I wanted to bring some attention to an activist situation that has flown under the radar. There is something for everyone here: personal drama, a badly-underperforming company to make us all feel better about ourselves, and a potential investment angle.

Joseph Stilwell is an accomplished activist investor who has run dozens of successful activist campaigns, mostly targeting mis-managed or under-managed community banks. Stilwell is refreshingly direct, unafraid to call out laziness and greed wherever he sees it. There are many anecdotes concerning Stilwell, but my favorite comes from his proxy battle with Harvard Illinois Bancorp in which Stilwell took a picture of the bank’s chairman apparently sleeping during a shareholder meeting. Stilwell employed the picture to great effect, publishing it in an SEC filing and garnering national attention. At this point, any bank that catches Stilwell’s disapproving eye had better shape up quickly or risk embarrassment.

Most recently, Stilwell turned his attention away from small banks and toward Wheeler Real Estate Investment Trust, Inc., an atrociously under-performing retail-focused REIT. In a series of letters and presentations, Stilwell highlighted management’s incompetence and self-dealing, as well as the board’s absent oversight and minimal financial commitment. Perhaps most damningly, Stilwell pointed out the incredible losses suffered by Wheeler’s shareholders, down 96% since the IPO not even a decade earlier. Stilwell even placed a billboard near Wheeler headquarters with an image of the Grinch and a Wheeler stock chart. (The billboard mysteriously disappeared and was replaced.) Wheeler responded with no shortage of vitriol, accusing Stilwell of all manner of illegality and ill intent.

Despite Wheeler’s obvious issues, the Stilwell group was not successful in its first attempt at reconstituting the board. But Stilwell ultimately prevailed in December 2019, succeeding in electing three of its nominees to the board of directors. With the subsequent resignations of a legacy board member and the company’s CFO, the Stilwell Group effectively took control.

Stilwell’s plan for Wheeler was straightforward and sensible. The company would cut administrative costs and sell several of its properties, including its crown jewel shopping center. The company would use the proceeds to reduce debt and improve its balance sheet. Ultimately, the company would achieve a sustainable capital structure and would resume paying dividends on its common and preferred shares. Following the payoff of near-term debt maturities, Wheeler’s highest balance sheet priority would be addressing its Series D preferred shares. These shares were issued in 2016 during a dire period for the company and the terms reflect the circumstances. The company’s Series D preferreds carried a hefty 8.75% coupon at issuance. What’s more, the shares would be puttable by holders in September 2023, requiring the company to redeem shares at par value plus any accrued, unpaid dividends, in cash or in stock. Shares remaining outstanding past September 2023 would see their coupon increase by 200 basis points annually to a maximum of 14%. Obviously, the Series D preferreds represented a toxic liability for Wheeler. Depending on the company’s cash position, ability to access new capital, and common share price come September 2023, holders of Series D preferreds could wind up owning effectively all of Wheeler!

Stilwell’s plan to right the ship at Wheeler may have been intelligent and achievable, but it was certainly never a guarantee. Despite a number of obvious improvements the company could make to its operations and capital structure, Wheeler remained the over-leveraged owner of a challenging set of assets. The ongoing issues that many retailers face were no secret. Wheeler’s shopping centers were largely anchored by grocery stores, which helped. But the company’s ability to raise rents was limited at best, and occupancy trends were poor at many locations.

Enter COVID-19. The economic effects of the pandemic have further challenged Wheeler’s results with many tenants unable to pay contractual rents. Wheeler has been successful thus far in negotiating with its own creditors about loan extensions and forbearance, but the company will ultimately need to succeed in collecting the amounts it is owed in order to address its own liabilities. Furthermore, Wheeler will have to succeed in selling multiple properties in a difficult market for commercial real estate.

All of that said, if Wheeler succeeds in collecting the rents is it owed and if the company’s lenders remain cooperative and if the company manages to shrink to sustainability by selling off some key properties, the upside could be impressive. (This trio of ifs absolutely depends on factors outside the company’s control, so act accordingly.)

Wheeler Series D preferreds currently trade in the $12-13 range, or just over 40% of liquidation preference plus dividends in arrears. We are 38 months from the put date. Series B preferreds trade around $7, or 28% of liquidation preference. While both preferreds rank equally in the capital structure, the valuation difference is due to the Series D put feature and coupon step-up, plus the fact that Wheeler will engage in aggressive repurchases of Series D preferreds if it is able.

Wheeler common stock is priced like a call option, valued at less than 5% of the company’s enterprise value. Obviously, holders of the common stock could profit immensely if the Stilwell Group is able to turn the company around, but there is a high chance of a total wipeout for common share holders if the turnaround doesn’t materialize. At normal occupancy, operating efficiency, and cap rates for Wheeler’s properties, substantial equity value appears to exist for the preferreds and quite possibly, the common equity. Whether this value proves realizable will depend on the direction of the economy and on Stilwell’s ability to sell assets and satisfy liabilities. Historically, underestimating Stillwell has been a bad bet. Stilwell has done shareholders a lot of good over the years. I am rooting for him. Then again, these are unprecedented times.

For anyone interested in digging in, Wheeler provides a reasonable level of disclosure down to the property level including details on lease rates and terms, tenant composition, and its debt structure. Happy hunting!

Alluvial Capital Management, LLC does not hold Wheeler Real Estate Investment Trust, Inc. securities for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.