10-Q 1 rvi-10q_20180630.htm 10-Q rvi-10q_20180630.htm

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 June 30, 2018

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, Ohio 44122

(Address of principal executive offices - zip code)

(216) 755-5500

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  (Do not check if a smaller reporting company)

  

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 July 31, 2018, the registrant had 18,465,046 outstanding common shares, $0.10 par value per share.

 

 

 

 


 

Retail Value Inc.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED June 30, 2018

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements - Unaudited

 

 

Combined Balance Sheets as of June 30, 2018 and December 31, 2017

2

 

Combined Statements of Operations and Comprehensive Loss for the Three Months Ended June 30, 2018 and 2017

3

 

Combined Statements of Operations and Comprehensive Loss for the Six Months Ended June 30, 2018 and 2017

4

 

Combined Statement of Equity for the Six Months Ended June 30, 2018

5

 

Combined Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

6

 

Notes to Condensed Combined Financial Statements

7

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

35

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37

 

 

 

SIGNATURES

38

 

 

 

1

 


 

Retail Value Inc.

COMBINED BALANCE SHEETS

(Unaudited, In thousands)  

 

 

June 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

Land

$

689,386

 

 

$

717,584

 

Buildings

 

1,813,456

 

 

 

1,932,495

 

Fixtures and tenant improvements

 

196,539

 

 

 

195,138

 

 

 

2,699,381

 

 

 

2,845,217

 

Less: Accumulated depreciation

 

(720,103

)

 

 

(699,288

)

 

 

1,979,278

 

 

 

2,145,929

 

Construction in progress

 

20,663

 

 

 

4,656

 

Total real estate assets, net

 

1,999,941

 

 

 

2,150,585

 

Cash and cash equivalents

 

22,110

 

 

 

8,283

 

Restricted cash

 

73,276

 

 

 

35

 

Accounts receivable, net

 

33,844

 

 

 

33,336

 

Property insurance receivable

 

49,202

 

 

 

60,293

 

Intangible assets

 

54,525

 

 

 

67,495

 

Other assets, net

 

8,663

 

 

 

6,575

 

 

$

2,241,561

 

 

$

2,326,602

 

Liabilities and Equity

 

 

 

 

 

 

 

Parent Company unsecured debt

$

 

 

$

813,308

 

Mortgage indebtedness

 

1,241,805

 

 

 

320,844

 

Total indebtedness

 

1,241,805

 

 

 

1,134,152

 

Accounts payable and other liabilities

 

120,448

 

 

 

101,986

 

Total liabilities

 

1,362,253

 

 

 

1,236,138

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Redeemable preferred equity

 

190,000

 

 

 

 

Equity

 

 

 

 

 

 

 

RVI Predecessor equity

 

689,308

 

 

 

1,090,464

 

Total equity

 

689,308

 

 

 

1,090,464

 

 

$

2,241,561

 

 

$

2,326,602

 

 

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

 

2

 


 

Retail Value Inc.

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, In thousands)

 

 

Three Months

 

 

Ended June 30,

 

 

2018

 

 

2017

 

Revenues from operations:

 

 

 

 

 

 

 

Minimum rents

$

51,366

 

 

$

58,241

 

Percentage and overage rents

 

793

 

 

 

611

 

Recoveries from tenants

 

18,625

 

 

 

19,624

 

Other income

 

5,090

 

 

 

2,740

 

Business interruption income

 

3,100

 

 

 

 

 

 

78,974

 

 

 

81,216

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

12,531

 

 

 

12,568

 

Real estate taxes

 

9,677

 

 

 

9,517

 

Management fees

 

3,462

 

 

 

3,420

 

Impairment charges

 

15,060

 

 

 

 

Hurricane property loss

 

187

 

 

 

 

General and administrative

 

4,484

 

 

 

4,546

 

Depreciation and amortization

 

24,072

 

 

 

30,351

 

 

 

69,473

 

 

 

60,402

 

Other expense:

 

 

 

 

 

 

 

Interest expense

 

(18,144

)

 

 

(21,640

)

Debt extinguishment costs

 

(1,970

)

 

 

 

Transaction costs

 

(28,240

)

 

 

 

Other expense, net

 

 

 

 

(1

)

 

 

(48,354

)

 

 

(21,641

)

Loss before tax expense

 

(38,853

)

 

 

(827

)

Tax expense

 

(4,082

)

 

 

(148

)

Loss from continuing operations

 

(42,935

)

 

 

(975

)

Gain on disposition of real estate, net

 

13,096

 

 

 

 

Net loss

$

(29,839

)

 

$

(975

)

Comprehensive loss

$

(29,839

)

 

$

(975

)

 

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

3

 


 

Retail Value Inc.

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, In thousands)

 

 

Six Months Ended

 

 

June 30

 

 

2018

 

 

2017

 

Revenues from operations:

 

 

 

 

 

 

 

Minimum rents

$

102,967

 

 

$

116,194

 

Percentage and overage rents

 

1,870

 

 

 

1,479

 

Recoveries from tenants

 

37,345

 

 

 

40,095

 

Other income

 

7,952

 

 

 

5,003

 

Business interruption income

 

5,100

 

 

 

 

 

 

155,234

 

 

 

162,771

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

24,608

 

 

 

25,443

 

Real estate taxes

 

19,571

 

 

 

19,338

 

Management fees

 

6,819

 

 

 

6,972

 

Impairment charges

 

48,680

 

 

 

8,600

 

Hurricane property loss

 

868

 

 

 

 

General and administrative

 

7,638

 

 

 

11,042

 

Depreciation and amortization

 

50,144

 

 

 

60,529

 

 

 

158,328

 

 

 

131,924

 

Other expense:

 

 

 

 

 

 

 

Interest expense

 

(37,584

)

 

 

(44,909

)

Debt extinguishment costs

 

(109,036

)

 

 

 

Transaction costs

 

(33,325

)

 

 

 

Other expense, net

 

(3

)

 

 

(1

)

 

 

(179,948

)

 

 

(44,910

)

Loss before tax expense

 

(183,042

)

 

 

(14,063

)

Tax expense

 

(4,210

)

 

 

(281

)

Loss from continuing operations

 

(187,252

)

 

 

(14,344

)

Gain on disposition of real estate, net

 

13,096

 

 

 

447

 

Net loss

$

(174,156

)

 

$

(13,897

)

Comprehensive loss

$

(174,156

)

 

$

(13,897

)

 

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

4

 


 

Retail Value Inc.

COMBINED STATEMENT OF EQUITY

(Unaudited, In thousands)

 

 

 

RVI

Predecessor

(Deficit) Equity

 

 

Balance, December 31, 2017

 

$

1,090,464

 

 

Net transactions with DDR

 

 

(227,000

)

 

Net loss

 

 

(174,156

)

 

Balance, June 30, 2018

 

$

689,308

 

 

 

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

 

5

 


 

Retail Value Inc.

COMBINED STATEMENTS OF CASH FLOWS

(Unaudited, In thousands)

 

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net loss

$

(174,156

)

 

$

(13,897

)

 

Adjustments to reconcile net loss to net cash flow provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

50,144

 

 

 

60,529

 

 

Amortization and write-off of above- and below- market leases, net

 

(928

)

 

 

(5,119

)

 

Amortization and write-off of debt issuance costs and fair market value of debt adjustments

 

14,556

 

 

 

317

 

 

Gain on disposition of real estate

 

(13,096

)

 

 

(447

)

 

Impairment charges

 

48,680

 

 

 

8,600

 

 

Loss on debt extinguishment

 

97,077

 

 

 

 

 

Interest rate hedging activities

 

(4,538

)

 

 

 

 

Assumption of building due to ground lease termination

 

(2,150

)

 

 

 

 

Valuation allowance of prepaid taxes

 

3,991

 

 

 

 

 

Net change in accounts receivable

 

(4,664

)

 

 

921

 

 

Net change in accounts payable and other liabilities

 

15,472

 

 

 

(3,525

)

 

Net change in other operating assets

 

(1,556

)

 

 

489

 

 

Total adjustments

 

202,988

 

 

 

61,765

 

 

Net cash flow provided by operating activities

 

28,832

 

 

 

47,868

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Real estate improvements to operating real estate

 

(20,461

)

 

 

(10,720

)

 

Proceeds from disposition of real estate

 

100,347

 

 

 

 

 

Hurricane property insurance advance proceeds

 

20,193

 

 

 

 

 

Net cash flow provided by (used for) investing activities

 

100,079

 

 

 

(10,720

)

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Proceeds from Parent Company unsecured debt, net of discounts and loan costs

 

 

 

 

149,801

 

 

Repayment of Parent Company unsecured debt

 

(899,880

)

 

 

(151,279

)

 

Proceeds from mortgage debt

 

1,350,000

 

 

 

 

 

Repayment of mortgage debt

 

(421,344

)

 

 

(5,193

)

 

Payment of debt issuance costs

 

(32,755

)

 

 

 

 

Net transactions with DDR

 

(37,864

)

 

 

(24,800

)

 

Net cash flow used for financing activities

 

(41,843

)

 

 

(31,471

)

 

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents and restricted cash

 

87,068

 

 

 

5,677

 

 

Cash, cash equivalents and restricted cash, beginning of period

 

8,318

 

 

 

11,024

 

 

Cash, cash equivalents and restricted cash, end of period

$

95,386

 

 

$

16,701

 

 

 

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

 

6

 


 

Notes to Condensed Combined Financial Statements

1.

Nature of Business

On July 1, 2018, DDR Corp. (“DDR” or the “Manager”) completed the separation of Retail Value Inc., an Ohio corporation formed in December 2017 that owns and operates a portfolio of 48 real estate assets 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. RVI’s properties comprised 16 million square feet of gross leasable area (“GLA”) and are located in 17 states and Puerto Rico.

In connection with the separation from DDR, on July 1, 2018, the Company and DDR entered into a separation and distribution agreement (the “Separation and Distribution Agreement”), pursuant to which, among other things, DDR 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 DDR’s common shares as of the close of business on June 26, 2018, the record date. On July 1, 2018, holders of DDR’s common shares received one common share of RVI for every ten shares of DDR common stock held on the record date.  In connection with the separation from DDR, DDR 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 (Note 7).

On July 1, 2018, the Company and DDR also entered into an external management agreement which, together with various property management agreement, governs the fees, terms and conditions pursuant to which DDR will manage RVI and its properties.  DDR will provide RVI with day-to-day management, subject to supervision and certain discretionary limits and authorities granted by the RVI Board, and the Company is not expected to have any employees.  In general, either DDR or RVI may terminate the management agreements on December 31, 2019, or at the end of any six-month renewal period thereafter.  DDR and RVI also entered into a tax matters agreement which governs the rights and responsibilities of the parties following the separation from DDR with respect to various tax matters, and provides for the allocation of tax-related assets, liabilities and obligations.

The Company intends to elect to be treated as a Real Estate Investment Trust (“REIT”) for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2018, and intends to maintain its status as a REIT for U.S. federal income tax purposes in future periods.

Through June 30, 2018, the Company is operated as one segment, which owns, operates and finances shopping centers. The tenant base of the Company primarily includes national and regional retail chains and local retailers. Consequently, the Company’s credit risk is concentrated in the retail industry.

2.

Basis of Presentation

The accompanying historical condensed combined financial statements and related notes of the Company do not represent the balance sheet, 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 DDR’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated in combination. The preparation of these combined financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the combined financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

These combined financial statements reflect the revenues and direct expenses of the RVI Predecessor and include material assets and liabilities of DDR 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 DDR, which are the result of treasury activities and net funding provided by or distributed to DDR prior to the separation from DDR, 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.

The combined financial statements include the revenues and direct expenses of the RVI Predecessor. Certain direct costs historically paid by the properties but contracted through DDR include, but are not limited to, management fees, insurance, compensation costs and out-of-pocket expenses directly related to the management of the properties (Note 10). Further, the combined financial statements include an allocation of indirect costs and expenses incurred by DDR 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 DDR management’s knowledge of the Company. In addition, the combined financial

7

 


 

statements reflect interest expense on DDR unsecured debt, excluding debt that is specifically attributable to the Company (Note 5); interest expense was allocated by calculating the unencumbered net assets of each property held by the Company as a percentage of DDR’s total consolidated unencumbered net assets and multiplying that percentage by the interest expense on DDR unsecured debt. Included in the allocation of General and Administrative expenses for the six months ended June 30, 2018 and 2017, are employee separation charges aggregating $1.1 million and $3.7 million, respectively, related to DDR’s management transition and staffing reduction. 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. DDR believes the assumptions underlying DDR’s allocation of indirect expenses are reasonable.

The Company will seek to realize value for its shareholders through operations and asset sales. However, these combined financial statements are presented on a going concern basis and, consequently, no adjustments to the combined financial statements have been made.

Unaudited Interim Financial Statements

These combined financial statements have been prepared by the Company in accordance with GAAP for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the three and six months ended June 30, 2018 and 2017, are not necessarily indicative of the results that may be expected for the full year.  These financial statements should be read in conjunction with the Company’s condensed combined financial statements and notes thereto included in Amendment No. 1 to the Company’s Form 10 filed with the Securities and Exchange Commission on June 14, 2018.  

3.

Summary of Significant Accounting Policies

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):

 

 

Six Months

 

 

Ended June 30,

 

 

2018

 

 

2017

 

Accounts payable related to construction in progress

$

10.1

 

 

$

2.2

 

Receivable and reduction of real estate assets, net - related to hurricane

 

6.1

 

 

 

 

Assumption of building due to ground lease termination

 

2.2

 

 

 

 

New Accounting Standards Adopted

Revenue Recognition

On January 1, 2018, the Company adopted the new accounting guidance for Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective approach. The guidance has been applied to contracts that were not completed as of the date of the initial application. The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard.  A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements and will be governed by the leasing guidance (Topic 842) and there are no material revenue streams within the scope of Topic 606.  The adoption of this standard did not have a material impact to the Company’s combined financial statements at adoption and for the six months ended June 30, 2018.

Real Estate Sales

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (“Topic 610”). Topic 610 provides that sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of, or obtain substantially all of the remaining benefits from, the asset. This generally occurs when the transaction closes and consideration is exchanged for control of the asset. The Company adopted Topic 610 using the modified retrospective approach for

8

 


 

contracts that are not completed as of the date of initial application. The adoption of this standard did not have a material impact to the Company’s combined financial statements.

New Accounting Standards to Be Adopted

Accounting for Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases. Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet. Other significant provisions of this standard include (i) defining the “lease term” to include the non-cancelable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease, (ii) defining the initial lease liability to be recorded on the balance sheet to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components. The lease standard is effective for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years), with early adoption permitted. The Company will adopt the standard using the modified retrospective approach for financial statements issued after January 1, 2019.

The Company is in the process of evaluating the impact that the adoption of ASU No. 2016-02 will have on its combined financial statements and disclosures. The Company has currently identified several areas within its accounting policies it believes could be impacted by the new standard, including where the Company is a lessor under its tenant lease agreements and a lessee under its ground leases. The Company may have a change in presentation on its combined statements of operations with regards to Recoveries from Tenants, which includes reimbursements from tenants for certain operating expenses, real estate taxes and insurance. The Company also has certain lease arrangements with its tenants for space at its shopping centers in which the contractual amounts due under the lease by the lessee are not allocated between the rental and expense reimbursement components (“Gross Leases”). The aggregate revenue earned under Gross Leases is presented as Minimum rents in the combined statements of operations. In July 2018, the FASB approved targeted improvements to the Leases standard that provides lessors with a practical expedient, by class of underlying asset, to avoid separating non-lease components from the lease component of certain contracts. Such practical expedient is limited to circumstances in which (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the stand alone lease component would be classified as an operating lease if accounted for separately. The Company will elect the practical expedient which would allow the Company the ability to account for the combined component based on its predominant characteristics if the underlying asset meets the two criteria defined above.

In addition, the Company has ground lease agreements in which the Company is the lessee for land beneath all or a portion of the buildings at two shopping centers. Currently, the Company accounts for these arrangements as operating leases. Under the new standard, the Company will record its rights and obligations under these leases as a right of use asset and lease liability on its combined balance sheets. The Company is currently in the process of evaluating the inputs required to calculate the amount that will be recorded on its balance sheet for each ground lease. Lastly, this standard impacts the lessor’s ability to capitalize initial direct costs related to the leasing of vacant space. However, the Company does not believe this change regarding capitalization will have a material impact on its combined financial statements.

Accounting for Credit Losses

In June 2016, the FASB issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date. 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. The Company is in the process of evaluating the impact of this guidance.

9

 


 

4.

Other Assets and Intangibles

Other assets and intangibles consist of the following (in thousands):

 

 

June 30, 2018

 

 

December 31, 2017

 

Intangible assets:

 

 

 

 

 

 

 

In-place leases, net

$

21,941

 

 

$

28,779

 

Above-market leases, net

 

2,823

 

 

 

3,640

 

Lease origination costs, net

 

3,267

 

 

 

4,203

 

Tenant relationships, net

 

26,494

 

 

 

30,873

 

Total intangible assets, net(A)

$

54,525

 

 

$

67,495

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Prepaid expenses, net(B)

$

3,557

 

 

$

6,247

 

Deposits

 

245

 

 

 

231

 

Other assets(C)

 

4,861

 

 

 

97

 

Total other assets, net

$

8,663

 

 

$

6,575

 

 

 

 

 

 

 

 

 

Accounts payable and other liabilities:

 

 

 

 

 

 

 

Below-market leases, net(A)

$

(47,444

)

 

$

(53,399

)

(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 written off.

(B)

Includes Puerto Rico prepaid tax assets of $4.0 million at December 31, 2017, net of a valuation allowance of $11.3 million. In connection with the separation from DDR, the remaining $4.0 million prepaid tax asset was written off to Tax Expense in the Company’s combined statements of operations.

(C)

Includes $4.8 million fair value of an interest rate cap at June 30, 2018, related to the $1.35 billion mortgage loan entered into in February 2018 in connection with the separation from DDR (Note 5).

5.

Indebtedness

Mortgages Payable

On February 14, 2018, certain wholly-owned subsidiaries of the Company entered into a mortgage loan with an initial aggregate principal amount of $1.35 billion. The borrowers’ obligations to pay principal, interest and other amounts under the 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’ respective continental U.S. properties (a total of an initial 38 properties); (ii) a pledge of the equity of the Company’s subsidiaries that own the 12 Puerto Rico properties and a pledge of rents and other cash flows, insurance proceeds and condemnation awards in connection with the 12 Puerto Rico properties; 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.

The loan facility will mature on February 9, 2021, subject to two 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 first 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 operating income of the continental U.S. properties to the outstanding principal amount of the loan facility) equals or exceeds 11% and the ratio of the outstanding principal amount of the notes to the value of the continental U.S. properties (based on appraisal values determined at the time of the initial closing) is less than 50%, and (iii) in the case of the second one-year extension option, evidence that the Debt Yield equals or exceeds 12% and the loan-to-value ratio is less than 45%.

The initial weighted-average interest rate applicable to the notes is equal to one-month LIBOR plus a spread of 3.15% per annum, provided that such spread is subject to an increase of 0.25% per annum in connection with any exercise of the first extension option and an additional increase of 0.25% per annum in connection with any exercise of the second extension option. Borrowers are required to maintain an interest rate cap with respect to the principal amount of the notes having (i) during the initial three-year term of the loan, a LIBOR strike rate equal to 3.0% and (ii) with respect to any extension period, a LIBOR strike rate that would result in a

10

 


 

debt service coverage ratio of 1.20x based on the continental U.S. properties. Mortgage-backed securities securitized by the notes were sold by the lenders to investors at a blended rate (prior to exercise of any extension option) of one-month LIBOR plus a spread of 2.91% per annum; the spread paid by the Company increased to 3.15% per annum based on terms included in the originating lenders’ initial financing commitment to borrowers. Application of voluntary prepayments as described below may cause the weighted-average interest rate to increase over time.

The loan facility is structured as an interest only loan throughout the initial three-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 10.8% as of March 31, 2019, 11.9% as of September 30, 2019, 14.1% as of March 31, 2020 and 19.2% as of September 30, 2020. The Debt Yield as of February 14, 2018 was 9.8%. In the event an Amortization Period occurs, 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, DDR 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 (20% as of June 30, 2018), with the remainder of required REIT distributions during an Amortization Period likely to be paid by the Company in shares of the Company’s common stock.

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 March 9, 2019. Additionally, no prepayment premium will apply to prepayments made in connection with permitted property sales. Each continental U.S. 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 continental U.S. 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 12.0%, the release price is the greater of (i) 100% of the property’s net sale proceeds and (ii) 110% of its allocated loan amount;

 

if the Debt Yield is greater than 12.0% but less than or equal to 15.0%, the release price is the greater of (i) 90% of the property’s net sale proceeds and (ii) 105% of its allocated loan amount; and

 

if the Debt Yield is greater than 15.0%, the release price is the greater of (i) 80% of the property’s net sale proceeds and (ii) 100% of its allocated loan amount.

To the extent the net cash proceeds from the sale of a continental U.S. 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 continental U.S. properties.

Once the aggregate principal amount of the notes is less than $270.0 million, 100% of net proceeds from the sales of continental U.S. properties must be applied towards prepayment of the notes. Properties in Puerto Rico do not have allocated loan amounts or minimum release prices; all proceeds from sales of Puerto Rico properties are required to be used to prepay the notes, except that borrowers can obtain a release of all of the Puerto Rico properties for a minimum release price of $350.0 million.

Voluntary prepayments made by the borrowers (including prepayments made with proceeds from asset sales) up to $337.5 million in the aggregate will be applied ratably to the senior and junior tranches of the notes. All other prepayments (including 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

11

 


 

Company agreed to indemnify the lenders for certain environmental risks and guaranty 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 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.

The proceeds from the loan were used to repay all of the Company’s outstanding mortgage indebtedness and Parent Company unsecured debt. In connection with the repayment of debt, the Company incurred $107.1 million of aggregate debt extinguishment costs. Included in this amount, are $70.9 million of make-whole premiums incurred related to the repayment of the Parent Company unsecured debt, $20.3 million of make-whole premiums incurred related to the repayment of the mortgage indebtedness, as well as the write off of unamortized deferred financing costs and the cost of a treasury rate lock.

At June 30, 2018, the mortgage balance outstanding was $1.27 billion. This mortgage was assumed in connection with the separation from DDR on July 1, 2018.

Allocated Parent Company Interest

Included in interest expense was $4.4 million for the three and six months ended June 30, 2018 and $8.3 million and $16.5 million, respectively, for the three and six months ended June 30, 2017 of interest expense on DDR’s unsecured debt, excluding debt that was specifically attributable to RVI.  Interest expense was allocated by calculating the unencumbered net assets of each property held by RVI as a percentage of DDR’s total consolidated unencumbered net assets and multiplying that percentage by the interest expense on DDR unsecured debt (Note 2).

6.

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 combined balance sheets for these financial instruments approximated fair value because of their short-term maturities.

Debt

The fair market value of the Parent Company unsecured debt is determined using the trading price of DDR’s public debt. The fair market value for all other 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. The Company’s Parent Company unsecured debt and all other debt are classified as Level 2 and Level 3, respectively, 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.

Debt instruments with carrying values that are different than estimated fair values are summarized as follows (in thousands):

 

 

June 30, 2018

 

 

December 31, 2017

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Parent Company unsecured debt

$

 

 

$

 

 

$

813,308

 

 

$

841,440

 

Mortgage indebtedness

 

1,241,805

 

 

 

1,271,963

 

 

 

320,844

 

 

 

329,161

 

 

$

1,241,805

 

 

$

1,271,963

 

 

$

1,134,152

 

 

$

1,170,601

 

12

 


 

Interest Rate Cap

In March 2018, the Company entered into a $1.35 billion interest rate cap, in connection with entering into the mortgage loan (Note 5). At June 30, 2018, the notional amount of the interest rate cap was $1.27 billion.  The fair value of the interest rate cap was $4.8 million at June 30, 2018, and was included in Other Assets. Changes in fair value are marked-to-market to earnings in Other Income (Expense). For the three and six months ended June 30, 2018, the Company recorded income of $0.4 million and $0.2 million, respectively.  The Company did not elect to apply hedge accounting related to the interest rate cap and has applied the guidance under economic hedging. As such, the Company has elected the policy to classify cash flows related to an economic hedge following the cash flows of the hedged item.

The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. The valuation of this instrument was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. The Company determined that the significant inputs used to value this derivative fell within Level 2 of the fair value hierarchy. To accomplish this objective, the Company generally uses interest rate instruments as part of its interest rate risk management strategy. The Company is exposed to credit risk in the event of non-performance by the counterparties. The Company believes it mitigates its credit risk by entering into these arrangements with major financial institutions. The Company continually monitors and actively manages interest costs on it variable-rate debt portfolio and may enter into additional interest rate positions or other derivative interest rate instruments based on market conditions. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.

7.

Preferred Stock

On June 30, 2018, the Company issued 1,000 shares of its series A preferred stock (the “RVI Preferred Shares”) to DDR, which 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 exceeds $2.0 billion. Notwithstanding the foregoing, the RVI Preferred Shares are only entitled to receive dividends 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 DDR of aggregate 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 $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.  The RVI Preferred Stock is classified as Preferred Redeemable Equity outside of permanent Equity in the combined balance sheet due to the redemption provisions.

8.

Commitments and Contingencies

Hurricane Loss

In 2017, Hurricane Maria made landfall in Puerto Rico. At June 30, 2018, 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 and is currently not operational, except for one anchor tenant and a few

13

 


 

other tenants representing a minimal amount of Company-owned GLA. The other 11 assets sustained varying degrees of damage, consisting primarily of roof and HVAC system damage and water intrusion. With respect to the Company’s anchor spaces comprising greater than 25,000 square feet of GLA in Puerto Rico, 27, or 82% of such tenants, were open as of July 25, 2018, including all seven Walmart stores, a Sam’s Club, both Home Depot stores, all three Sears/Kmart stores and all five grocery stores (including Pueblo, Econo and Selectos Supermarket). Although some tenant spaces remain untenantable, as of July 25, 2018, 86% of the Company’s leased GLA in Puerto Rico was open for business, excluding Plaza Palma Real (or 82% including Plaza Palma Real).

The Company has engaged various consultants to assist with the damage scoping assessment. The Company continues to work with its consultants to finalize the scope and schedule of work to be performed. Restoration work is underway at all of the shopping centers, including Plaza Palma Real. The Company anticipates that repairs will be substantially complete at all 12 properties by the third quarter of 2019. The timing and schedule of additional repair work to be completed are highly dependent upon any changes in the scope of work, as well as the availability of building materials, supplies and skilled labor.

The Company maintains insurance on its assets in Puerto Rico with policy limits of approximately $330 million for both property damage and business interruption. The Company’s insurance policies are subject to various terms and conditions, including a combined property damage and business interruption deductible of approximately $6.0 million. The Company expects that its insurance for property damage and business interruption claims will include the costs to clean up, repair and rebuild the properties, as well as lost revenue. Certain continental-U.S.-based anchor tenants maintain their own property insurance on their Company-owned premises and are expected to make the required repairs to their stores. The Company is unable to estimate the impact of potential increased costs associated with resource constraints in Puerto Rico relating to building materials, supplies and labor. The Company believes it maintains adequate insurance coverage on each of its properties and is working closely with the insurance carriers to obtain the maximum amount of insurance recovery provided under the policies. However, the Company can give no assurances as to the amounts of such claims, timing of payments and resolution of the claims.

As of June 30, 2018, the estimated net book value of the property damage written off for damage to the Company’s Puerto Rico assets was $78.8 million. However, the Company continues to assess the impact of the hurricane on its properties, and the final net book value write-offs could vary significantly from this estimate. Any changes to this estimate will be recorded in the periods in which they are determined.

The Company’s Property Insurance Receivable was $49.2 million at June 30, 2018, which represents estimated insurance recoveries related to the net book value of the property damage written off, as well as other expenses, as the Company believes it is probable that the insurance recovery, net of the deductible, will exceed the net book value of the damaged property. The outstanding receivable is recorded as Property Insurance Receivable on the Company’s combined balance sheet as of June 30, 2018. The Company received an additional $20.2 million toward the property damage portion of its insurance claim in the second quarter.

The Company’s business interruption insurance covers lost revenue through the period of property restoration and for up to 365 days following completion of restoration. For the three and six months ended June 30, 2018, rental revenues of $2.8 million and $6.6 million, respectively, were not recorded because of lost tenant revenue attributable to Hurricane Maria that has been partially defrayed by insurance proceeds. The Company will record revenue for covered business interruption in the period it determines that it is probable it will be compensated. This income recognition criteria will likely result in business interruption insurance proceeds being recorded in a period subsequent to the period that the Company experiences lost revenue from the damaged properties. For the three and six months ended June 30, 2018, the Company received insurance proceeds of approximately $3.1 million and $5.1 million, respectively, related to business interruption claims, which is recorded on the Company’s combined statements of operations as Business Interruption Income.

Pursuant to the terms of the Separation and Distribution Agreement in connection with the separation from DDR, DDR will be entitled to insurance claim proceeds for unreimbursed restoration costs incurred through June 30, 2018, as well as business interruption losses for the same period.  Business interruption proceeds will continue to be recorded to revenue in the period that it is determined that DDR will be compensated.  

Commitments and Guaranties

The Company has entered into agreements with general contractors related to its shopping centers aggregating commitments of approximately $20.6 million as of June 30, 2018.

14

 


 

9.

Impairment Charges

DDR’s senior management recorded impairment charges on assets included in RVI Predecessor based on the difference between the carrying value of the assets and the estimated fair market value of $48.7 million and $8.6 million for the six months ended June 30, 2018 and 2017, respectively.

The impairments recorded on eight assets during six months ended June 30, 2018 primarily were triggered by indicative bids received and changes in market assumptions due to the disposition process.  The impairments recorded during the three and six months ended June 30, 2017 primarily were triggered by changes in asset hold-period assumptions and/or expected future cash flows.

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 and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence. 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 DDR 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 six months ended June 30, 2018. The table also indicates the fair value hierarchy of the valuation techniques used by DDR 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

$

 

 

$

 

 

$

403.4

 

 

$

403.4

 

 

$

48.7

 

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

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Fair Value at

 

 

 

 

 

 

Range

Description

 

June 30, 2018

 

 

Valuation Technique

 

Unobservable Inputs

 

2018

Impairment of combined assets

 

$

162.4

 

 

Indicative Bid(A)

 

Indicative Bid(A)

 

N/A

 

 

 

241.0

 

 

Income Capitalization

Approach

 

Market Capitalization

Rate

 

7.4%-9.3%

(A)

Fair value measurements based upon indicative bids were developed by third-party sources (including offers and comparable sales values), subject to DDR’s corroboration for reasonableness. The Company does not have access to certain unobservable inputs used by these third parties to determine these estimated fair values.

15

 


 

10.

Transactions with Parent Company

The following table presents fees and other amounts charged to the Company by DDR for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Management fees(A)

$

3,462

 

 

$

3,420

 

 

$

6,819

 

 

$

6,972

 

Leasing commissions(B)

 

982

 

 

 

 

 

 

982

 

 

 

 

Insurance premiums(C)

 

1,047

 

 

 

1,000

 

 

 

2,084

 

 

 

2,009

 

Maintenance services and other(D)

 

518

 

 

 

624

 

 

 

1,085

 

 

 

1,231

 

Disposition fees(E)

 

1,058

 

 

 

 

 

 

1,058

 

 

 

 

 

$

7,067

 

 

$

5,044

 

 

$

12,028

 

 

$

10,212

 

(A)

Management fees are generally calculated based on a percentage of tenant cash receipts for each property pursuant to its property management arrangements.

(B)

Leasing commissions represent fees charged for the execution of the leasing of retail space.  Leasing commissions are included within Operating and Maintenance on the combined statements of operations.

(C)

DDR arranged for insurance coverage for the 38 properties in the continental U.S. from insurers authorized to do business in the United States, which provide liability and property coverage. The Company remitted to DDR insurance premiums associated with these insurance policies. Insurance premiums are included within Operating and Maintenance on the combined statements of operations.

(D)

Maintenance services represents 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 on the combined statements of operations.

(E)

Disposition fees equal 1% of the gross sales price of each asset sold (two assets sold in the second quarter of 2018).

As of June 30, 2018 and December 31, 2017, the Company had amounts payable to DDR of $0.2 million in both periods.  The amounts are included within accounts payable and other liabilities, on the combined balance sheet and represent amounts owed to DDR for the services and fees discussed above.

Net Transactions with DDR shown in the combined statements of equity include contributions from and distributions to DDR, which are the result of treasury activities and net funding provided by or distributed to DDR prior to the separation from DDR in addition to the indirect costs and expenses allocated to RVI Predecessor by DDR as described in Note 2.

11.Subsequent Events

Asset Sales

From July 1, 2018 to August 1, 2018, the Company sold three shopping centers for $66.3 million.  Net proceeds were used to repay mortgage debt outstanding.

Credit Agreement

On July 2, 2018, the Company entered into a Credit Agreement (the “Revolving Credit Agreement”), among the Company, the lenders named therein and PNC Bank, National Association, as administrative agent (“PNC”).  The Revolving Credit Agreement provides for borrowings of up to $30 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.

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The Revolving Credit Agreement contains certain financial and operating covenants, including, among other things, a net worth covenant, as well as limitations on the Company’s ability to incur additional indebtedness and engage in mergers.  The Revolving Credit Agreement also contains customary default provisions including the failure to make timely payments of principal and interest, the failure to comply with financial and operating covenants, and the failure of the Company or its subsidiaries to pay, when due, certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods.

The Revolving Credit Agreement matures on the earliest to occur of (i) February 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 DDR 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 $1.35 billion mortgage loan is repaid or refinanced.

The Company’s obligations under the Revolving Credit Agreement are guaranteed by DDR.  In consideration thereof, on July 2, 2018, the Company entered into a guaranty fee and reimbursement letter agreement with DDR pursuant to which the Company has agreed to pay to DDR 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 DDR pays any amounts to PNC pursuant to DDR’s guaranty and the Company fails to reimburse DDR 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 DDR until repaid by the Company at a rate per annum equal to the sum of the LIBOR rate plus 8.50%.

17

 


 

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 Company’s financial condition, results of operations, liquidity 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 Amendment No. 1 to the Company’s Form 10 filed with the Securities and Exchange Commission on June 14, 2018, as well as other publicly available information.

Executive Summary

Retail Value Inc. (“RVI” or the “Company”) (NYSE: RVI) is an Ohio company formed in December 2017 that owns and operates a portfolio of retail real estate assets located in the continental U.S. and Puerto Rico.  The Company intends to realize value for shareholders through the operations and sales of the Company’s assets.  Prior to the Company’s separation on July 1, 2018, the Company was a wholly owned subsidiary of DDR Corp. (“DDR” or the “Parent Company”).    

In order to consummate the Company’s separation from DDR, on July 1, 2018, the Company and DDR entered into a separation and distribution agreement (the “Separation and Distribution Agreement”), pursuant to which, among other things, DDR 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 DDR’s common shares as of the close of business on June 26, 2018, the record date. On July 1, 2018, the separation date, holders of DDR’s common shares received one common share of RVI for every ten shares of DDR common stock held on the record date.  In connection with the separation, DDR 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.  

As of June 30, 2018, the Company’s portfolio consisted of 36 continental U.S. assets located in 17 states and 12 Puerto Rico assets and totaled 16 million square feet of gross leasable area (“GLA”). The Company’s continental U.S. assets comprised 67% and the properties in Puerto Rico comprised 33% of its total combined revenue for the six-month period ended June 30, 2018. The Company’s centers have a diverse tenant base that include national retailers such as Walmart/Sam’s Club, Bed, Bath & Beyond, the TJX Companies (T.J. Maxx, Marshalls and HomeGoods), Best Buy, PetSmart, Ross Stores, Kohl’s, Dick’s Sporting Goods and Michaels. At June 30, 2018, the aggregate occupancy of the Company’s operating shopping center portfolio was 89.5%, and the average annualized base rent per occupied square foot was $15.30.

The Company sold the following assets from July 1, 2018 to August 1, 2018 (in thousands):

Date Sold

 

Property Name

 

City, State

 

Total Owned GLA

 

 

Sales Price

 

7/6/18

 

Tequesta Shoppes

 

Tequesta, FL

 

 

110

 

 

$

14,333

 

7/10/18

 

Lake Walden Square

 

Plant City, FL

 

 

244

 

 

 

29,000

 

8/1/18

 

East Lloyd Commons

 

Evansville, IN

 

 

160

 

 

 

23,000

 

 

 

 

 

 

 

 

514

 

 

$

66,333

 

In February 2018, the Company incurred $1.35 billion of mortgage financing. The Company expects to focus on realizing value in its portfolio through operations and sales of its assets, which had a combined gross book value of approximately $2.7 billion as of June 30, 2018. The Company primarily intends to use net asset sale proceeds to repay mortgage debt. 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 certain cash balances held in restricted accounts on the separation date in connection with the mortgage loan. The Company has agreed to pay these amounts to DDR as soon as reasonably possible out of its operating cash flow but in no event later than March 31, 2020.

The Company intends to elect to be treated as a REIT for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2018, and intends to maintain its status as a REIT for U.S. federal income tax purposes in future periods.

Our Manager

In connection with the Company’s separation from DDR, on July 1, 2018, the Company entered into an external management agreement which, together with various property management agreements, governs the fees, terms and conditions pursuant to which

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DDR will serve as our manager.  The Company is not expected to have any employees. In general, either the Company or DDR may terminate these management agreements in December 31, 2019, or at the end of any six-month renewal period thereafter.  

Pursuant to the external management agreement, the Company is expected to pay DDR 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 DDR in connection with the services it provides to the Company along with the payment of transaction-based fees to DDR in the event of any debt financings or change of control transactions.

Pursuant to the property management agreements, the Company is expected to pay DDR and certain of its subsidiaries 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 non-Puerto Rico properties and the Puerto Rico properties, respectively, on a monthly basis. The property management agreements also provide for the payment to DDR of certain leasing commissions and a disposition fee of 1% of the gross sale price of each asset sold by the Company.

 

RESULTS OF OPERATIONS

Revenues from Operations (in thousands)

 

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Base and percentage rental revenues

$

52,159

 

 

$

58,852

 

 

$

(6,693

)

Recoveries from tenants

 

18,625

 

 

 

19,624

 

 

 

(999

)

Other income

 

5,090

 

 

 

2,740

 

 

 

2,350

 

Business interruption income

 

3,100

 

 

 

 

 

 

3,100

 

Total revenues

$

78,974

 

 

$

81,216

 

 

$

(2,242

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Base and percentage rental revenues(A)

$

104,837

 

 

$

117,673

 

 

$

(12,836

)

Recoveries from tenants(B)

 

37,345

 

 

 

40,095

 

 

 

(2,750

)

Other income(C)

 

7,952

 

 

 

5,003

 

 

 

2,949

 

Business interruption income(D)

 

5,100

 

 

 

 

 

 

5,100

 

Total revenues(E)

$

155,234

 

 

$

162,771

 

 

$

(7,537

)

(A)

Includes a reduction associated with Hurricane Maria for the Puerto Rico properties that has been partially defrayed by insurance proceeds as noted in (D) and (E) below.

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

 

 

Shopping Center Portfolio

June 30,

 

 

2018

 

 

2017

 

Centers owned

48

 

 

50

 

Aggregate occupancy rate

 

89.5

%

 

 

92.5

%

Average annualized base rent per occupied square foot

$

15.30

 

 

$

15.33

 

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The decrease in the occupancy rate primarily was due to a combination of anchor store tenant expirations and bankruptcies throughout 2017. The 2018 occupancy rate reflects the impact of unabsorbed vacancy related to a Toys “R” Us location rejected in the retailer’s bankruptcy proceeding in the first half of 2018, other bankruptcies in previous years and lower occupancy rates within the Puerto Rico portfolio.

(B)

Recoveries were approximately 90.9% and 94.5% of reimbursable operating expenses and real estate taxes for the six-month periods ended June 30, 2018 and 2017, respectively. The overall decreased percentage of recoveries from tenants primarily was attributable to the impact of the occupancy loss discussed above as well as conversions to gross leases in Puerto Rico where tenants did not separately contribute toward expenses. Also, 2018 was impacted by a reduction in income associated with Hurricane Maria for the Puerto Rico properties that has been partially defrayed by insurance proceeds as noted in (D) and (E) below.

(C)

Composed of the following (in thousands):

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Ancillary and other property income

$

5,042

 

 

$

4,733

 

 

$

309

 

Lease termination fees

 

2,910

 

 

 

270

 

 

 

2,640

 

 

$

7,952

 

 

$

5,003

 

 

$

2,949

 

The Company recorded a lease termination fee of $2.2 million in the second quarter of 2018 related to the receipt of a building triggered by an anchor tenant’s termination of a ground lease at a shopping center in Erie, Pennsylvania.

(D)

Represents payments received in the first half of 2018 from the Company’s insurance company related to its claims for business interruption losses incurred at its Puerto Rico properties associated with Hurricane Maria.

(E)

The Company did not record $6.6 million of revenues in the first half of 2018 because of lost tenant revenue attributable to Hurricane Maria that has been partially defrayed by the receipt of business interruption insurance proceeds as noted above. See further discussion in both “Contractual Obligations and Other Commitments” and Note 8, “Commitments and Contingencies,” to the Company’s combined financial statements included herein.

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Expenses from Operations (in thousands)

 

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Operating and maintenance

$

12,531

 

 

$

12,568

 

 

$

(37

)

Real estate taxes

 

9,677

 

 

 

9,517

 

 

 

160

 

Management fees

 

3,462

 

 

 

3,420

 

 

 

42

 

Impairment charges

 

15,060

 

 

 

 

 

 

15,060

 

Hurricane property loss

 

187

 

 

 

 

 

 

187

 

General and administrative

 

4,484

 

 

 

4,546

 

 

 

(62

)

Depreciation and amortization

 

24,072

 

 

 

30,351

 

 

 

(6,279

)

 

$

69,473

 

 

$

60,402

 

 

$

9,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Operating and maintenance

$

24,608

 

 

$

25,443

 

 

$

(835

)

Real estate taxes

 

19,571

 

 

 

19,338

 

 

 

233

 

Management fees

 

6,819

 

 

 

6,972

 

 

 

(153

)

Impairment charges(A)

 

48,680

 

 

 

8,600

 

 

 

40,080

 

Hurricane property loss(B)

 

868

 

 

 

 

 

 

868

 

General and administrative(C)

 

7,638

 

 

 

11,042

 

 

 

(3,404

)

Depreciation and amortization(D)

 

50,144

 

 

 

60,529

 

 

 

(10,385

)

 

$

158,328

 

 

$

131,924

 

 

$

26,404

 

(A)

The Company recorded impairment charges in the first half of 2018 related to eight operating 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 9, “Impairment Charges,” to the Company’s combined financial statements included herein.

(B)

The Hurricane Property Loss is more fully described in “Contractual Obligations and Other Commitments” later in this section and Note 8, “Commitments and Contingencies,” to the Company’s combined financial statements included herein.

(C)

Primarily represents the allocation of indirect costs and expenses incurred by DDR 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. Included in the allocation in the first half of 2018 and 2017 are employee separation charges aggregating $1.1 million and $3.7 million, respectively, related to DDR’s management transition and staffing reduction. For the six months ended June 30, 2018, general and administrative expenses of $7.6 million less the separation charges of $1.1 million were approximately 4.2% of total revenues.  For the six months ended June 30, 2017, general and administrative expenses of $11.0 million less the separation charges of $3.7 million were approximately 4.5% of total revenues.

(D)

Depreciation expense was lower in 2018, primarily as a result of the write off of assets in Puerto Rico as a result of the hurricane damage, assets that were fully amortized in 2017, as well as the impact of impairment charges in previous periods.

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Other Income and Expenses (in thousands)

 

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2018

 

 

2017

 

 

$ Change

 

Interest expense

$

(18,144

)

 

$

(21,640

)

 

$

3,496

 

Debt extinguishment costs

 

(1,970

)

 

 

 

 

 

(1,970

)

Transaction costs

 

(28,240

)

 

 

 

 

 

(28,240

)

Other expense, net

 

 

 

 

(1

)

 

 

1

 

 

$

(48,354

)

 

$

(21,641

)

 

$