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Retail Value Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                  

Commission file number 1-38517

 

RETAIL VALUE INC.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

82-4182996

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

3300 Enterprise Parkway

Beachwood, OH

 

44122

(Address of principal executive offices)

 

(Zip Code.)

 

Registrant’s telephone number, including area code:   (216) 755-5500

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, Par Value $0.10 Per Share

RVI

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☒  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 31, 2019, the registrant had 19,052,138 shares of common stock, $0.10 par value per share, outstanding.

 

 

 


 

Retail Value Inc.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED September 30, 2019

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements - Unaudited

 

 

Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

2

 

Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018

3

 

Combined and Consolidated Statements of Operations and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018

4

 

Combined and Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018

5

 

Combined and Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018

6

 

Notes to Condensed Combined and Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

39

 

 

 

SIGNATURES

40

 

 

 

1

 


 

Retail Value Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share amounts)  

 

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

Land

$

539,069

 

 

$

622,827

 

Buildings

 

1,407,000

 

 

 

1,629,862

 

Fixtures and tenant improvements

 

152,496

 

 

 

172,679

 

 

 

2,098,565

 

 

 

2,425,368

 

Less: Accumulated depreciation

 

(662,728

)

 

 

(704,401

)

 

 

1,435,837

 

 

 

1,720,967

 

Construction in progress

 

26,961

 

 

 

26,070

 

Total real estate assets, net

 

1,462,798

 

 

 

1,747,037

 

Cash and cash equivalents

 

71,322

 

 

 

44,565

 

Restricted cash

 

99,152

 

 

 

66,634

 

Accounts receivable

 

24,247

 

 

 

31,426

 

Property insurance receivable

 

 

 

 

29,422

 

Other assets, net

 

28,543

 

 

 

43,560

 

 

$

1,686,062

 

 

$

1,962,644

 

Liabilities and Equity

 

 

 

 

 

 

 

Mortgage indebtedness, net

$

654,723

 

 

$

967,569

 

Payable to SITE Centers

 

16,668

 

 

 

33,985

 

Accounts payable and other liabilities

 

58,437

 

 

 

84,832

 

Dividends payable

 

 

 

 

24,005

 

Total liabilities

 

729,828

 

 

 

1,110,391

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Redeemable preferred equity

 

190,000

 

 

 

190,000

 

Retail Value Inc. shareholders' equity

 

 

 

 

 

 

 

Common shares, with par value, $0.10 stated value; 200,000,000 shares authorized;

   19,052,592 and 18,465,165 shares issued at September 30, 2019 and

   December 31, 2018, respectively

 

1,905

 

 

 

1,846

 

Additional paid-in capital

 

692,966

 

 

 

675,566

 

Retained earnings (accumulated distributions in excess of net income )

 

71,378

 

 

 

(15,153

)

Less: Common shares in treasury at cost: 448 and 267 shares at September 30, 2019 and

   December 31, 2018, respectively

 

(15

)

 

 

(6

)

Total equity

 

766,234

 

 

 

662,253

 

 

$

1,686,062

 

 

$

1,962,644

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

 

2

 


 

Retail Value Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited, in thousands, except per share amounts)

 

 

For the Three

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

Revenues from operations:

 

 

 

 

 

 

 

Rental income

$

54,291

 

 

$

67,202

 

Business interruption income

 

5,675

 

 

 

2,404

 

Other income

 

894

 

 

 

49

 

 

 

60,860

 

 

 

69,655

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

9,819

 

 

 

10,376

 

Real estate taxes

 

6,900

 

 

 

9,062

 

Property and asset management fees

 

5,104

 

 

 

6,552

 

Impairment charges

 

19,790

 

 

 

4,420

 

Hurricane property insurance (income) loss, net

 

(72,602

)

 

 

155

 

General and administrative

 

1,111

 

 

 

1,009

 

Depreciation and amortization

 

17,676

 

 

 

22,138

 

 

 

(12,202

)

 

 

53,712

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(9,381

)

 

 

(17,050

)

Debt extinguishment costs

 

(1,949

)

 

 

(2,713

)

Transaction costs

 

(19

)

 

 

(179

)

Other income, net

 

 

 

445

 

Gain on disposition of real estate, net

 

10,483

 

 

 

9,835

 

 

 

(866

)

 

 

(9,662

)

Income before tax expense

 

72,196

 

 

 

6,281

 

Tax benefit (expense)

 

72

 

 

 

(328

)

Net income

$

72,268

 

 

$

5,953

 

Comprehensive income

$

72,268

 

 

$

5,953

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Basic and diluted

$

3.79

 

 

$

0.32

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

3

 


 

Retail Value Inc.

COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands, except per share amounts)

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Revenues from operations:

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

174,736

 

 

$

67,202

 

 

$

149,825

 

Business interruption income

 

7,675

 

 

 

2,404

 

 

 

5,100

 

Other income

 

945

 

 

 

49

 

 

 

309

 

 

 

183,356

 

 

 

69,655

 

 

 

155,234

 

Rental operation expenses:

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

30,722

 

 

 

10,376

 

 

 

24,608

 

Real estate taxes

 

21,579

 

 

 

9,062

 

 

 

19,571

 

Property and asset management fees

 

16,739

 

 

 

6,552

 

 

 

6,819

 

Impairment charges

 

32,990

 

 

 

4,420

 

 

 

48,680

 

Hurricane property insurance (income) loss, net

 

(76,233

)

 

 

155

 

 

 

868

 

General and administrative

 

3,054

 

 

 

1,009

 

 

 

7,638

 

Depreciation and amortization

 

55,409

 

 

 

22,138

 

 

 

50,144

 

 

 

84,260

 

 

 

53,712

 

 

 

158,328

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(34,201

)

 

 

(17,050

)

 

 

(37,584

)

Debt extinguishment costs

 

(19,358

)

 

 

(2,713

)

 

 

(109,036

)

Transaction costs

 

(37

)

 

 

(179

)

 

 

(33,325

)

Other (expense) income, net

 

(850

)

 

 

445

 

 

 

(3

)

Gain on disposition of real estate, net

 

41,648

 

 

 

9,835

 

 

 

13,096

 

 

 

(12,798

)

 

 

(9,662

)

 

 

(166,852

)

Income (loss) before tax expense

 

86,298

 

 

 

6,281

 

 

 

(169,946

)

Tax expense

 

(423

)

 

 

(328

)

 

 

(4,210

)

Net income (loss)

$

85,875

 

 

$

5,953

 

 

$

(174,156

)

Comprehensive income (loss)

$

85,875

 

 

$

5,953

 

 

$

(174,156

)

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

4.52

 

 

$

0.32

 

 

N/A

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

4

 


 

Retail Value Inc.

COMBINED AND CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in thousands)

 

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained Earnings

(Accumulated Distributions

in Excess of

Net Income)

 

 

Treasury

Stock at

Cost

 

 

Total

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

1,846

 

 

$

675,566

 

 

$

(15,153

)

 

$

(6

)

 

$

662,253

 

Issuance of common shares related to

   stock plans

 

 

58

 

 

 

17,099

 

 

 

 

 

 

 

 

 

17,157

 

Repurchase of common shares

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

Adoption of ASC Topic 842 (Leases)

 

 

 

 

 

 

 

 

700

 

 

 

 

 

 

700

 

Dividends declared

 

 

 

 

 

 

 

 

(44

)

 

 

 

 

 

(44

)

Net income

 

 

 

 

 

 

 

 

13,607

 

 

 

 

 

 

13,607

 

Balance, June 30, 2019

 

 

1,904

 

 

 

692,665

 

 

 

(890

)

 

 

(10

)

 

 

693,669

 

Issuance of common shares related to

   stock plans

 

 

1

 

 

 

301

 

 

 

 

 

 

10

 

 

 

312

 

Repurchase of common shares

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

(15

)

Net income

 

 

 

 

 

 

 

 

72,268

 

 

 

 

 

 

72,268

 

Balance, September 30, 2019

 

$

1,905

 

 

$

692,966

 

 

$

71,378

 

 

$

(15

)

 

$

766,234

 

 

 

 

RVI

Predecessor

Equity

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained Earnings

(Accumulated Distributions

in Excess of

Net Income)

 

 

Treasury

Stock at

Cost

 

 

Total

 

RVI Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

1,090,464

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,090,464

 

Net transactions with SITE Centers

 

 

(227,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(227,000

)

Net loss

 

 

(174,156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(174,156

)

Balance, June 30, 2018

 

$

689,308

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

689,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions from SITE Centers

 

$

 

 

$

1,846

 

 

$

675,566

 

 

$

 

 

$

(3

)

 

$

677,409

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,953

 

 

 

 

 

 

5,953

 

Balance, September 30, 2018

 

$

 

 

$

1,846

 

 

$

675,566

 

 

$

5,953

 

 

$

(3

)

 

$

683,362

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

 

5

 


 

Retail Value Inc.

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

85,875

 

 

$

5,953

 

 

$

(174,156

)

Adjustments to reconcile net income (loss) to net cash flow

     provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

55,409

 

 

 

22,138

 

 

 

50,144

 

Amortization and write-off of above- and below- market

   leases, net

 

(938

)

 

 

(590

)

 

 

(928

)

Amortization and write-off of debt issuance costs and fair

   market value of debt adjustments

 

13,376

 

 

 

3,742

 

 

 

14,556

 

Gain on disposition of real estate, net

 

(41,648

)

 

 

(9,835

)

 

 

(13,096

)

Property insurance proceeds in excess of receivable

 

(74,489

)

 

 

 

 

 

 

Impairment charges

 

32,990

 

 

 

4,420

 

 

 

48,680

 

Loss on debt extinguishment

 

235

 

 

 

39

 

 

 

97,077

 

Interest rate hedging activities

 

1,152

 

 

 

 

 

 

(4,538

)

Assumption of buildings due to ground lease terminations

 

(830

)

 

 

 

 

 

(2,150

)

Valuation allowance of prepaid taxes

 

 

 

 

 

 

 

3,991

 

Net change in accounts receivable

 

3,575

 

 

 

(1,273

)

 

 

(4,664

)

Net change in accounts payable and other liabilities

 

(6,053

)

 

 

1,634

 

 

 

15,472

 

Net change in other operating assets

 

2,799

 

 

 

(3,594

)

 

 

(1,556

)

Total adjustments

 

(14,422

)

 

 

16,681

 

 

 

202,988

 

Net cash flow provided by operating activities

 

71,453

 

 

 

22,634

 

 

 

28,832

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Real estate improvements to operating real estate

 

(65,147

)

 

 

(21,353

)

 

 

(20,461

)

Proceeds from disposition of real estate

 

298,958

 

 

 

153,747

 

 

 

100,347

 

Hurricane property insurance proceeds

 

104,267

 

 

 

 

 

 

20,193

 

Net repayments to SITE Centers

 

(17,000

)

 

 

(966

)

 

 

 

Net cash flow provided by investing activities

 

321,078

 

 

 

131,428

 

 

 

100,079

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayment of Parent Company unsecured debt

 

 

 

 

 

 

 

(899,880

)

Proceeds from mortgage debt

 

900,000

 

 

 

 

 

 

1,350,000

 

Repayment of mortgage debt

 

(1,214,514

)

 

 

(117,044

)

 

 

(421,344

)

Payment of debt issuance costs

 

(11,895

)

 

 

(252

)

 

 

(32,755

)

Net transactions with SITE Centers

 

 

 

 

 

 

 

(37,864

)

Dividends paid

 

(6,847

)

 

 

 

 

 

 

Net cash flow used for financing activities

 

(333,256

)

 

 

(117,296

)

 

 

(41,843

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents and restricted cash

 

59,275

 

 

 

36,766

 

 

 

87,068

 

Cash, cash equivalents and restricted cash, beginning of period

 

111,199

 

 

 

95,386

 

 

 

8,318

 

Cash, cash equivalents and restricted cash, end of period

$

170,474

 

 

$

132,152

 

 

$

95,386

 

 

 

The accompanying notes are an integral part of these condensed combined and consolidated financial statements.

 

6

 


 

Notes to Combined and Consolidated Financial Statements

1.

Nature of Business

On July 1, 2018, SITE Centers Corp., formerly known as DDR Corp. (“SITE Centers” or the “Manager”), completed the separation of Retail Value Inc., an Ohio corporation formed in December 2017 that owned and operated a portfolio of 48 real estate assets at the time of the separation that included 36 continental U.S. assets and 12 Puerto Rico assets (collectively, “RVI” the “RVI Predecessor” or the “Company”), into an independent public company.  At September 30, 2019, RVI owned 29 properties that included 17 continental U.S. assets and 12 Puerto Rico assets comprising 12 million square feet of gross leasable area (“GLA”) and located in 11 states and Puerto Rico.  These properties serve as direct or indirect collateral for a mortgage loan which, as of September 30, 2019, had an aggregate principal balance of $674.3 million.

In connection with the separation from SITE Centers, on July 1, 2018, the Company and SITE Centers entered into a separation and distribution agreement (the “Separation and Distribution Agreement”) pursuant to which, among other things, SITE Centers agreed to transfer properties and certain related assets, liabilities and obligations to RVI, and to distribute 100% of the outstanding common shares of RVI to holders of record of SITE Centers’ common shares as of the close of business on June 26, 2018, the record date.  On July 1, 2018, holders of SITE Centers’ common shares received one common share of RVI for every ten shares of SITE Centers’ common stock held on the record date.  In connection with the separation from SITE Centers, SITE Centers retained 1,000 shares of RVI’s series A preferred stock having an aggregate dividend preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by RVI asset sales.

On July 1, 2018, the Company and SITE Centers also entered into an external management agreement (the “External Management Agreement”) which, together with various property management agreements, governs the fees, terms and conditions pursuant to which SITE Centers manages RVI and its properties.  SITE Centers provides RVI with day-to-day management, subject to supervision and certain discretionary limits and authorities granted by the RVI Board of Directors.  The Company does not have any employees.  In general, either SITE Centers or RVI may terminate the management agreements on December 31, 2019, or at the end of any six-month renewal period thereafter.  SITE Centers and RVI also entered into a tax matters agreement that governs the rights and responsibilities of the parties following RVI’s separation from SITE Centers with respect to various tax matters, and provides for the allocation of tax-related assets, liabilities and obligations.

2.

Basis of Presentation

Principles of Consolidation

The Company

For periods after July 1, 2018, the consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest.  All significant inter-company balances and transactions have been eliminated in consolidation.

RVI Predecessor

For periods prior to July 1, 2018, the accompanying historical condensed combined financial statements and related notes of the Company do not represent the statement of operations and cash flows of a legal entity, but rather a combination of entities under common control that have been “carved-out” of SITE Centers’ consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  All inter-company transactions and balances have been eliminated in combination.  

For periods prior to July 1, 2018, these combined financial statements reflect the revenues and direct expenses of the RVI Predecessor and include material assets and liabilities of SITE Centers that are specifically attributable to the Company.  RVI Predecessor equity in these combined financial statements represents the excess of total assets over total liabilities.  RVI Predecessor equity is impacted by contributions from and distributions to SITE Centers, which are the result of treasury activities and net funding provided by or distributed to SITE Centers prior to the separation from SITE Centers, as well as the allocated costs and expenses described below.  The combined financial statements also include the consolidated results of certain of the Company’s wholly-owned subsidiaries, as applicable.  All significant inter-company balances and transactions have been eliminated in consolidation.

7

 


 

For periods prior to July 1, 2018, the combined financial statements include certain direct costs historically paid by the properties but contracted through SITE Centers, including but not limited to, management fees, insurance, compensation costs and out-of-pocket expenses directly related to the management of the properties (Note 11).  Further, the combined financial statements include an allocation of indirect costs and expenses incurred by SITE Centers related to the Company, primarily consisting of compensation and other general and administrative costs that have been allocated using the relative percentage of property revenue of the Company and SITE Centers’ management’s knowledge of the Company.  In addition, the combined financial statements include an allocation of interest expense on SITE Centers’ unsecured debt, excluding debt that is specifically attributable to the Company; interest expense was allocated by calculating the unencumbered net assets of each property held by the Company as a percentage of SITE Centers’ total consolidated unencumbered net assets and multiplying that percentage by the interest expense on SITE Centers unsecured debt.  The amounts allocated in the accompanying combined financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had the RVI Predecessor been a separate independent entity.  SITE Centers believes the assumptions underlying SITE Centers’ allocation of indirect expenses are reasonable.

3.

Summary of Significant Accounting Policies

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year.  Actual results could differ from those estimates.  

Reclassifications

Certain amounts in prior periods have been reclassified in order to conform with the current period’s presentation.  The Company reclassified $2.2 million and $7.6 million of contractual lease payments from Other Income to Rental Income within total revenues on its combined statements of operations for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018, respectively, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-02—Leases, as amended (“Topic 842”), as discussed below.

Rental Income

Rental Income on the combined and consolidated statements of operations includes contractual lease payments that generally include the following:

 

Fixed lease payments, which include fixed payments associated with expense reimbursements from tenants for common area maintenance, taxes and insurance from tenants in shopping centers, are recognized on a straight-line basis over the non-cancelable term of the lease, which generally ranges from one month to 30 years, and include the effects of applicable rent steps and abatements.  

 

 

Variable lease payments, which include percentage and overage income, which are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.  

 

 

Variable lease payments associated with expense reimbursements from tenants for common area maintenance, taxes, insurance and other property operating expenses, based upon the tenant’s lease provisions, which are recognized in the period the related expenses are incurred.

 

 

Lease termination payments, which are recognized upon the effective termination of a tenant’s lease when the Company has no further obligations under the lease.  

 

 

Ancillary and other property-related rental payments, primarily composed of leasing vacant space to temporary tenants, kiosk income and parking income, which are recognized in the period earned.

 

Upon adoption of Topic 842, Rental Income for the periods beginning on or after January 1, 2019, has been reduced for amounts the Company believes are not probable of being collected.  Rental income is recognized on a straight-line basis over the lease term. Rental income is not recognized when collection is not reasonably assured as the customer is placed on non-accrual status and rental income is recognized as cash payments are received.  

8

 


 

Statements of Cash Flows and Supplemental Disclosure of Non-Cash Investing and Financing Information

Non-cash investing and financing activities are summarized as follows (in millions):

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Contribution of net assets from SITE Centers

$

 

 

$

677.4

 

 

$

 

Accounts payable related to construction in progress

 

10.9

 

 

 

17.2

 

 

 

10.1

 

Stock dividends

17.2

 

 

 

 

 

 

 

Assumption of buildings due to ground lease termination

 

0.8

 

 

 

 

 

 

2.2

 

Receivable and reduction of real estate assets, net -

   related to hurricane

 

 

 

 

 

 

 

6.1

 

 

New Accounting Standard Adopted

Accounting for Leases

The Company adopted Topic 842 as of January 1, 2019, using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption.  The Company elected the following practical expedients permitted under the transition guidance within the new standard:

 

The package of practical expedients, which among other things, allowed the Company to carry forward the historical lease classification;

 

Land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and

 

To not separate lease and non-lease components for all leases and recording the combined component based on its predominant characteristics, as rental income or expense.

The Company did not adopt the practical expedient to use hindsight in determining the lease term.

The Company made the following accounting policy elections as a lessor in connection with the adoption:

 

To include operating lease liabilities in the asset group and include the associated operating lease payments in the undiscounted cash flows when considering recoverability of a long-lived asset group and

 

To exclude from lease payments taxes assessed by a governmental authority that are both imposed on and concurrent with lease revenue producing activity and collected by the lessor from the lessee (i.e., sales tax).

The adoption of the standard impacted the Company’s consolidated financial statements as follows:

 

The Company had ground lease agreements in which the Company is the lessee for land beneath all or a portion of the buildings at two shopping centers (Note 5), where the Company has recorded its rights and obligations under these leases as a right-of-use (“ROU”) asset and lease liability, which is included in Other Assets and Accounts Payable and Other Liabilities, respectively, in the consolidated balance sheet.  Previously, the Company accounted for these arrangements as operating leases. These leases will continue to be classified as operating leases due to the election of the package practical expedients.  The Company recorded ROU assets and lease liabilities of approximately $1.9 million and $3.0 million, respectively, as of January 1, 2019.  The difference between the ROU asset and lease liability was due to the straight-line rent balance that existed as of the date of application of the standard.

 

Previously, the Company included real estate taxes paid by a lessee directly to a third party in recoveries from tenants and real estate tax expense, on a gross basis.  Upon adoption of the standard, the Company no longer records these amounts in revenue or expense as the standard precludes the Company from recording payments made directly by the lessee. In addition, on January 1, 2019, the Company reversed $0.6 million of real estate taxes paid by certain major tenants previously reflected in Accounts Receivable and Accounts Payable and Other Liabilities on the Company’s consolidated balance sheet as of December 31, 2018.

 

The Company recorded an adjustment for the cumulative effect due to a change in accounting principal of $0.7 million in equity related to the change in its collectability assessment of operating lease receivables under Topic 842.  

9

 


 

 

Upon adoption of the practical expedient with regards to not separating lease and non-lease components, where applicable, the Company has prospectively recorded, on a straight-line basis, lease payments associated with fixed expense reimbursements.

 

The adoption of this standard did not materially impact the Company’s consolidated net income or consolidated cash flows.

The adoption of the new standard also resulted in various presentation changes in the Company’s consolidated statements of operations.  The Company aggregated the following components of contractual lease payments into one line item referred to as Rental Income:  Minimum Rents, Percentage and Overage Rents, Recoveries from Tenants, Ancillary Income and Lease Termination Fees.  The prior period presentation was conformed to the current period presentation for comparability related to these revenue components.  In addition, effective January 1, 2019, the Company presents bad debt as a component of Rental Income within Revenues.  For prior periods, bad debt is included in Operating and Maintenance Expenses.  In addition, effective January 1, 2019, the Company no longer records real estate taxes paid by major tenants directly to the applicable governmental authority.  For prior periods, these amounts are included in Recoveries from Tenants and Real Estate Taxes.

New Accounting Standard to Be Adopted

Accounting for Credit Losses

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date (ASU 2016-13, Financial Instruments – Credit Losses).  The guidance requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable.  The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected.  This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2019.  In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326.  The Company is in the process of evaluating the impact of this guidance.

4.

Other Assets, net

Other Assets, Net on the Company’s consolidated balance sheets consists of the following (in thousands):

 

September 30, 2019

 

 

December 31, 2018

 

Intangible assets:

 

 

 

 

 

 

 

In-place leases, net

$

6,323

 

 

$

11,926

 

Above-market leases, net

 

1,036

 

 

 

2,001

 

Lease origination costs, net

 

1,023

 

 

 

1,713

 

Tenant relations, net

 

10,696

 

 

 

16,242

 

Total intangible assets, net(A)

 

19,078

 

 

 

31,882

 

Operating lease ROU assets(B)

 

1,763

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Prepaid expenses

 

7,397

 

 

 

10,011

 

Deposits

 

140

 

 

 

194

 

Deferred charges, net

 

130

 

 

 

179

 

Other assets(C)

 

35

 

 

 

1,294

 

Total other assets, net

$

28,543

 

 

$

43,560

 

 

 

 

 

 

 

 

 

Accounts payable and other liabilities:

 

 

 

 

 

 

 

Below-market leases, net(A)

$

(20,465

)

 

$

(33,914

)

(A)

In the event a tenant terminates its lease prior to the contractual expiration, the unamortized portion of the related intangible asset or liability is adjusted to reflect the updated lease term.

(B)

Operating lease ROU assets are discussed further in Notes 1 and 5.

(C)

Included $1.2 million fair value of an interest rate cap at December 31, 2018, which was terminated in March 2019.

10

 


 

5.

Leases

Lessee

The Company is engaged in the operation of shopping centers that are either owned or, with respect to certain shopping centers, operated under long-term ground leases that expire at various dates through 2033.  The Company determines if an arrangement is a lease at inception.  

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the term of the lease.  As most of the Company’s leases do not include an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date of the standard in determining the present value of lease payments.  For each lease, the Company utilized a market-based approach to estimate the incremental borrowing rate (“IBR”), which required significant judgment.  The Company estimated base IBRs based on an analysis of (i) yields on comparable companies, (ii) observable mortgage rates and (iii) unlevered property yields and discount rates.  The Company applied adjustments to the base IBRs to account for full collateralization and lease term.  Operating lease ROU assets also include any lease payments made.  The Company has options to extend certain of the ground leases; however, these options were not considered as part of the lease term when calculating the lease liability as they were not reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.  

Operating lease ROU assets and operating lease liabilities are in the Company’s consolidated balance sheet as follows (in thousands):

 

 

 

 

Classification

 

September 30, 2019

 

   Operating Lease ROU Assets

 

Other Assets, Net

 

$

1,763

 

 

 

 

 

 

 

 

Operating Lease Liabilities

 

Accounts Payable and Other Liabilities

 

$

2,890

 

Operating lease expenses, including straight-line expense, are included in Operating and Maintenance Expense for the Company’s ground leases and aggregated $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.  Supplemental information related to leases was as follows:

 

 

September 30, 2019

 

Weighted-Average Remaining Lease Term

 

11.6 years

 

Weighted-Average Discount Rate

 

 

6.6

%

Cash paid for amounts included in the measurement —

   operating cash flows from lease liabilities (in thousands)

 

$

303

 

As determined under FASB Accounting Standards Codification (“ASC”) 840, Leases, the scheduled future minimum rental revenues from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises, and the scheduled minimum rental payments under the terms of all non-cancelable operating leases, principally ground leases, in which the Company was the lessee as of December 31, 2018, were as follows (in thousands):

Year

 

Minimum

Rental

Revenues

 

 

Minimum

Rental

Payments

 

2019

 

$

169,109

 

 

$

405

 

2020

 

 

143,736

 

 

 

414

 

2021

 

 

118,947

 

 

 

423

 

2022

 

 

92,495

 

 

 

433

 

2023

 

 

65,225

 

 

 

217

 

Thereafter

 

 

195,610

 

 

 

2,806

 

 

 

$

785,122

 

 

$

4,698

 

11

 


 

As determined under Topic 842, maturities of lease liabilities were as follows for the 12-month periods ending September 30, (in thousands):

 

Year

 

September 30,

 

2020

 

$

412

 

2021

 

 

421

 

2022

 

 

430

 

2023

 

 

271

 

2024

 

 

225

 

Thereafter

 

 

2,637

 

   Total lease payments

 

 

4,396

 

Less imputed interest

 

 

(1,506

)

   Total

 

$

2,890

 

Lessor

Space in the shopping centers is leased to tenants pursuant to agreements that provide for terms generally ranging from one month to 30 years and for rents which, in some cases, are subject to upward adjustments based on operating expense levels, sales volume or contractual increases as defined in the lease agreements.  

 

The scheduled future minimum rental revenues from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions, as determined under Topic 842 for such premises for the 12-month periods ending September 30, were as follows (in thousands):

 

Year Ending

 

September 30,

 

2020

 

$

145,376

 

2021

 

 

124,284

 

2022

 

 

101,298

 

2023

 

 

75,791

 

2024

 

 

52,416

 

Thereafter

 

 

194,695

 

   Total

 

$

693,860

 

6.

Credit Agreement

The Company maintains a Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as lender and administrative agent (“PNC”).  The Revolving Credit Agreement provides for borrowings of up to $30.0 million.  Borrowings under the Revolving Credit Agreement may be used by the Company for general corporate purposes and working capital.  The Company’s borrowings under the Revolving Credit Agreement bear interest at variable rates at the Company’s election, based on either (i) LIBOR plus a specified spread ranging from 1.05% to 1.50% depending on the Company’s Leverage Ratio (as defined in the Revolving Credit Agreement) or (ii) the Alternate Base Rate (as defined in the Revolving Credit Agreement) plus a specified spread ranging from 0.05% to 0.50% depending on the Company’s Leverage Ratio.  The Company is also required to pay a facility fee on the aggregate revolving commitments at a rate per annum that ranges from 0.15% to 0.30% depending on the Company’s Leverage Ratio.

The Revolving Credit Agreement matures on the earliest to occur of (i) March 9, 2021, (ii) the date on which the External Management Agreement is terminated, (iii) the date on which DDR Asset Management, LLC or another wholly-owned subsidiary of SITE Centers ceases to be the “Service Provider” under the External Management Agreement as a result of assignment or operation of law or otherwise and (iv) the date on which the principal amount outstanding under the Company’s mortgage loan is repaid or refinanced (Note 7).

The Company’s obligations under the Revolving Credit Agreement are guaranteed by SITE Centers in favor of PNC.  In consideration thereof, on July 2, 2018, the Company entered into a guaranty fee and reimbursement letter agreement with SITE Centers pursuant to which the Company has agreed to pay to SITE Centers the following amounts: (i) an annual guaranty commitment fee of 0.20% of the aggregate commitments under the Revolving Credit Agreement, (ii) for all times other than those referenced in clause (iii) below, when any amounts are outstanding under the Revolving Credit Agreement, an amount equal to 5.00% per annum times the average aggregate outstanding daily principal amount of such loans plus the aggregate stated average daily amount of

12

 


 

outstanding letters of credit and (iii) in the event SITE Centers pays any amounts to PNC pursuant to SITE Centers’ guaranty (credit facility guaranty fee) and the Company fails to reimburse SITE Centers for such amount within three business days, an amount in cash equal to the amount of such paid obligations plus default interest which will accrue from the date of such payment by SITE Centers until repaid by the Company at a rate per annum equal to the sum of the LIBOR rate plus 8.50%.  

At September 30, 2019, there were no amounts outstanding under the Revolving Credit Agreement.

7.

Mortgage Indebtedness

On March 11, 2019, certain wholly-owned subsidiaries of the Company entered into a mortgage loan with an initial aggregate principal amount of $900 million.  Substantially all proceeds from the mortgage loan were used to refinance and prepay all amounts outstanding under the Company’s February 2018 mortgage loan in the original aggregate principal amount of $1.35 billion. The outstanding aggregate principal amount of the mortgage loan was $674.3 million at September 30, 2019.  The borrowers’ obligations are evidenced by promissory notes which are secured by, among other things: (i) mortgages encumbering the borrowers’ properties located in the continental U.S. (which comprise substantially all of the Company’s properties located in the continental U.S.) and Plaza Del Sol located in Bayamon, Puerto Rico (collectively, the “Mortgaged Properties”); (ii) a pledge of the equity of the Company’s subsidiaries that own each of the Company’s properties located in Puerto Rico (collectively, the “Pledged Properties”) and a pledge of related rents and other cash flows, insurance proceeds and condemnation awards; and (iii) a pledge of any reserves and accounts of any borrower.

The loan facility will mature on March 9, 2021, subject to three one-year extensions at borrowers’ option based on certain conditions of the agreement.  The initial weighted-average interest rate applicable to the notes was equal to one-month LIBOR plus a spread of 2.30% per annum, provided that such spread is subject to an increase of 0.25% per annum in connection with any exercise of the third extension option.  Application of voluntary prepayments, as described below, will cause the weighted-average interest rate to increase over time.  At September 30, 2019, the interest rate of the Company’s mortgage loan was 4.7%.

The loan facility is structured as an interest only loan throughout the initial two-year term and any exercised extension options. As a result, so long as the borrowers maintain a minimum debt yield of 10% with respect to the Mortgaged Properties and no event of default exists, any property cash flows available following payment of debt service and funding of certain required reserve accounts (including reserves for payment of real estate taxes, insurance premiums, ground rents, tenant improvements and capital expenditures), will be available to the borrowers to pay operating expenses and for other general corporate purposes. The debt yield with respect to the Mortgaged Properties was 13.9% as of September 30, 2019.

Subject to certain conditions described in the mortgage loan agreement, the borrowers may prepay principal amounts outstanding under the loan facility in whole or in part by providing (i) advance notice of prepayment to the lenders and (ii) remitting the prepayment premium described in the mortgage loan agreement. No prepayment premium is required with respect to any prepayments made after April 9, 2020. Additionally, no prepayment premium will apply to prepayments made in connection with permitted property sales. Each Mortgaged Property has a portion of the original principal amount of the mortgage loan allocated to it. The amount of proceeds from the sale of an individual Mortgaged Property required to be applied towards prepayment of the notes (i.e., the property’s “release price”), will depend upon the principal amount of the mortgage loan allocated to it and the debt yield at the time of the sale.  All proceeds for the sales of Pledged Properties other than Plaza Del Sol are required to be applied towards prepayment of the notes.

Voluntary prepayments made by the borrowers will be applied to tranches of notes (i) absent an event of default, in descending order of seniority (i.e., such prepayments will first be applied to the most senior tranches of notes) and (ii) following any event of default, in such order as the loan servicer determines in its sole discretion. As a result, the Company expects that the weighted average interest rate of the notes will increase during the term of the loan facility.

In the event of a default, the contract rate of interest on the notes will increase to the lesser of (i) the maximum rate allowed by law or (ii) the greater of (A) 4% above the interest rate otherwise applicable and (B) the Prime Rate (as defined in the mortgage loan) plus 1.0%. The notes contain other terms and provisions that are customary for instruments of this nature. The mortgage loan agreement also includes customary events of default, including among others, principal and interest payment defaults and breaches of affirmative or negative covenants, the mortgage loan agreement does not contain any financial maintenance covenants.

In connection with the refinancing, the Company incurred $20.2 million of aggregate financing costs which included a $1.8 million debt financing fee paid to SITE Centers.  This refinancing was treated as a loan modification versus a debt extinguishment pursuant to the applicable accounting guidance.  As a result, only the portion of the financing costs incurred related to the new lender group was capitalized.  The remaining financing costs not capitalized as a loan cost were recorded as debt extinguishment costs in the

13

 


 

consolidated statement of operations along with the write-off of an allocation of the related unamortized deferred financing costs aggregating $12.7 million.

8.

Financial Instruments and Fair Value Measurements

The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments:

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable and Other Liabilities

The carrying amounts reported in the Company’s consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities.

Debt

The fair market value of debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile, including the Company’s non-performance risk and loan to value and is classified as Level 3 in the fair value hierarchy.

Considerable judgment is necessary to develop estimated fair values of financial instruments.  Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The carrying amount of debt was $654.7 million and $967.6 million at September 30, 2019 and December 31, 2018, respectively.  The fair value of debt was $699.2 million and $1,016.1 million at September 30, 2019 and December 31, 2018, respectively.  

Interest Rate Cap

In March 2018, the Company entered into an interest rate cap in connection with entering into the mortgage loan, which was terminated with the new mortgage financing (Note 7).  At December 31, 2018, the notional amount of the interest rate cap was $1.0 billion.  The fair value of the interest rate cap was $1.2 million at December 31, 2018, and was included in Other Assets.  In March 2019, in connection with the mortgage refinancing, the interest rate cap was terminated and the Company received $0.3 million upon final settlement.  

9.

Commitments and Contingencies

Hurricane Loss

In 2017, Hurricane Maria made landfall in Puerto Rico.  At September 30, 2019, the Company owned 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA.  One of the 12 assets (Plaza Palma Real, consisting of approximately 0.4 million of Company-owned GLA) was severely damaged in Hurricane Maria.  At September 30, 2019, three anchor tenants and a few other tenants totaling 0.3 million square feet were open for business approximating 61% of Plaza Palma Real’s Company-owned GLA.  The other 11 assets sustained varying degrees of damage, consisting primarily of roof, HVAC system damage and water intrusion.  Although some of the tenant spaces remain untenantable, a majority of the Company’s leased space that was open prior to the storm was open for business by mid-2018.

Restoration work is underway at all of the shopping centers.  The Company anticipates that the repair and restoration work will be substantially complete by mid-2020.  The timing and schedule of additional repair work to be completed are highly dependent upon any changes in the scope of work, the availability of building materials, supplies and skilled labor.

In August 2019, the Company reached a settlement with its insurer with respect to the Company’s claims relating to the hurricane.  Pursuant to the settlement, the insurer agreed to pay the Company $154.4 million on account of property damage caused by the hurricane, of which $83.9 million had been paid to the Company prior to the settlement, and $31.3 million on account of the Company’s business interruption claim, of which $24.3 million had been paid to the Company prior to the settlement.  As a result, in the third quarter of 2019, the insurer made a net payment of $77.5 million to the Company in full settlement of the Company’s claims related to the hurricane.  Pursuant to the terms of the Separation and Distribution Agreement, $0.8 million of this amount was paid to SITE Centers on account of unreimbursed business interruption losses incurred through June 30, 2018.  The property damage settlement proceeds are reflected in the Company’s consolidated balance sheet as Restricted Cash and will be disbursed to the Company in accordance with the terms of the Company’s mortgage financing.

14

 


 

The Company’s Property Insurance Receivable was $29.4 million at December 31, 2018.  The December 31, 2018 balance represented the estimated insurance recoveries related to the net book value of the property damage written off, as well as other expenses, as the Company believed it was probable that the insurance recovery, net of the deductible, would exceed the net book value of the damaged property.  Hurricane Property Insurance Income on the Company’s Statement of Operations for the three and nine months ended September 30, 2019 includes $70.5 million and $74.5 million, respectively, resulting from the excess payments made by the insurer over the $78.8 million of the estimated net book value written off.  The Company received $104.3 million of the $154.4 million during the nine months ended September 30, 2019, toward its final settled property insurance claim.

For the three and nine months ended September 30, 2019, rental revenues of $0.2 million and $2.9 million, respectively, and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018, to June 30, 2018, rental revenues of $2.4 million and $6.6 million, respectively, were not recorded because of lost tenant revenue attributable to the hurricane that has been partially defrayed by insurance proceeds.  The Company records revenue for covered business interruption in the period it determines it is probable it will be compensated and all the applicable contingencies with the insurance company have been resolved.  For all periods presented, the Company recorded insurance proceeds received as Business Interruption Income on the Company’s combined and consolidated statements of operations.

Legal Matters

The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company.  The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance.  While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.  

10.

Impairment Charges

Impairment charges were recorded on assets based on the difference between the carrying value of the assets and the estimated fair market value.  These impairments primarily were triggered by indicative bids received and changes in market assumptions due to the disposition process.

Items Measured at Fair Value on a Non-Recurring Basis

The valuation of impaired real estate assets and investments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset, as well as the income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties.  In general, the Company considers multiple valuation techniques when measuring fair value of real estate.  However, in certain circumstances, a single valuation technique may be appropriate.

For operational real estate assets, the significant assumptions included the capitalization rate used in the income capitalization valuation, as well as the projected property net operating income.  These valuation adjustments were calculated based on market conditions and assumptions made by SITE Centers or the Company at the time the valuation adjustments and impairments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change.

The following table presents information about the Company’s impairment charges on nonfinancial assets that were measured on a fair-value basis for the nine months ended September 30, 2019.  The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).

 

 

Fair Value Measurements

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total Impairment Charges

 

Long-lived assets held and used

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

$

 

 

$

 

 

$

73.1

 

 

$

73.1

 

 

$

33.0

 

 

15

 


 

 

The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

Description

 

Fair Value at September 30, 2019

 

 

Valuation Technique

 

Unobservable Inputs

 

Range

Impairment of assets

 

$

47.1

 

 

Income Capitalization

Approach

 

Market Capitalization

Rate

 

8.1%-9.1%

 

 

 

26.0

 

 

Discounted

Cash Flow

 

Discount Rate

 

9.5%-18.1%

 

 

 

 

 

 

 

 

Terminal Capitalization Rate

 

7.0%-10.0%

 

11.

Transactions with SITE Centers

The following table presents fees and other amounts charged by SITE Centers (in thousands):

 

For the Three

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

Management fees

$

2,676

 

 

$

3,283

 

Asset management fees

 

2,428

 

 

 

3,269

 

Leasing commissions

 

366

 

 

 

665

 

Maintenance services and other

 

360

 

 

 

406

 

Disposition fees

 

546

 

 

 

1,622

 

Credit facility guaranty and debt refinancing fees

 

60

 

 

 

60

 

Legal fees

 

221

 

 

 

266

 

 

$

6,657

 

 

$

9,571

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Management fees(A)

$

8,671

 

 

$

3,283

 

 

$

6,819

 

Asset management fees (B)

 

8,068

 

 

 

3,269

 

 

 

 

Leasing commissions(C)

 

1,811

 

 

 

665

 

 

 

982

 

Insurance premiums(D)

 

 

 

 

 

 

 

2,084

 

Maintenance services and other(E)

 

1,115

 

 

 

406

 

 

 

1,085

 

Disposition fees(F)

 

3,160

 

 

 

1,622

 

 

 

1,058

 

Credit facility guaranty and debt refinancing fees(G)

 

1,860

 

 

 

60

 

 

 

 

Legal fees(H)

 

578

 

 

 

266

 

 

 

 

 

$

25,263

 

 

$

9,571

 

 

$

12,028

 

(A)

Beginning on July 1, 2018, property management fees are generally calculated based on a percentage of tenant cash receipts collected during the three months immediately preceding the most recent June 30 or December 31.  Prior to the spin-off, calculated pursuant to the respective management agreements.

(B)

Asset management fees are generally calculated at 0.5% per annum of the gross asset value as determined on the immediately preceding June 30 or December 31.

(C)

Leasing commissions represent fees charged for the execution of the leasing of retail space.  Leasing commissions are included within Real Estate Assets on the consolidated balance sheets.

(D)

For periods prior to July 1, 2018, SITE Centers contracted with authorized insurance companies for the liability and property insurance coverage for the continental U.S. properties.  The Company remitted to SITE Centers insurance premiums associated with these insurance policies.  Insurance premiums are included within Operating and Maintenance on the combined statements of operations.

(E)

Maintenance services represent amounts charged to the properties for the allocation of compensation and other benefits of personnel directly attributable to the management of the properties.  Amounts are recorded in Operating and Maintenance Expense on the combined and consolidated statements of operations.

16

 


 

(F)

Disposition fees equal 1% of the gross sales price of each asset sold.  Disposition fees are included within Gain on Disposition of Real Estate on the combined and consolidated statements of operations.

(G)

The Company paid a debt financing fee equal to 0.20% of the aggregate principal amount of the mortgage refinancing closed in March 2019 (Note 7).  For periods after July 1, 2018, the credit facility guaranty fee equals 0.20% per annum of the aggregate commitments under the Revolving Credit Agreement plus an amount equal to 5.0% per annum times the average aggregate daily principal amount of loans plus the aggregate stated average daily amount of letters of credit outstanding under the Revolving Credit Agreement (Note 6).  Credit facility guaranty fees are included within Interest Expense on the consolidated statements of operations.

(H)

Legal fees charged for collection activity, negotiating and reviewing tenant leases and contracts for asset dispositions.

As of September 30, 2019 and December 31, 2018, the Company had amounts payable to SITE Centers of $16.7 million and $34.0 million, respectively.  The amounts are included as Payables to SITE Centers on the consolidated balance sheets and primarily represent amounts owed to SITE Centers for restricted cash escrows held by the mortgage lender at the time of the Company’s separation from SITE Centers.

12.

Earnings Per Share

The following table provides the net income and the number of common shares used in the computations of “basic” earnings per share (“EPS”), which utilizes the weighted-average number of common shares outstanding, and “diluted” EPS (in thousands, except per share amounts):  

 

For the Three

 

 

For the Period from

 

 

For the Nine

 

 

Months Ended

 

 

July 1, 2018 to

 

 

Months Ended

 

 

September 30, 2019

 

 

September 30, 2018

 

 

September 30, 2019

 

Numerators Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders after

   allocation to participating securities

$

72,268

 

 

$

5,953

 

 

$

85,875

 

Denominators Number of Shares

 

 

 

 

 

 

 

 

 

 

 

Basic and DilutedAverage shares outstanding

 

19,052

 

 

 

18,464

 

 

 

18,993

 

Income Per Share:

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

$

3.79

 

 

$

0.32

 

 

$

4.52

 

 

Dividends

In December 2018, the Company declared a 2018 dividend on its common shares of $1.30 per share that was paid in a combination of cash and the Company’s common shares, subject to a Puerto Rico withholding tax of 10%.  The aggregate amount of cash paid to shareholders was limited to 20% of the total dividend paid.  In connection with the 2018 dividend, in January 2019, the Company issued 578,238 common shares, based on the volume-weighted average trading price of $29.8547 per share, and paid $6.7 million in cash, which included the Puerto Rico withholding tax.

13.

Segment Information

The Company has two reportable operating segments: continental U.S. and Puerto Rico.  The table below presents information about the Company’s reportable operating segments (in thousands):

 

For the Three Months Ended September 30, 2019

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue and other property revenue

$

29,857

 

 

$

31,003

 

 

 

 

 

 

$

60,860

 

Rental operation expenses

 

(8,801

)

 

 

(7,918

)

 

 

 

 

 

 

(16,719

)

Net operating income

 

21,056

 

 

 

23,085

 

 

 

 

 

 

 

44,141

 

Property and asset management fees

 

(2,650

)

 

 

(2,454

)

 

 

 

 

 

 

(5,104

)

Impairment charges

 

(15,310

)

 

 

(4,480

)

 

 

 

 

 

 

(19,790

)

Hurricane property insurance income (loss), net

 

 

 

 

 

72,602

 

 

 

 

 

 

 

72,602

 

Depreciation and amortization

 

(10,282

)

 

 

(7,394

)

 

 

 

 

 

 

(17,676

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(12,460

)

 

 

(12,460

)

Gain on disposition of real estate, net

 

10,483

 

 

 

 

 

 

 

 

 

 

 

10,483

 

Income before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

72,196

 

 

17

 


 

 

For the Period from July 1, 2018 to September 30, 2018

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue and other property revenue

$

44,692

 

 

$

24,963

 

 

 

 

 

 

$

69,655

 

Rental operation expenses

 

(12,961

)

 

 

(6,477

)

 

 

 

 

 

 

(19,438

)

Net operating income

 

31,731

 

 

 

18,486

 

 

 

 

 

 

 

50,217

 

Property and asset management fees

 

(3,933

)

 

 

(2,619

)

 

 

 

 

 

 

(6,552

)

Impairment charges

 

(4,420

)

 

 

 

 

 

 

 

 

 

 

(4,420

)

Hurricane property insurance income (loss), net

 

 

 

 

 

(155

)

 

 

 

 

 

 

(155

)

Depreciation and amortization

 

(16,118

)

 

 

(6,020

)

 

 

 

 

 

 

(22,138

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(20,506

)

 

 

(20,506

)

Gain on disposition of real estate, net

 

9,835

 

 

 

 

 

 

 

 

 

 

 

9,835

 

Income before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

6,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross real estate assets

$

1,563,394

 

 

$

1,011,223

 

 

 

 

 

 

$

2,574,617

 

 

 

For the Nine Months Ended September 30, 2019

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue and other property revenue

$

101,920

 

 

$

81,436

 

 

 

 

 

 

$

183,356

 

Rental operation expenses

 

(29,768

)

 

 

(22,533

)

 

 

 

 

 

 

(52,301

)

Net operating income

 

72,152

 

 

 

58,903

 

 

 

 

 

 

 

131,055

 

Property and asset management fees

 

(9,100

)

 

 

(7,639

)

 

 

 

 

 

 

(16,739

)

Impairment charges

 

(28,510

)

 

 

(4,480

)

 

 

 

 

 

 

(32,990

)

Hurricane property insurance income (loss), net

 

 

 

 

 

76,233

 

 

 

 

 

 

 

76,233

 

Depreciation and amortization

 

(34,676

)

 

 

(20,733

)

 

 

 

 

 

 

(55,409

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(57,500

)

 

 

(57,500

)

Gain on disposition of real estate, net

 

41,648

 

 

 

 

 

 

 

 

 

 

 

41,648

 

Income before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

86,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross real estate assets

$

1,049,465

 

 

$

1,076,061

 

 

 

 

 

 

$

2,125,526

 

 

 

For the Period from January 1, 2018 to June 30, 2018

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

RVI Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue and other property revenue

$

103,264

 

 

$

51,970

 

 

 

 

 

 

$

155,234

 

Rental operation expenses

 

(30,228

)

 

 

(13,951

)

 

 

 

 

 

 

(44,179

)

Net operating income

 

73,036

 

 

 

38,019

 

 

 

 

 

 

 

111,055

 

Property and asset management fees

 

(3,589

)

 

 

(3,230

)

 

 

 

 

 

 

(6,819

)

Impairment charges

 

(48,680

)

 

 

 

 

 

 

 

 

 

 

(48,680

)

Hurricane property insurance income (loss), net

 

 

 

 

 

(868

)

 

 

 

 

 

 

(868

)

Depreciation and amortization

 

(37,339

)

 

 

(12,805

)

 

 

 

 

 

 

(50,144

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(187,586

)

 

 

(187,586

)

Gain on disposition of real estate, net

 

13,096

 

 

 

 

 

 

 

 

 

 

 

13,096

 

Loss before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

(169,946

)

(A)

Unallocated expenses consist of General and Administrative Expenses, Interest Expense and Other Expenses as listed in the Company’s combined and consolidated statements of operations.  

18

 


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides readers with a perspective from management on the financial condition, results of operations and liquidity of Retail Value Inc. and its related consolidated real estate subsidiaries (collectively, the “Company” or “RVI”) (NYSE: RVI) and other factors that may affect the Company’s future results.  The Company believes it is important to read the MD&A in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2018, as well as other publicly available information.

RVI is an Ohio company formed in December 2017 that, as of September 30, 2019, owned and operated a portfolio of 29 assets, composed of 17 continental U.S. assets and 12 assets in Puerto Rico.  These properties consisted of retail shopping centers composed of 12 million square feet of Company-owned gross leasable area (“GLA”) and were located in 11 states and Puerto Rico.  The Company’s continental U.S. assets comprised 56% and the properties in Puerto Rico comprised 44% of its total consolidated revenue for the nine months ended September 30, 2019.  The Company’s centers have a diverse tenant base that includes national retailers such as Walmart/Sam’s Club, Bed, Bath & Beyond, PetSmart, the TJX Companies (T.J. Maxx, Marshalls and HomeGoods), Kohl’s, Best Buy, Gap, and Michaels.  At September 30, 2019, the aggregate occupancy of the Company’s shopping center portfolio was 87.8%, and the average annualized base rent per occupied square foot was $15.71.  Prior to the Company’s separation on July 1, 2018, the Company was a wholly-owned subsidiary of SITE Centers Corp. (“SITE Centers” or the “Parent Company”).

Unless otherwise expressly stated or the context otherwise requires, in the case of information as of dates or for periods prior to the Company’s separation from SITE Centers, references to the “Company” and the “RVI Predecessor” refer to the combined and consolidated entities of SITE Centers that owned the assets comprising the Company’s portfolio as of July 1, 2018, assuming that such entities owned only the assets comprising the Company’s portfolio as of July 1, 2018.

Executive Summary

In order to consummate the Company’s separation from SITE Centers, on July 1, 2018, the Company and SITE Centers entered into a separation and distribution agreement (the “Separation and Distribution Agreement”), pursuant to which, among other things, SITE Centers agreed to transfer properties and certain related assets, liabilities and obligations to RVI and to distribute 100% of the outstanding common shares of RVI to holders of record of SITE Centers’ common shares as of the close of business on June 26, 2018, the record date.  On July 1, 2018, the separation date, holders of SITE Centers’ common shares received one common share of RVI for every ten shares of SITE Centers’ common stock held on the record date.  In connection with the separation, SITE Centers retained 1,000 shares of RVI’s series A preferred stock (the “RVI Preferred Shares”) having an aggregate dividend preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by RVI asset sales.

In March 2019, the Company entered into a mortgage loan in the aggregate principal amount of $900 million in order to refinance and prepay all amounts outstanding under its February 2018 mortgage loan, which had an original principal balance of $1.35 billion.  The Company incurred costs of $20.2 million in connection with the financing, which included a $1.8 million debt financing fee paid to SITE Centers.  

The Company expects to focus on realizing value in its portfolio through operations and sales of its assets.  The Company primarily intends to use net asset sale proceeds first to repay mortgage debt, second to make distributions on account of the RVI Preferred Shares, up to the preference amount, and third to make distributions to holders of the Company’s common shares.  In addition, pursuant to the Separation and Distribution Agreement, and subject to maintaining its status as a Real Estate Investment Trust (“REIT”), the Company has agreed to repay to SITE Centers certain cash balances held in restricted accounts on the separation date in connection with the original mortgage loan.  The Company has agreed to pay these amounts ($16.7 million as of September 30, 2019) to SITE Centers as soon as reasonably possible out of its operating cash flow but in no event later than March 31, 2020.

19

 


 

From January 1, 2019 through September 30, 2019, the Company sold the following assets (in thousands):

Date Sold

 

Property Name

 

City, State

 

Total Owned GLA

 

 

Gross

Sales Price

 

2/8/19

 

Millenia Plaza

 

Orlando, FL

 

 

412

 

 

$

56,400

 

2/27/19

 

Homestead Pavilion - TD Bank outparcel

 

Homestead, FL

 

 

4

 

 

 

4,091

 

3/1/19

 

West Allis Center - Chick-Fil-A outparcel

 

Milwaukee, WI

 

 

5

 

 

 

2,211

 

3/4/19

 

Lowe's Home Improvement

 

Hendersonville, TN

 

 

129

 

 

 

16,058

 

3/26/19

 

Midway Marketplace

 

St. Paul, MN

 

 

324

 

 

 

31,210

 

4/5/19

 

Mariner Square

 

Spring Hill, FL

 

 

194

 

 

 

17,000

 

5/23/19

 

Shoppers World of Brookfield

 

Brookfield, WI

 

 

203

 

 

 

19,450

 

5/31/19

 

Homestead Pavilion

 

Homestead, FL

 

 

295

 

 

 

62,250

 

6/13/19

 

Beaver Creek Crossings

 

Apex, NC

 

 

321

 

 

 

52,750

 

8/7/19

 

Harbison Court

 

Columbia, SC

 

 

242

 

 

 

36,500

 

8/9/19

 

West Allis Center

 

West Allis, WI

 

 

259

 

 

 

18,100

 

 

 

 

 

 

 

 

2,388

 

 

$

316,020

 

Manager

The Company is party to an external management agreement (the “External Management Agreement”), which, together with various property management agreements, governs the fees, terms and conditions pursuant to which SITE Centers serves as the Company’s manager.  The Company does not have any employees.  In general, either the Company or SITE Centers may terminate these management agreements on December 31, 2019, or at the end of any six-month renewal period thereafter.  

Pursuant to the External Management Agreement, the Company pays SITE Centers and certain of its subsidiaries a monthly asset management fee in an aggregate amount of 0.5% per annum of the gross asset value of the Company’s properties (calculated in accordance with the terms of the External Management Agreement).  The External Management Agreement also provides for the reimbursement of certain expenses incurred by SITE Centers in connection with the services it provides to the Company along with the payment of transaction-based fees to SITE Centers in the event of any debt financings or change of control transactions.

Pursuant to the property management agreements, the Company pays SITE Centers and certain of its subsidiaries a monthly property management fee in an aggregate amount of 3.5% and 5.5% of the gross revenue (as calculated in accordance with the terms of the property management agreements) of the Company’s continental U.S. properties and the Puerto Rico properties, respectively, on a monthly basis.  The property management agreements also provide for the payment to SITE Centers of certain leasing commissions and financing fees and a disposition fee of 1% of the gross sale price of each asset sold by the Company.  

RESULTS OF OPERATIONS

Where used, references to “Comparable Portfolio Properties” reflect shopping center properties owned as of September 30, 2019.

Revenues from Operations (in thousands)

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

Rental income

$

54,291

 

 

$

67,202

 

 

$

(12,911

)

Business interruption income

 

5,675

 

 

 

2,404

 

 

 

3,271

 

Other income

 

894

 

 

 

49

 

 

 

845

 

Total revenues

$

60,860

 

 

$

69,655

 

 

$

(8,795

)

 

20

 


 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

YTD

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

Rental income (A)

$

174,736

 

 

$

67,202

 

 

$

149,825

 

 

$

(42,291

)

Business interruption income(B)

 

7,675

 

 

 

2,404

 

 

 

5,100

 

 

 

171

 

Other income

 

945

 

 

 

49

 

 

 

309

 

 

 

587

 

Total revenues (C), (D)

$

183,356

 

 

$

69,655

 

 

$

155,234

 

 

$

(41,533

)

(A)

Includes a reduction associated with Hurricane Maria for the Puerto Rico properties that has been partially defrayed by insurance proceeds as noted in (B) and (C) below. In addition, the Company adopted Accounting Standards Update No. 2016-02—Leases, as amended (“Topic 842”), using the modified retrospective approach as of January 1, 2019, and elected to apply the transition provisions of the standard at the beginning of the period of adoption.  As the Company adopted the practical expedient with regards to not separating lease and non-lease components, all rental income earned pursuant to tenant leases, including the provision for uncollectible amounts, is reflected as one line item, “Rental Income,” in the consolidated statements of operations for the three and nine months ended September 30, 2019.  See further discussion of 2018 reclassification impact in Note 3, “Summary of Significant Accounting Policies,” to the Company’s combined and consolidated financial statements included herein.  

The following tables summarize the key components of the 2019 rental income as compared to 2018:

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

Contractual Lease Payments

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

Base and percentage rental income

$

37,894

 

 

$

48,944

 

 

$

(11,050

)

Recoveries from tenants

 

13,569

 

 

 

16,057

 

 

 

(2,488

)

Lease termination fees and ancillary rental income

 

3,059

 

 

 

2,201

 

 

 

858

 

Bad debt

 

(231

)

 

N/A

 

 

 

(231

)

Total contractual lease payments

$

54,291

 

 

$

67,202

 

 

$

(12,911

)

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

YTD

 

Contractual Lease Payments

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

Base and percentage rental income(1)

$

124,233

 

 

$

48,944

 

 

$

104,837

 

 

$

(29,548

)

Recoveries from tenants(2)

 

42,650

 

 

 

16,057

 

 

 

37,345

 

 

 

(10,752

)

Lease termination fees and ancillary

   rental income

 

7,811

 

 

 

2,201

 

 

 

7,643

 

 

 

(2,033

)

Bad debt(3)

 

42

 

 

N/A

 

 

N/A

 

 

 

42

 

Total contractual lease payments

$

174,736

 

 

$

67,202

 

 

$

149,825

 

 

$

(42,291

)

 

(1)

The following table presents the statistics for the Company’s portfolio affecting base and percentage rental revenues:

 

Shopping Center Portfolio

September 30,

 

 

2019

 

 

2018

 

Centers owned

29

 

 

42

 

Aggregate occupancy rate

 

87.8

%

 

 

89.8

%

Average annualized base rent per occupied square foot

$

15.71

 

 

$

15.38

 

The decrease in base and percentage rental income primarily is due to the disposition of assets as noted in (D) below.  The decrease in the occupancy rate primarily was due to asset dispositions and a combination of tenant expirations and tenant bankruptcies.  

21

 


 

 

(2)

Recoveries were approximately 71.6% and 73.0% of reimbursable operating expenses and real estate taxes for the nine-month periods ended September 30, 2019 and 2018, respectively.  The overall decrease in the amount of recoveries from tenants related to the disposition of higher occupancy assets as noted in (D) below along with the impact of anchor tenant vacancies and conversions to gross leases in Puerto Rico.  The recovery percentage was impacted by the adoption of Topic 842, which resulted in certain financial statement presentation changes that reduced Rental Income but had no impact on net income.    

 

(3)

Classified in Operating and Maintenance Expense for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018.

(B)

Represents payments received from the Company’s insurance company related to its claims for business interruption losses incurred at its Puerto Rico properties associated with Hurricane Maria.

(C)

The Company did not record $2.9 million and $9.0 million of aggregate revenues for the nine months ended September 30, 2019 and 2018, respectively, because of lost tenant revenue attributable to Hurricane Maria that has been partially defrayed by the receipt of business interruption insurance proceeds as noted in (B) above.  See further discussion in both “Contractual Obligations and Other Commitments” below and Note 9, “Commitments and Contingencies,” to the Company’s combined and consolidated financial statements included herein related to the Company’s insurance claim.

(D)

The changes in Total Revenues are composed of the following (in millions):

 

 

2019 vs. 2018

 

 

 

$ Change

 

Continental U.S.

 

$

(46.0

)

Puerto Rico

 

 

4.5

 

 

 

$

(41.5

)

 

 

 

2019 vs. 2018

 

 

 

$ Change

 

Comparable Portfolio Properties

 

$

0.9

 

Disposition of shopping centers

 

 

(42.4

)

 

 

$

(41.5

)

Expenses from Operations (in thousands)

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

Operating and maintenance

$

9,819

 

 

$

10,376

 

 

$

(557

)

Real estate taxes

 

6,900

 

 

 

9,062

 

 

 

(2,162

)

Property and asset management fees

 

5,104

 

 

 

6,552

 

 

 

(1,448

)

Impairment charges

 

19,790

 

 

 

4,420

 

 

 

15,370

 

Hurricane property insurance (income) loss, net

 

(72,602

)

 

 

155

 

 

 

(72,757

)

General and administrative

 

1,111

 

 

 

1,009

 

 

 

102

 

Depreciation and amortization

 

17,676

 

 

 

22,138

 

 

 

(4,462

)

 

$

(12,202

)

 

$

53,712

 

 

$

(65,914

)

 

22

 


 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

YTD

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

Operating and maintenance(A)

$

30,722

 

 

$

10,376

 

 

$

24,608

 

 

$

(4,262

)

Real estate taxes(A)

 

21,579

 

 

 

9,062

 

 

 

19,571

 

 

 

(7,054

)

Property and asset management

   fees

 

16,739

 

 

 

6,552

 

 

 

6,819

 

 

 

3,368

 

Impairment charges(B)

 

32,990

 

 

 

4,420

 

 

 

48,680

 

 

 

(20,110

)

Hurricane property insurance

   (income) loss, net(C)

 

(76,233

)

 

 

155

 

 

 

868

 

 

 

(77,256

)

General and administrative(D)

 

3,054

 

 

 

1,009

 

 

 

7,638

 

 

 

(5,593

)

Depreciation and amortization(E)

 

55,409

 

 

 

22,138

 

 

 

50,144

 

 

 

(16,873

)

 

$

84,260

 

 

$

53,712

 

 

$

158,328

 

 

$

(127,780

)

(A)

The changes in Operating and Maintenance and Real Estate Taxes are composed of the following (in millions):

 

 

2019 vs. 2018 $ Change

 

 

 

Operating

and

Maintenance

 

 

Real Estate

Taxes

 

Continental U.S.

 

$

(6.8

)

 

$

(7.3

)

Puerto Rico

 

 

2.5

 

 

 

0.2

 

 

 

$

(4.3

)

 

$

(7.1

)

 

 

 

2019 vs. 2018 $ Change

 

 

 

Operating

and

Maintenance

 

 

Real Estate

Taxes

 

Comparable Portfolio Properties

 

$

1.1

 

 

$

(1.0

)

Disposition of shopping centers

 

 

(5.4

)

 

 

(6.1

)

 

 

$

(4.3

)

 

$

(7.1

)

The decrease in real estate taxes for the Comparable Portfolio Properties is a result of the adoption of Topic 842.

(B)

The Company recorded impairment charges in 2019 related to shopping centers marketed for sale.  Changes in (i) an asset’s expected future undiscounted cash flows due to changes in market conditions, (ii) various courses of action that may occur or (iii) holding periods each could result in the recognition of additional impairment charges.  Impairment charges are presented in Note 10, “Impairment Charges,” to the Company’s combined and consolidated financial statements included herein.

(C)

The Hurricane Property Insurance (Income) Loss is more fully described in “Contractual Obligations and Other Commitments” later in this section and Note 9, “Commitments and Contingencies,” to the Company’s combined and consolidated financial statements included herein.

(D)

Subsequent to the separation from SITE Centers, primarily represents legal, audit, tax and compliance services and director compensation.  Prior to the separation from SITE Centers, primarily represents the allocation of indirect costs and expenses incurred by SITE Centers related to the Company’s business consisting of compensation and other general and administrative expenses that have been allocated using the property revenue of the Company.  

(E)

The disposition of shopping centers accounts for $17.4 million in the reduction of depreciation expense.

23

 


 

Other Income and Expenses (in thousands)

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

Interest expense

$

(9,381

)

 

$

(17,050

)

 

$

7,669

 

Debt extinguishment costs

 

(1,949

)

 

 

(2,713

)

 

 

764

 

Transaction costs

 

(19

)

 

 

(179

)

 

 

160

 

Other income, net

 

 

 

 

445

 

 

 

(445

)

Gain on disposition of real estate, net

 

10,483

 

 

 

9,835

 

 

 

648

 

Tax expense

 

72

 

 

 

(328

)

 

 

400

 

 

$

(794

)

 

$

(9,990

)

 

$

9,196

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

YTD

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

Interest expense(A)

$

(34,201

)

 

$

(17,050

)

 

$

(37,584

)

 

$

20,433

 

Debt extinguishment costs(B)

 

(19,358

)

 

 

(2,713

)

 

 

(109,036

)

 

 

92,391

 

Transaction costs(C)

 

(37

)

 

 

(179

)

 

 

(33,325

)

 

 

33,467

 

Other (expense) income, net

 

(850

)

 

 

445

 

 

 

(3

)

 

 

(1,292

)

Gain on disposition of real

   estate, net(D)

 

41,648

 

 

 

9,835

 

 

 

13,096

 

 

 

18,717

 

Tax expense

 

(423

)

 

 

(328

)

 

 

(4,210

)

 

 

4,115

 

 

$

(13,221

)

 

$

(9,990

)

 

$

(171,062

)

 

$

167,831

 

(A)

At September 30, 2019, the interest rate of the Company’s mortgage loan was 4.7% per annum.  The decrease in interest expense primarily was due to a change in the amount of debt outstanding, as well as the lower interest rate applicable to the Company’s new mortgage loan.  In addition, interest expense in 2018 included expense allocated from SITE Centers prior to the incurrence of the Company’s original mortgage loan in February 2018.

Interest costs capitalized in conjunction with capital projects were $0.2 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, compared to $0.3 million and $0.1 million for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018, respectively.  The change in the amount of interest costs capitalized is a result of the restoration work in Puerto Rico.

(B)

Includes debt extinguishment costs of $12.7 million, which were recorded primarily in connection with the Company entering into the $900.0 million mortgage loan in March 2019.  See further discussion in Note 7, “Mortgage Indebtedness,” to the Company’s combined and consolidated financial statements included herein.

(C)

Costs related to the Company’s separation from SITE Centers.  

(D)

Related to the sale of nine assets and two outparcels during the nine months ended September 30, 2019.  

24

 


 

Net Income (Loss) (in thousands)

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

Net income

$

72,268

 

 

$

5,953

 

 

$

66,315

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

YTD

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

Net income (loss)

$

85,875

 

 

$

5,953

 

 

$

(174,156

)

 

$

254,078

 

The increase in net income primarily is attributable to the August 2019 settlement of the hurricane property and business interruption insurance claims relating to the Puerto Rico assets.

NON-GAAP FINANCIAL MEASURES

Funds from Operations and Operating Funds from Operations

Definition and Basis of Presentation

The Company believes that Funds from Operations, or FFO, and Operating FFO, both non-GAAP financial measures, provide additional and useful means to assess the financial performance of REITs.  FFO and Operating FFO are frequently used by the real estate industry, as well as securities analysts, investors and other interested parties, to evaluate the performance of REITs.  The Company also believes that FFO and Operating FFO more appropriately measure the core operations of the Company and provide benchmarks to its peer group.

In December 2018, the National Association of Real Estate Investment Trusts (“NAREIT”) issued NAREIT Funds From Operations White Paper - 2018 Restatement (the “2018 FFO White Paper”).  The purpose of the 2018 FFO White Paper was not to change the fundamental definition of FFO but to clarify existing guidance and to consolidate into a single document, alerts and policy bulletins issued by NAREIT since the last FFO white paper was issued in 2002.  The 2018 FFO White Paper was effective starting with first quarter 2019 reporting.  The Company did not report any changes in the calculation of FFO in 2019 related to the clarification in the 2018 FFO White Paper.

FFO excludes GAAP historical cost depreciation and amortization of real estate and real estate investments, which assume that the value of real estate assets diminishes ratably over time.  Historically, however, real estate values have risen or fallen with market conditions, and many companies use different depreciable lives and methods.  Because FFO excludes depreciation and amortization unique to real estate and gains and losses from property dispositions, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, interest costs and acquisition, disposition and development activities.  This provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.

FFO is generally defined and calculated by the Company as net income (loss) (computed in accordance with GAAP), adjusted to exclude (i) gains and losses from disposition of real estate property and related investments, which are presented net of taxes, if any, (ii) impairment charges on real estate property and related investments and (iii) certain non-cash items.  These non-cash items principally include real property depreciation and amortization of intangibles.  The Company’s calculation of FFO is consistent with the definition of FFO provided by NAREIT.

The Company believes that certain charges and income recorded in its operating results are not comparable or reflective of its core operating performance.  Operating FFO is useful to investors as the Company removes non-comparable charges and income to analyze the results of its operations and assess performance of the core operating real estate portfolio.  As a result, the Company also computes Operating FFO and discusses it with the users of its financial statements, in addition to other measures such as net income (loss) determined in accordance with GAAP and FFO.  Operating FFO is generally defined and calculated by the Company as FFO excluding certain charges and gains that management believes are not comparable and indicative of the results of the Company’s operating real estate portfolio.  Such adjustments include gains/losses on the early extinguishment of debt, net hurricane-related activity, transaction costs and other restructuring type costs.  The disclosure of these charges and income is generally requested by users of the Company’s financial statements.  

25

 


 

The adjustment for these charges and income may not be comparable to how other REITs or real estate companies calculate their results of operations, and the Company’s calculation of Operating FFO differs from NAREIT’s definition of FFO.  Additionally, the Company provides no assurances that these charges and income are non-recurring.  These charges and income could be reasonably expected to recur in future results of operations.

These measures of performance are used by the Company for several business purposes and by other REITs.  The Company uses FFO and/or Operating FFO in part (i) as a disclosure to improve the understanding of the Company’s operating results among the investing public, (ii) as a measure of a real estate asset’s performance and (iii) to compare the Company’s performance to that of other publicly traded shopping center REITs.

For the reasons described above, management believes that FFO and Operating FFO provide the Company and investors with an important indicator of the Company’s operating performance.  They provide recognized measures of performance other than GAAP net income, which may include non-cash items (often significant).  Other real estate companies may calculate FFO and Operating FFO in a different manner.

The Company’s management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s net income.  FFO and Operating FFO do not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties.  The Company’s management does not use FFO or Operating FFO as an indicator of the Company’s cash obligations and funding requirements for future commitments or redevelopment activities.  Neither FFO nor Operating FFO represents cash generated from operating activities in accordance with GAAP, and neither is necessarily indicative of cash available to fund cash needs.  Neither FFO nor Operating FFO should be considered an alternative to net income computed in accordance with GAAP or as an alternative to cash flow as a measure of liquidity.  FFO and Operating FFO are simply used as additional indicators of the Company’s operating performance.  The Company believes that to further understand its performance, FFO and Operating FFO should be compared with the Company’s reported net income (loss) and considered in addition to cash flows determined in accordance with GAAP, as presented in its combined and consolidated financial statements.  Reconciliations of these measures to their most directly comparable GAAP measure of net income (loss) have been provided below.

Reconciliation Presentation

FFO and Operating FFO were as follows (in thousands):

 

For the Three

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

$ Change

 

FFO

$

99,225

 

 

$

22,638

 

 

$

76,587

 

Operating FFO

 

23,085

 

 

 

25,237

 

 

 

(2,152

)

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

 

 

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

 

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

$ Change

 

 

The Company

 

 

RVI Predecessor

 

 

 

 

 

FFO

$

132,548

 

 

$

22,638

 

 

$

(89,204

)

 

$

199,114

 

Operating FFO

 

71,831

 

 

 

25,237

 

 

 

59,824

 

 

 

(13,230

)

The increase in FFO primarily was a result of the hurricane settlement in August 2019, debt extinguishment charges and transaction costs incurred in connection with the Company’s mortgage loan in February 2018, partially offset by the dilutive impact from the disposition of assets.  The decrease in Operating FFO primarily was due to asset sales.

26

 


 

The Company’s reconciliation of net income (loss) to FFO and Operating FFO is as follows (in thousands).  The Company provides no assurances that these charges and income adjusted in the calculation of Operating FFO are non-recurring.  These charges and income could reasonably be expected to recur in future results of operations.

 

For the Three

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

Net income

$

72,268

 

 

$

5,953

 

Depreciation and amortization of real estate

   investments

 

17,650

 

 

 

22,100

 

Impairment of real estate assets

 

19,790

 

 

 

4,420

 

Gain on disposition of real estate

 

(10,483

)

 

 

(9,835

)

FFO

 

99,225

 

 

 

22,638

 

Hurricane activity, net

 

(78,108

)

 

 

152

 

Other expenses

 

1,968

 

 

 

2,447

 

Non-operating items, net

 

(76,140

)

 

 

2,599

 

Operating FFO

$

23,085

 

 

$

25,237

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Net income (loss)

$

85,875

 

 

$

5,953

 

 

$

(174,156

)

Depreciation and amortization of real estate

   investments

 

55,331

 

 

 

22,100

 

 

 

49,365

 

Impairment of real estate assets

 

32,990

 

 

 

4,420

 

 

 

48,680

 

Gain on disposition of real estate

 

(41,648

)

 

 

(9,835

)

 

 

(13,093

)

FFO

 

132,548

 

 

 

22,638

 

 

 

(89,204

)

Hurricane activity, net(A)

 

(80,962

)

 

 

152

 

 

 

2,338

 

Separation charges

 

 

 

 

 

 

 

1,138

 

Other expenses(B)

 

20,245

 

 

 

2,447

 

 

 

145,552

 

Non-operating items, net

 

(60,717

)

 

 

2,599

 

 

 

149,028

 

Operating FFO

$

71,831

 

 

$

25,237

 

 

$

59,824

 

 

(A)

The hurricane activity, net is summarized as follows (in thousands):

 

For the Three

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

Lost tenant revenue

$

169

 

 

$

2,401

 

Business interruption income

 

(5,675

)

 

 

(2,404

)

Hurricane property insurance income, net

 

(72,602

)

 

 

155

 

 

$

(78,108

)

 

$

152

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Lost tenant revenue

$

2,946

 

 

$

2,401

 

 

$

6,570

 

Business interruption income

 

(7,675

)

 

 

(2,404

)

 

 

(5,100

)

Hurricane property insurance income, net

 

(76,233

)

 

 

155

 

 

 

868

 

 

$

(80,962

)

 

$

152

 

 

$

2,338

 

27

 


 

 

(B)

Amounts included in other expenses as follows (in millions):

 

For the Three

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

Transaction and other expenses

$

 

 

$

0.2

 

Debt extinguishment costs

 

2.0

 

 

 

2.3

 

 

$

2.0

 

 

$

2.5

 

 

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Transaction and other expenses

$

0.9

 

 

$

0.2

 

 

$

36.5

 

Debt extinguishment costs

 

19.4

 

 

 

2.3

 

 

 

109.0

 

 

$

20.3

 

 

$

2.5

 

 

$

145.5

 

 

 

LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES

The Company requires capital to fund its operating expenses, capital expenditures and investment activities.  The Company’s capital sources may include cash on hand, cash flow from operations (absent the occurrence of an Amortization Period as described below), as well as availability under its Revolving Credit Agreement (as defined below).

Debt outstanding was $674.3 million and $988.6 million at September 30, 2019 and December 31, 2018, respectively.  The Company’s mortgage loan generally requires interest only payments.  The Company intends to utilize net asset sale proceeds to repay the principal of the mortgage loan.  In addition, and subject to maintaining its status as a REIT, the Company has agreed to repay SITE Centers for certain cash held in restricted accounts at the time of the separation and other amounts as soon as reasonably possible out of the Company’s operating cash flow but in no event later than March 31, 2020.  The amount payable to SITE Centers was $16.7 million at September 30, 2019.  While the Company currently believes it has several viable sources to obtain capital and fund its business, including capacity under the Revolving Credit Agreement, no assurance can be provided that its obligations, including the mortgage loan, will be refinanced or repaid as currently anticipated.

2019 Financing Activities

Mortgage Financing

On March 11, 2019, certain wholly-owned subsidiaries of the Company entered into a mortgage loan with an initial aggregate principal amount of $900 million.  Substantially all proceeds from the mortgage loan were used to refinance and prepay all amounts outstanding under the Company’s February 2018 mortgage loan in the original aggregate principal amount of $1.35 billion. The borrowers’ obligations to pay principal, interest and other amounts under the new mortgage loan are evidenced by certain promissory notes executed by the borrowers, which are referred to collectively as the notes, which are secured by, among other things: (i) mortgages encumbering the borrowers’ properties located in the continental U.S. (which comprise substantially all of the Company’s properties located in the continental U.S.) and Plaza Del Sol located in Bayamon, Puerto Rico (collectively, the “Mortgaged Properties”); (ii) a pledge of the equity of the Company’s subsidiaries that own each of the Company’s properties located in Puerto Rico (collectively, the “Pledged Properties”) and a pledge of related rents and other cash flows, insurance proceeds and condemnation awards; and (iii) a pledge of any reserves and accounts of any borrower. Subsequent to closing, the originating lenders placed the notes into a securitization trust that issued and sold mortgage-backed securities to investors.

As of September 30, 2019, the aggregate principal amount of the mortgage loan was $674.3 million.  The loan facility will mature on March 9, 2021, subject to three one-year extensions at borrowers’ option conditioned upon, among other items, (i) an event of default shall not be continuing, (ii) in the case of the second one-year extension option, evidence that the Debt Yield (as defined and calculated in accordance with the loan agreement, but which is the ratio of net cash flow of the Mortgaged Properties to the outstanding principal amount of the loan facility) equals or exceeds 13% and (iii) in the case of the third one-year extension option, evidence that the Debt Yield equals or exceeds 14%.

The initial weighted-average interest rate applicable to the notes was equal to one-month LIBOR plus a spread of 2.30% per annum, provided that such spread is subject to an increase of 0.25% per annum in connection with any exercise of the third extension

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option. Borrowers are required to maintain an interest rate cap with respect to the principal amount of the notes having (i) during the initial two-year term of the loan, a LIBOR strike rate equal to 4.5% and (ii) with respect to any extension period, a LIBOR strike rate that would result in a debt service coverage ratio of 1.20x based on the Mortgaged Properties.  Application of voluntary prepayments as described below will cause the weighted-average interest rate to increase over time.  At September 30, 2019, the interest rate applicable to the mortgage loan was 4.7%.

The loan facility is structured as an interest only loan throughout the initial two-year term and any exercised extension options. As a result, so long as no Amortization Period (as described below) or event of default exists, any property cash flows available following payment of debt service and funding of certain required reserve accounts (including reserves for payment of real estate taxes, insurance premiums, ground rents, tenant improvements and capital expenditures), will be available to the borrowers to pay operating expenses and for other general corporate purposes. An Amortization Period will be deemed to commence in the event the borrowers fail to achieve a Debt Yield of 10.0% at the end of any fiscal quarter. The Debt Yield as of September 30, 2019, was approximately 13.9%. During the pendency of an Amortization Period, any property cash flows available following payment of debt service and the funding of certain reserve accounts (including the reserve accounts referenced above and additional reserves established for payment of approved operating expenses, SITE Centers management fees, certain public company costs, certain taxes and the minimum cash portion of required REIT distributions) shall be applied to the repayment of the notes. During an Amortization Period, cash flow from the borrowers’ operations will only be made available to the Company to pay required REIT distributions in an amount equal to the minimum portion of required REIT distributions allowed by law to be paid in cash (currently 20%), with the remainder of required REIT distributions during an Amortization Period likely to be paid in common shares of the Company.

Subject to certain conditions described in the mortgage loan agreement, the borrowers may prepay principal amounts outstanding under the loan facility in whole or in part by providing (i) advance notice of prepayment to the lenders and (ii) remitting the prepayment premium described in the mortgage loan agreement. No prepayment premium is required with respect to any prepayments made after April 9, 2020. Additionally, no prepayment premium will apply to prepayments made in connection with permitted property sales. Each Mortgaged Property has a portion of the original principal amount of the mortgage loan allocated to it. The amount of proceeds from the sale of an individual Mortgaged Property required to be applied towards prepayment of the notes (i.e., the property’s “release price”), will depend upon the Debt Yield at the time of the sale as follows:

 

if the Debt Yield is less than or equal to 14.0%, the release price is the greater of (i) 100% of the property’s net sale proceeds and (ii) 110% of its allocated loan amount; and

 

 

if the Debt Yield is greater than 14.0%, the release price is the greater of (i) 90% of the property’s net sale proceeds and (ii) 105% of its allocated loan amount.

To the extent the net cash proceeds from the sale of a Mortgaged Property that are applied to repay the mortgage loan exceed the amount specified in applicable clause (ii) above with respect to such property, the excess may be applied by the Company as a credit against the release price applicable to future sales of Mortgaged Properties.

Pledged Properties other than Plaza Del Sol do not have allocated loan amounts or, in general, minimum release prices; all proceeds from sales of Pledged Properties are required to be used to prepay the notes. Notwithstanding the foregoing, in order to obtain a release of all of the Pledged Properties (excluding Plaza Del Sol) in connection with a portfolio sale of all of the Pledged Properties, the loan facility requires a minimum release price equal to the greater of (i) $250 million and (ii) 100% of the net sale proceeds.

Voluntary prepayments made by the borrowers (including prepayments made with proceeds from asset sales and prepayments made with property cash flows following commencement of any Amortization Period) will be applied to tranches of notes (i) absent an event of default, in descending order of seniority (i.e., such prepayments will first be applied to the most senior tranches of notes) and (ii) following any event of default, in such order as the loan servicer determines in its sole discretion. As a result, the Company expects that the weighted-average interest rate of the notes will increase during the term of the loan facility.

In the event of a default, the contract rate of interest on the notes will increase to the lesser of (i) the maximum rate allowed by law or (ii) the greater of (A) 4% above the interest rate otherwise applicable and (B) the Prime Rate (as defined in the mortgage loan) plus 1.0%. The notes contain other terms and provisions that are customary for instruments of this nature. In addition, the Company executed a certain environmental indemnity agreement and a certain guaranty agreement in favor of the lenders under which the Company agreed to indemnify the lenders for certain environmental risks and guarantee the borrowers’ obligations under the exceptions to the non-recourse provisions in the mortgage loan agreement. The mortgage loan agreement includes representations, warranties, affirmative and restrictive covenants and other provisions customary for agreements of this nature. The mortgage loan agreement also includes customary events of default, including, among others, principal and interest payment defaults and breaches of

29

 


 

affirmative or negative covenants; the mortgage loan agreement does not contain any financial maintenance covenants.  Upon the occurrence of an event of default, the lenders may avail themselves of various customary remedies under the loan agreement and other agreements executed in connection therewith or applicable law, including accelerating the loan facility and realizing on the real property collateral or pledged collateral.

In connection with the refinancing in March 2019, the Company incurred $12.7 million of aggregate debt extinguishment costs which included the write off of unamortized deferred financing costs.  See further discussion in Note 7, “Mortgage Indebtedness” of the Company’s combined and consolidated financial statements included herein.  

Credit Agreement

In July 2018, the Company entered into a Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association (“PNC”).  The Revolving Credit Agreement provides for borrowings of up to $30.0 million.  The Company’s borrowings under the Revolving Credit Agreement bear interest at variable rates at the Company’s election, based on either (i) LIBOR plus a specified spread ranging from 1.05% to 1.50% depending on the Company’s Leverage Ratio (as defined in the Revolving Credit Agreement) or (ii) the Alternate Base Rate (as defined in the Revolving Credit Agreement) plus a specified spread ranging from 0.05% to 0.50% depending on the Company’s Leverage Ratio.  The Company is also required to pay a facility fee on the aggregate revolving commitments at a rate per annum that ranges from 0.15% to 0.30% depending on the Company’s Leverage Ratio.

The Revolving Credit Agreement matures on the earliest to occur of (i) March 9, 2021, (ii) the date on which the External Management Agreement is terminated, (iii) the date on which DDR Asset Management, LLC or another wholly-owned subsidiary of SITE Centers ceases to be the “Service Provider” under the External Management Agreement as a result of assignment or operation of law or otherwise and (iv) the date on which the principal amount outstanding under the Company’s $900 million mortgage loan is repaid or refinanced.

The Revolving Credit Facility contains customary affirmative and negative covenants, including a tangible net worth requirement.  Upon the occurrence of certain customary events of default, the Company’s obligations under the Revolving Credit Agreement may be accelerated and the lending commitments thereunder terminated.  The Company may not borrow under the Revolving Credit Agreement, and a Default (as defined therein) occurs under the Revolving Credit Agreement, if there is a “Default” under SITE Centers’ corporate credit facility with JPMorgan Chase Bank, N.A., SITE Centers’ corporate credit facility with Wells Fargo Bank, National Association or SITE Centers’ corporate credit facility with PNC.  Additionally, the Company may not borrow under the Revolving Credit Agreement if there is a “Default” under the Revolving Credit Agreement or an “Event of Default” under the Company’s $900 million mortgage loan, if the External Management Agreement is no longer in full force and effect or if the Company has delivered or received a notice of termination or a notice of default under the External Management Agreement.

The Company’s obligations under the Revolving Credit Agreement are guaranteed by SITE Centers in favor of PNC.  In consideration thereof, the Company has agreed to pay to SITE Centers the following amounts: (i) an annual guaranty commitment fee of 0.20% of the aggregate commitments under the Revolving Credit Agreement, (ii) for all times other than those referenced in clause (iii) below, when any amounts are outstanding under the Revolving Credit Agreement, an amount equal to 5.00% per annum times the average aggregate outstanding daily principal amount of such loans plus the aggregate stated average daily amount of outstanding letters of credit and (iii) in the event SITE Centers pays any amounts to PNC pursuant to SITE Centers’ guaranty and the Company fails to reimburse SITE Centers for such amount within three business days, an amount in cash equal to the amount of such paid obligations plus default interest, which will accrue from the date of such payment by SITE Centers until repaid by the Company at a rate per annum equal to the sum of the LIBOR rate plus 8.50%.  

Series A Preferred Stock

In connection with the Company’s separation from SITE Centers, the Company issued the RVI Preferred Shares to SITE Centers that are noncumulative and have no mandatory dividend rate.  The RVI Preferred Shares rank, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, senior in preference and priority to the Company’s common shares and any other class or series of the Company’s capital stock.  Subject to the requirement that the Company distribute to its common shareholders the minimum amount required to be distributed with respect to any taxable year in order for the Company to maintain its status as a REIT and to avoid U.S. federal income taxes, the RVI Preferred Shares will be entitled to a dividend preference for all dividends declared on the Company’s capital stock at any time up to a “preference amount” equal to $190 million in the aggregate, which amount may increase by up to an additional $10 million if the aggregate gross proceeds of the Company’s asset sales subsequent to July 1, 2018 exceed $2.0 billion.  Notwithstanding the foregoing, the RVI Preferred Shares are entitled to receive dividends only when, as and if declared by the Company’s Board of Directors and the Company’s ability to pay dividends is subject to any restrictions set forth in the terms of its indebtedness.  Upon payment to SITE Centers of aggregate dividends on the RVI Preferred

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Shares equaling the maximum preference amount of $200 million, the RVI Preferred Shares are required to be redeemed by the Company for $1.00 per share.

Subject to the terms of any of the Company’s indebtedness and unless prohibited by Ohio law governing distributions to stockholders, the RVI Preferred Shares must be redeemed upon (i) the Company’s failure to maintain its status as a REIT, (ii) any failure by the Company to comply with the terms of the RVI Preferred Shares or (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that the Company sells, assigns, transfers, conveys or otherwise disposes of all or substantially all of its properties or assets, in one or more related transactions, to any person or entity, or any person or entity, directly or indirectly, becomes the beneficial owner of 40% or more of the Company’s common shares, measured by voting power.  The RVI Preferred Shares also contain restrictions on the Company’s ability to invest in joint ventures, acquire assets or properties, develop or redevelop real estate or make loans or advances to third parties.

The Company may redeem the RVI Preferred Shares, or any part thereof, at any time at a price payable per share calculated by dividing the number of RVI Preferred Shares outstanding on the redemption date into the difference of (x) $200 million minus (y) the aggregate amount of dividends previously distributed on the RVI Preferred Shares to be redeemed.  As of October 31, 2019, no dividends have been paid on the RVI Preferred Shares.

Common Shares

The Company paid a dividend on its common shares on January 25, 2019 in a combination of cash and the Company’s common shares.  See Note 12, “Earnings Per Share,” of the Company’s combined and consolidated financial statements included herein.

Dividend Distributions

The Company anticipates making distributions to holders of its common shares to satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax (other than with respect to operations conducted through the Company’s TRS).  U.S. federal income tax law generally requires that a REIT distribute annually to holders of its capital stock at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. The Company generally intends to make distributions with respect to each taxable year in an amount at least equal to its REIT taxable income for such taxable year.  The Company also anticipates making future distributions to holders of its common shares in order to satisfy the requirements of its closing agreement with the Puerto Rico Department of Treasury in order to be exempt from Puerto Rico income taxes.  Although the Company expects to declare and pay distributions on or around the end of each calendar year, the Company’s Board of Directors will evaluate its dividend policy regularly.

To the extent that cash available for future distributions is less than the Company’s REIT taxable income or its taxable income generated in Puerto Rico, or if amortization requirements commence with respect to the terms of the mortgage loan, or if the Company determines it is advisable for other reasons, the Company may make a portion of its distributions in the form of common shares, and any such distribution of common shares may be taxable as a dividend to shareholders.  The Company may also distribute debt or other securities in the future, which also may be taxable as a dividend to shareholders.

Any distributions the Company makes to its shareholders will be at the discretion of the Company’s Board of Directors and will depend upon, among other things, the Company’s actual and anticipated results of operations and liquidity, which will be affected by various factors, including the income from its portfolio, its operating expenses (including management fees and other obligations owing to SITE Centers), repayments of restricted cash balances to SITE Centers in connection with the mortgage loan and other expenditures and the terms of the mortgage financing and the limitations set forth in the mortgage loan agreements.  Distributions will also be impacted by the pace and success of the Company’s property disposition strategy.  As a result of the terms of the mortgage financing, the Company anticipates that the majority of distributions of sales proceeds to be made to shareholders will not occur until after the mortgage loan has been repaid or refinanced.  Furthermore, subject to the Company’s ability to make distributions to the holders of the Company’s common shares in amounts necessary to maintain its status as a REIT and to avoid payment of U.S. federal income taxes, the RVI Preferred Shares will be entitled to a dividend preference for all dividends declared on the Company’s capital stock, at any time up to the preference amount.  Subsequent to the payment of dividends on the RVI Preferred Shares equaling the maximum preference amount of $200 million, the RVI Preferred Shares are required to be redeemed by the Company for an aggregate amount of $1.00 per share.  Due to the dividend preference of the RVI Preferred Shares, distributions of sales proceeds to holders of common shares are unlikely to occur until after aggregate dividends have been paid on the RVI Preferred Shares in an amount equal to the maximum preference amount.  At this time, the Company cannot predict when or if it will declare dividends to the holders of RVI Preferred Shares and when or if such dividends, if paid, will equal the maximum preference amount.  

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Dispositions

For the nine months ended September 30, 2019, the Company sold nine shopping centers and two outparcels aggregating 2.4 million square feet, for an aggregate sales price of $316.0 million.

Cash Flow Activity

The Company expects that its core business of leasing space to well capitalized tenants will continue to generate consistent and predictable cash flow after expenses and interest payments.  As discussed above, in general, the Company intends to utilize net asset sale proceeds to: first, repay its mortgage loan and any other indebtedness (including any amounts owed to SITE Centers); second, make distributions on account of the RVI Preferred Shares up to the maximum preference amount and third, make distributions to holders of the Company’s common shares.

The Company’s cash flow activities are summarized as follows (in thousands):  

 

For the Nine

 

 

For the Period from

 

 

For the Period from

 

 

Months Ended

 

 

July 1, 2018 to

 

 

January 1, 2018 to

 

 

September 30, 2019

 

 

September 30, 2018

 

 

June 30, 2018

 

 

The Company

 

 

RVI Predecessor

 

Cash flow provided by operating activities

$

71,453

 

 

$

22,634

 

 

$

28,832

 

Cash flow provided by investing activities

 

321,078

 

 

 

131,428

 

 

 

100,079

 

Cash flow used for financing activities

 

(333,256

)

 

 

(117,296

)

 

 

(41,843

)

Changes in cash flow compared to the prior nine month period are described as follows:  

Operating Activities: Cash provided by operating activities increased $20.0 million primarily due to reduction in Parent Company allocated expenses and separation costs, partially offset by lower income related to property dispositions.

Investing Activities: Cash provided by investing activities increased $89.6 million due to an increase in proceeds from dispositions of real estate of $44.8 million, an increase in property insurance proceeds of $84.1 million partially offset by an increase in real estate asset improvements of $23.3 million and net repayment to SITE Centers of $16.0 million of certain cash balances maintained in restricted accounts in accordance with the terms of the Company’s separation from SITE Centers.

Financing Activities: Cash used for financing activities increased by $174.1 million primarily due to a $205.1 million increase in debt repayments, net of issuances and issuance costs.

CAPITALIZATION

At September 30, 2019, the Company’s capitalization consisted of $674.3 million of mortgage debt, $190.0 million of RVI Preferred Shares and $705.7 million of market equity (market equity is defined as common shares outstanding multiplied by $37.04, the closing price of the Company’s common shares on the New York Stock Exchange on September 30, 2019), resulting in a debt to total market capitalization ratio of 0.43 to 1.0, as compared to the ratio of 0.59 to 1.0 at September 30, 2018.  The closing price of the Company’s shares on the New York Stock Exchange was $32.69 at September 28, 2018, the last trading day of September.  

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The Company had aggregate outstanding mortgage indebtedness of $674.3 million at September 30, 2019 with a maturity of March 2021, subject to three one-year extension options. In addition, the Company has two long-term ground leases in which it is the lessee.

In connection with the separation from SITE Centers, on July 1, 2018, the Company and SITE Centers entered into the Separation and Distribution Agreement, pursuant to which, among other things, SITE Centers transferred properties and certain related assets, liabilities and obligations to the Company and distributed 100% of the outstanding common shares to holders of record of SITE Centers’ common shares as of the close of business on June 26, 2018, the record date.  In connection with the separation from SITE Centers, SITE Centers retained the RVI Preferred Shares, which have an aggregate dividend preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by the Company asset sales.  

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Payable to SITE Centers

Pursuant to the terms of the Separation and Distribution Agreement, the Company is obligated to repay SITE Centers for certain cash balances held in restricted cash accounts on the separation date in connection with the Company’s mortgage loan and for certain other amounts.  The Company is obligated to repay these amounts to SITE Centers as soon as reasonably possible out of its operating cash flow but in no event later than March 31, 2020.  As of September 30, 2019 and December 31, 2018, respectively, the amounts of these obligations totaled $16.7 million and $34.0 million, respectively, and are included in the line item Payable to SITE Centers on the Company’s consolidated balance sheets.

SITE Centers Guaranty

On July 2, 2018, SITE Centers provided an unconditional guaranty to PNC with respect to any obligations outstanding from time to time under the Company’s Revolving Credit Agreement.  In connection with this arrangement, the Company has agreed to pay to SITE Centers a guaranty commitment fee of 0.20% per annum on the committed amount of the Revolving Credit Agreement and a fee equal to 5.00% per annum on any amounts drawn by the Company under the Revolving Credit Agreement.  In the event SITE Centers pays any of the Company’s obligations on the Revolving Credit Agreement and the Company fails to reimburse such amount within three business days, the guaranty provides for default interest that accrues at a rate equal to the sum of the LIBOR rate plus 8.50% per annum.

Other Commitments

The Company has entered into agreements with general contractors related to its shopping centers having aggregate commitments of approximately $15.3 million at September 30, 2019.  These obligations, composed principally of construction contracts for the repair of the Puerto Rico properties, are generally due within 12 to 24 months, as the related construction costs are incurred, and are expected to be financed through operating cash flow. These contracts typically can be changed or terminated without penalty.  

The Company routinely enters into contracts for the maintenance of its properties.  These contracts typically can be canceled upon 30 to 60 days’ notice without penalty.  At September 30, 2019, the Company had purchase order obligations, typically payable within one year, aggregating approximately $0.8 million related to the maintenance of its properties and general and administrative expenses.

Hurricane Loss

In 2017, Hurricane Maria made landfall in Puerto Rico and the Company’s 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA, were significantly impacted.  One of the assets, Plaza Palma Real, consisting of approximately 0.4 million square feet of Company-owned GLA, was severely damaged. At September 30, 2019, three anchor tenants and a few other tenants totaling 0.3 million square feet were open for business approximating 61% of Plaza Palma Real’s Company-owned GLA.  The other 11 assets sustained varying degrees of damage, consisting primarily of roof, HVAC system damage and water intrusion.  Although some of the tenant spaces remain untenantable, a majority of the Company’s leased space that was open prior to the storm was open for business by mid-2018.

 

In August 2019, the Company reached a settlement with its insurer with respect to the Company’s claims related to the hurricane.  Pursuant to the settlement, the insurer agreed to pay the Company $154.4 million on account of property damage caused by the hurricane, of which $83.9 million had been paid to the Company prior to the settlement, and $31.3 million on account of the Company’s business interruption claim, of which $24.3 million had been paid to the Company prior to the settlement.  As a result, in the third quarter of 2019, the insurer made a net payment of $77.5 million to the Company in full settlement of the Company’s claims relating to the hurricane.  Pursuant to the terms of the Separation and Distribution Agreement, $0.8 million of this amount was paid to SITE Centers on account of unreimbursed business interruption losses incurred through June 30, 2018.  The property damage settlement proceeds are reflected in the Company’s consolidated balance sheet as Restricted Cash and will be disbursed to the Company in accordance with the terms of the Company’s mortgage financing.

Restoration work is underway at all of the shopping centers.  As of September 30, 2019, the Company had expended $104.3 million in connection with repairing property damage caused by the hurricane.  The Company believes the insurance settlement proceeds received will be sufficient to complete its restoration efforts.  The Company anticipates that the repair and restoration work will be substantially complete by mid-2020.  The timing and schedule of additional repair work to be completed are highly dependent upon any changes in the scope of work, the availability of building materials, supplies and skilled labor.

 

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See further discussion in Item 1A., “Risk Factors–Damages Sustained on Account of Hurricane Maria May Exceed Insurance Recoveries,in the Company’s Annual Report on 10-K for the year ended December 31, 2018 and Note 9, “Commitments and Contingencies,” of the Company’s combined and consolidated financial statements included herein.

INFLATION

Most of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation.  Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses that generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales.  Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices.  In addition, many of the Company’s leases are for terms of less than 10 years, permitting the Company to seek increased rents at market rates upon renewal.  Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.

ECONOMIC CONDITIONS

Despite recent tenant bankruptcies and e-commerce distribution, the Company believes there is healthy tenant demand for quality locations within well-positioned shopping centers.  Further, the Company continues to see demand from a broad range of tenants for its continental U.S. space, particularly in the off-price sector, which the Company believes is a reflection of increasingly value-oriented consumers.  The RVI Portfolio has a diversified tenant base, with only three tenants whose annualized rental revenue equals or exceeds 3% of the Company’s annualized revenues at September 30, 2019 (Walmart/Sam’s Club at 5.6%, Bed Bath & Beyond, which includes Bed Bath & Beyond, Cost Plus World Market and Christmas Tree Shops, at 3.6%, and Petsmart at 3.2%).  Other significant tenants include TJX Companies, which includes T.J. Maxx, Marshalls and HomeGoods and Best Buy, all of which have strong credit ratings, remain well-capitalized and have outperformed other retail categories on a relative basis over time.  The Company expects these tenants to continue to provide a stable revenue base, given the long-term nature of these leases.  Moreover, the majority of the tenants in the Company’s shopping centers provide day-to-day consumer necessities with a focus on value and convenience, which the Company believes will enable many of its tenants to succeed even in a challenging economic environment.  Property revenues are generally derived from tenants with good credit profiles under long-term leases, with very little reliance on overage rents generated by tenant sales performance.  The Company recognizes the risks posed by the economy but believes that the general diversity and credit quality of its tenant base should enable it to successfully navigate through a cyclical downturn.

The retail sector continues to be affected by increasing competition, including the impact of e-commerce.  These dynamics are expected to continue to lead to tenant bankruptcies, closures and store downsizing.  In some cases, the loss of a weaker tenant or downsizing of space creates a value-add opportunity such as re-leasing space to a stronger retailer.  The loss of a tenant or downsizing of space can adversely affect the Company (see Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018).

The Company believes that its shopping center portfolio is generally high quality, as evidenced by the occupancy rates and in the average annualized base rent per occupied square foot.  The shopping center portfolio’s occupancy was 87.8% and 89.3% at September 30, 2019 and December 31, 2018, respectively.  The net decrease in the rate primarily was attributed to the sale of assets having higher occupancy rates and a combination of tenant expirations and tenant bankruptcies.  The total portfolio average annualized base rent per occupied square foot was $15.71 at September 30, 2019, as compared to $15.45 at December 31, 2018.  

At September 30, 2019, the Company owned 12 assets on the island of Puerto Rico aggregating 4.4 million square feet, representing 38% of Company-owned GLA and approximately 44% of the Company’s total consolidated revenue and approximately 45% of the Company’s total consolidated revenue less operating expenses (i.e., net operating income) for the nine months ended September 30, 2019.  The Company believes that the tenants at its Puerto Rico assets (many of which are high-quality continental U.S. retailers, such as Walmart/Sam’s Club and the TJX Companies (T.J. Maxx and Marshalls)) typically cater to the local consumer’s desire for value, convenience and day-to-day necessities.  Nevertheless, there is continued concern about the strength of the Puerto Rican economy, the ability of the government of Puerto Rico to meet its financial obligations and the impact of the territory’s ongoing bankruptcy and debt restructuring process on the economy of Puerto Rico.  The impact of Hurricane Maria further exacerbated these concerns.  See Note 9, “Commitments and Contingencies,” to the Company’s combined and consolidated financial statements included herein and Item 1A., “Risk Factors–The Company is Subject to Risks Relating to the Puerto Rico Economy and Government,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

In addition to its goal of maximizing cash flow from property operations, the Company seeks to realize profits through the regular sale of assets to a variety of buyers.  The market upon which this aspect of the business plan relies is currently characterized as liquid but fragmented, with a wide range of generally small, non-institutional investors.  While some investors do not require debt financing, many seek to capitalize on leveraged returns using mortgage financing at interest rates well below the initial asset-level

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returns implied by disposition prices.  In addition to small, often local buyers, the Company also plans to transact with mid-sized institutional investors, some of which are domestic and foreign publicly traded companies.  Many larger domestic institutions, such as pension funds and insurance companies that were traditionally large buyers of retail real estate assets, have generally become less active participants in retail transaction markets over the last several years.  Lower participation of institutions and a generally smaller overall buyer pool has resulted in some level of pressure on asset prices, particularly for larger properties, though this impact remains highly heterogeneous and varies widely by market and specific assets.  Asset prices for retail real estate in Puerto Rico remain highly uncertain due to lack of transaction activity since Hurricane Maria.

New Accounting Standards

New Accounting Standards are more fully described in Note 3, “Summary of Significant Accounting Policies,” to the Company’s combined and consolidated financial statements.

FORWARD-LOOKING STATEMENTS

MD&A should be read in conjunction with the Company’s combined and consolidated financial statements and the notes thereto appearing elsewhere in this report.  Historical results and percentage relationships set forth in the Company’s combined and consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations.  The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), both as amended, with respect to the Company’s expectations for future periods.  Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations.  Although the Company believes that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved.  For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements.  Without limiting the foregoing, the words “will,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements.  Readers should exercise caution in interpreting and relying on forward-looking statements because such statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements and that could materially affect the Company’s actual results, performance or achievements.  For additional factors that could cause the results of the Company to differ materially from those indicated in the forward-looking statements (see Item 1A., “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018).

Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

 

The Company may be unable to dispose of properties on favorable terms or at all, especially in markets or regions experiencing deteriorating economic conditions and properties anchored by tenants experiencing financial challenges.  In addition, real estate investments can be illiquid, particularly as prospective buyers may experience increased costs of financing or difficulties obtaining financing due to local, national or global conditions;

 

The Company is subject to general risks affecting the real estate industry, including the need to enter into new leases or renew leases on favorable terms to generate rental revenues, and any economic downturn may adversely affect the ability of the Company’s tenants, or new tenants, to enter into new leases or the ability of the Company’s existing tenants to renew their leases at rates at least as favorable as their current rates;

 

The Company could be adversely affected by changes in the local markets where its properties are located, as well as by adverse changes in regional or national economic and market conditions;

 

The Company may fail to anticipate the effects on its properties of changes in consumer buying practices, including sales over the Internet and the resulting retailing practices and space needs of its tenants, or a general downturn in its tenants’ businesses, which may cause tenants to close stores or default in payment of rent;

 

The Company is subject to competition for tenants from other owners of retail properties, and its tenants are subject to competition from other retailers and methods of distribution.  The Company is dependent upon the successful operations and financial condition of its tenants, in particular its major tenants.  The bankruptcy of major tenants could result in a loss of significant rental income and could give rise to termination or rent abatement by other tenants under the co-tenancy clauses of their leases;

35

 


 

 

The Company relies on major tenants, which makes it vulnerable to changes in the business and financial condition of, or demand for its space by, such tenants;

 

The Company’s financial condition may be affected by required debt service payments, the risk of default and restrictions on its ability to incur additional debt or to enter into certain transactions under documents governing its debt obligations.  In addition, it may encounter difficulties in refinancing existing debt.  Borrowings under the mortgage loan or the revolving credit facility are subject to certain representations and warranties and customary events of default, including any event that has had or could reasonably be expected to have a material adverse effect on the Company’s business or financial condition;

 

Changes in interest rates could adversely affect the market price of the Company’s common shares, its performance and cash flow, and its ability to sell assets and the sales prices applicable thereto;

 

Debt and/or equity financing necessary for the Company to continue to operate its business or to refinance existing indebtedness may not be available or may not be available on favorable terms;

 

Disruptions in the financial markets could affect the Company’s ability to obtain financing or to refinance existing indebtedness on reasonable terms and have other adverse effects on the Company and the market price of the Company’s common shares;

 

The ability of the Company to pay dividends on its common shares in excess of its REIT taxable income is generally subject to its ability to first declare and pay aggregate dividends on the RVI Preferred Shares in an amount equal to the preference amount;

 

The Company is subject to complex regulations related to its status as a REIT and would be adversely affected if it failed to qualify as a REIT;

 

The Company must make distributions to shareholders to continue to qualify as a REIT, and if the Company must borrow funds to make distributions, those borrowings may not be available on favorable terms or at all;

 

The outcome of litigation, including litigation with tenants, may adversely affect the Company’s results of operations and financial condition;

 

The Company may not realize anticipated returns from its 12 real estate assets located in Puerto Rico, which carry risks in addition to those it faces with its continental U.S. properties and operations;

 

Property damage, expenses related thereto, and other business and economic consequences (including the potential loss of revenue) resulting from extreme weather conditions in locations where the Company owns properties;

 

Sufficiency and timing of any insurance recovery payments related to damages from extreme weather conditions;

 

The Company is subject to potential environmental liabilities;

 

The Company may incur losses that are uninsured or exceed policy coverage due to its liability for certain injuries to persons, property or the environment occurring on its properties;

 

The Company could incur additional expenses to comply with or respond to claims under the Americans with Disabilities Act or otherwise be adversely affected by changes in government regulations, including changes in environmental, zoning, tax and other regulations;

 

The Company’s Board of Directors, which regularly reviews the Company’s business strategy and objectives, may change its strategic plan;

 

A change in the Company’s relationship with SITE Centers and SITE Centers’ ability to retain qualified personnel and adequately manage the Company;

 

Potential conflicts of interest with SITE Centers and the Company’s ability to replace SITE Centers as manager (and the fees to be paid to any replacement manager) in the event the management agreements are terminated and

 

The Company and its vendors could sustain a disruption, failure or breach of their respective networks and systems, including as a result of cyber-attacks, which could disrupt the Company’s business operations, compromise the confidentiality of sensitive information and result in fines and penalties.

36

 


 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk.  At September 30, 2019 and December 31, 2018, the Company’s outstanding indebtedness was composed of all variable-rate debt.  At September 30, 2019, the Company’s carrying value of the variable-rate debt was $654.7 million and its fair value was $699.2 million.  At December 31, 2018, the Company’s carrying value of the variable-rate debt was $967.6 million and its fair value was $1,016.1 million.  If interest rates were to increase by 1.00%, or 100 basis-points, the fair value of the debt would be $698.4 million and $1,014.6 million at September 30, 2019 and December 31, 2018, respectively.  The sensitivity to changes in interest rates of the Company’s variable-rate debt was determined using a valuation model based upon factors that measure the net present value of such obligations that arise from the hypothetical estimate as discussed above. A 100 basis-point increase in short-term market interest rates on variable-rate debt at September 30, 2019, would result in an increase in interest expense of approximately $5.1 million for the nine-month period ended September 30, 2019.  

The Company intends to use proceeds from asset sales to repay its indebtedness and, to the extent permitted by the mortgage loan, for general corporate purposes including distributions to the Company’s preferred and common shareholders.  To the extent the Company was to incur variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period could increase.  The Company does not believe, however, that increases in interest expense as a result of inflation will significantly impact the Company’s distributable cash flow.

The Company intends to continually monitor and actively manage interest costs on any variable-rate debt portfolio and may enter into swap positions or interest rate caps.  Accordingly, the cost of obtaining such protection agreements in relation to the Company’s access to capital markets will continue to be evaluated.  The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.  As of September 30, 2019, the Company had no other material exposure to market risk.

Item 4.

CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation, pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b), of the effectiveness of our disclosure controls and procedures.  Based on their evaluation as required, the CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of the end of such period to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

For the three months ended September 30, 2019, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

 

Item 1.

The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company.  The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance.  While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

 

Item 1A.

RISK FACTORS

None.

 

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)

 

 

(b)

 

 

(c)

 

 

(d)

 

 

Total

Number of

Shares

Purchased(1)

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares Purchased

as Part of

Publicly Announced

Plans or Programs

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares that May Yet

Be Purchased Under

the Plans or Programs

 

July 1–31, 2019

 

448

 

 

$

34.23

 

 

 

 

 

 

 

August 1–31, 2019

 

 

 

 

 

 

 

 

 

 

 

September 1–30, 2019

 

 

 

 

 

 

 

 

 

 

 

Total

 

448

 

 

$

34.23

 

 

 

 

 

 

 

 

(1)

Consists of common shares surrendered or deemed surrendered to the Company to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted equity distributed in connection with the Company’s separation from SITE Centers.

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

Item 5.

OTHER INFORMATION

None.

 

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Item 6.

EXHIBITS

31.1

 

Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 19342

 

 

 

31.2

 

Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 19342

 

 

 

32.1

 

Certification of chief executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 2002 1,2

 

 

 

32.2

 

Certification of chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 2002 1,2

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document2

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document 2

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document 2

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document 2

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document 2

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document 2

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, has been formatted in Inline XBRL.

1

Pursuant to SEC Release No. 34-4751, these exhibits are deemed to accompany this report and are not “filed” as part of this report.

2

Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline Extensible Business Reporting Language): (i)  Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii)  Combined and Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018, (iii) Combined and Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018, (iv) Combined and Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018 and (v) Notes to Condensed Combined and Consolidated Financial Statements.

39

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Retail Value Inc.

 

 

 

 

 

 

By:

 

/s/ Christa A. Vesy

 

 

 

 

Name:

 

Christa A. Vesy

 

 

 

 

Title:

 

Executive Vice President
and Chief Accounting Officer
(Authorized Officer)

Date:  November 5, 2019

 

 

 

 

 

 

 

40