UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Large accelerated filer |
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Non-accelerated filer |
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Emerging growth company |
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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
As of April 30, 2020, the registrant had
Retail Value Inc.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED March 31, 2020
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements – Unaudited |
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Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 |
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Consolidated Statements of Equity for the Three Months Ended March 31, 2020 and 2019 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
28 |
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Item 4. |
28 |
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PART II. OTHER INFORMATION |
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Item 1. |
29 |
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Item 1A. |
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Item 2. |
29 |
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Item 3. |
30 |
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Item 4. |
30 |
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Item 5. |
30 |
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Item 6. |
31 |
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32 |
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1
Retail Value Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
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March 31, 2020 |
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December 31, 2019 |
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Assets |
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Land |
$ |
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$ |
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Buildings |
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Fixtures and tenant improvements |
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Less: Accumulated depreciation |
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Construction in progress |
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Total real estate assets, net |
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Cash and cash equivalents |
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Restricted cash |
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Accounts receivable |
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Other assets, net |
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$ |
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$ |
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Liabilities and Equity |
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Mortgage indebtedness, net |
$ |
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$ |
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Payable to SITE Centers |
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Accounts payable and other liabilities |
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Dividends payable |
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Total liabilities |
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Commitments and contingencies (Note 5) |
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Redeemable preferred equity |
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Retail Value Inc. shareholders' equity |
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Common shares, with par value, $ respectively |
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Additional paid-in capital |
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Accumulated distributions in excess of net income |
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Less: Common shares in treasury at cost: December 31, 2019 |
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Total equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Retail Value Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited, in thousands, except per share amounts)
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Three Months |
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Ended March 31, |
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2020 |
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2019 |
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Revenues from operations: |
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Rental income |
$ |
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$ |
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Other income |
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Rental operation expenses: |
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Operating and maintenance |
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Real estate taxes |
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Property and asset management fees |
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Impairment charges |
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Hurricane property insurance loss, net |
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General and administrative |
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Depreciation and amortization |
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Other expense: |
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Interest expense, net |
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Debt extinguishment costs |
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Other income (expense), net |
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Gain on disposition of real estate, net |
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(Loss) income before tax expense |
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Tax expense |
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Net loss |
$ |
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$ |
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Comprehensive loss |
$ |
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$ |
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Per share data: |
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Basic and diluted |
$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Retail Value Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands)
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Common Shares |
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Additional Paid-in Capital |
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Accumulated Distributions in Excess of Net Income |
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Treasury Stock at Cost |
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Total |
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The Company |
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Balance as of December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common shares related to stock dividends |
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Net loss |
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Balance, March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common Shares |
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Additional Paid-in Capital |
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Accumulated Distributions in Excess of Net Income |
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Treasury Stock at Cost |
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Total |
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Balance as of December 31, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Issuance of common shares related to stock dividend |
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Repurchase of common shares |
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Adoption of ASC Topic 842 (Leases) |
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Dividends declared |
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Net loss |
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Balance, March 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Retail Value Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Three Months |
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Ended March 31, |
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2020 |
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2019 |
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Cash flow from operating activities: |
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Net loss |
$ |
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$ |
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Adjustments to reconcile net loss to net cash flow provided by operating activities: |
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Depreciation and amortization |
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Amortization and write-off of above- and below-market leases, net |
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Amortization and write-off of debt issuance costs and fair market value of debt adjustments |
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Gain on disposition of real estate, net |
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Impairment charges |
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Loss on debt extinguishment |
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Interest rate hedging activities |
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Net change in accounts receivable |
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Net change in accounts payable and other liabilities |
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Net change in other operating assets |
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Total adjustments |
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Net cash flow provided by operating activities |
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Cash flow from investing activities: |
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Real estate improvements to operating real estate |
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Proceeds from disposition of real estate |
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Hurricane property insurance proceeds |
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Net cash flow provided by investing activities |
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Cash flow from financing activities: |
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Proceeds from mortgage debt |
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Repayment of mortgage debt, including repayment costs |
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Payment of debt issuance costs |
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Dividends paid |
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Net cash flow used for financing activities |
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Net decrease in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
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1. |
Nature of Business and Financial Statement Presentation |
Nature of Business
Retail Value Inc. and its related consolidated real estate subsidiaries (collectively, the “Company” or “RVI”) were formed in December 2017 and owned
In connection with RVI’s separation from SITE Centers, SITE Centers retained
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 June 30, 2020, 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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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.
Unaudited Interim Financial Statements
These 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 months ended March 31, 2020 and 2019, are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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):
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Three Months |
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Ended March 31, |
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2020 |
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2019 |
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Accounts payable related to construction in progress |
$ |
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$ |
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Stock dividends |
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6
New Accounting Standard 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 (Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, “Topic 326”). 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Accounting for Leases During COVID-19 Pandemic
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company at the time of entering into such concessions.
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2. |
Other Assets, net |
Other Assets, net consists of the following (in thousands):
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March 31, 2020 |
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December 31, 2019 |
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Intangible assets: |
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In-place leases, net |
$ |
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$ |
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Above-market leases, net |
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Lease origination costs, net |
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Tenant relationships, net |
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Total intangible assets, net(A) |
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Operating lease ROU assets |
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Other assets: |
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Prepaid expenses |
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Deposits |
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Deferred charges, net |
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Other assets |
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Total other assets, net |
$ |
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$ |
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Below-market leases, net (other liabilities) |
$ |
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$ |
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(A) |
The Company recorded amortization expense related to its intangibles, excluding above- and below-market leases, of $ |
7
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3. |
Indebtedness |
Mortgage Indebtedness
The Company has a mortgage loan, which had an outstanding aggregate principal amount of $
As of March 31, 2020, the Company was in compliance with all provisions of the loan agreements, and the Company believes that it would have qualified to exercise the loan’s initial extension option in the event the extension option had been exercisable at March 31, 2020. The Company expects to be in compliance with all provisions of the loan agreements on the initial extension date. As of the date of issuance of the interim consolidated financial statements, in the event that amounts remain outstanding on the loan’s maturity date, management’s intent is to exercise the initial extension option upon maturity.
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 $
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.
At March 31, 2020, there were
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4. |
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 $
8
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5. |
Commitments and Contingencies |
Hurricane Loss
In 2017, Hurricane Maria made landfall in Puerto Rico. At the time of the hurricane, the Company owned
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 upon the lender’s satisfaction that all necessary restoration work has been completed. The Company recorded revenue for covered business interruption in the period it determined it was probable it would be compensated and all the applicable contingencies with the insurance company had been resolved. The Company recorded insurance proceeds received as Business Interruption Income on the Company’s 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.
|
6. |
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 is determined using widely accepted valuation techniques including actual sales negotiations and bona fide purchase offers received from third parties, an income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, as well as discounted cash flow analysis on the expected cash flows of each asset. 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 fair value of real estate that was impaired and therefore measured on a fair value basis, along with the related impairment charge, for the three months ended March 31, 2020. 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 |
|
|||||
|
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets held and used |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
9
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 March 31, 2020 |
|
|
Valuation Technique |
|
Unobservable Inputs |
|
Range |
|
|
Long-lived assets held and used |
|
$ |
|
|
|
Income Capitalization Approach |
|
Market Capitalization Rate |
|
|
|
|
|
|
|
|
|
Indicative Bid(A) |
|
Indicative Bid(A) |
|
N/A |
|
(A) |
Fair value measurements based upon indicative bids were developed by third-party sources (including offers and comparable sales values), subject to SITE Centers’ corroboration for reasonableness. The Company does not have access to certain unobservable inputs used by these third parties to determine these estimated values. |
|
7. |
Transactions with SITE Centers |
The following table presents fees and other amounts charged by SITE Centers (in thousands):
|
|
Three Months |
|
|||||
|
|
Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Property management fees(A) |
$ |
|
|
|
$ |
|
|
|
Asset management fees (B) |
|
|
|
|
|
|
|
|
Leasing commissions(C) |
|
|
|
|
|
|
|
|
Maintenance services and other(D) |
|
|
|
|
|
|
|
|
Disposition fees(E) |
|
|
|
|
|
|
|
|
Credit facility guaranty and debt refinancing fees(F) |
|
|
|
|
|
|
|
|
Legal fees(G) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(A) |
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. |
|
(B) |
Asset management fees are generally calculated at |
|
(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) |
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 consolidated statements of operations. |
|
(E) |
Disposition fees equal |
|
(F) |
|
|
(G) |
Legal fees charged for collection activity, negotiating and reviewing tenant leases and contracts for asset dispositions. |
In April 2020, the Company entered into an agreement (the “Agreement”) with an affiliate of SITE Centers Corp., in order to address the impact of novel coronavirus on the level of property management fees beginning on July 1, 2020 through December 31, 2020. For additional information, see Item 5. Other Information in Part II of this Quarterly Report on Form 10-Q.
10
|
8. |
Earnings Per Share |
The following table provides the net loss 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):
|
|
Three Months |
|
|||||
|
|
Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Numerators – Basic and Diluted |
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders after allocation to participating securities |
$ |
( |
) |
|
$ |
( |
) |
|
Denominators – Number of Shares |
|
|
|
|
|
|
|
|
Basic and Diluted—Average shares outstanding |
|
|
|
|
|
|
|
|
Income Per Share: |
|
|
|
|
|
|
|
|
Basic and Diluted |
$ |
( |
) |
|
$ |
|
|
Dividends
In November 2019, the Company declared a dividend on its common shares of $
|
9. |
Segment Information |
The Company has
|
|
Three Months Ended March 31, 2020 |
|
|||||||||||||
|
|
Continental U.S. |
|
|
Puerto Rico |
|
|
Other |
|
|
Total |
|
||||
|
Lease revenue and other property revenue |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Rental operation expenses |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and asset management fees |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Impairment charges |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Depreciation and amortization |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Unallocated expenses(A) |
|
|
|
|
|
|
|
|
$ |
( |
) |
|
|
( |
) |
|
Gain on disposition of real estate, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
11
|
|
Three Months Ended March 31, 2019 |
|
|||||||||||||
|
|
Continental U.S. |
|
|
Puerto Rico |
|
|
Other |
|
|
Total |
|
||||
|
Lease revenue and other property revenue |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Rental operation expenses |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and asset management fees |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Impairment charges |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Hurricane property insurance loss |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Depreciation and amortization |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Unallocated expenses(A) |
|
|
|
|
|
|
|
|
$ |
( |
) |
|
|
( |
) |
|
Gain on disposition of real estate, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
(A) |
Unallocated expenses consist of General and Administrative Expenses, Interest Expense, Debt Extinguishment Costs and Other Expenses as listed in the Company’s consolidated statements of operations. |
|
10. |
Subsequent Events |
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and other countries across the world. Federal, state and local governments have taken various actions including the issuance of stay-at-home orders, social distancing guidelines and ordering the temporary closure of non-essential businesses, including many of the Company’s tenants to limit the spread of COVID-19. Accordingly, many of the Company’s tenants have adjusted, reduced or suspended operating activities.
The Company has received numerous requests for rent relief including deferment of the payment of rent or rent reductions beginning with April 2020 rent. Discussions with individual tenants that failed to satisfy their April rent obligations are underway. Though the outcome of these discussions is expected to vary from tenant to tenant, the Company expects that it may enter into rent‑deferral arrangements with some tenants, including smaller local operators, whose operations have been significantly impacted by COVID-19. In addition, in an effort to maintain the Company’s liquidity position, the pandemic has created an uncertainty with respect to the timing and ability of the Company to execute the disposition portion of its business plan. Beginning in March 2020, many prospective purchasers have delayed or suspended their acquisition activities. A decrease in the expected level of pricing for the Company’s assets could also result in the recognition of impairment charges. The ultimate impact of the pandemic and secondary social and economic effects on the Company's results of operations, financial position, liquidity and capital resources remains unclear and cannot be reasonably forecasted at this time.
12
|
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, 2019, as well as other publicly available information.
RVI is an Ohio company formed in December 2017 that, as of March 31, 2020, owned and operated a portfolio of 26 assets, composed of 14 continental U.S. assets and 12 assets in Puerto Rico. These properties consisted of retail shopping centers composed of 10.2 million square feet of Company-owned gross leasable area (“GLA”) and were located in 10 states and Puerto Rico. The Company’s continental U.S. properties and Puerto Rico properties each comprised approximately 50% of its total consolidated revenue for the three months ended March 31, 2020. At March 31, 2020, the aggregate occupancy of the Company’s shopping center portfolio was 86.7%, and the average annualized base rent per occupied square foot was $15.65.
EXECUTIVE SUMMARY
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.
From January 1, 2020 through March 31, 2020, the Company sold the following assets (in thousands):
|
Date Sold |
|
Property Name |
|
City, State |
|
Total Owned GLA |
|
|
Gross Sales Price |
|
||
|
1/15/20 |
|
Newnan Crossing (Excluding Lowe's parcel) |
|
Newnan, GA |
|
|
92 |
|
|
$ |
11,600 |
|
|
2/19/20 |
|
Hamilton Commons |
|
Mays Landing, NJ |
|
|
403 |
|
|
|
60,000 |
|
|
2/26/20 |
|
Tucson Spectrum |
|
Tucson, AZ |
|
|
717 |
|
|
|
84,000 |
|
|
|
|
|
|
|
|
|
1,212 |
|
|
$ |
155,600 |
|
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, federal, state and local governments have taken various actions including the issuance of stay-at-home orders, social distancing guidelines and ordering the temporary closure of non-essential businesses, including many of the Company’s tenants. Accordingly, many of the Company’s tenants have adjusted, reduced or suspended operating activities. In addition, SITE Centers, the Company’s manager, closed all of its offices in March 2020 and successfully transitioned to working remotely. The ultimate impact of the pandemic and secondary social and economic effects on the Company's results of operations, financial position, liquidity and capital resources remains unclear and cannot be reasonably forecasted at this time. For further discussion see “Liquidity, Capital Resources and Financing Activities” and “Economic Conditions” included in this section and Item 1A. Risk Factors in Part II of this Quarterly Report.
Manager
The Company entered into an external management agreement (the “External Management Agreement”) with SITE Centers Corp. (“SITE Centers”) 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 June 30, 2020, 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.
13
As a result of the impact of COVID-19 on property revenues, the Company has agreed to pay an affiliate of SITE Centers a supplemental fee for the six-month period ending December 31, 2020 (see Item 5. Other information in Part II of this Quarterly Report on Form 10-Q). The property management agreements also provide for the payment to SITE Centers of certain leasing commissions and a disposition fee of 1% of the gross sales price of each asset sold by the Company.
COMPARISON OF 2020 AND 2019 RESULTS OF OPERATIONS
Where used, references to “Comparable Portfolio Properties” reflect shopping center properties owned as of March 31, 2020.
Revenues from Operations (in thousands)
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Rental income(A) |
$ |
50,330 |
|
|
$ |
61,570 |
|
|
$ |
(11,240 |
) |
|
Other income |
|
39 |
|
|
|
41 |
|
|
|
(2 |
) |
|
Total revenues (B)(C) |
$ |
50,369 |
|
|
$ |
61,611 |
|
|
$ |
(11,242 |
) |
|
(A) |
The following table summarize the key components of the 2020 rental income as compared to 2019: |
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
Contractual Lease Payments |
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Base and percentage rental income(1) |
$ |
35,614 |
|
|
$ |
44,603 |
|
|
$ |
(8,989 |
) |
|
Recoveries from tenants(2) |
|
12,896 |
|
|
|
14,949 |
|
|
|
(2,053 |
) |
|
Lease termination fees and ancillary rental income |
|
2,678 |
|
|
|
2,167 |
|
|
|
511 |
|
|
Bad debt(3) |
|
(858 |
) |
|
|
(149 |
) |
|
|
(709 |
) |
|
Total contractual lease payments |
$ |
50,330 |
|
|
$ |
61,570 |
|
|
$ |
(11,240 |
) |
|
|
(1) |
The following tables presents the statistics for the Company’s portfolio affecting base and percentage rental revenues: |
|
|
Shopping Center Portfolio March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Centers owned |
26 |
|
|
35 |
|
||
|
Aggregate occupancy rate |
|
86.7 |
% |
|
|
88.4 |
% |
|
Average annualized base rent per occupied square foot |
$ |
15.65 |
|
|
$ |
15.63 |
|
|
|
Continental U.S. March 31, |
|
|
Puerto Rico March 31, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Centers owned |
14 |
|
|
23 |
|
|
12 |
|
|
12 |
|
||||
|
Aggregate occupancy rate |
|
89.3 |
% |
|
|
91.0 |
% |
|
|
83.3 |
% |
|
|
83.3 |
% |
|
Average annualized base rent per occupied square foot |
$ |
13.00 |
|
|
$ |
13.55 |
|
|
$ |
19.85 |
|
|
$ |
20.59 |
|
The decrease in the continental U.S. occupancy rate primarily was due to disposition of higher occupancy properties and a combination of tenant expirations and tenant bankruptcies.
14
|
|
(2) |
Recoveries from Comparable Portfolio Properties were approximately 68.9% and 73.8% of reimbursable operating expenses and real estate taxes for the three months ended March 31, 2020 and 2019, respectively. The overall decrease in the amount of recoveries from tenants related to the disposition of higher occupancy assets as noted in (C) below along with the impact of tenant expirations and vacancies in both the continental U.S. and Puerto Rico portfolios and conversions to gross leases in Puerto Rico. |
|
|
(3) |
The increase in bad debt in 2020 primarily was due to the impact of COVID-19 and related reserves for credit risk tenants. |
|
(B) |
The Company did not record $1.6 million of aggregate revenues for the three months ended March 31, 2019 because of lost tenant revenue attributable to Hurricane Maria for the Puerto Rico properties. |
|
(C) |
The changes in Total Revenues are composed of the following (in millions): |
|
|
|
2020 vs. 2019 |
|
|
|
|
|
$ Change |
|
|
|
Continental U.S. |
|
$ |
(12.0 |
) |
|
Puerto Rico |
|
|
0.8 |
|
|
|
|
$ |
(11.2 |
) |
|
|
|
2020 vs. 2019 |
|
|
|
|
|
$ Change |
|
|
|
Comparable Portfolio Properties |
|
$ |
(1.0 |
) |
|
Disposition of shopping centers |
|
|
(10.2 |
) |
|
|
|
$ |
(11.2 |
) |
The decrease in Total Revenues for the Comparable Portfolio Properties primarily was due to the impact of COVID-19. The Company recorded reductions in straight-line rent as well as the aforementioned increase in bad debt for credit risk tenants.
Expenses from Operations (in thousands)
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Operating and maintenance(A) |
$ |
11,062 |
|
|
$ |
10,502 |
|
|
$ |
560 |
|
|
Real estate taxes(A) |
|
5,719 |
|
|
|
7,510 |
|
|
|
(1,791 |
) |
|
Property and asset management fees |
|
4,876 |
|
|
|
5,816 |
|
|
|
(940 |
) |
|
Impairment charges(B) |
|
15,910 |
|
|
|
6,090 |
|
|
|
9,820 |
|
|
Hurricane property insurance loss, net |
|
— |
|
|
|
183 |
|
|
|
(183 |
) |
|
General and administrative(C) |
|
1,077 |
|
|
|
885 |
|
|
|
192 |
|
|
Depreciation and amortization(D) |
|
16,470 |
|
|
|
19,355 |
|
|
|
(2,885 |
) |
|
|
$ |
55,114 |
|
|
$ |
50,341 |
|
|
$ |
4,773 |
|
|
(A) |
The changes in Operating and Maintenance and Real Estate Taxes are composed of the following (in millions): |
|
|
|
2020 vs. 2019 $ Change |
|
|||||
|
|
|
Operating and Maintenance |
|
|
Real Estate Taxes |
|
||
|
Continental U.S. |
|
$ |
(0.7 |
) |
|
$ |
(1.8 |
) |
|
Puerto Rico |
|
|
1.3 |
|
|
— |
|
|
|
|
|
$ |
0.6 |
|
|
$ |
(1.8 |
) |
15
|
|
|
2020 vs. 2019 $ Change |
|
|||||
|
|
|
Operating and Maintenance |
|
|
Real Estate Taxes |
|
||
|
Comparable Portfolio Properties |
|
$ |
1.5 |
|
|
$ |
(0.3 |
) |
|
Disposition of shopping centers |
|
|
(0.9 |
) |
|
|
(1.5 |
) |
|
|
|
$ |
0.6 |
|
|
$ |
(1.8 |
) |
The increase in Operating and Maintenance for the Comparable Portfolio Properties was primarily a result of increased property insurance premiums.
|
(B) |
The Company recorded impairment charges in 2020 and 2019 related to shopping centers marketed for sale. Changes in (i) holding periods, (ii) various courses of action that may occur or (iii) an asset’s expected future undiscounted cash flows due to changes in market or leasing conditions each could result in the recognition of additional impairment charges. Impairment charges are presented in Note 6, “Impairment Charges,” to the Company’s consolidated financial statements included herein. |
|
(C) |
Primarily represents legal, audit, tax and compliance services and director compensation. |
|
(D) |
The disposition of shopping centers accounts for $3.5 million in the reduction of depreciation expense. |
Other Income and Expenses (in thousands)
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Interest expense, net(A) |
$ |
(7,292 |
) |
|
$ |
(13,974 |
) |
|
$ |
6,682 |
|
|
Debt extinguishment costs(B) |
|
(3,965 |
) |
|
|
(14,482 |
) |
|
|
10,517 |
|
|
Other expense, net |
|
334 |
|
|
|
(868 |
) |
|
|
1,202 |
|
|
Gain on disposition of real estate, net(C) |
|
2,674 |
|
|
|
18,219 |
|
|
|
(15,545 |
) |
|
Tax expense |
|
(73 |
) |
|
|
(175 |
) |
|
|
102 |
|
|
|
$ |
(8,322 |
) |
|
$ |
(11,280 |
) |
|
$ |
2,958 |
|
|
(A) |
At March 31, 2020 and 2019, the interest rate of the Company’s mortgage loan was 3.8% and 4.8% per annum, respectively. The decrease in interest expense primarily was due to both a reduction in the amount of debt outstanding and the interest rate. |
Interest costs capitalized in conjunction with capital projects were $0.3 million for the three months ended March 31, 2019, primarily related to restoration work in Puerto Rico.
|
(B) |
Debt extinguishment costs are incurred at the time of an asset sale in connection with a prepayment on the mortgage. In 2019, included debt extinguishment costs of $12.7 million, which were recorded primarily in connection with the Company’s debt refinancing in March 2019. |
|
(C) |
Related to the sale of three assets for each of the three months ended March 31, 2020 and 2019, respectively. |
Net Loss (in thousands)
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
Net loss |
$ |
(13,067 |
) |
|
$ |
(10 |
) |
|
$ |
(13,057 |
) |
The increase in net loss primarily was attributable to the sale of assets and impairment charges partially offset by a decrease in debt extinguishment costs related to the debt refinancing in 2019.
16
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.
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.
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
17
determined in accordance with GAAP, as presented in its 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):
|
|
Three Months |
|
|
|
|
|
|||||
|
|
Ended March 31, |
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|||
|
FFO |
$ |
16,622 |
|
|
$ |
7,190 |
|
|
$ |
9,432 |
|
|
Operating FFO |
|
20,253 |
|
|
|
24,348 |
|
|
|
(4,095 |
) |
The increase in FFO primarily was a result of debt extinguishment charges incurred in 2019 in connection with the refinancing of the Company’s mortgage loan, partially offset by the dilutive impact from the disposition of assets. The decrease in Operating FFO primarily was due to asset sales.
The Company’s reconciliation of net 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.
|
|
Three Months |
|
|||||
|
|
Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Net loss |
$ |
(13,067 |
) |
|
$ |
(10 |
) |
|
Depreciation and amortization of real estate investments |
|
16,453 |
|
|
|
19,329 |
|
|
Impairment of real estate assets |
|
15,910 |
|
|
|
6,090 |
|
|
Gain on disposition of real estate |
|
(2,674 |
) |
|
|
(18,219 |
) |
|
FFO |
|
16,622 |
|
|
|
7,190 |
|
|
Hurricane activity, net(A) |
|
— |
|
|
|
1,808 |
|
|
Other expenses(B) |
|
3,631 |
|
|
|
15,350 |
|
|
Non-operating items, net |
|
3,631 |
|
|
|
17,158 |
|
|
Operating FFO |
$ |
20,253 |
|
|
$ |
24,348 |
|
|
|
(A) |
The hurricane activity, net is summarized as follows (in thousands): |
|
|
Three Months |
|
|
|
|
Ended March 31, |
|
|
|
|
2019 |
|
|
|
Lost tenant revenue |
$ |
1,625 |
|
|
Clean up costs and other uninsured expenses |
|
183 |
|
|
|
$ |
1,808 |
|
|
|
(B) |
Amounts included in other expenses as follows (in millions): |
|
|
Three Months |
|
|||||
|
|
Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Transaction and other expenses, net |
$ |
(0.4 |
) |
|
$ |
0.9 |
|
|
Debt extinguishment costs |
|
4.0 |
|
|
|
14.5 |
|
|
|
$ |
3.6 |
|
|
$ |
15.4 |
|
18
LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES
The Company requires capital to fund its operating expenses, capital expenditures and investment activities. Absent the occurrence of an Amortization Period (as described below), the Company’s capital sources may include cash flow from operations, as well as availability under its Revolving Credit Agreement (as defined below).
Although the Company has experienced a reduction in timely collections of April 2020 rent and may experience delays in the execution of its disposition strategy as a result of the COVID-19 pandemic, the Company believes that it has sufficient liquidity and capital resources to operate its business. At March 31, 2020, the Company had an unrestricted cash balance of $92.4 million, restricted cash on deposit with its mortgage lender of $81.3 million and $30.0 million of availability under its Revolving Credit Agreement (subject to satisfaction of applicable borrowing conditions). Debt outstanding was $519.7 million at March 31, 2020. The Company’s mortgage loan generally requires interest-only payments subject to maintenance of a minimum debt yield and has an initial maturity date of March 2021 with three one-year extensions at the Company’s option based on satisfaction of certain conditions. Subject to the uncertain impact of COVID-19 on capital and transactions markets, the Company expects to utilize net asset sale proceeds to repay the principal of the mortgage loan and may utilize one or more of the loan’s existing extension options. No assurance can be provided that obligations outstanding under the mortgage loan will be repaid, extended or refinanced as currently anticipated.
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. 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, 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 March 31, 2020, the aggregate principal amount of the mortgage loan was $519.7 million. The loan facility will mature on March 9, 2021, subject to three one-year extensions at the 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) 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%.
As of March 31, 2020, the weighted-average interest rate applicable to the notes was equal to one-month LIBOR plus a spread of 3.14% 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. The 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 spread to increase over time. At March 31, 2020, the interest rate applicable to the mortgage loan was 3.8%.
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 March 31, 2020, was 14.1%. 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 be made available to the Company only 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.
19
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 toward 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 spread applicable to 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 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.
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.
20
The Revolving Credit Agreement contains customary affirmative and negative covenants, including a requirement to maintain tangible net worth of $500 million. 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 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 April 30, 2020, no dividends have been paid on the RVI Preferred Shares.
Common Share Dividends
The Company’s 2018 dividend was paid on January 25, 2019 and the Company’s 2019 dividend was paid on January 8, 2020, in each case in a combination of cash and the Company’s common shares. See Note 8, “Earnings Per Share,” of the Company’s consolidated financial statements included herein.
Distributions of Puerto Rico sourced net taxable income to Company shareholders are subject to a 10% Puerto Rico withholding tax. In 2018, the Company entered into a closing agreement with the Puerto Rico Department of Treasury which provides that the Company will be exempt from Puerto Rico income taxes so long as it qualifies as a REIT in the U.S. and distributes at least 90% of its
21
Puerto Rico net taxable income to its shareholders every year. As such, in late 2018 and 2019 the Company’s Board of Directors declared common share dividends, subject to a 10% withholding tax, on account of taxable income generated in Puerto Rico in those years. The amount of each dividend is expected to exceed the amount of REIT taxable income generated by the Company in the applicable year. Accordingly, federal income taxes were not incurred by the REIT.
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 particularly in light of the current and potential impacts of COVID-19.
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.
Dispositions
For the three months ended March 31, 2020, the Company sold three shopping centers aggregating 1.2 million square feet, for an aggregate sales price of $155.6 million and net proceeds prior to debt repayment of $146.8 million.
22
Cash Flow Activity
The Company’s cash flow activities are summarized as follows (in thousands):
|
|
Three Months |
|
|||||
|
|
Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Cash flow provided by operating activities |
$ |
15,223 |
|
|
$ |
11,524 |
|
|
Cash flow provided by investing activities |
|
140,672 |
|
|
|
93,720 |
|
|
Cash flow used for financing activities |
|
(165,554 |
) |
|
|
(107,327 |
) |
Changes in cash flow compared to the prior comparable period are described as follows:
Operating Activities: Cash provided by operating activities increased $3.7 million primarily due to reduction in interest expense and costs incurred with the March 2019 debt refinancing offset by a decrease in income due to asset sales.
Investing Activities: Cash provided by investing activities increased $47.0 million primarily due to the following:
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• |
Increase in proceeds from dispositions of real estate of $41.0 million; |
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• |
Decrease in payments for real estate improvements of $19.8 million and |
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• |
Decrease in hurricane insurance proceeds of $13.8 million. |
Financing Activities: Cash used for financing activities increased by $58.2 million primarily due to the following:
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• |
Increase in debt repayments, net of proceeds and loan costs of $54.4 million and |
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• |
Increase in dividends paid of $4.2 million. |
CAPITALIZATION
At March 31, 2020, the Company’s capitalization consisted of $519.7 million of mortgage debt, $190.0 million of RVI Preferred Shares and $242.7 million of market equity (market equity is defined as common shares outstanding multiplied by $12.25, the closing price of the Company’s common shares on the New York Stock Exchange at March 31, 2020), resulting in a debt to total market capitalization ratio of 0.55 to 1.0, as compared to the ratio of 0.53 to 1.0 at March 31, 2019. The closing price of the Company’s shares on the New York Stock Exchange was $31.17 at March 29, 2019, the last trading day of March.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company had aggregate outstanding mortgage indebtedness of $519.7 million at March 31, 2020 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.
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 $10.2 million at March 31, 2020. 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 March 31, 2020, the Company had purchase order obligations, typically payable
23
within one year, aggregating approximately $0.7 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. In August 2019, the Company reached a settlement with its insurer with respect to the Company’s claims related to the hurricane. 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.
As of March 31, 2020, the Company had expended $116 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 in the second half of 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 addition, the timing of completing the remaining repair work could be delayed by orders made by the Puerto Rico government related to both stay-at-home directives and the temporary closure of non-essential businesses as a result of the COVID-19 pandemic.
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
Portfolio Composition and Retail Environment. Though leasing prospects are heavily dependent on local conditions, in general, the Company continued to see modest demand from tenants for its continental U.S. space during January and February of 2020 before uncertainty and tenant concern around the COVID-19 pandemic caused a slow-down in lease activity in March 2020. The Company’s 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 March 31, 2020 (Walmart/Sam’s Club at 6.5%; Bed Bath & Beyond, which includes Bed Bath & Beyond and Christmas Tree Shops, at 3.2% and PetSmart at 3.1%). Other significant tenants include TJX Companies (T.J. Maxx, Marshalls and HomeGoods) and Best Buy, all of which have relatively strong financial positions, have outperformed other retail categories on a relative basis over time and we believe remain well capitalized. Historically, these tenants have provided a stable revenue base, and we believe that they will continue to provide a stable revenue base going forward, 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, convenience and service, which the Company believes will enable many of its tenants to succeed under a variety of economic conditions. The Company recognizes the risks posed by current economic conditions but believes that the diversity of its properties and the credit quality of its tenant base should enable it to navigate through a potentially challenging economic environment.
The shopping center portfolio’s occupancy was 86.7% and 88.4% at March 31, 2020 and 2019, 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. The total portfolio average annualized base rent per occupied square foot was $15.65 at March 31, 2020, as compared to $15.63 at March 31, 2019.
At March 31, 2020, the Company owned 12 assets on the island of Puerto Rico aggregating 4.4 million square feet, representing 43% of Company-owned GLA and approximately 50% of both the Company’s total consolidated revenue and the Company’s total consolidated revenue less operating expenses (i.e., net operating income) for the three months ended March 31, 2020. 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 in Puerto Rico further exacerbated these concerns. See Item
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1A. “Risk Factors– Geographic Concentration of the Company’s Properties Makes It Vulnerable to Natural Disasters, Extreme Weather Conditions and Climate Change. An Uninsured Loss or a Loss That Exceeds the Limits of the Company’s Insurance Policies Could Subject the Company to a Loss of Capital and Revenue” in the Company’s Annual Report on 10-K for the year ended December 31, 2019.
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. Some conventional department stores and national chains have announced bankruptcies, store closures and/or reduced expansion plans in recent years leading to a smaller overall number of tenants requiring large store formats. The loss of a tenant or downsizing of space can adversely affect the Company. See Item 1A. “Risk Factors – The Economic Performance and Value of the Company’s Shopping Centers Depend on Many Factors, Each of Which Could Have an Adverse Impact on the Company’s Cash Flows and Operating Results” in the Company’s Annual Report on 10-K for the year ended December 31, 2019.
In addition to the impacts of increased competition, e-commerce and adverse conditions in Puerto Rico, beginning in March 2020, the retail sector has been significantly impacted by the outbreak of COVID-19. Though the impact of COVID-19 on tenant operations has varied by tenant category, local conditions and applicable government mandates, a significant number of the Company’s tenants have experienced a drastic reduction in sales and foot traffic and many tenants have been forced to limit their operations or close their businesses for a period of time. As monthly rents are generally due from tenants at the beginning of each month, the outbreak of COVID-19 had a relatively minimal impact on the Company’s collection of March 2020 rents, but it has had a significant impact on collection of April 2020 rents. Discussions with individual tenants that failed to satisfy their April rent obligations are underway. Though the outcome of these discussions is expected to vary from tenant to tenant, the Company expects that it may enter into rent-deferral arrangements with some tenants, including smaller local operators, whose operations have been significantly impacted by COVID-19. It is also unclear to what extent, if any, the Company or its tenants will be able to mitigate the impact of COVID-19 on their operations through business interruption insurance coverage.
While the Company is unable to forecast the resolution of tenant relief and abatement claims, the degree to which similar requests and claims may be made by tenants in subsequent months or the duration of the disruption to tenant and Company operations caused by the COVID-19 pandemic, the Company expects that its results of operations will be adversely impacted by the outbreak and its impact on the economy. Additionally, the outbreak of the COVID-19 pandemic has resulted in a slow-down in the volume of new leasing activity and in delivery and rent commencement with respect to newly-leased space, and may ultimately lead to tenant closures and bankruptcies which may further adversely impact the Company’s results of operations in the future.
Disposition Outlook. 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 has recently been 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 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.
The recent outbreak of COVID-19 has created uncertainty with respect to the timing and ability of the Company to execute the disposition portion of its business plan. Beginning in March 2020, many prospective purchasers have delayed or suspended their acquisition activities due to, among other factors, the uncertainty of tenant operations and the availability and terms of financing. Purchasers’ expectations with respect to economic returns from future investments in retail real estate may also be impacted by uncertainties caused by COVID-19. Although the Company believes that the outbreak of COVID-19 may have an adverse effect on the timing and pricing of disposition activity, the Company is currently unable to predict the magnitude of such impact.
For additional risks relating to the outbreak of COVID-19, see Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q.
New Accounting Standards
New Accounting Standards are more fully described in Note 1, “Nature of Business and Financial Statement Presentation,” to the Company’s consolidated financial statements.
25
FORWARD-LOOKING STATEMENTS
MD&A should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the Company’s 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 10-K for the year ended December 31, 2019 and of this Quarterly Report on Form 10-Q. The impact of the COVID-19 may also exacerbate the risks discussed therein and herein, any of which could have a material effect of the Company.
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:
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The Company may be unable to dispose of properties on favorable terms or at all, especially (i) in markets or regions experiencing deteriorating economic conditions, (ii) with respect to properties anchored by tenants experiencing financial challenges and (iii) during periods of diminished demand for commercial real estate assets, whether caused by public health crises, other social disruptions or otherwise. 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; |
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• |
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; |
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• |
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; |
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• |
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; |
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• |
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; |
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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; |
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• |
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; |
26
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• |
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; |
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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; |
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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; |
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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; |
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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; |
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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; |
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The outcome of litigation, including litigation with tenants, may adversely affect the Company’s results of operations and financial condition; |
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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; |
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Property damage, expenses related thereto, and other business and economic consequences (including the potential loss of revenue) resulting from natural disasters and extreme weather conditions in locations where the Company owns properties; |
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Sufficiency and timing of any insurance recovery payments related to damages from extreme weather conditions; |
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The Company and its tenants could be negatively affected by the impacts of pandemics and other public health crises, including the recent outbreak of COVID-19; |
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The Company is subject to potential environmental liabilities; |
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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; |
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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; |
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Changes in accounting or other standards may adversely affect the Company’s business; |
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The Company’s Board of Directors, which regularly reviews the Company’s business strategy and objectives, may change its strategic plan, including to adopt a plan of dissolution and/or delay distributions; |
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A change in the Company’s relationship with SITE Centers and SITE Centers’ ability to retain qualified personnel and adequately manage the Company; |
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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 |
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The Company and its vendors, including SITE Centers, 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. |
27
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Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s primary market risk exposure is interest rate risk. At March 31, 2020 and 2019, the Company’s outstanding indebtedness was composed of all variable-rate debt. At March 31, 2020, the Company’s carrying value of the variable-rate debt was $505.8 million and its fair value was $524.8 million. At December 31, 2019, the Company’s carrying value of the variable-rate debt was $655.8 million and its fair value was $682.2 million. If interest rates were to increase by 1.00%, or 100 basis-points, the fair value of the debt would be $524.6 million and $681.9 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020, would result in an increase in interest expense of approximately $1.3 million for the three-month period ended March 31, 2020.
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 March 31, 2020, the Company had no other material exposure to market risk.
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Item 4. |
CONTROLS AND PROCEDURES |
Disclosure 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 the Company’s 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 March 31, 2020, 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 March 31, 2020, 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 March 31, 2020, 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.
28
PART II
OTHER INFORMATION
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Item 1. |
LEGAL PROCEEDINGS |
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.
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Item 1A. |
RISK FACTORS |
Reference is made to Part 1, Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The risk factor set forth below updates, and should be read together with, such risk factors. Furthermore, the impact of COVID-19 may also exacerbate the risks discussed therein, any of which could have a material effect on the Company.
The Recent Outbreak of a Novel Coronavirus (COVID-19) Has Had, and Will Likely Continue to Have, a Significant Impact on the Company and its Tenants’ Businesses.
The Company’s business and the businesses of its tenants have been, and are likely to continue to be, significantly impacted by the recent outbreak of a novel coronavirus (COVID-19) and the public perception of and reaction to the related risks. Beginning in March 2020, the outbreak of COVID-19 has resulted in the closure of many tenant businesses and has substantially reduced foot traffic to other tenant businesses. Such events have adversely impacted many tenants’ sales and operations and may adversely affect their ability to finance their businesses and satisfy their obligations, including rent owed to the Company. The Company has received a substantial number of tenant requests for rent relief and claims for abatement with respect to monthly rent for April 2020 and beyond, and the Company’s results of operations are likely to be adversely impacted as a result thereof. The timing of tenant store re-openings and resumption of normalized business activity levels remains uncertain and may be adversely impacted by disruptions in inventory supply chains from local and international suppliers, staffing challenges and the public’s perception of continued health risks relating to COVID-19. Furthermore, the outbreak of COVID-19 may cause prospective tenants to abandon or delay new store growth plans or choose to lease fewer spaces, which could lead to a decline in leasing volume and diminished demand and rents for the Company’s properties. Such events may also increase the risk of delays in completing tenant build-outs, delivering space to new tenants and achieving rent commencement dates with respect to recently executed leases. Additionally, the impacts of COVID-19 may cause one or more existing tenants to file for bankruptcy protection. The Company may not be able to recover any amounts from insurance carriers in order to mitigate the impact of lost tenant revenues.
Moreover, the outbreak of COVID-19 has significantly limited the ability of the employees of the Company’s manager to access the manager’s offices and properties, which could adversely impact the manager’s ability to manage the Company’s properties and complete other operating and administrative functions that are important to the Company’s business. Efforts by the employees of the Company’s manager to work remotely could also expose the Company to additional risks, such as increased cybersecurity risk.
In addition to the impacts and uncertainties listed above, the outbreak of COVID-19 could result in other companies and funds invested in commercial real estate assets curtailing or abandoning planned acquisition or development activity, which in turn could adversely impact the Company’s ability to market its remaining properties for sale and the level of pricing and demand for such properties by potential buyers. A decrease in the expected level of pricing for the Company’s assets could also result in the recognition of impairment charges. Furthermore, the outbreak of COVID-19 could continue to negatively affect global capital markets, which, in turn, could negatively affect the Company’s ability, and the ability of potential buyers of real estate assets, to obtain necessary financing on favorable terms, or at all.
Any of the foregoing risks, or related risks that the Company is unable to predict due to changing circumstances relating to COVID-19, could have a material adverse effect on the Company’s business, results of operations and financial condition.
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Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
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Item 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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Item 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
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Item 5. |
OTHER INFORMATION |
On April 29, 2020, the Company entered into an agreement (the “Agreement”) with JDN Development Company, an affiliate of SITE Centers, in order to address the impact of COVID-19 on the level of property management fees payable to affiliates of SITE Centers (collectively, the “Manager”) beginning on July 1, 2020. Pursuant to the terms of the existing property management agreements between affiliates of the Company and the Manager, the property management fee is determined on each July 1 and January 1 based on gross revenues received at the Company’s properties during the three-month period immediately preceding such determination date. In order to offset the impact of reduced property collections during the three-month period preceding July 1, 2020 on the property management fee, the Agreement provides that beginning on July 1, 2020, the Company will pay JDN Development Company a monthly supplemental fee in an amount equal to (i) the average monthly property management fee paid during 2019 with respect to the properties owned by the Company and its subsidiaries as of April 1, 2020 (which amount is $789,126) minus (ii) the monthly property management fee determined on July 1, 2020 for the remaining six months of 2020 in accordance with the existing property management agreements. The foregoing description of the Agreement is qualified in its entirety by reference to Exhibit 10.1 to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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Item 6. |
EXHIBITS |
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10.1 |
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Agreement dated April 29, 2020 between Retail Value Inc. and JDN Development Company2 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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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 |
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101.SCH |
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XBRL Taxonomy Extension Schema Document 2 |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document 2 |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document 2 |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document 2 |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document 2 |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, has been formatted in Inline XBRL. |
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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. |
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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 March 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019, (iii) Consolidated Statements of Equity for the Three Months Ended March 31, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 and (v) Notes to Condensed Consolidated Financial Statements.
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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.
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Retail Value Inc. |
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By: |
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/s/ Christa A. Vesy |
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Name: |
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Christa A. Vesy |
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Title: |
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Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer |
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Date: May 1, 2020 |
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32
Exhibit 10.1
AGREEMENT
THIS AGREEMENT (this “Agreement”) is made as and entered into as of April 29, 2020, by and between Retail Value inc., an Ohio corporation (“RVI”) and JDN DEVELOPMENT COMPANY, a Delaware corporation (“JDN Development”).
W I T N E S S E T H :
WHEREAS, prior to the date hereof, RVI and SITE Centers Corp., an Ohio corporation (“SITE”), caused their respective subsidiaries to enter into the following property management agreements (collectively, as amended, assigned or supplemented, the “Property Management Agreements”) in connection with certain property management services provided at the retail shopping centers owned by RVI: (i) that certain Amended and Restated Management and Leasing Agreement by and among the Owners (as defined therein) and DDR Asset Management LLC, dated as of February 14, 2018 [US REIT Owners]; (ii) that certain Amended and Restated Management and Leasing Agreement by and among the Owners (as defined therein) and DDR Asset Management LLC, dated as of February 14, 2018 [US Non-REIT Owners]; and (iii) that certain Amended and Restated Management and Leasing Agreement by and among the Owners (as defined therein), DDR Asset Management LLC and DDR PR Ventures II LLC, dated as of February 14, 2018 [Puerto Rico Owners];
WHEREAS, pursuant to each of the Property Management Agreements, the monthly Management Fee for the six-month period beginning on July 1, 2020 is to be determined on July 1, 2020 based on Gross Revenues received from all Properties during the three (3) month period immediately preceding July 1, 2020 (including Properties disposed of during or subsequent to such period) and is payable by the Owners on July 1, 2020 and on the first day of each month thereafter occurring prior to and including December 1, 2020;
WHEREAS, in recognition of the uncertain level of Gross Revenues to be received by the Owners during the three (3) month period preceding July 1, 2020 due to the impact of the COVID-19 pandemic on tenant rent collections and the resulting impact on the level of the Management Fee applicable with respect to the six-month period beginning on July 1, 2020, RVI has agreed to make certain payments to JDN Development as more particularly described herein; and
WHEREAS, capitalized terms not defined herein shall have the meaning given to such terms in the Property Management Agreements.
NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.Agreed Fee.
a.If the aggregate monthly Management Fee calculated on July 1, 2020 is less than the aggregate of the monthly base amounts set forth on Schedule I attached hereto, which aggregate amount is Seven Hundred Eighty-Nine Thousand One Hundred Twenty-Six Dollars (the “Base Amount”), then RVI shall pay to JDN Development an amount equal to the Base Amount minus such Management Fee (such difference, the “Agreed Fee”). To the extent payable, the Agreed Fee shall be paid monthly by RVI to JDN Development on July 1, 2020 and on the first day of each calendar month thereafter occurring prior to and including December 1, 2020, simultaneously with the payment of the Management Fee by the Owners to the applicable Property Manager. In the event any adjustments are made to the Management Fee following July 1, 2020 in accordance with Section 5.1(b) of the Property Management Agreements, the Agreed Fee shall be modified to reflect such adjustment with any resulting excess or shortfall in the originally calculated Agreed Fee to be deducted from or added to the next succeeding calendar month as appropriate.
b.For the avoidance of doubt, any Agreed Fee paid by RVI to JDN Development shall not constitute an additional Management Fee. Further, any fees payable under Sections 5.2 and 5.3 of the Property Management Agreements shall not be considered Management Fees or considered in calculating the Agreed Fee.
c.Nothing in this Agreement shall in any way amend, modify or otherwise change any of the terms, conditions, rights or obligations in the Property Management Agreements or that certain External Management Agreement, dated as of July 1, 2018, by and between RVI and DDR Asset Management LLC (as amended, assigned or supplemented, the “EMA”).
2.Term. This Agreement shall terminate on December 31, 2020.
3.Miscellaneous.
a.Notices. All notices, requests or other communications given under this Agreement shall be provided in accordance with the notice requirements of the EMA.
b.Assignment. Neither party may assign any of its rights or obligations under this Agreement without the other party’s prior written consent, provided, however JDN Development (and any as successor or assign of JDN Development’s interest under this Agreement) shall have the right to assign all or any portion of its interest under this Agreement (or the right to receive the Agreed Fee hereunder) to any direct or indirect subsidiary of SITE, including DDR PR Ventures II, LLC. In the event of such permitted assignment, the assignor of shall provide written notice of such assignment to RVI within 10 days following the effective date of such assignment.
c.Entire Agreement. This Agreement constitutes and expresses the entire agreement of the parties hereto with regard to the subject matter covered and no agreements, warranties, representations or covenants not herein expressed shall be binding upon the parties.
d.Amendment. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought.
e.Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which counterparts together shall constitute one and the same instrument. Signatures to this Agreement transmitted by electronic mail shall be valid and effective to bind the party so signing.
f.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. If any provision of this Agreement or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of that provision to other persons or circumstances shall not be affected but rather shall be enforced to the extent permitted by law. This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing this Agreement to be drafted.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first above written.
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RVI: |
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RETAIL VALUE INC., an Ohio corporation |
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By: |
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/s/ Scott D. Roulston |
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Name: |
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Scott D. Roulston |
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Title: |
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Chairman of the Board |
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JDN DEVELOPMENT: |
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JDN DEVELOPMENT COMPANY, a Delaware corporation |
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By: |
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/s/ David R. Lukes |
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Name: |
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David R. Lukes |
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Title: |
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President and Chief Executive Officer |
Exhibit 31.1
CERTIFICATIONS
I, David R. Lukes, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Retail Value Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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May 1, 2020 |
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Date |
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/s/ David R. Lukes |
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David R. Lukes |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Christa A. Vesy, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of Retail Value Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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May 1, 2020 |
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Date |
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/s/ Christa A. Vesy |
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Christa A. Vesy |
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Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer
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Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Lukes, President and Chief Executive Officer of Retail Value Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
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/s/ David R. Lukes |
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David R. Lukes |
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President and Chief Executive Officer |
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May 1, 2020 |
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Christa A. Vesy, Executive Vice President and Chief Financial Officer of Retail Value Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
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/s/ Christa A. Vesy |
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Christa A. Vesy |
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Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer |
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May 1, 2020 |
Nature of Business and Financial Statement Presentation |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Organization Consolidation And Presentation Of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||
| Nature of Business and Financial Statement Presentation |
Nature of Business Retail Value Inc. and its related consolidated real estate subsidiaries (collectively, the “Company” or “RVI”) were formed in December 2017 and owned 48 properties, comprised of 36 continental U.S. assets and 12 Puerto Rico assets, at the time of their separations from SITE Centers Corp. (“SITE Centers”) on July 1, 2018. As of March 31, 2020, RVI owned 26 properties that included 14 continental U.S. assets and 12 Puerto Rico assets comprising 10.2 million square feet of gross leasable area (“GLA”) and located in 10 states and Puerto Rico. These properties serve as direct or indirect collateral for a mortgage loan which, as of March 31, 2020, had an aggregate principal balance of $519.7 million. In connection with RVI’s 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 June 30, 2020, 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. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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. Unaudited Interim Financial Statements
These 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 months ended March 31, 2020 and 2019, are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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):
New Accounting Standard 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 (Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, “Topic 326”). 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Accounting for Leases During COVID-19 Pandemic In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company at the time of entering into such concessions. |
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CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares |
Mar. 31, 2020 |
Dec. 31, 2019 |
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| Statement Of Financial Position [Abstract] | ||
| Common shares, par value | $ 0.10 | $ 0.10 |
| Common shares, shares authorized | 200,000,000 | 200,000,000 |
| Common shares, shares issued | 19,816,476 | 19,052,592 |
| Treasury common shares | 454 | 454 |
Indebtedness - Mortgage Indebtedness - Additional Information (Details) - Mortgage Loan $ in Millions |
3 Months Ended |
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Mar. 31, 2020
USD ($)
Option
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| Debt Instrument [Line Items] | |
| Aggregate outstanding principal amount | $ 519.7 |
| Promissory Notes | |
| Debt Instrument [Line Items] | |
| Aggregate outstanding principal amount | $ 519.7 |
| Debt instrument maturity date | Mar. 09, 2021 |
| Debt instrument number of extension options | Option | 3 |
| Debt instrument extension options maturity period | 1 year |
| Interest rate description | one-month LIBOR plus a spread of 3.14% per annum |
| Percentage of increase in debt instrument exercise of third extension option | 0.25% |
| Debt instrument interest rate | 3.80% |
| Promissory Notes | LIBOR | |
| Debt Instrument [Line Items] | |
| Specified spread line of credit facility | 3.14% |
Impairment Charges (Tables) |
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| Asset Impairment Charges [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment Charges Measured at Fair Value on Non-Recurring Basis |
The following table presents information about the fair value of real estate that was impaired and therefore measured on a fair value basis, along with the related impairment charge, for the three months ended March 31, 2020. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).
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| Summary of Significant Unobservable Inputs |
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):
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Impairment Charges |
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| 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 is determined using widely accepted valuation techniques including actual sales negotiations and bona fide purchase offers received from third parties, an income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, as well as discounted cash flow analysis on the expected cash flows of each asset. 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 fair value of real estate that was impaired and therefore measured on a fair value basis, along with the related impairment charge, for the three months ended March 31, 2020. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).
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):
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Subsequent Events |
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Mar. 31, 2020 | |||
| Subsequent Events [Abstract] | |||
| Subsequent Events |
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and it continues to spread throughout the United States and other countries across the world. Federal, state and local governments have taken various actions including the issuance of stay-at-home orders, social distancing guidelines and ordering the temporary closure of non-essential businesses, including many of the Company’s tenants to limit the spread of COVID-19. Accordingly, many of the Company’s tenants have adjusted, reduced or suspended operating activities. The Company has received numerous requests for rent relief including deferment of the payment of rent or rent reductions beginning with April 2020 rent. Discussions with individual tenants that failed to satisfy their April rent obligations are underway. Though the outcome of these discussions is expected to vary from tenant to tenant, the Company expects that it may enter into rent‑deferral arrangements with some tenants, including smaller local operators, whose operations have been significantly impacted by COVID-19. In addition, in an effort to maintain the Company’s liquidity position, the pandemic has created an uncertainty with respect to the timing and ability of the Company to execute the disposition portion of its business plan. Beginning in March 2020, many prospective purchasers have delayed or suspended their acquisition activities. A decrease in the expected level of pricing for the Company’s assets could also result in the recognition of impairment charges. The ultimate impact of the pandemic and secondary social and economic effects on the Company's results of operations, financial position, liquidity and capital resources remains unclear and cannot be reasonably forecasted at this time. |