Board of Directors Must Take Immediate Action to Cease Ongoing Value Destruction and Unlock Stockholder Value at Wheeler Real Estate Investment Trust, Inc.
$WHLR
Dear Directors:
As former CEO and current stockholder of over 11% of the common stock of Wheeler Real Estate Investment Trust, Inc. (“Wheeler” or the “Company”), I am deeply concerned with the Company’s performance and the decisions by the Board of Directors and the actions of management. Stockholder confidence in the Company’s strategy has collapsed, the Company’s stock price has plummeted, and investors have lost all confidence in the Company’s leadership. In fact, the price of the Company’s common stock is lower today than when activist Joseph Stilwell joined the Board in 2019 – more than 3 years ago!
There is no more time left for the Board to delay facing the significant issues eroding stockholder value. In recognition of the obvious urgency demanded, the Board must (1) immediately begin negotiating a settlement with the holders of the Company’s Series D preferred stock, (2) stop issuing deeply discounted preferred securities in lieu of cash interest payments on the Company’s 7.00% subordinated convertible notes due 2031 (the “Convertible Notes”), (3) gain control of the Company’s outsized and growing expenses, and (4) initiate quarterly conference calls in order to effectively foster transparency.
Value Destructive Capital Allocation
It is clear to stockholders that the Company’s massive stock depreciation is a direct result of the Board and management’s reckless pursuit of value-destructive strategies, including the incomprehensible decision to pay interest on the Convertible Notes in anything other than cash and the suspension of the payment of dividends on the Company’s common stock in the last five years (in each case despite the Company’s $28.5 million in cash and cash equivalents at December 31, 2022).1
1See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 2, 2023.
Wheeler Real Estate Investment Trust, Inc. May 11, 2023
The Board faces consequential decisions that will significantly impact the Company’s stock price and the valuation of all of the Company’s securities – including the potentially dilutive and value-destructive effect of the optional redemption of the Series D preferred stock and the payment of interest on the Convertible Notes in deeply discounted shares of Series D or Series B preferred stock. How much more time does the Company need to make the right decisions? Leadership has had more than three years since the election of Mr. Stilwell, together with his two other director nominees, to address the potentially destabilizing consequences of the upcoming redemption of the Series D preferred stock, which optional redemption right vests on September 22, 2023. Unfortunately, Mr. Stilwell and the Board, of which he now controls a majority of the directors, have yet to successfully resolve this issue.
The Board and management must understand the importance of ceasing any issuance of deeply discounted Series D or Series B preferred stock to holders of the Convertible Notes. Such issuances are not only manifestly unfair and dilutive, but, most importantly, contrary to the Board’s fiduciary duties. Management and the Board are on a path toward pronounced and likely permanent value destruction. There should be significant concern in the boardroom that the value of the Company’s common stock could be irreversibly eroded, absent a deal resulting in the successful tender of all Series D preferred stock.
Empty Promises and Dramatic Underperformance
In 2019, Mr. Stilwell claimed that the issuance of the Series D preferred stock at an $8.50 discount to face value was destructive and appalling capital allocation.2 He also claimed, with surprising foresight, that the issuance of such preferred stock at a significant discount could have serious consequences: “the Series D Convertible Preferred Stock has a Death Spiral provision that could wipe out Common Stock value.”3
Despite his claims in 2019, the current Board, of which he now controls a majority of the directors, is continuing the same failed strategy with the Series D preferred stock that he previously criticized. Yet now, with the impending optional redemption deadline mere months away, such strategy is all the more troubling. Stockholders are left to wonder: What has changed, Mr. Stilwell?
Based on publicly available information, it appears that Mr. Stilwell ran his 2019 proxy campaign, at least in part, due to his concerns with the Company’s handling of this Series D preferred stock issue and included prescient statements in his proxy statement, which he filed with the SEC (the “Stilwell 2019 Proxy”): “We seriously question how Wheeler can be finished with or close to finishing asset sales when the Board has yet to address (or even mention) the serious consequences of the optional Series D Preferred Stock redemption in 2023. We believe the Board needs to ensure that Wheeler continues selling underperforming properties to generate cash to buy back the Series D Preferred Stock.”4 And, “Despite the Death Spiral’s potentially dire consequences, the Company does not appear to have a clear strategy in place as to how it plans on handling this Series D redemption, which is only four years away.”5
2See the DFAN14A filed by Mr. Stilwell, among others, with the SEC on November 20, 2019.3Id.4See the DEFC14A filed by Mr. Stilwell, among others, with the SEC on October 29, 2019.5See the DFAN14A filed by Mr. Stilwell, among others, with the SEC on November 20, 2019.
2
Wheeler Real Estate Investment Trust, Inc. May 11, 2023
The Company has unsuccessfully tendered for the shares of Series D preferred stock three times. While there is a potential path forward, the Company should make a meaningful offer to the holders, such as an offer that combines cash, notes and common stock. This approach would be significantly less dilutive then if the Company does nothing – or continues to put forth unsuccessful tender offer terms – and the shares are ultimately redeemed for shares of common stock on September 23rd of this year, which date is, again, less than a mere five months away. Under this proposed approach, the Company would maintain a meaningful amount of its cash and exchange a relatively small number of shares of common stock for the Series D preferred stock. And, importantly, this approach could be accretive to the Company’s net asset value.
Now, with fewer than five months remaining until the September 22, 2023 deadline when the optional redemption right of the Series D preferred stock vests, no solution has been negotiated and there is no remedy for a long-simmering problem. The Company has wasted valuable time and significant capital on interest expenses, prepayment penalties and legal expenses. And, despite this woeful track record, the Company has still failed to resolve the Series D problem. The “Death Spiral” that Mr. Stilwell criticized has only grown worse, alongside stockholder disappointment.
Making matters even worse, the Board and management have failed to responsibly manage the Company’s balance sheet. And there is nothing in the Company’s history of issuing securities that has had a more expensive cost of capital than the payment-in-kind interest that was previously paid on the Convertible Notes in shares of Series D and Series B preferred stock priced at a 45% discount to market.6 This strategy dilutes stockholders, while allowing Mr. Stilwell to be the primary beneficiary as he appears to be, based on SEC filings, the beneficial owner of over 80% of the Convertible Notes. The idea of issuing new Series D and Series B shares at a tremendous discount, for the benefit of essentially one director, only to dilute stockholders, is a stunning disregard of the stockholders’ interest and a breach of fiduciary duties. Further, $28.5 million of the $33.0 million of Convertible Notes remained on the Company’s balance sheet at December 31, 2022 – more than ample funds to pay cash for the interest payments.
All of this evidence makes clear two critical points: the directors have mismanaged the Company at the expense of stockholders and there appears to be a concerted effort to shift value away from the common and preferred stockholders to Mr. Stilwell and a few other minority noteholders. Given this history, how can the Board claim that its actions are consistent with maximizing value for ALL stockholders? This misalignment of interests once again broadcasts the Board’s impropriety and the blatant shifting of value away from the holders of the Company’s common and preferred stock for the benefit of a few noteholders.
6See Amendment No. 1 to the Company’s Registration Statement on Form S-11 filed with the SEC on July 21, 2021 and the Company’s Prospectus filed with the SEC on July 22, 2021.
3
Wheeler Real Estate Investment Trust, Inc. May 11, 2023
Broken Corporate Governance and Lack of Transparency
There should be serious concern regarding insider transactions. Let me be clear: Mr. Stilwell beneficially owns over 80% of the Convertible Notes associated with the rights offering and he has received a substantial number of preferred shares since purchasing the Convertible Notes.7 Issuing deeply discounted Series D preferred stock further exacerbates the “Death Spiral” that Mr. Stilwell described in his 2019 campaign, which resulted in his election to the Board together with his two other director nominees.
Additionally, while the Company’s operating expenses and net losses attributable to common stockholders have grown each year since 2020, the directors have increased their own compensation.8 Astonishingly, for fiscal year 2021, the Board took the exceptionally unusual action to award large, special bonuses to certain of its members.9 These special bonuses were made despite the Company’s plummeting stock price in 2021!10
The Path Forward
The Board and management are involved in relationships and transactions that are self-serving, dysfunctional and unethical. Immediate action must be taken to correct the governance and management of Wheeler and to take concrete steps to maximize stockholder value. The Company’s stock price is lower than it was when Mr. Stilwell joined the Board in 2019, down approximately 78% since July 2, 2021, and the Company has fewer than five months until the Series D “Death Spiral” that Mr. Stilwell prophetically criticized.11
7See Mr. Stilwell’s Statement of Changes in Beneficial Ownership on Form 4 filed with the SEC on January 5, 2023.8See the Company’s Annual Reports on Form 10-K for the years ended December 31, 2022 and 2021 filed with the SEC on March 2, 2023 and February 28. 2022, respectively.9See the DEF14A filed by the Company with the SEC on April 29, 2022.10January 4, 2021, the first trading day of 2021, the Company’s common stock closed at $2.78. On December 31, 2021, the Company’s common stock closed at $1.94.11On July 2, 2021, which was the last trading day before I resigned as Chief Executive Officer of Wheeler, the Company’s common stock closed at $5.10. On May 10, 2023, the Company’s common stock closed at $1.10.
4
Wheeler Real Estate Investment Trust, Inc. May 11, 2023
The Board must (1) urgently negotiate a settlement with the holders of the Company’s Series D preferred stock, (2) stop issuing deeply discounted preferred securities in lieu of cash interest payments on the Convertible Notes, (3) gain control over the Company’s expenses, and (4) initiate quarterly conference calls in order to effectively foster transparency. Despite my private letters to the Board, the Company has not successfully addressed the Series D preferred stock issue, expenses have surged and there has been no effort to communicate to the stockholders a new path forward addressing these capital structure issues or contemplating a more profitable Company.
The Board and management have failed stockholders. However, if urgent action is taken, stockholder value might be preserved, and would likely even grow. There is no more time to waste.
Sincerely, /s/ Daniel Khoshaba
Source:
https://www.sec.gov/Archives/edgar/data/1457592/000110465923059145/tm2315330d1_sc13da.htm