements, lease commissions, real estate taxes and insurance at December 31, 2022; and • intends to use cash generated from operations during the year ended December 31, 2023. Additionally, the Company plans to undertake measures to grow its operations and increase liquidity through delivering space currently leased but not yet occupied, backfilling vacant anchor spaces, replacing tenants who are in default of their lease terms, increasing future lease revenue through tenant improvements partially funded by restricted cash, disposition of assets and refinancing properties. Our success in executing on our strategy will dictate our liquidity needs going forward. If we are unable to execute in these areas, our ability to grow may be limited without additional capital. 18 In addition, the Board of Directors suspended Series A Preferred, Series B Preferred and Series D Preferred dividend payments beginning with the fourth quarter 2018 dividend. On November 3, 2021, common stockholders of the Company approved amendments to the Company’s Charter to remove the cumulative dividend of the Series A Preferred and the Series B Preferred. The Company believes that these actions support the Company's liquidity needs and improve the Company's capital structure. Series D Preferred Stock After September 21, 2023 (the “Series D Redemption Date”), the Series D Preferred Holders will have the right to cause the Company to redeem their Series D Preferred at a price of $25.00 per share plus the amount of all accrued and unpaid dividends. This redemption price is payable by the Company, at the Company’s election, in cash or shares of our common stock, $0.01 par value per share (“Common Stock”), or a combination of cash and shares of Common Stock. Since January 2019, Series D Preferred (of which there are approximately 3.15 million shares outstanding at December 31, 2022) has been accruing unpaid dividends at a rate of 10.75% per annum of the $25.00 liquidation preference per share, or at $2.6875 per share per annum . As of December 31, 2022, the outstanding Series D Preferred had an aggregate liquidation preference of approximately $78.81 million, with aggregate accrued and unpaid dividends in the amount of approximately $34.63 million, for a total liquidation value of $113.44 million. Assuming dividends continue to accrue and remain unpaid on the Series D Preferred, then on the Series D Redemption Date we estimate that the aggregate liquidation preference (based on the 3,152,392 shares outstanding as of December 31, 2022) would be approximately $78.81 million, with aggregate accrued and unpaid dividends in the amount of approximately $40.99 million, for a total liquidation value of $119.80 million. As of December 31, 2022, the Series D Preferred is convertible, in whole or in part, at any time, at the option of the Series D Preferred Holders, into previously unissued Common Stock at a conversion price of $16.96 per share of Common Stock. Based upon the closing price of our Common Stock on February 28, 2023 of $1.58 per share, we believe it unlikely that Series D Preferred Holders would convert their shares of Series D Preferred into Common Stock in advance of the Series D Redemption Date, and likely that they would instead choose to exercise their redemption rights after the Series D Redemption Date. In an effort to address the risk of a significant reduction to the value of a Series D Preferred Holder’s investment in Series D Preferred and Common Stock following the Series D Redemption Date, the Company launched a modified Dutch auction tender offer in December 2020 for up to $19.00 million (subsequently reduced to $6.00 million) of Series D Preferred, in which 1,467,162 shares were tendered and 387,097 shares were accepted for purchase for an aggregate cost of $6.00 million. We subsequently launched a second modified Dutch auction tender offer in April 2021 for up to $12.00 million of our Series D Preferred, in which 103,513 shares were tendered and accepted for purchase for an aggregate cost of $1.86 million. In July 2021, we raised additional capital for the Company through a rights offering pursuant to which the Common Stock holders purchased $30.00 million in aggregate principal amount of our Convertible Notes. Interest on the Convertible Notes is payable at the Company’s option in cash, Series B Preferred and/or Series D Preferred. On December 31, 2021, the first interest payment date on the Convertible Notes, interest was paid in the form of Series D Preferred. For purposes of determining the value of the Series D Preferred paid as interest on the Convertible Notes, each share of Series D Preferred was deemed to have a value equal to the product of (x) the average of the per share volume-weighted average prices of the Series D Preferred for the 15 consecutive trading days ending on the third business day immediately preceding the interest payment date, and (y) 0.55. On June 30, 2022, interest on the Convertible Notes was paid in the form of Series B Preferred. For purposes of determining the value of the Series B Preferred paid as interest on the Convertible Notes, each share of Series B Preferred was deemed to have a value equal to the product of (x) the average of the per share volume-weighted average prices of the Series B Preferred for the 15 consecutive trading days ending on the third business day immediately preceding the interest payment date, and (y) 0.55. 19 On January 3, 2023 (the next succeeding Business Day after December 31, 2022), interest was paid on the Convertible Notes in the form of Series B Preferred. For purposes of determining the value of the Series B Preferred paid as interest on the Convertible Notes, each share of Series B Preferred was deemed to have a value equal to the product of (x) the average of the per share volume-weighted average prices of the Series B Preferred for the 15 consecutive trading days ending on the third business day immediately preceding the interest payment date, and (y) 0.55. The Convertible Notes could have the effect of causing, if interest is paid in the future in shares of Series D Preferred, substantial dilution of the Series D Preferred and reduction in the value of any Series D Preferred. In an effort to address the risk associated with the significant and growing financial obligation to the Series D Preferred H olders, and to provide the Series D Preferred Holders with an opportunity to receive value for their Series D Preferred prior to the Series D Redemption Date, o n November 22, 2022, the Company commenced an Exchange Offer and related Consent Solicitation. The consummation of the Exchange Offer and Consent Solicitation was subject to, and was conditional upon, the satisfaction of certain conditions, including the condition that the holders of at least 66 2/3% of the outstanding shares of Series D Preferred (i) validly tender their Series D Preferred into the Exchange Offer, and do not validly withdraw such Series D Preferred, on or prior to the expiration date of the Exchange Offer, and (ii) consent to the Proposed Amendments. As of the expiration of the Exchange Offer on January 20, 2023, 864,391 shares of Series D Preferred (representing 26.8 % of the total outstanding Series D Preferred) had been validly tendered (and not validly withdrawn) in the Exchange Offer. A ccordingly, the condition that the holders of at least 66 2/3% of the outstanding shares of Series D Preferred (i) validly tender their Series D Preferred into the Exchange Offer, and not validly withdraw such Series D Preferred, and (ii) consent to the Proposed Amendments, had not been satisfied, and the Exchange Offer expired on January 20, 2023. As a result, the Series D Preferred remains outstanding with no change to its terms, including its redemption rights. We anticipate that, in the event of the Series D Preferred Holders’ exercise of such redemption rights after the Series D Redemption Date, the Company will not have sufficient available cash to pay the aggregate redemption price. Accordingly, in such event, we will not be able to meet our redemption obligation without either liquidating assets or issuing significant additional amounts of Common Stock. The Company does not believe it is in its interests to liquidate assets or incur indebtedness to fund cash redemptions of the Series D Preferred Stock and, accordingly, it has no intention of doing so. Therefore, the Company will likely be required to settle redemptions of Series D Preferred following the Series D Redemption Date in Common Stock. We believe that the issuance of Common Stock to either (i) fund cash redemptions or (ii) directly settle redemptions in Common Stock, will result in a substantial dilution of Common Stock. Inflation, Deflation and Economic Condition Considerations Prior to 2021, inflation was relatively low and did not have a significant detrimental impact on the Company’s results of operations. However, inflation substantially increased in 2022. In addition, substantially all of the Company’s tenant leases contain provisions designed to partially mitigate the negative impact of inflation in the near term. Such lease provisions include clauses that require tenants to reimburse the Company for inflation-sensitive costs such as real estate taxes, insurance and many of the operating expenses it incurs. In addition, many of our leases are for terms of less than ten years, which permits us to seek increased rents upon re-rental at market rates. Significant inflation rate increases over a prolonged period of time may have a material adverse impact on the Company’s business. Conversely, deflation could lead to downward pressure on rents and other sources of income. Interest rate increases could result in higher incremental borrowing costs for the Company and our tenants. The duration of our indebtedness and our relatively low exposure to floating rate debt have mitigated the direct impact of inflation and interest rate increases, the degree and pace of these changes have had and may continue to have impacts on our business. Recent Accounting Pronouncements See Note 2 to the consolidated financial statements beginning on page 38 of this Annual Report on Form 10-K. 20 Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Results of Operations Results from operations for the year ended December 31, 2022 reflect the results of the Company’s acquisition of Cedar on August 22, 2022. Accordingly, our results of operations will reflect the combined operations for the entire period for future quarters. Therefore, our historical financial statements may not be indicative of future operating results. The following table presents a comparison of the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively (in thousands, except Property Data). For the Years Ended December 31, Year over Year Changes 2022 2021 $/# % PROPERTY DATA: Number of properties owned and leased at period end (1) 75 58 17 29.31 % Aggregate gross leasable area at period end (1) 8,172,527 5,478,855 2,693,672 49.16 % Ending leased rate at period end (1) 92.9 % 94.2 % (1.3) % (1.38) % FINANCIAL DATA: Rental revenues $ 75,195 $ 60,368 $ 14,827 24.56 % Other revenues 1,450 942 508 53.93 % Total Revenue 76,645 61,310 15,335 25.01 % EXPENSES: Property operations 25,731 19,618 6,113 31.16 % Depreciation and amortization 19,540 14,797 4,743 32.05 % Impairment of assets held for sale 760 2,300 (1,540) (66.96) % Corporate general & administrative 8,620 7,140 1,480 20.73 % Total Operating Expenses 54,651 43,855 10,796 24.62 % Gain on disposal of properties 2,604 2,055 549 26.72 % Operating Income 24,598 19,510 5,088 26.08 % Interest income 65 34 31 91.18 % Interest expense (30,107) (33,028) 2,921 8.84 % Net changes in fair value of derivative liabilities (2,335) 3,768 (6,103) (161.97) % Other income — 552 (552) (100.00) % Other expense (691) (185) (506) (273.51) % Net Loss Before Income Taxes (8,470) (9,349) 879 9.40 % Income tax expense — (2) 2 100.00 % Net Loss (8,470) (9,351) 881 9.42 % Less: Net loss attributable to noncontrolling interests 3,984 92 3,892 4,230.43 % Net Loss Attributable to Wheeler REIT $ (12,454) $ (9,443) $ (3,011) (31.89) % (1) Excludes the undeveloped land parcels. Includes assets held for sale. Total Revenue Total revenue was $76.65 million and $61.31 million for the years ended December 31, 2022 and December 31, 2021, respectively, representing an increase of 25.01%. The increase in rental revenues of $14.83 million is primarily a result of the Cedar Acquisition, partially offset by the decrease from sold properties. See Same Store and Non-same Store Operating Income for further details about the changes within operating revenue. Total Operating Expenses 21 Total operating expenses were $54.65 and $43.86 million for the years ended December 31, 2022 and 2021, respectively, representing an increase of 24.62%. The increases are primarily a result of the Cedar Acquisition. See Same Store and Non-same Store Operating Income for further details about the changes within property operations expense. Impairment of assets held for sale was $760 thousand and $2.30 million for the years ended December 31, 2022 and 2021 respectively, as a result of Harbor Pointe Land Parcel and Columbia Fire Station, respectively. Depreciation and amortization increased 32.05% for the year ended December 31, 2022 primarily as a result of the Cedar Acquisition. Corporate general and administrative expenses were $8.62 million and $7.14 million for the years ended December 31, 2022 and 2021, respectively, representing an increase of 20.73%, primarily a result of the following: • $811 thousand increase in compensation and benefits primarily driven by hiring more employees due to the Cedar Acquisition and payroll related costs; • $694 thousand increase in professional fees primarily a result of the Cedar preferred litigation; • $200 thousand increase in advertising related costs; • $130 thousand increase in corporate administration costs; and partially offset by • $355 thousand decrease in other expenses, primarily related to lower fees associated with capital, debt and financing activities. Disposal of Properties The net gain on disposal of properties increase of $549 thousand for the year ended December 31, 2022 is a result of the 2022 sale of Walnut Hill Plaza and Butler Square compared to the 2021 sale of the Rivergate Shopping Center Out Parcel, Berkley Shopping Center and Berkley Land Parcel, Columbia Fire Station and Tulls Creek Land Parcel. Interest Expense Interest expense was $30.11 million and $33.03 million for the year ended December 31, 2022 and 2021, respectively, representing a decrease of 8.84%. Below is a comparison of the components which make up interest expense (in thousands): December 31, Changes 2022 2021 Change % Change Property debt interest - excluding Cedar debt $ 14,717 $ 14,611 $ 106 0.73 % Convertible Notes interest (1) 3,739 1,610 2,129 132.24 % Defeasance paid 2,614 687 1,927 280.49 % Amortization of deferred financing costs 6,098 12,710 (6,612) (52.02) % Interest on corporate debt — 3,410 (3,410) (100.00) % Property debt interest - Cedar 2,939 — 2,939 100.00 % Total Interest Expense $ 30,107 $ 33,028 $ (2,921) (8.84) % (1) Includes the fair value adjustment for the paid-in-kind interest. Net Change in Fair Value of Derivative Liabilities The net changes in the fair value of derivative liabilities was a loss of $2.34 million and a gain of $3.77 million for the years ended December 31, 2022 and 2021, respectively, which represents a non-cash adjustment from a change in the fair value. The largest impact on the derivative liabilities' valuation is a result of the change in fair market value of the Company's securities described at Note 6 on this Form 10-K. Other Income and Expense Other income was $0 and $552 thousand for the years ended December 31, 2022 and 2021, respectively, relating to Paycheck Protection Program (the "PPP") Promissory Note forgiveness. Other expense was $691 thousand and $185 thousand 22 for the years ended December 31, 2022, respectively, relating to legal settlement costs. Other income and other expense are non-operating in nature. Same Store and Non-same Store Operating Income NOI is a widely-used non-GAAP financial measure for REITs. The Company believes that NOI is a useful measure of the Company's property operating performance. The Company defines NOI as property revenues (rental and other revenues) less property and related expenses (property operation and maintenance and real estate taxes). Because NOI excludes general and administrative expenses, depreciation and amortization, interest expense, interest income, provision for income taxes, gain or loss on sale or capital expenditures and leasing costs, impairment charges, it provides a performance measure, that when compared year over year, reflects the revenues and expenses directly associated with owning and operating commercial real estate properties and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing perspective not immediately apparent from net income. The Company uses NOI to evaluate its operating performance since NOI allows the Company to evaluate the impact of factors, such as occupancy levels, lease structure, lease rates and tenant base, have on the Company's results, margins and returns. NOI should not be viewed as a measure of the Company's overall financial performance since it does not reflect general and administrative expenses, depreciation and amortization, involuntary conversion, interest expense, interest income, provision for income taxes, market lease amortization, gain or loss on sale or disposition of assets, and the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company's properties. Other REITs may use different methodologies for calculating NOI, and accordingly, the Company's NOI may not be comparable to that of other REITs. The following table is a reconciliation of same and non-same store NOI from the most directly comparable GAAP financial measure of net income (loss). Same stores consist of those properties owned during all periods presented in their entirety, non-same stores consist of those properties acquired or disposed of during the periods presented. The non-same store category consists of the following properties: • Continuing operations ◦ Berkley Shopping Center and Berkley Land Parcel (sold March 25, 2021); ◦ Tulls Creek Land Parcel (sold July 9, 2021); ◦ Rivergate Shopping Center Out Parcel (sold August 31, 2021); ◦ Columbia Fire Station (sold November 17, 2021); ◦ Walnut Hill Plaza (sold January 11, 2022); ◦ Butler Square (sold December 9, 2022); and ◦ Cedar Portfolio, 19 properties (acquired August 22, 2022). 23 Years Ended December 31, Same Store Non-same Store Total 2022 2021 2022 2021 2022 2021 (in thousands) Net (Loss) Income $ (5,926) $ (8,179) $ (2,544) $ (1,172) $ (8,470) $ (9,351) Adjustments: Income tax expense — 2 — — — 2 Other expense 691 185 — — 691 185 Net changes in fair value of derivative liabilities 2,335 (3,768) — — 2,335 (3,768) Interest expense 23,067 31,551 7,040 1,477 30,107 33,028 Interest Income (65) (34) — — (65) (34) Gain on disposal of properties — — (2,604) (2,055) (2,604) (2,055) Corporate general & administrative 6,850 7,063 1,770 77 8,620 7,140 Impairment of assets held for sale 760 — — 2,300 760 2,300 Depreciation and amortization 14,193 14,404 5,347 393 19,540 14,797 Other non-property revenue (33) (585) (2,069) 10 (2,102) (575) Property Net Operating Income $ 41,872 $ 40,639 $ 6,940 $ 1,030 $ 48,812 $ 41,669 Property revenues $ 62,150 $ 59,594 $ 12,393 $ 1,693 $ 74,543 $ 61,287 Property expenses 20,278 18,955 5,453 663 25,731 19,618 Property Net Operating Income $ 41,872 $ 40,639 $ 6,940 $ 1,030 $ 48,812 $ 41,669 Property Revenues Total same store property revenues were $62.15 million and $59.59 million for the years ended December 31, 2022 and 2021, respectively, representing an increase of 4.29%. The same store property revenue increases are primarily related to the occupancy growth since December 31, 2020. Property Expenses Total same store property expenses were $20.28 million and $18.96 million for the years ended December 31, 2022 and 2021, respectively, an increase of 6.98% . Same store property expense increase was primarily due to expense increases in insurance, grounds and landscaping and repairs and maintenance. Property Net Operating Income Total property net operating income were $48.81 million and $41.67 million for the years ended December 31, 2022 and 2021, respectively, representing a increase of 17.14%, primarily as a result of the Cedar Acquisition. Funds from Operations (FFO) We use FFO, a non-GAAP measure, as an alternative measure of our operating performance, specifically as it relates to results of operations and liquidity. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999, April 2002 and December 2018). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs), impairment of real estate related long-lived assets and after adjustments for unconsolidated partnerships and joint ventures. Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions and excluding depreciation, FFO is a helpful tool that can assist in the comparison of the operating performance of a company’s real estate between periods, or as compared to different companies. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate 24 assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, while historically real estate values have risen or fallen with market conditions. Accordingly, we believe FFO provides a valuable alternative measurement tool to GAAP when presenting our operating results. Below is a comparison of same and non-same store FFO, which is a non-GAAP measurement, for the years ended December 31, 2022 and 2021: Years Ended December 31, Same Store Non-same Store Total Year Over Year Changes 2022 2021 2022 2021 2022 2021 $ % Net Loss $ (5,926) $ (8,179) $ (2,544) $ (1,172) $ (8,470) $ (9,351) $ 881 9.42 % Depreciation and amortization of real estate assets 14,193 14,404 5,347 393 19,540 14,797 4,743 32.05 % Impairment of assets held for sale 760 — — 2,300 760 2,300 (1,540) (66.96) % Gain on disposal of properties — — (2,604) (2,055) (2,604) (2,055) (549) (26.72) % FFO $ 9,027 $ 6,225 $ 199 $ (534) $ 9,226 $ 5,691 $ 3,535 62.12 % During the year ended December 31, 2022, same store FFO increased $2.80 million. We believe the computation of FFO in accordance with NAREIT's definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include, but are not limited to, legal settlements, non-cash share-based compensation expense, non-cash amortization on loans and acquisition costs. Therefore, in addition to FFO, management uses Adjusted FFO ("AFFO"), which we define to exclude such items. Management believes that these adjustments are appropriate in determining AFFO as they are not indicative of the operating performance of our assets. In addition, we believe that AFFO is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that AFFO presented by us is comparable to the adjusted or modified FFO of other REITs. Total AFFO for the years ended December 31, 2022 and 2021 is shown in the table below (in thousands): Years Ended December 31, 2022 2021 FFO $ 9,226 $ 5,691 Preferred stock dividends - undeclared (9,056) (8,837) Dividends on noncontrolling interests preferred stock (3,913) — Preferred stock redemption — 70 Preferred stock accretion adjustments 584 600 FFO available to common stockholders and common unitholders (3,159) (2,476) Capital related costs 27 438 Other non-recurring and non-cash expenses 3,065 352 Net changes in fair value of derivative liabilities 2,335 (3,768) Share-based compensation — 14 Straight-line rental revenue, net straight-line expense (768) (1,026) Loan cost amortization 6,098 12,710 Paid-in-kind interest 3,739 1,610 Above (below) market lease amortization (2,079) 13 Recurring capital expenditures and tenant improvement reserves (1,354) (1,096) AFFO $ 7,904 $ 6,771 25 Other non-recurring and non-cash expenses are costs we believe will not be incurred on a go forward basis. Other nonrecurring expenses of $3.07 million for the year ended December 31, 2022 primarily include $2.61 million in loan defeasance payments, a result of the 2022 loan refinancing activities, $691 thousand legal settlement costs and severance partially offset with $353 thousand nonrecurring revenue related to Cedar's recognition of easement revenue. Other nonrecurring expenses of $352 thousand for the year ended December 31, 2021 include $185 thousand in legal settlement costs, $687 thousand in loan prepayment penalty on sale of the Berkley Shopping Center, partially offset with $552 thousand in PPP Promissory Note forgiveness. The preferred stock redemption of $0 and $70 thousand for the years ended December 31, 2022 and 2021, respectively, represents the undeclared dividends on the stock retirement for the months preceding their retirement. Net changes in fair value of derivative liabilities is the result of the non-cash loss or gain from adjusting the warrant liabilities and embedded derivative liabilities to their fair market value, further details are described at Note 6 on this Form 10-K. The preferred stock accretion adjustments represent the amortization of offering costs associated with raising the Series B Preferred and Series D Preferred. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item. Item 8. Financial Statements and Supplementary Data. The information required by this Item 8 is incorporated by reference to our Financial Statements beginning on page 33 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.