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 strip centers, neighborhood centers, grocery-anchored centers, community centers and free-standing retail properties. We have targeted competitively protected properties located within developed areas, commonly referred to as in-fill, that possess minimal competition risk and 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 Southeast and Mid-Atlantic. Our portfolio is comprised of sixty retail shopping centers and six undeveloped land parcels. Twelve of these properties are located in Virginia, three are located in Florida, seven are located in North Carolina, twenty-three are located in South Carolina, twelve are located in Georgia, two are located in Kentucky, two are located in Tennessee, one is located in New Jersey, one is located in Alabama, one is located in West Virginia, one is located in Oklahoma and one is located in Pennsylvania. The Company’s portfolio had total net rentable space of approximately 5,561,766 square feet and a leased level of approximately 88.9% at December 31, 2020. Recent Trends and Activities There have been several significant events in 2020 that have impacted our Company. These events are summarized below. 10 Impact of COVID-19 The following discussion is intended to provide stockholders with certain information regarding the impacts of the COVID-19 pandemic on the Company’s business and management’s efforts to respond. Unless otherwise specified, the statistical and other information regarding the Company’s portfolio and tenants are estimates based on information available to the Company. As a result of the rapid development, fluidity and uncertainty surrounding this situation, the Company expects that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on the Company’s business, operations, cash flows and financial condition for future periods. The United States of America has been subject to significant economic disruption caused by the onset of COVID-19. Nearly every industry has been impacted directly or indirectly, and the U.S. retail market has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders at the state and local levels. These containment measures, which generally do not apply to businesses designated as “essential”, are affecting the operations of different categories of the Company’s base to varying degrees with, for example, grocery stores and pharmacies generally permitted to remain open and operational, restaurants generally limited to take-out and delivery services only and capacity restrictions while open, and non-essential businesses generally forced to close. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or partially reopen. The properties are geographically located in the Southeast, Mid-Atlantic and Northeast, which markets represented approximately 61%, 35% and 4%, respectively, of the total annualized base rent of the properties in our portfolio. Our operating portfolio contains retail shopping centers with a particular emphasis on grocery-anchored retail centers; grocers represent approximately 26% of total annualized base rent as of December 31, 2020. We generally lease our properties to national and regional retailers. The Company’s portfolio and tenants have been impacted as follows: • The Company’s sixty retail shopping centers are open and operating. As of December 31, 2020, all of the Company’s shopping centers feature necessity-based tenants, with forty-three of the sixty properties anchored by grocery and/or drug stores. • The Company agreed to lease modifications with nine tenants who declared bankruptcy, resulting in a weighted average rate decrease of 7.54% or $0.86 rate per square foot. • Nine tenants vacated due to bankruptcy and three of these vacated tenants have been backfilled. • Beginning in April 2020, the Company received certain rent relief requests, most often in the form of rent deferral requests, as a result of COVID-19. The Company evaluates each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests ultimately result in concessions or modification of agreements, nor is the Company forgoing its contractual rights under its lease agreements. As a result, the Company granted 148 concessions as of March 5, 2021 and modified 72 leases as of December 31, 2020, with a weighted average rate increase of 3.53% and 3 year weighted average extension term. During the three months ended December 31, 2020, the Company modified 4 leases at no rate change and five months weighted average extension term. • The Company has received payment of 97% of contractual base rent and tenant reimbursements billed for the three months ended December 31, 2020, total 2020 collections were 99%. • As of December 31, 2020, $257 thousand of accounts receivable relate to short term deferral of rents, a decrease of $132 thousand compared to September 30, 2020. The Company has taken a number of proactive measures to maintain the strength of its business and manage the impact of COVID-19 on the Company’s operations and liquidity, including the following: 11 • Along with the Company’s tenants and the communities they serve, the health and safety of the Company’s employees and their families is a top priority. The Company has adapted its operations to protect employees, including implementing a work from home policy and the Company’s IT systems have enabled its team to work seamlessly. • The Company is in constant communication with its tenants and sharing resources on how to identify local, state and federal resources that may be available to support their businesses and employees during the pandemic, including stimulus funds that may be available under the Coronavirus Aid, Relief and Economic Security Act of 2020 and the Consolidated Appropriations Act of 2021. • The Company currently has approximately $7.66 million in cash and cash equivalents and an additional $35.11 million in restricted cash. • Given the uncertainty of the COVID-19 pandemic’s near and potential long-term impact on the Company’s business, and in order to preserve its liquidity position, the Company has continued its suspension of any dividend distributions. The Company derives revenues primarily from rents received from tenants under leases at the Company’s properties. The Company’s operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic impacts the businesses of the Company’s tenants, and the Company’s operations and financial condition, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and such containment measures, among others. While the extent of the outbreak and its impact on the Company, its tenants and the U.S. retail market is uncertain, a prolonged crisis could result in continued disruptions in the credit and financial markets, continued high unemployment rates, low consumer confidence and consumer spending levels and overall poor global and U.S. economic conditions. The factors described above, as well as additional factors that the Company may not currently be aware of, could materially negatively impact the Company’s ability to collect rent and could lead to 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. The comparability of the Company’s results of operations for the year ended December 31, 2020 to future periods may be significantly impacted by the effects of the outbreak of the COVID-19 pandemic. Paycheck Protection Program The Company received proceeds of $552 thousand (the "PPP funds") pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP funds were received in the form of a promissory note, dated April 24, 2020 (the “Promissory Note”), between the Company and KeyBank as the lender that matures on April 24, 2022 bearing interest at a fixed rate of 1% per annum, payable monthly commencing seven months from the date of the note. Under the terms of the PPP, the principal may be forgiven if the proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, mortgage interest, rent and utilities. On January 8, 2021, KeyBank notified the Company that the PPP Promissory Note application for forgiveness has been approved. Assets Held for Sale and Dispositions At December 31, 2020, assets held for sale included Columbia Fire Station, Berkley Shopping Center, a .75 acre land parcel at Berkley and two outparcels at Rivergate Shopping Center, as the Company has committed to a plan to sell each property. The Company recorded $600 thousand impairment expense for Columbia Fire Station for the year ended December 31, 2020 reducing the carrying value for the amounts that exceeded the property's fair value less estimated selling costs. 12 Disposal Date Property Contract Price Gain (Loss) Net Sales Proceeds (in thousands) December 31, 2020 Riversedge North - Virginia Beach, VA $ 3,000 $ 49 $ 2,843 January 21, 2020 St. Matthews - St. Matthews, SC 1,775 (26) 1,665 On December 31, 2020, the Company sold its corporate headquarters in Virginia Beach to an unrelated party and simultaneously leased the building for ten years at an annual base rent of $265 thousand, plus taxes and other operating and maintenance expenses. The transaction qualified for sale leaseback accounting in accordance with ASC 842. As a result of this transaction, a gain of $49 thousand was recognized, which is included in "gain on disposal of properties" on the consolidated statements of operations with the remaining gain of $725 thousand deferred over the life of the lease and the net cash proceeds were approximately $1.10 million after transaction costs and repayment of the outstanding mortgage. Powerscourt Financing Agreement On December 22, 2020, the Company entered into a financing agreement (the "Powerscourt Financing Agreement") with Powerscourt Investments XXII, LP, as administrative agent and collateral agent. The Powerscourt Financing Agreement provides for a term loan in the aggregate principal of $25.00 million. The proceeds of the Powerscourt Financing Agreement are intended for the following: (i) to paydown the Company’s indebtedness on the KeyBank Credit Agreement, (ii) to redeem certain shares of the Company’s Series D Preferred and (iii) to pay fees and expenses in connection with the transactions contemplated by the Powerscourt Financing Agreement. The Powerscourt Financing Agreement is at a rate of 13.50% and matures on March 31, 2023 with quarterly interest only payments beginning on January 15, 2021. In conjunction with the Powerscourt Financing Agreement, the Company issued to Powerscourt XXII, LP a warrant to purchase an aggregate of 496,415 shares of the Company’s Common Stock (see the “Powerscourt Warrant Agreement” below). Powerscourt Warrant Agreement Pursuant to Powerscourt Financing Agreement, the Company issued Powerscourt Investments XXII, LP, a warrant (the “Warrant”) to purchase 496,415 shares of Common Stock for $3.12 per share (the “Powerscourt Warrant Agreement”). The Warrant is exercisable at the option of its holder in whole or in part into shares of Common Stock from time to time on or after December 22, 2020 (the “Effective Date”) and before the date that is the 36-month anniversary of the Effective Date. The Powerscourt Warrant Agreement contains terms and features that give rise to derivative liability classification. The Company utilized the Monte Carlo simulation model to calculate the fair value of these warrants at the date of commitment. Significant observable and unobservable inputs include stock price, conversion price, annual risk free rate, term, likelihood of an event of contractual conversion and expected volatility. The Monte Carlo simulation is a Level 3 valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators. The warrants were valued at approximately $594 thousand and the Company recorded a liability included on the consolidated balance sheet. See Note 6 included in this Form 10-K for additional details. KeyBank Credit Agreement On January 24, 2020, the Company and KeyBank entered into a Second Amendment to the KeyBank Credit Agreement (the "Second Amendment"), effective December 21, 2019. Pursuant to the Second Amendment, the Company began making monthly principal payments of $350 thousand on November 1, 2019. The Second Amendment, among other provisions, requires a pledge of additional collateral of $15.00 million in residual equity interests and staggered maturity dates with an ultimate maturity of June 30, 2020. On July 21, 2020, the Company and KeyBank entered into a Third Amendment to the KeyBank Credit Agreement (the "Third Amendment"). The Third Amendment, among other provisions, reduces the pledge of additional collateral by two properties and extends the maturity to December 31, 2020. The KeyBank Credit Agreement was paid in full as of December 22, 2020. The following collateralized portions of the Amended and Restated Credit Agreement had principal paydowns associated with each refinancing as noted below: • $1.78 million paydown from St. Matthews sale proceeds on January 21, 2020; 13 • $5.75 million paydown from Shoppes at Myrtle Park refinancing proceeds on January 23, 2020; • $2.50 million paydown from cash released to the Company from restricted cash accounts on May 20, 2020; • $1.00 million paydown on November 12, 2020; • $3.00 million final paydown from Powerscourt Financing Agreement proceeds on December 22, 2020. Columbia Fire Station Extension Effective September 3, 2020, the Company extended the Columbia Fire Station promissory note ("Columbia Fire Station Loan") to December 3, 2020, with the monthly principal payment increasing $20 thousand for a total monthly principal and interest payment of $46 thousand beginning on October 3, 2020. On December 7, 2020, the Company received a letter demanding payment in full from Pinnacle Bank for all amounts due under Columbia Fire Station Loan and the interest rate increased to 14%, the default rate. On December 29, 2020, Pinnacle Bank filed a suit against the Company, guarantor. On January 21, 2021, the Company entered into a Forbearance Agreement (the "Forbearance Agreement") with Pinnacle Bank at an interest rate of 14% and made a $500 thousand principal payment. The Forbearance Agreement, among other provisions, extends the maturity date of the Columbia Fire Station Loan to July 21, 2021 and waives all defaults and late fees existing prior to the Forbearance Agreement. Operating Partnership Purchase of Stock On September 22, 2020, the Operating Partnership purchased 71,343 shares of Series D Preferred from an unaffiliated investor at $15.50 per share. These shares are deemed to be retired on the consolidated financial statements. Preferred Dividends At December 31, 2020, the Company had accumulated undeclared dividends of $30.51 million to holders of shares of our Series A Preferred Stock, Series B Preferred Stock, and Series D Preferred Stock of which $13.85 million is attributable to the year ended December 31, 2020. 14 New Leases, Leasing Renewals and Expirations The following table presents selected lease activity statistics for our properties. Years Ended December 31, 2020 (3) 2019 Renewals (1) : Leases renewed with rate increase (sq feet) 616,548 685,124 Leases renewed with rate decrease (sq feet) 123,935 52,282 Leases renewed with no rate change (sq feet) 404,428 298,611 Total leases renewed (sq feet) 1,144,911 1,036,017 Leases renewed with rate increase (count) 127 116 Leases renewed with rate decrease (count) 24 12 Leases renewed with no rate change (count) 53 21 Total leases renewed (count) 204 149 Option exercised (count) 22 38 Weighted average on rate increases (per sq foot) $ 1.12 $ 0.68 Weighted average on rate decreases (per sq foot) $ (1.43) $ (2.25) Weighted average rate (per sq foot) $ 0.45 $ 0.34 Weighted average change over prior rates 4.63 % 4.17 % Weighted average change over prior rates, excluding bankruptcy negotiations 5.58 % New Leases (1) (2) : New leases (sq feet) 333,279 117,605 New leases (count) 72 43 Weighted average rate (per sq foot) $ 9.03 $ 12.82 Gross Leasable Area ("GLA") expiring during the next 12 months, including month-to-month leases 6.97 % 13.10 % (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 transactions related to bankruptcy negotiations, unless otherwise noted. Critical Accounting Policies 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 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 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. 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. 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. 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. Upon adoption of ASC Topic 842 "Leases," reserves for uncollectible accounts were recorded and reclassified to "rental revenues". Prior to adoption, reserves for uncollectible accounts were recorded as an operating expense, provision for credit losses. The standard also provides guidance on calculating reserves; however, those did not impact the Company. Beginning in April 2020, the Company received certain rent relief requests, most often in the form of rent deferral requests, as a result of COVID-19. The Company evaluates each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests ultimately result in concessions or modification of agreements, nor is the Company forgoing its contractual rights under its lease agreements. The Financial Accounting Standards Board (the "FASB") issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. The Lease Modification Q&A clarifies that entities may elect to treat qualifying lease concessions as if they were based on enforceable rights and obligations, and may choose to apply or not to apply modification accounting to those qualifying concessions. Qualifying concessions must be in response to COVID-19 and not have a substantial increase in the lessee’s obligation or the lessor’s rights under the contract. The Company has elected not to apply ASC 842 modification guidance for concessions that did not increase the lease term, generally these concessions do not impact the overall economics of the lease. Concessions that extend the lease term are accounted for under ASC 842, lease modification guidance. 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. 16 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 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. The Company recognized $600 thousand and $1.60 million of impairment expense to its assets held for sale for the years ended December 31, 2020 and 2019, respectively. Liquidity and Capital Resources At December 31, 2020, our consolidated cash, cash equivalents and restricted cash totaled $42.77 million compared to consolidated cash, cash equivalents and restricted cash of $21.59 million at December 31, 2019. Cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2020 and 2019 are as follows (in thousands): Years Ended December 31, Year Over Year Change 2020 2019 $ % Operating activities $ 15,780 $ 15,253 $ 527 3.46 % Investing activities $ 2,237 $ 868 $ 1,369 157.72 % Financing activities $ 3,160 $ (12,529) $ 15,689 125.22 % Operating Activities During the year ended December 31, 2020, our cash flows from operating activities were $15.78 million, compared to cash flows from operating activities of $15.25 million during the year ended December 31, 2019, representing an increase of 3.46% or $527 thousand. This increase is primarily a result of the decrease in interest expense and corporate general and administrative expense, partially offset by the increase in accounts receivables due to the impacts of COVID-19 on the portfolio, a decrease in property net operating income ("NOI") of $2.07 million and the timing of accounts payable, accrued expenses and other liabilities and deferred costs and other assets. Investing Activities During the year ended December 31, 2020, our cash flows from investing activities were $2.24 million, compared to cash flows from investing activities of $868 thousand during the year ended December 31, 2019, representing an increase of 157.72% or $1.37 million primarily due to the 2020 sales of St. Matthews and Riversedge North compared to the three properties sold in 2019, sale of Harbor Pointe land parcel and a decrease in capital expenditures of $440 thousand primarily related to fewer tenant improvement projects in 2020. Financing Activities During the year ended December 31, 2020, our cash flows from financing activities were $3.16 million, compared to $12.53 million of cash flows used in financing activities during the year ended December 31, 2019, representing an increase of 125.22% or $15.69 million due to the following: • $11.92 million decrease in loan principal payments primarily as a result of the 2020 Shoppes at Myrtle Park and Folly Road refinances, the St. Matthews sale and pay-down of the KeyBank Credit Agreement, offset by the three properties sold in 2019 and the 2019 payoff of the Revere Term Loan and Senior Convertible Notes in addition to the Village of Martinsville, Laburnum Square and Litchfield Market Village refinances; • $6.69 million increase in loan proceeds due to the Shoppes at Myrtle Park and Folly Road refinances and Powerscourt Financing Agreement occurring in 2020 offset by the 2019 Village of Martinsville, Laburnum Square and Litchfield Market Village refinances; • $552 thousand increase in proceeds from PPP funds as detailed in Note 2; partially offset by • $2.36 million increase in deferred financing costs primarily related to the Powerscourt Financing Agreement; and • $1.11 million increase in preferred stock redemption. 17 We intend to continue managing our debt prudently so as to maintain a conservative capital structure and minimize leverage within our company. As of December 31, 2020 and 2019, our debt balances, excluding unamortized debt issuance costs, consisted of the following (in thousands): December 31, 2020 2019 Fixed-rate notes $ 323,868 $ 305,017 Adjustable-rate mortgages (1) 23,576 24,163 Fixed-rate notes, assets held for sale 6,472 — Floating-rate line of credit (1) — 17,879 Total debt $ 353,916 $ 347,059 (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 5.46% and 3.79 years, respectively, at December 31, 2020. We have $43.93 million of debt maturing, including scheduled principal repayments, during the year ending December 31, 2021. 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 6 included in this Form 10-K for additional mortgage indebtedness details. Future Liquidity Needs The primary liquidity needs of the Company, in addition to the funding of our ongoing operations, at December 31, 2020 are $43.93 million in debt maturities and principal payments due in the year ended December 31, 2021 as described in Note 6 on this Form 10-K. Included in the $43.93 million are 6 loans collateralized by 7 properties within our portfolio. The Company plans to pay these obligations through a combination of refinances, dispositions and operating cash. Management intends to refinance or extend the remaining maturing debt as it comes due. 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. As discussed above, the continuing COVID-19 pandemic outbreak has adversely impacted states and cities where the Company’s tenants operate their businesses and where the Company’s properties are located. The COVID-19 pandemic could have a material adverse effect on the Company’s financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of the Company’s tenants’ businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to the Company in full. Closures of stores operated by the Company’s tenants could reduce the Company’s cash flows. To meet these future liquidity needs: • $7.66 million in cash and cash equivalents at December 31, 2020; • $35.11 million held in lender reserves for the purpose of tenant improvements, lease commissions, real estate taxes, insurance and funds held for the 2020 tender offer at December 31, 2020; and • intends to use cash generated from operations during the year ended December 31, 2021. In addition, the Board suspended Series A Preferred, Series B Preferred and Series D Preferred dividend payments beginning with the fourth quarter 2018 dividend. The Board plans to revisit the dividend payment policy with respect to the Series A Preferred, Series B Preferred and Series D Preferred on an ongoing basis. The Board believes that the dividend suspension will provide the Company approximately $3.44 million of additional funds per quarter to help meet its ongoing liquidity needs. Additionally, the Company plans to undertake measures to grow its operations and increase liquidity through 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 refinancing the debt, and executing on our strategy will dictate our liquidity needs going forward. If we are unable to execute in these areas, our ability to grow and reinstate dividends may be limited without additional capital. 18 Off-Balance Sheet Arrangements On September 1, 2011, the Grove Economic Development Authority issued the Grove Economic Development Authority Tax Increment Revenue Note, Taxable Series 2011 in the amount of $2.42 million, bearing a variable interest rate of 2.29%, not to exceed 14% and payable in 50 semi-annual installments. The proceeds of the bonds were to provide funding for the construction of public infrastructure and other site improvements and to be repaid by incremental additional property taxes generated by development. Harbor Pointe Associates, LLC, then owned by an affiliate of former CEO, Jon Wheeler, entered into an Economic Development Agreement with the Grove Economic Development Authority for this infrastructure development and in the event the ad valorem taxes were insufficient to cover annual debt service, Harbor Pointe Associates, LLC would reimburse the Grove Economic Development Authority (the “Harbor Pointe Agreement”). In 2014, Harbor Pointe Associates, LLC was acquired by the Company. The total debt service shortfall over the life of the bond is uncertain as it is based on ad valorem taxes, assessed property values, property tax rates, LIBOR and future potential development ranging until 2036. The Company’s future total principal obligation under the Harbor Pointe Agreement will be no more than $2.21 million, the principal amount of the bonds, as of December 31, 2020. In addition, the Company may have an interest obligation on the note based on the principal balance and LIBOR rates in effect at future payment dates. In 2020 and 2019, we funded approximately $0 thousand and $79 thousand, respectively in debt service shortfalls. No amounts have been accrued for this as of December 31, 2020 as a reasonable estimate of future debt service shortfalls cannot be determined based on variables noted above. As of December 31, 2020, we have no off-balance sheet arrangements, other than that noted above, that are likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. Inflation, Deflation and Economic Condition Considerations Inflation has been historically low and has had a minimal impact on the operating performance of our shopping centers; however, inflation may become a greater concern in the near future. Most of our leases contain provisions designed to partially mitigate the impact of inflation, which require tenants to pay their pro-rata share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation, although some tenants have capped the amount of these operating expenses they are responsible for under the lease. A small number of our leases also include percentage rent clauses enabling us to receive additional rent based on tenant sales above a predetermined level, which sales generally increase as prices rise and are typically related to increases in the Consumer Price Index or similar inflation indices. 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. However, during deflationary periods or periods of economic weakness, minimum rents and percentage rents will decline as the supply of available retail space exceeds demand and consumer spending declines. Occupancy declines will result in lower recovery rates of our operating expenses. Recent Accounting Pronouncements See Note 2 to the consolidated financial statements beginning on page 35 of this Annual Report on Form 10-K. 19 Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Results of Operations The following table presents a comparison of the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively (in thousands, except Property Data). For the Years Ended December 31, Year over Year Changes 2020 2019 $/# % PROPERTY DATA: Number of properties owned and leased at period end (1) 60 61 (1) (1.64) % Aggregate gross leasable area at period end (1) 5,561,766 5,618,877 (57,111) (1.02) % Ending leased rate at period end (1) 88.9 % 89.8 % (0.9) % (1.00) % FINANCIAL DATA: Rental revenues $ 60,039 $ 62,442 $ (2,403) (3.85) % Other revenues 964 720 244 33.89 % Total Revenue 61,003 63,162 (2,159) (3.42) % EXPENSES: Property operations 18,886 19,127 (241) (1.26) % Non-REIT management and leasing services — 25 (25) (100.00) % Depreciation and amortization 17,291 21,319 (4,028) (18.89) % Impairment of notes receivable — 5,000 (5,000) (100.00) % Impairment of assets held for sale 600 1,598 (998) (62.45) % Corporate general & administrative 5,831 6,633 (802) (12.09) % Total Operating Expenses 42,608 53,702 (11,094) (20.66) % Gain on disposal of properties 23 1,394 (1,371) (98.35) % Operating Income 18,418 10,854 7,564 69.69 % Interest expense (17,092) (18,983) 1,891 9.96 % Other expense (1,039) — (1,039) (100.00) % Net Income (Loss) Before Income Taxes 287 (8,129) 8,416 103.53 % Income tax expense — (15) 15 100.00 % Net Income (Loss) 287 (8,144) 8,431 103.52 % Less: Net loss attributable to noncontrolling interests 42 (105) 147 140.00 % Net Income (Loss) Attributable to Wheeler REIT $ 245 $ (8,039) $ 8,284 103.05 % (1) Excludes the undeveloped land parcels. Includes assets held for sale. Total Revenue Total revenue was $61.00 million for the year ended December 31, 2020 compared to $63.16 million for the year ended December 31, 2019, representing a decrease of 3.42% primarily due to sold properties, three new anchor vacancies of which two were backfilled with rent commencing in 2021 and an increase in the credit loss on operating receivables driven by higher accounts receivable due to impacts of COVID-19 on the portfolio. These negative impacts were partially offset by increases in straight-line rental revenues resulting from long-term lease extensions. See Same Store and Non-same Store Operating Income for further details about the changes within operating revenue. Total Operating Expenses Total operating expenses for the year ended December 31, 2020 were $42.61 million compared to $53.70 million for the year ended December 31, 2019, representing a decrease of 20.66%. The decrease are primarily a result of decreases in impairments, depreciation and amortization and corporate general and administrative expense. Impairments decreased as a 20 result of the $5.00 million impairment of the Sea Turtle notes receivable and $1.00 million decrease in impairment of assets held for sale, Perimeter Square and St. Matthews impaired in 2019 compared to Columbia Fire Station impairment in 2020. Depreciation and amortization decreased $4.03 million primarily as a result of lease intangibles becoming fully amortized and ceasing of depreciation and amortization as properties were classified as available held for sale. Corporate general and administrative expenses for the year ended December 31, 2020 decreased 12.09% or $802 thousand, as a result of the following: • $402 thousand decrease in compensation and benefits primarily driven by a reduction in personnel and decrease in director's compensation; • $159 thousand decrease in advertising costs for leasing activities related to cancellation of conferences due to COVID-19; and • $154 thousand decrease in other expenses primarily associated with a reduction in taxes and licenses and travel expenses, partially offset by an increase in debt financing costs associated with short term loan extensions. Gain on Disposal of Properties The gain on disposal of properties decrease of $1.37 million for the year months ended December 31, 2020 is a result of the 2020 sales of St. Matthews and Riversedge North, net of the 2019 demolition of an approximate 10,000 square foot outparcel at the JANAF property to make way for a new approximate 20,000 square foot building constructed by a grocer tenant, Aldi, and sales of Jenks Plaza, Graystone Crossing and Perimeter Square. Interest Expense Interest expense decreased $1.89 million or 9.96% for the year ended December 31, 2020, compared to $18.98 million for the year ended December 31, 2019. The decrease is primarily attributable to a $12.86 reduction in loans payable from December 31, 2019 absent the Powerscourt Financing Agreement combined with lower loan cost amortization due to loan modifications and sold properties. Other Expenses Other expenses were $1.04 million for the year ended December 31, 2020. Other expenses include $600 thousand in legal settlement costs and $439 thousand for reimbursement of the Stilwell Group's proxy solicitation expenses incurred in connection with the Company's 2019 annual meeting of stockholders. These expenses 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 of assets held for sale and held for use and impairment of notes receivable, 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, 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 21 entirety, while non-same stores consist of those properties acquired or disposed of during the periods presented. The non-same store category consists of the following sold properties: • Discontinued operations ◦ Harbor Pointe land parcel (sold February 7, 2019); • Continuing operations ◦ Jenks Plaza (sold January 11, 2019); ◦ Graystone Crossing (sold March 18, 2019); ◦ Perimeter Square (sold July 12, 2019); and ◦ St. Matthews (sold January 21, 2020). Years Ended December 31, Same Store Non-same Store Total 2020 2019 2020 2019 2020 2019 (in thousands) Net Income (Loss) $ 285 $ (8,100) $ 2 $ (44) $ 287 $ (8,144) Adjustments: Income tax expense — 15 — — — 15 Other expense 1,039 — — — 1,039 — Interest expense 17,092 18,693 — 290 17,092 18,983 Gain on disposal of properties — — (23) (1,394) (23) (1,394) Corporate general & administrative 5,829 6,613 2 20 5,831 6,633 Impairment of assets held for sale 600 — — 1,598 600 1,598 Impairment of notes receivable — 5,000 — — — 5,000 Depreciation and amortization 17,290 21,241 1 78 17,291 21,319 Non-REIT management and leasing services — 25 — — — 25 Other non-property revenue (272) (125) — — (272) (125) Property Net Operating Income $ 41,863 $ 43,362 $ (18) $ 548 $ 41,845 $ 43,910 Property revenues $ 60,721 $ 62,193 $ 10 $ 844 $ 60,731 $ 63,037 Property expenses 18,858 18,831 28 296 18,886 19,127 Property Net Operating Income $ 41,863 $ 43,362 $ (18) $ 548 $ 41,845 $ 43,910 Property Revenues Total same store property revenues for the year ended December 31, 2020 decreased to $60.72 million compared to $62.19 million for the year ended December 31, 2019, representing a decrease of 2.37% primarily due to: • $1.33 million decrease in rental revenues due to three new anchor vacancies of which two were backfilled with rent commencing in 2021; • $602 thousand increase in the credit loss on operating receivables driven by higher accounts receivable due to the impacts of COVID-19 on the portfolio; • $267 thousand decrease in above (below) market lease amortization related to leases becoming fully amortized; partially offset by • $783 thousand increase in straight-line rental revenues resulting from long-term lease extensions. Property Expenses Total same store property expenses for the year ended December 31, 2020 remained relatively consistent at $18.86 million, compared to $18.83 million for the year ended December 31, 2019. Property expenses had an increase of $400 22 thousand in insurance that was, partially offset by a decrease of $326 thousand in common area maintenance expenses and real estate taxes. There were no significant unusual or non-recurring items included in non-same store property expenses for the years ended December 31, 2020 and 2019. Property Net Operating Income Total property net operating income was $41.85 million for the year ended December 31, 2020, compared to $43.91 million for the year ended December 31, 2019 representing a decrease of 4.70%. Same stores accounted for decreases of $1.50 million, while non-same stores had a decrease of $566 thousand, resulting from the loss of NOI associated with sold properties. 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 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, 2020 and 2019: Years Ended December 31, Same Store Non-same Store Total Year Over Year Changes 2020 2019 2020 2019 2020 2019 $ % Net Income (loss) $ 285 $ (8,100) $ 2 $ (44) $ 287 $ (8,144) $ 8,431 103.52 % Depreciation and amortization of real estate assets 17,290 21,241 1 78 17,291 21,319 (4,028) (18.89) % Impairment of assets held for sale 600 — — 1,598 600 1,598 (998) (62.45) % Gain on disposal of properties — — (23) (1,394) (23) (1,394) 1,371 98.35 % FFO $ 18,175 $ 13,141 $ (20) $ 238 $ 18,155 $ 13,379 $ 4,776 35.70 % During the year ended December 31, 2020, same store FFO increased $5.03 million primarily due to the following: • $5.00 million decrease in impairment of notes receivable; • $1.60 million decrease in interest expense • $784 thousand decrease in corporate general and administrative expenses; partially offset by • $1.04 million increase in other expense for legal settlements and reimbursement of 2019 proxy costs; and • $1.50 million decrease in property net operating income. 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 23 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, 2020 and 2019 is shown in the table below (in thousands): Years Ended December 31, 2020 2019 FFO $ 18,155 $ 13,379 Preferred stock dividends - undeclared (14,528) (14,629) Preferred stock redemption 96 — Preferred stock accretion adjustments 677 680 FFO available to common stockholders and common unitholders 4,400 (570) Impairment of notes receivable — 5,000 Acquisition and development costs — 26 Capital related costs 291 144 Other non-recurring and non-cash expenses 1,085 42 Share-based compensation — 2 Straight-line rental revenue, net straight-line expense (971) 6 Loan cost amortization 1,097 1,707 (Below) above market lease amortization (461) (1,261) Recurring capital expenditures and tenant improvement reserves (1,112) (1,126) AFFO $ 4,329 $ 3,970 Impairment on notes receivable during the year ended December 31, 2019 is due to the impairment of the notes receivable related to Sea Turtle and is not indicative of our core portfolio of properties and future operations. Other non-recurring and non-cash expenses are costs we believe will not be incurred on a go forward basis. Other non-recurring expenses during year ended December 31, 2020 include $600 thousand in legal settlement costs, $439 thousand for reimbursement of the Stilwell Group's proxy solicitation expenses incurred in connection with the Company's 2019 annual meeting of stockholders and $51 thousand for severance. During the year ended December 31, 2019, other non-recurring expenses were for severance, vacation accrual and one-time fees we believe will not be incurred on a go forward basis. The preferred stock redemption represents the retirement of the undeclared dividends during the year ended December 31, 2020 associated with the Operating Partnership purchasing 71,343 shares of the Series D Preferred Stock from an unaffiliated investor. These shares are considered retired on the consolidated financial statements. The preferred stock accretion adjustments represent the amortization of offering costs associated with raising the Series B Preferred Stock and Series D Preferred Stock. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 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 30 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 24