Wheeler Real Estate Investment Trust Inc (NASDAQ:WHLR): Is This 18.1% Yield Safe?
Should Investors Consider This High-Yield Stock?
High-yield stocks are not known for their dividend safety, so today let’s look at a company that currently offers a jaw-dropping yield of 18.05% and see whether it deserves the attention of income investors.
The company in question is Wheeler Real Estate Investment Trust Inc (NASDAQ:WHLR), a real estate investment trust (REIT) headquartered in Virginia Beach, Virginia. Wheeler is in the business of acquiring and operating income-producing retail properties, particularly grocery-anchored shopping centers. By owning and operating these properties, Wheeler REIT collects a stream of rental income from the tenants.
And because the company is structured as a REIT, it is required by law to distribute at least 90% of its profits to shareholders every year in the form of dividends. This distribution requirement is one of the reasons why REITs often turn out to be the higher-yielding instruments in today’s market.
Wheeler REIT pays quarterly dividends of $0.34 per share. At the current price, that translates to an annual yield of 18.05%, which is more than nine times the yield of the average S&P 500 company.
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When it comes to evaluating a real estate company’s dividend safety, a key metric to consider is funds from operations (FFO). FFO is basically a measure of operating cash flow, which is where dividends come from. If a REIT wants to pay sustainable dividends, it has to be able to generate enough FFO to cover its payout.
In 2016, Wheeler REIT generated adjusted funds from operations (AFFO) of $0.21 per share. Back then, the company was paying monthly dividends of $0.0175 per share. So the AFFO it generated last year was just enough to cover its 12 monthly distributions. (Source: “Wheeler Real Estate Investment Trust, Inc. Announces 2016 Annual Results, 1-For-8 Reverse Stock Split and Transition to Quarterly Common Stock Dividend Payments,” Wheeler Real Estate Investment Trust Inc, February 27, 2017.)
A 100% payout ratio leaves no margin for error, and the company was prompt to cut its payout. Now, keep in mind that Wheeler REIT also conducted a one-for-eight reverse stock split earlier this year, so the dividend amount will need to be adjusted as well.
After the reverse split, the company started paying quarterly dividends of $0.34 per share, which represented a 19% decrease from last year’s split-adjusted equivalent quarterly payout.
Does the new payout amount leave at least some margin for safety?
Well, so far, the company has reported financial results for the first two quarters of 2017. During this period, Wheeler REIT grew its total revenue from continuing operations by 43.6% year-over-year to $8.8 million. The company’s net operating income from continuing operations increased 42.6% year-over-year to $20.0 million. (Source: “Wheeler Real Estate Investment Trust, Inc. Announces 2017 Second Quarter Financial Results,” Wheeler Real Estate Investment Trust Inc, August 8, 2017.)
The thing is, though, Wheeler REIT’s adjusted funds from operations came in at $0.70 per share for the first half of 2017, which was not enough to cover its $0.76 of dividends per share declared during this period.
The Bottom Line on WHLR Stock
Certain aspects of Wheeler REIT’s business have been improving. But, unless the company can significantly boost its operating cash flow, the current payout level does not look sustainable.