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RVI Retail Value

Filed: 3 Aug 21, 4:41pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended June 30, 2021 

OR

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

For the transition period from                 to                  

Commission file number 1-38517

 

RETAIL VALUE INC.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

82-4182996

(State or other jurisdiction of incorporation or organization)

 

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

 

3300 Enterprise Parkway

Beachwood, OH

 

44122

(Address of principal executive offices)

 

(Zip Code.)

 

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

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, Par Value $0.10 Per Share

RVI

New York Stock Exchange

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

 

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

As of July 30, 2021, the registrant had 21,117,150 shares of common stock, $0.10 par value per share, outstanding.

 


 

 

Retail Value Inc.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED June 30, 2021

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements – Unaudited

 

 

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

2

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended June 30, 2021 and 2020

3

 

Consolidated Statements of Operations and Comprehensive Loss for the Six Months Ended June 30, 2021 and 2020

4

 

Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2021 and 2020

5

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

 

 

 

SIGNATURES

35

 

 

 

1

 

 


 

 

Retail Value Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share amounts)  

 

 

June 30, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

Land

$

337,869

 

 

$

397,699

 

Buildings

 

918,294

 

 

 

1,031,886

 

Fixtures and tenant improvements

 

114,580

 

 

 

134,335

 

 

 

1,370,743

 

 

 

1,563,920

 

Less: Accumulated depreciation

 

(554,434

)

 

 

(593,691

)

 

 

816,309

 

 

 

970,229

 

Construction in progress

 

2,489

 

 

 

1,515

 

Total real estate assets, net

 

818,798

 

 

 

971,744

 

Cash and cash equivalents

 

67,185

 

 

 

56,849

 

Restricted cash

 

59,048

 

 

 

115,939

 

Accounts receivable

 

17,501

 

 

 

25,302

 

Other assets, net

 

17,960

 

 

 

26,042

 

 

$

980,492

 

 

$

1,195,876

 

Liabilities and Equity

 

 

 

 

 

 

 

Mortgage indebtedness, net

$

207,243

 

 

$

344,485

 

Accounts payable and other liabilities

 

30,420

 

 

 

38,603

 

Dividends payable

 

0

 

 

 

23,002

 

Total liabilities

 

237,663

 

 

 

406,090

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Redeemable preferred equity

 

190,000

 

 

 

190,000

 

Retail Value Inc. shareholders' equity

 

 

 

 

 

 

 

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

   21,104,840 and 19,829,498 shares issued at June 30, 2021 and December 31, 2020,

   respectively

 

2,110

 

 

 

1,983

 

Additional paid-in capital

 

740,548

 

 

 

721,234

 

Accumulated distributions in excess of net loss

 

(189,800

)

 

 

(123,428

)

Less: Common shares in treasury at cost: 1,620 and 234 shares at June 30, 2021 and

   December 31, 2020

 

(29

)

 

 

(3

)

Total equity

 

552,829

 

 

 

599,786

 

 

$

980,492

 

 

$

1,195,876

 

 

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)

 

 

Three Months

 

 

Ended June 30,

 

 

2021

 

 

2020

 

Revenues from operations:

 

 

 

 

 

 

 

Rental income

$

41,857

 

 

$

39,299

 

Other income

 

54

 

 

 

(7

)

 

 

41,911

 

 

 

39,292

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

9,169

 

 

 

9,627

 

Real estate taxes

 

3,757

 

 

 

5,483

 

Property and asset management fees

 

4,034

 

 

 

4,890

 

Impairment charges

 

79,050

 

 

 

10,910

 

General and administrative

 

1,258

 

 

 

924

 

Depreciation and amortization

 

11,204

 

 

 

14,211

 

 

 

108,472

 

 

 

46,045

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense, net

 

(3,437

)

 

 

(5,660

)

Debt extinguishment costs

 

(1,112

)

 

 

(12

)

Other income, net

 

197

 

 

 

0

 

Gain on disposition of real estate, net

 

1,420

 

 

 

10,958

 

 

 

(2,932

)

 

 

5,286

 

Loss before tax expense

 

(69,493

)

 

 

(1,467

)

Tax expense

 

(88

)

 

 

(519

)

Net loss

$

(69,581

)

 

$

(1,986

)

Comprehensive loss

$

(69,581

)

 

$

(1,986

)

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Basic and diluted

$

(3.30

)

 

$

(0.10

)

 

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

3

 


 

Retail Value Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share amounts)

 

 

Six Months

 

 

Ended June 30,

 

 

2021

 

 

2020

 

Revenues from operations:

 

 

 

 

 

 

 

Rental income

$

83,279

 

 

$

89,629

 

Other income

 

91

 

 

 

32

 

 

 

83,370

 

 

 

89,661

 

Rental operation expenses:

 

 

 

 

 

 

 

Operating and maintenance

 

18,776

 

 

 

20,689

 

Real estate taxes

 

8,023

 

 

 

11,202

 

Property and asset management fees

 

8,069

 

 

 

9,766

 

Impairment charges

 

81,060

 

 

 

26,820

 

General and administrative

 

2,123

 

 

 

2,001

 

Depreciation and amortization

 

24,562

 

 

 

30,681

 

 

 

142,613

 

 

 

101,159

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense, net

 

(7,428

)

 

 

(12,952

)

Debt extinguishment costs

 

(1,242

)

 

 

(3,977

)

Other income, net

 

197

 

 

 

334

 

Gain on disposition of real estate, net

 

1,541

 

 

 

13,632

 

 

 

(6,932

)

 

 

(2,963

)

Loss before tax expense

 

(66,175

)

 

 

(14,461

)

Tax expense

 

(197

)

 

 

(592

)

Net loss

$

(66,372

)

 

$

(15,053

)

Comprehensive loss

$

(66,372

)

 

$

(15,053

)

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Basic and diluted

$

(3.16

)

 

$

(0.76

)

 

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

4

 


 

Retail Value Inc.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in thousands)

 

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Accumulated Distributions

in Excess of

Net Loss

 

 

Treasury

Stock at

Cost

 

 

Total

 

Balance as of December 31, 2020

 

$

1,983

 

 

$

721,234

 

 

$

(123,428

)

 

$

(3

)

 

$

599,786

 

Issuance of common shares related to

   stock dividend and stock plan

 

 

125

 

 

 

18,896

 

 

 

 

 

 

 

 

 

19,021

 

Net income

 

 

 

 

 

 

 

 

3,209

 

 

 

 

 

 

3,209

 

Balance, March 31, 2021

 

 

2,108

 

 

 

740,130

 

 

 

(120,219

)

 

 

(3

)

 

 

622,016

 

Issuance of common shares related to

   stock dividend and stock plan

 

 

2

 

 

 

418

 

 

 

 

 

 

(26

)

 

 

394

 

Net loss

 

 

 

 

 

 

 

 

(69,581

)

 

 

 

 

 

(69,581

)

Balance, June 30, 2021

 

$

2,110

 

 

$

740,548

 

 

$

(189,800

)

 

$

(29

)

 

$

552,829

 

 

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Accumulated Distributions

in Excess of

Net Loss

 

 

Treasury

Stock at

Cost

 

 

Total

 

Balance as of December 31, 2019

 

$

1,905

 

 

$

692,871

 

 

$

(6,857

)

 

$

(16

)

 

$

687,903

 

Issuance of common shares related to

   stock dividend

 

 

77

 

 

 

28,022

 

 

 

 

 

 

 

 

 

28,099

 

Net loss

 

 

 

 

 

 

 

 

(13,067

)

 

 

 

 

 

(13,067

)

Balance, March 31, 2020

 

 

1,982

 

 

 

720,893

 

 

 

(19,924

)

 

 

(16

)

 

 

702,935

 

Net loss

 

 

 

 

 

 

 

 

(1,986

)

 

 

 

 

 

(1,986

)

Balance, June 30, 2020

 

$

1,982

 

 

$

720,893

 

 

$

(21,910

)

 

$

(16

)

 

$

700,949

 

 

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

 

5

 


 

 

Retail Value Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

Six Months

 

 

Ended June 30,

 

 

2021

 

 

2020

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net loss

$

(66,372

)

 

$

(15,053

)

Adjustments to reconcile net loss to net cash flow

   provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

24,562

 

 

 

30,681

 

Amortization and write-off of above- and

   below-market leases, net

 

(424

)

 

 

(587

)

Amortization and write-off of debt issuance costs and

   fair market value of debt adjustments

 

2,461

 

 

 

5,500

 

Gain on disposition of real estate, net

 

(1,541

)

 

 

(13,632

)

Impairment charges

 

81,060

 

 

 

26,820

 

Assumption of building due to ground lease termination

 

(1,350

)

 

 

0

 

Net change in accounts receivable

 

6,159

 

 

 

(8,721

)

Net change in accounts payable and other liabilities

 

(2,709

)

 

 

(7,881

)

Net change in other operating assets

 

5,763

 

 

 

3,083

 

Total adjustments

 

113,981

 

 

 

35,263

 

Net cash flow provided by operating activities

 

47,609

 

 

 

20,210

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Real estate improvements to operating real estate

 

(6,073

)

 

 

(13,053

)

Proceeds from disposition of real estate

 

56,021

 

 

 

167,452

 

Net cash flow provided by investing activities

 

49,948

 

 

 

154,399

 

Cash flow from financing activities:

 

 

 

 

 

 

 

Repayment of mortgage debt, including repayment costs

 

(139,657

)

 

 

(154,596

)

Payment of debt issuance costs

 

(74

)

 

 

0

 

Dividends paid

 

(4,381

)

 

 

(10,958

)

Net cash flow used for financing activities

 

(144,112

)

 

 

(165,554

)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(46,555

)

 

 

9,055

 

Cash, cash equivalents and restricted cash, beginning of period

 

172,788

 

 

 

183,293

 

Cash, cash equivalents and restricted cash, end of period

$

126,233

 

 

$

192,348

 

 

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

 

6

 


 

 

Notes to Condensed Consolidated Financial Statements

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 and operated a portfolio of 48 retail shopping centers, comprised of 36 continental U.S. assets and 12 Puerto Rico assets, at the time of their separation from SITE Centers Corp. (“SITE Centers”) on July 1, 2018.  The Company focuses on realizing value in its business through operations and sales of its assets.  At June 30, 2021, RVI owned 17 retail shopping centers that included 8 continental U.S. assets and 9 Puerto Rico assets (including 4 enclosed malls) comprising 7.3 million square feet of Company-owned gross leasable area (“GLA”) located in 8 states and Puerto Rico.  These properties serve as direct or indirect collateral for a mortgage loan which, as of June 30, 2021, had an aggregate principal balance of $214.5 million.  

In connection with the separation from SITE Centers, SITE Centers retained 1,000 shares of RVI’s series A preferred stock having an aggregate dividend preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by RVI asset sales.

On July 1, 2018, the Company and SITE Centers also entered into an external management agreement (the “External Management Agreement”) which, together with various property management agreements, governs the fees, terms and conditions pursuant to which SITE Centers manages RVI and its properties.  SITE Centers provides RVI with day-to-day management, subject to supervision and certain discretionary limits and authorities granted by the RVI Board of Directors.  The Company does not have any employees.  In general, either SITE Centers or RVI may terminate the management agreements on December 31, 2021, 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 (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year.  The Company considered impacts to its estimates related to the COVID-19 pandemic, as appropriate, within its unaudited condensed consolidated financial statements, and there may be changes to those estimates in future periods.  The Company believes that its accounting estimates are appropriate after giving consideration to the uncertainties surrounding the severity and duration of the COVID‑19 pandemic.  Actual results could differ from those estimates.

Unaudited Interim Financial Statements

 

These financial statements have been prepared by the Company in accordance with U.S. 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 U.S. GAAP for complete financial statements.  However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented.  The results of operations for the three and six months ended June 30, 2021 and 2020, 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, 2020.

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

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

 

Six Months

 

 

Ended June 30,

 

 

2021

 

 

2020

 

Accounts payable related to construction in progress

$

1.6

 

 

$

4.1

 

Assumption of building due to ground lease termination

 

1.4

 

 

0

 

Stock dividends

 

18.6

 

 

 

28.1

 

 

7

 


 

 

Impact of COVID-19 Pandemic on Revenue and Receivables

Beginning in March 2020, the retail sector within the continental U.S. and Puerto Rico has been significantly impacted by the COVID-19 pandemic.  Though the impact of the COVID-19 pandemic 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 reduction in sales and foot traffic, and many tenants were forced to limit their operations or close their businesses for a period of time.  The COVID-19 pandemic had a significant impact on the Company’s collection of rents from April 2020 through the end of 2020.

The Company engaged in discussions with most of its larger tenants that failed to satisfy all or a portion of their rent obligations and has agreed to terms on rent-deferral arrangements (and, in a small number of cases, rent abatements) and other lease modifications with a significant number of such tenants, of which $1.0 million remains outstanding under these deferral arrangements at June 30, 2021 for tenants that are not accounted for on the cash basis.  The Company continues to evaluate its options with respect to tenants with which the Company has not reached satisfactory resolution of unpaid rents and has commenced collections actions against several tenants.  

For those tenants where the Company is unable to assert that collection of amounts due over the lease term is probable, regardless if the Company has entered into a deferral agreement to extend the payment terms, the Company has categorized these tenants on the cash basis of accounting.  As a result, all existing accounts receivable relating to these tenants have been reserved in full, including straight-line rental income and no rental income is recognized from such tenants once they have been placed on the cash basis of accounting until payments are received.  The Company will remove the cash basis designation and resume recording rental income from such tenants on a straight-line basis at such time it believes collection from the tenants is probable based upon a demonstrated payment history or a recapitalization event.

During the three and six months ended June 30, 2021, the Company recorded net uncollectible revenue that resulted in rental income of $2.8 million and $3.1 million, respectively, primarily due to rental income paid in 2021 related to outstanding receivables in 2020 from tenants on the cash basis of accounting. The aggregate amount of uncollectible revenue reported during the quarter primarily was due to the impact of the COVID-19 pandemic.  

Income Taxes

The aggregate net tax basis of the assets for federal income tax purposes was approximately $1.3 billion at June 30, 2021, of which $0.8 billion relates to the assets in Puerto Rico (Note 9).

 

2.

Other Assets and Intangibles, net

Other Assets and Intangibles, net consists of the following (in thousands):

 

 

June 30, 2021

 

 

December 31, 2020

 

Intangible assets:

 

 

 

 

 

 

 

In-place leases, net

$

2,408

 

 

$

3,244

 

Above-market leases, net

 

273

 

 

 

410

 

Lease origination costs, net

 

298

 

 

 

487

 

Tenant relationships, net

 

2,697

 

 

 

3,802

 

Total intangible assets, net(A)

 

5,676

 

 

 

7,943

 

Operating lease ROU assets

 

1,402

 

 

 

1,509

 

Notes receivable(B)

 

3,000

 

 

 

3,000

 

Other assets:

 

 

 

 

 

 

 

Prepaid expenses

 

7,565

 

 

 

13,314

 

Other assets

 

317

 

 

 

276

 

Total other assets, net

$

17,960

 

 

$

26,042

 

 

 

 

 

 

 

 

 

Below-market leases, net (other liabilities)

$

11,828

 

 

$

13,829

 

 

 

(A)

The Company recorded amortization expense related to its intangibles, excluding above- and below-market leases, of $0.3 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively and $0.7 million and $1.6 million for the six months ended June 30, 2021 and 2020, respectively.

 

(B)

Maturity date is the earlier of September 2022 (subject to buyer’s option to exercise a six-month extension in certain circumstances) and the satisfaction of certain property leasing conditions.

8

 


 

 

3.

Indebtedness

Mortgage Indebtedness

The Company has a mortgage loan, which had an outstanding aggregate principal amount of $214.5 million at June 30, 2021, and is secured, directly and indirectly, by all of its properties.  In June 2021, the Company made a $20.0 million voluntary prepayment on the mortgage loan.  

On March 9, 2021, the Company exercised its first one-year extension option under the loan agreement to extend the maturity date to March 9, 2022, subject to 2 remaining 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 (exercisable March 2022), in addition to (i) above, 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 (exercisable March 2023), in addition to (i) above, evidence that the Debt Yield equals or exceeds 14% on the extension date.  

As of June 30, 2021, the Company was in compliance with all provisions of the loan agreements. The Company expects to continue to use cash flow from operations and asset sales to repay the mortgage loan.  As of August 3, 2021, the Company plans to exercise the second one-year extension option effective March 9, 2022 to the extent the mortgage loan remains outstanding.  The Debt Yield as of June 30, 2021 was 23.84%, which is in excess of the required threshold of 13% in order to exercise the second one-year extension option.  If the Debt Yield requirement is not met at the time of the extension exercise, the Company can utilize unrestricted cash to pay down principal to satisfy the Debt Yield requirement.  If the Company does not have sufficient cash to pay down the principal to satisfy the required Debt Yield, the Company would need to obtain alternative sources of capital, which could include a refinancing of the current mortgage loan or other financing options.

As of June 30, 2021, the interest rate of the Company’s mortgage loan was 4.5% per annum.  The interest rate on the mortgage loan is equal to the one-month LIBOR plus a weighted-average spread of 4.4% per annum as of June 30, 2021, provided that such spread is subject to an increase of 0.25% per annum in connection with any exercise of the third extension option.  Application of voluntary prepayments will cause the weighted-average interest rate spread to increase over time as senior tranches of the mortgage debt are repaid first.

Credit Agreement

The Company maintains a Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as lender and administrative agent (“PNC”) that was amended and extended in February 2021.  The Revolving Credit Agreement provides for borrowings of up to $30.0 million.  Borrowings under the Revolving Credit Agreement may be used by the Company for general corporate purposes and working capital.  The Company’s borrowings under the Revolving Credit Agreement bear interest at variable rates at the Company’s election, based on either (i) LIBOR plus a specified spread ranging from 1.30% to 1.75% per annum 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 0.30% to 0.75% per annum 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 of (i) February 9, 2022, (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 June 30, 2021, there were 0 amounts outstanding under the Revolving Credit Agreement.

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.

9

 


 

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, including deferred financing costs, was $207.2 million and $344.5 million at June 30, 2021 and December 31, 2020, respectively.  The fair value of debt was $222.8 million and $362.7 million at June 30, 2021 and December 31, 2020, respectively.  

5.

Commitments and Contingencies

Hurricane Loss

In 2017, Hurricane Maria made landfall in Puerto Rico.  At the time of the hurricane, the Company owned 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA, which sustained varying degrees of damage.  In August 2019, the Company reached a settlement with its insurer with respect to the Company’s claims relating to the hurricane damage.  The Company continued to own 9 of these Puerto Rico assets at June 30, 2021.

The remaining unutilized property damage settlement proceeds of $30.7 million, along with other related reserves required by the mortgage lender of $6.5 million, are reflected in the Company’s consolidated balance sheets 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.

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 after the assets failed a step-one analysis that compared the sum of estimated future undiscounted cash flows to the assets’ carrying value.  In the second quarter of 2021, the impairment charges recorded were triggered by a change in the hold period assumptions for the Puerto Rico assets.  The impairments recorded in the first quarter of 2021 and prior years primarily were triggered by indicative bids received and changes in market assumptions due to the disposition process, as well as changes in projected cash flows.  The following table summarizes the impairment charges during the three and six months ended June 30, 2021 and 2020 (in millions):

 

 

Three Months

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Puerto Rico Assets

$

79.1

 

 

$

0

 

 

$

81.1

 

 

$

0

 

Continental U.S. Assets

 

0

 

 

 

10.9

 

 

 

0

 

 

 

26.8

 

Total impairment charges

$

79.1

 

 

$

10.9

 

 

$

81.1

 

 

$

26.8

 

 

Items Measured at Fair Value  

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 and 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.

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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 six months ended June 30, 2021.  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

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held and used

 

$

0

 

 

$

0

 

 

$

324.5

 

 

$

324.5

 

 

$

81.1

 

 

 

The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value for the six months ended June 30, 2021 (in millions):

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

Description

 

Fair Value at

June 30, 2021

 

 

Valuation

Technique

 

Unobservable Inputs

 

Range

 

Weighted

Average

Long-lived assets held and used

 

$

324.5

 

 

Indicative Bid (A)

 

Indicative Bid(A)

 

N/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

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Property management fees(A)

$

2,264

 

 

$

2,566

 

 

$

4,528

 

 

$

5,118

 

Asset management fees(B)

 

1,770

 

 

 

2,324

 

 

 

3,541

 

 

 

4,648

 

Leasing commissions(C)

 

617

 

 

 

473

 

 

 

1,395

 

 

 

1,704

 

Maintenance services and other(D)

 

308

 

 

 

341

 

 

 

652

 

 

 

682

 

Disposition fees(E)

 

592

 

 

 

210

 

 

 

592

 

 

 

1,766

 

Legal fees(F)

 

105

 

 

 

92

 

 

 

209

 

 

 

185

 

 

$

5,656

 

 

$

6,006

 

 

$

10,917

 

 

$

14,103

 

 

(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.  For the three and six months ended June 30, 2021, includes the monthly supplemental fees discussed below.  

(B)

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

(C)

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

(D)

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

(F)

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

 

In October 2020, the Company entered into an Amended and Restated Agreement (the “Agreement”) with an affiliate of SITE Centers in order to address the impact of the COVID-19 pandemic on the level of effort required to manage the portfolio and the property management fees for the six-month period ending June 30, 2021.  Pursuant to the terms of the Company’s existing property management agreements with SITE Centers, property management fees are determined on each July 1 and January 1 based on gross

11

 


 

property revenues received 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 January 1, 2021 on the property management fee applicable to the first six months of 2021, the Agreement provided that beginning on January 1, 2021, the Company was to pay JDN Development Company (an affiliate of SITE Centers) 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 October 1, 2020 (which amount is $737,377) minus (ii) the monthly property management fee determined on January 1, 2021 for the first six months of 2021 in accordance with the existing property management agreements (which amount is $634,848).  This arrangement is similar to the prior arrangement between the parties governing the payment of a monthly supplemental fee with respect to the last six months of 2020.

 

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

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerators Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

   after allocation to participating securities

$

(69,581

)

 

$

(1,986

)

 

$

(66,372

)

 

$

(15,053

)

Denominators Number of Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and DilutedAverage shares outstanding

 

21,094

 

 

 

19,816

 

 

 

21,006

 

 

 

19,782

 

Loss Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

$

(3.30

)

 

$

(0.10

)

 

$

(3.16

)

 

$

(0.76

)

 

Dividends

In November 2020, the Company declared a dividend on its common shares of $1.16 per share that was paid in January 2021 in a combination of cash and the Company’s common shares, subject to a Puerto Rico withholding tax of 10%.  The aggregate amount of cash paid to shareholders was limited to 10% of the total dividend paid.  In connection with the 2020 dividend, in January 2021, the Company issued 1,253,988 common shares, based on the volume-weighted average trading price of $14.8492 per share, and paid $4.4 million in cash, which included the Puerto Rico withholding tax.

9.

Segment Information

The Company has 2 reportable operating segments: continental U.S. and Puerto Rico.  The table below presents information about the Company’s reportable operating segments (in thousands):

 

 

Three Months Ended June 30, 2021

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

Lease revenue and other property revenue

$

17,462

 

 

$

24,449

 

 

 

 

 

 

$

41,911

 

Rental operation expenses

 

(4,946

)

 

 

(7,980

)

 

 

 

 

 

 

(12,926

)

Net operating income

 

12,516

 

 

 

16,469

 

 

 

 

 

 

 

28,985

 

Property and asset management fees

 

(1,547

)

 

 

(2,487

)

 

 

 

 

 

 

(4,034

)

Impairment charges

 

0

 

 

 

(79,050

)

 

 

 

 

 

 

(79,050

)

Depreciation and amortization

 

(4,700

)

 

 

(6,504

)

 

 

 

 

 

 

(11,204

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(5,610

)

 

 

(5,610

)

Gain (loss) on disposition of real estate, net

 

1,696

 

 

 

(276

)

 

 

 

 

 

 

1,420

 

Loss before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

(69,493

)

12

 


 

 

 

 

Three Months Ended June 30, 2020

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

Lease revenue and other property revenue

$

19,051

 

 

$

20,241

 

 

 

 

 

 

$

39,292

 

Rental operation expenses

 

(7,054

)

 

 

(8,056

)

 

 

 

 

 

 

(15,110

)

Net operating income

 

11,997

 

 

 

12,185

 

 

 

 

 

 

 

24,182

 

Property and asset management fees

 

(2,417

)

 

 

(2,473

)

 

 

 

 

 

 

(4,890

)

Impairment charges

 

(10,910

)

 

 

 

 

 

 

 

 

 

 

(10,910

)

Depreciation and amortization

 

(6,961

)

 

 

(7,250

)

 

 

 

 

 

 

(14,211

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(6,596

)

 

 

(6,596

)

Gain on disposition of real estate, net

 

10,958

 

 

 

 

 

 

 

 

 

 

 

10,958

 

Loss before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,467

)

 

 

Six Months Ended June 30, 2021

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

Lease revenue and other property revenue

$

35,631

 

 

$

47,739

 

 

 

 

 

 

$

83,370

 

Rental operation expenses

 

(10,464

)

 

 

(16,335

)

 

 

 

 

 

 

(26,799

)

Net operating income

 

25,167

 

 

 

31,404

 

 

 

 

 

 

 

56,571

 

Property and asset management fees

 

(3,095

)

 

 

(4,974

)

 

 

 

 

 

 

(8,069

)

Impairment charges

 

0

 

 

 

(81,060

)

 

 

 

 

 

 

(81,060

)

Depreciation and amortization

 

(11,688

)

 

 

(12,874

)

 

 

 

 

 

 

(24,562

)

Unallocated expenses(A)

 

 

 

 

 

 

 

 

$

(10,596

)

 

 

(10,596

)

Gain (loss) on disposition of real estate, net

 

1,845

 

 

 

(304

)

 

 

 

 

 

 

1,541

 

Loss before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

(66,175

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross real estate assets

$

527,068

 

 

$

846,164

 

 

 

 

 

 

$

1,373,232

 

Total real estate assets, net

$

305,598

 

 

$

513,200

 

 

 

 

 

 

$

818,798

 

 

 

Six Months Ended June 30, 2020

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Other

 

 

Total

 

Lease revenue and other property revenue

$

44,006

 

 

$

45,655

 

 

 

 

 

 

$

89,661

 

Rental operation expenses

 

(15,331

)

 

 

(16,560

)

 

 

 

 

 

 

(31,891

)

Net operating income

 

28,675

 

 

 

29,095

 

 

 

 

 

 

 

57,770

 

Property and asset management fees

 

(4,835

)

 

 

(4,931

)

 

 

 

 

 

 

(9,766

)

Impairment charges

 

(26,820

)

 

 

 

 

 

 

 

 

 

 

(26,820

)

Depreciation and amortization

 

(16,191

)

 

 

(14,490

)

 

 

 

 

 

 

(30,681

)

Unallocated expenses(A)

 

 

 

 

 

 

 

��

$

(18,596

)

 

 

(18,596

)

Gain on disposition of real estate, net

 

13,632

 

 

 

 

 

 

 

 

 

 

 

13,632

 

Loss before tax expense

 

 

 

 

 

 

 

 

 

 

 

 

$

(14,461

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross real estate assets

$

726,607

 

 

$

1,088,218

 

 

 

 

 

 

$

1,814,825

 

Total real estate assets, net

$

452,598

 

 

$

740,127

 

 

 

 

 

 

$

1,192,725

 

 

 

(A)

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

10.

Subsequent Events

On July 13, 2021, the general due diligence period expired under the Purchase and Sale Agreement, dated as of June 30, 2021 (the “Puerto Rico Purchase Agreement”), by and among the Company and RVT PR Mezz Borrower 1 LLC, a wholly-owned subsidiary of the Company (collectively, the “Sellers”), and Kildare Acquisitions US, LLC (the “Purchaser”). Pursuant to the Puerto Rico Purchase Agreement, the Sellers have agreed to sell to the Purchaser all of their interests in the limited liability companies that

13

 


 

own all of the Company’s remaining assets located in Puerto Rico (comprising approximately 3.5 million square feet of Company-owned gross leasable area) for $550 million in cash, subject to adjustment for certain closing pro-rations, allocations and adjustments.  The sale does not include any cash or restricted cash held by or on behalf of the limited liability companies at closing and the Sellers will retain the right to pursue and collect amounts from tenants relating to pre-closing periods (including amounts relating to pre-closing periods which have been deferred and are to be repaid by tenants sometime after the closing date).  Closing remains subject to customary conditions, including but not limited to delivery of estoppel letters from tenants, the accuracy of Sellers’ representations in all material respects and the absence of condemnation or casualty events exceeding $30 million in the aggregate. In connection with the expiry of the Purchaser’s general due diligence period, the Purchaser posted a deposit of $15 million with the escrow agent for the transaction, which deposit is nonrefundable (except in certain limited circumstances as set forth in the Puerto Rico Purchase Agreement) and will be credited to the Purchaser against the purchase price at closing.  Closing of the transaction is expected to occur by the end of the third quarter of 2021.  The Company anticipates utilizing a portion of the net proceeds from this transaction to repay the entire balance of the mortgage loan, as required under the mortgage agreement (Note 3).

 

14

 


 

 

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, 2020, as well as other publicly available information.  

RVI is an Ohio company formed in December 2017 that, as of June 30, 2021, owned and operated a portfolio of 17 assets, composed of eight continental U.S. assets and nine assets in Puerto Rico.  These properties consisted of retail shopping centers (including four enclosed malls) composed of 7.3 million square feet of Company-owned gross leasable area (“GLA”) and were located in eight states and Puerto Rico.  The Company’s continental U.S. properties and Puerto Rico properties comprised approximately 43% and 57%, respectively, of its total consolidated revenue for the six months ended June 30, 2021.  At June 30, 2021, the aggregate occupancy of the Company’s shopping center portfolio was 89.7%, and the average annualized base rent per occupied square foot was $16.26.  

All of the Company’s properties serve as direct or indirect collateral for a mortgage loan which, as of June 30, 2021, had an aggregate principal balance of $214.5 million.   In connection with the Company’s separation from SITE Centers Corp. (“SITE Centers”) in 2018, 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 (the “RVI Preferred Shares”).

EXECUTIVE SUMMARY

The Company continues its 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, 2021 through July 30, 2021, the Company sold the following assets (in thousands):

Date Sold

 

Property Name

 

City, State

 

Total Owned GLA

 

 

Gross

Sales Price

 

4/9/21

 

Marketplace of Brown Deer

 

Brown Deer, WI

 

 

405

 

 

$

10,250

 

4/13/21

 

Noble Town Center

 

Jenkintown, PA

 

 

168

 

 

 

14,000

 

4/14/21

 

Plaza Vega Baja

 

Vega Baja, PR

 

 

185

 

 

 

4,500

 

4/21/21

 

Uptown Solon

 

Solon, OH

 

 

182

 

 

 

10,100

 

6/3/21

 

Señorial Plaza

 

Rio Piedras, PR

 

 

202

 

 

 

20,350

 

 

 

 

 

 

 

 

1,142

 

 

$

59,200

 

Transaction Update

On June 30, 2021, the Company and a wholly-owned subsidiary entered into a purchase and sale agreement to sell all of the Company’s interests in its remaining assets located in Puerto Rico (comprising approximately 3.5 million square feet of gross leasable area) for $550 million in cash, subject to adjustment for certain closing pro-rations, allocations and adjustments.  The general due diligence period has expired under this agreement and the closing is expected to occur by the end of the third quarter of 2021 subject to the satisfaction of various closing conditions.  The Company anticipates utilizing a portion of the net proceeds from this transaction to repay the entire balance of the mortgage loan, as required under the mortgage agreement.  See discussion below under “Liquidity, Capital Resources and Financing Activities – Dispositions.”

COVID-19

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it continues to spread throughout the United States and other countries across the world.  Beginning in mid-March 2020, federal, state and local governments took various actions to limit the spread of COVID-19, including ordering the temporary closure of non-essential businesses (which included many of the Company’s tenants) and imposing significant social distancing guidelines and restrictions on the continued operations of essential businesses and the reopening of non-essential businesses.  As of July 30, 2021, 100% of the Company’s tenants, based on average base rents, were open for business, up from a low of approximately 34% in early April 2020 due to the impact of the

15

 


 

COVID‑19 pandemic. Operating restrictions on many tenant businesses were lifted in the continental U.S. in the second quarter of 2021 and restrictions were lifted in Puerto Rico in July 2021.  

The COVID-19 pandemic had a significant impact on the Company’s collection of rents from April 2020 through the end of 2020.  The Company’s collection rates have shown significant improvement in 2021 relative to 2020 levels.  A substantial majority of tenants, including tenants previously on the cash basis of accounting, are paying their monthly rent and are repaying deferred rents relating to prior periods.  Results for the second quarter of 2021 included $2.3 million of net revenue related to prior periods (including deferred rents), which was collected in the current period primarily from cash basis tenants.  At June 30, 2021, the Company had contractual accounts receivable outstanding of $1.0 million for tenants that are not accounted for on the cash basis.  

Although rent collection levels continued to improve in the second quarter of 2021, collection levels remained below historical averages during the first half of 2021, and future rent collections may be negatively impacted by any surges in COVID-19 contagion, the discovery of new COVID-19 variants which are more infectious or resistant to COVID-19 vaccines or decreases in the effectiveness of such vaccines and any implementation of additional restrictions on tenant business as a result thereof. For a further discussion on the impact of the COVID-19 pandemic on the Company’s business, see “Liquidity, Capital Resources and Financing Activities” and “Economic Conditions” included in this section and Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Manager

The Company is party to an external management agreement (the “External Management Agreement”) with 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 December 31, 2021 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 (determined on the immediately preceding June 30 or December 31 and 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 average gross monthly property revenue collected during the most recent second or fourth quarter in respect to the Company’s continental U.S. properties and the Puerto Rico properties, respectively.  In order to address the impact of the pandemic on the level of effort required to manage the portfolio and property management fees paid in the first half of 2021, the Company has agreed to pay an affiliate of SITE Centers a supplemental monthly fee during the six-month period ending June 30, 2021 (see Note 7, “Transactions with SITE Centers” of the Company’s consolidated financial statements included herein).  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.

2021 RESULTS OF OPERATIONS

Where used, references to “Comparable Portfolio Properties” reflect shopping center properties owned as of June 30, 2021.  

Revenues from Operations (in thousands)

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Rental income

$

41,857

 

 

$

39,299

 

 

$

2,558

 

Other income

 

54

 

 

 

(7

)

 

 

61

 

Total revenues

$

41,911

 

 

$

39,292

 

 

$

2,619

 

16

 


 

 

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Rental income(A)

$

83,279

 

 

$

89,629

 

 

$

(6,350

)

Other income

 

91

 

 

 

32

 

 

 

59

 

Total revenues (B)

$

83,370

 

 

$

89,661

 

 

$

(6,291

)

(A)

The following table summarizes the key components of the 2021 rental income as compared to 2020 (in thousands):

 

 

 

Three Months

 

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

Contractual Lease Payments

 

2021

 

 

2020

 

 

$ Change

 

Base and percentage rental income

 

$

26,200

 

 

$

33,498

 

 

$

(7,298

)

Recoveries from tenants

 

 

9,574

 

 

 

11,819

 

 

 

(2,245

)

Uncollectible revenue

 

 

2,840

 

 

 

(6,820

)

 

 

9,660

 

Ancillary rental income

 

 

1,455

 

 

 

783

 

 

 

672

 

Lease termination fees

 

 

1,788

 

 

 

19

 

 

 

1,769

 

Total contractual lease payments

 

$

41,857

 

 

$

39,299

 

 

$

2,558

 

 

 

 

Six Months

 

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

Contractual Lease Payments

 

2021

 

 

2020

 

 

$ Change

 

Base and percentage rental income(1)

 

$

55,195

 

 

$

69,111

 

 

$

(13,916

)

Recoveries from tenants(2)

 

 

19,869

 

 

 

24,716

 

 

 

(4,847

)

Uncollectible revenue(3)

 

 

3,078

 

 

 

(7,678

)

 

 

10,756

 

Ancillary rental income

 

 

3,264

 

 

 

2,961

 

 

 

303

 

Lease termination fees

 

 

1,873

 

 

 

519

 

 

 

1,354

 

Total contractual lease payments

 

$

83,279

 

 

$

89,629

 

 

$

(6,350

)

 

(1)

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

 

Shopping Center Portfolio

June 30,

 

 

2021

 

 

2020

 

Centers owned

17

 

 

25

 

Aggregate occupancy rate

 

89.7

%

 

 

87.2

%

Average annualized base rent per occupied square foot

$

16.26

 

 

$

16.14

 

 

 

Continental U.S.

June 30,

 

 

Puerto Rico

June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Centers owned

8

 

 

13

 

 

9

 

 

12

 

Aggregate occupancy rate

 

87.7

%

 

 

88.8

%

 

 

91.8

%

 

 

85.2

%

Average annualized base rent per occupied square

   foot

$

13.41

 

 

$

13.60

 

 

$

19.40

 

 

$

19.80

 

For the six months ended June 30, 2021, the decrease in base and percentage rental income primarily was due to property dispositions.  The decrease in the continental U.S. occupancy rate primarily was due to the disposition of higher occupancy properties and a combination of tenant expirations and bankruptcies.  The increase in the occupancy rate for the Puerto Rico portfolio primarily was due to the disposition of two properties with lower occupancy rates.  

 

(2)

Recoveries from Comparable Portfolio Properties were approximately 66.5% and 70.8% of reimbursable operating expenses and real estate taxes for the six months ended June 30, 2021 and 2020, respectively.  The overall decrease in the amount of recoveries from tenants related primarily to anchor renewal conversions to gross leases in Puerto Rico and the impact of the COVID-19 pandemic including both tenant expirations and bankruptcies in the continental U.S.  

17

 


 

 

(3)

Primarily relates to the impact of the COVID-19 pandemic on rent collections, including the impact of lease modification accounting and tenants on the cash basis of accounting due to collectability concerns.  For the six months ended June 30, 2021, the net amount reported was income primarily due to rental income paid in 2021 from tenants on the cash basis of accounting, which related to amounts (including deferred rent) originally owed in 2020.

(B)

The changes in Total Revenues for the six months ended June 30, 2021, are composed of the following (in millions):

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Total

 

Comparable Portfolio Properties

 

$

4.6

 

 

$

5.1

 

 

$

9.7

 

Disposition of shopping centers

 

 

(13.0

)

 

 

(3.0

)

 

 

(16.0

)

 

 

$

(8.4

)

 

$

2.1

 

 

$

(6.3

)

Expenses from Operations (in thousands)

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Operating and maintenance

$

9,169

 

 

$

9,627

 

 

$

(458

)

Real estate taxes

 

3,757

 

 

 

5,483

 

 

 

(1,726

)

Property and asset management fees

 

4,034

 

 

 

4,890

 

 

 

(856

)

Impairment charges

 

79,050

 

 

 

10,910

 

 

 

68,140

 

General and administrative

 

1,258

 

 

 

924

 

 

 

334

 

Depreciation and amortization

 

11,204

 

 

 

14,211

 

 

 

(3,007

)

 

$

108,472

 

 

$

46,045

 

 

$

62,427

 

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Operating and maintenance(A)

$

18,776

 

 

$

20,689

 

 

$

(1,913

)

Real estate taxes(B)

 

8,023

 

 

 

11,202

 

 

 

(3,179

)

Property and asset management fees

 

8,069

 

 

 

9,766

 

 

 

(1,697

)

Impairment charges(C)

 

81,060

 

 

 

26,820

 

 

 

54,240

 

General and administrative(D)

 

2,123

 

 

 

2,001

 

 

 

122

 

Depreciation and amortization(E)

 

24,562

 

 

 

30,681

 

 

 

(6,119

)

 

$

142,613

 

 

$

101,159

 

 

$

41,454

 

(A)

The changes in Operating and Maintenance for the six months ended June 30, 2021, are composed of the following (in millions):

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Total

 

Comparable Portfolio Properties

 

$

 

 

$

1.3

 

 

$

1.3

 

Disposition of shopping centers

 

 

(2.0

)

 

 

(1.2

)

 

 

(3.2

)

 

 

$

(2.0

)

 

$

0.1

 

 

$

(1.9

)

(B)

The changes in Real Estate Taxes for the six months ended June 30, 2021, are composed of the following (in millions):

 

 

Continental U.S.

 

 

Puerto Rico

 

 

Total

 

Comparable Portfolio Properties

 

$

0.4

 

 

$

(0.1

)

 

$

0.3

 

Disposition of shopping centers

 

 

(3.3

)

 

 

(0.2

)

 

 

(3.5

)

 

 

$

(2.9

)

 

$

(0.3

)

 

$

(3.2

)

(C)

The Company recorded impairment charges in 2021 and 2020 primarily related to shopping centers marketed for sale.  The impairments in the second quarter of 2021 were triggered by the change in hold period assumptions for the Puerto Rico assets.  The impairments in the first quarter of 2021 and 2020 primarily were triggered by indicative bids received and changes in market assumptions due to the disposition process.  Changes in holding periods or an asset’s expected future undiscounted cash flows due to changes in market or leasing conditions (including as result of the COVID-19 pandemic) each could result in the

18

 


 

recognition of additional impairment charges.  Impairment charges are presented in Note 6, “Impairment Charges,” to the Company’s consolidated financial statements included herein.

(D)

Primarily represents legal, audit, tax and compliance services and director compensation.  

(E)

The disposition of shopping centers accounted for $4.9 million of the reduction in depreciation expense.

Other Income and Expenses (in thousands)

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Interest expense, net

$

(3,437

)

 

$

(5,660

)

 

$

2,223

 

Debt extinguishment costs

 

(1,112

)

 

 

(12

)

 

 

(1,100

)

Other income, net

 

197

 

 

 

 

 

 

197

 

Gain on disposition of real estate, net

 

1,420

 

 

 

10,958

 

 

 

(9,538

)

Tax expense

 

(88

)

 

 

(519

)

 

 

431

 

 

$

(3,020

)

 

$

4,767

 

 

$

(7,787

)

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Interest expense, net(A)

$

(7,428

)

 

$

(12,952

)

 

$

5,524

 

Debt extinguishment costs(B)

 

(1,242

)

 

 

(3,977

)

 

 

2,735

 

Other income, net

 

197

 

 

 

334

 

 

 

(137

)

Gain on disposition of real estate, net(C)

 

1,541

 

 

 

13,632

 

 

 

(12,091

)

Tax expense

 

(197

)

 

 

(592

)

 

 

395

 

 

$

(7,129

)

 

$

(3,555

)

 

$

(3,574

)

(A)

At June 30, 2021 and 2020, the interest rate of the Company’s mortgage loan was 4.5% and 3.3% per annum, respectively.  The decrease in interest expense was primarily due to reductions in the amount of debt outstanding.

(B)

Debt extinguishment costs were incurred in both years in connection with the prepayment of the mortgage loan with asset sale proceeds primarily related to the non-cash write-off of unamortized deferred financing costs.  

(C)

Related to the sale of five assets for the six months ended June 30, 2021.  

Net Loss (in thousands)

 

Three Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Net loss

$

(69,581

)

 

$

(1,986

)

 

$

(67,595

)

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Net loss

$

(66,372

)

 

$

(15,053

)

 

$

(51,319

)

The increase in net loss primarily was attributable to an increase in impairment charges in 2021, the impact of asset sales partially offset by a reduction in interest expense and debt extinguishment costs and rental income paid in 2021 by cash basis tenants, which related to amounts (including deferred rent) originally owed in 2020.

19

 


 

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 real estate investment trusts (“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

20

 


 

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 June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

FFO

$

19,236

 

 

$

12,159

 

 

$

7,077

 

Operating FFO

 

20,151

 

 

 

12,171

 

 

 

7,980

 

 

 

Six Months

 

 

 

 

 

 

Ended June 30,

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

FFO

$

37,675

 

 

$

28,781

 

 

$

8,894

 

Operating FFO

 

38,720

 

 

 

32,425

 

 

 

6,295

 

The increase in FFO primarily was due to the decrease in interest expense and debt extinguishment costs partially offset by the impact from the disposition of assets, as well as rental income paid in 2021 by cash basis tenants which related to amounts (including deferred rent) originally owed in 2020.  The change in Operating FFO primarily was due to the same factors impacting FFO, (except for the exclusion of debt extinguishments costs).

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

 

 

Six Months

 

 

Ended June 30,

 

 

Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net loss

$

(69,581

)

 

$

(1,986

)

 

$

(66,372

)

 

$

(15,053

)

Depreciation and amortization of real estate investments

 

11,187

 

 

 

14,193

 

 

 

24,528

 

 

 

30,646

 

Impairment of real estate assets

 

79,050

 

 

 

10,910

 

 

 

81,060

 

 

 

26,820

 

Gain on disposition of real estate

 

(1,420

)

 

 

(10,958

)

 

 

(1,541

)

 

 

(13,632

)

FFO

 

19,236

 

 

 

12,159

 

 

 

37,675

 

 

 

28,781

 

Debt extinguishment and other expenses

 

915

 

 

 

12

 

 

 

1,045

 

 

 

3,644

 

Non-operating items, net

 

915

 

 

 

12

 

 

 

1,045

 

 

 

3,644

 

Operating FFO

$

20,151

 

 

$

12,171

 

 

$

38,720

 

 

$

32,425

 

 

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 experienced a reduction in timely collections of rent and delays in the execution of its disposition strategy during 2020 as a result of the impacts of the COVID-19 pandemic, the Company witnessed significant improvement in rent collections and transaction markets during the first half of 2021 and believes that it has sufficient liquidity and capital resources to operate its business for at least the next twelve months.  At June 30, 2021, the Company had an unrestricted cash balance of $67.2 million, restricted cash on deposit with its mortgage lender of $59.0 million and $30.0 million of availability under its Revolving Credit Agreement (subject to satisfaction of applicable borrowing conditions). Debt outstanding was $214.5 million at June 30, 2021. The Company’s mortgage loan generally requires interest-only payments subject to maintenance of a minimum debt yield and has a maturity date of March 9, 2022 with two remaining one-year extensions at the Company’s option based on the satisfaction of certain conditions.  The Company anticipates utilizing a portion of the net proceeds from the pending sale of its Puerto Rico assets discussed below under “—Dispositions,” to repay the entire balance of the mortgage loan, as required under the mortgage agreement.  No assurance can be provided that this sale transaction will close or that the Company’s debt obligations, including the mortgage loan,

21

 


 

will be repaid, extended or refinanced as currently anticipated. Apart from capital expenditures deemed advisable in connection with the maintenance and leasing of its properties, and the completion of restoration work in Puerto Rico, the Company does not anticipate any material capital projects or development spending during the remainder of 2021.

Mortgage Indebtedness

As of June 30, 2021, the aggregate principal amount of the mortgage loan was $214.5 million.  On March 9, 2021, the Company exercised its first one-year extension option under the loan agreement to extend the maturity date to March 9, 2022, subject to two remaining 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 (exercisable March 2022), in addition to (i) above, 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 (exercisable March 2023), in addition to (i) above, evidence that the Debt Yield equals or exceeds 14% on the extension date.  The Debt Yield as of June 30, 2021, was 23.84%.  

As of June 30, 2021, the interest rate applicable to the notes was equal to one-month LIBOR plus a weighted-average spread of 4.4% 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%, (ii) during the initial one-year extension period, a LIBOR strike rate equal to 9.27% and (iii) with respect to any subsequent extension period, a LIBOR strike rate that would result in a debt service coverage ratio of 1.20x based on the Mortgaged Properties (as defined below).  Application of voluntary prepayments as described below will cause the weighted-average interest rate spread to increase over time as senior tranches of the mortgage debt are repaid first.  At June 30, 2021, the interest rate applicable to the mortgage loan was 4.5%.  

The borrowers’ obligations to pay principal, interest and other amounts under the 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.  The originating lenders placed the notes into a securitization trust that issued and sold mortgage-backed securities to investors.

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 June 30, 2021, was 23.84%.  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 10% for distributions declared in 2020, otherwise limited to 20%), with the remainder of required REIT distributions during an Amortization Period likely to be paid in common shares of the Company.

Subject to certain conditions described in the mortgage loan agreement, the borrowers may prepay principal amounts outstanding under the loan facility in whole or in part, without premium or penalty, by providing advance notice of prepayment to the lenders. The borrowers are required to use certain proceeds from permitted asset sales to prepay principal amounts outstanding under the loan facility.  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 principal amount of the mortgage loan allocated to it and 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

 

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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.  To the extent that net cash proceeds from the sale of a Mortgaged Property are less than the amount specified in the applicable clause (ii) above, the Company would be required to utilize credits from previous sales or cash on hand to satisfy the release price applicable to that property. 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.  

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”) that was amended and extended in February 2021.  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 1.30% to 1.75% 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 0.30% to 0.75% 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) February 9, 2022, (ii) the date on which the External Management Agreement is terminated, (iii) the date on which DDR Asset Management, LLC or another wholly-owned subsidiary of SITE Centers ceases to be the “Service Provider” under the External Management Agreement as a result of assignment or operation of law or otherwise and (iv) the date on which the principal amount outstanding under the Company’s $900 million mortgage loan is repaid or refinanced.

The Revolving Credit Agreement contains customary affirmative and negative covenants, including a requirement to maintain tangible net worth of $400 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 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

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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 generally equal to the sum of the LIBOR rate (or other applicable benchmark rate) plus 8.75%.  

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 approximately $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 July 30, 2021, no dividends have been paid on the RVI Preferred Shares.

Common Share Dividends

The Company’s 2020 dividend was paid on January 12, 2021, 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 Puerto Rico net taxable income to its shareholders every year.  As such, in November 2020, the Company’s Board of Directors declared a dividend on its common shares on account of taxable income generated in Puerto Rico, which dividend was paid, subject to a 10% withholding tax, in January 2021.  The amount of this dividend is expected to exceed the amount of REIT taxable income generated by the Company in 2020.  Accordingly, federal income taxes were not incurred by the Company in 2020.

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 taxable REIT subsidiary).  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

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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 the COVID-19 pandemic.

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), as well as gains and losses relating to the sale of assets, 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 of $190 million (which amount may increase by up to an additional $10 million if and to the extent aggregate gross proceeds generated from asset sales since the time of the Company’s separation from SITE Centers exceed approximately $2.0 billion).  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 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 preference amount or the maximum preference amount.  

Winding-up and Dissolution

As discussed below under “—Dispositions,” the Company has entered into an agreement to sell the remaining nine assets in Puerto Rico.  The general due diligence period has expired under this agreement and the closing of the transaction is expected to occur by the end of the third quarter of 2021.

In the event of the sale of all of the Company’s remaining assets, there are many factors that may affect the timing and amount of distributions to shareholders, including, among other things, the timing and amount received from the sale or other disposition of the Company’s assets, purchase price adjustments under sale agreements, and the amount of sale proceeds utilized to establish a reserve fund to satisfy projected expenses and known and unknown claims, which might arise during the winding-up and dissolution process.  

In the event of the sale of all of the Company’s remaining assets, the Company will likely seek to file articles of dissolution with the Secretary of State of the State of Ohio shortly afterward. Pursuant to Ohio law, the Company would continue to exist for a period of five years following the filing of the articles of dissolution for the purpose of paying, satisfying and discharging any unknown or contingent claims or any debts or other obligations, collecting and distributing its assets, and doing all other acts required to liquidate and wind-up its business and affairs. Under Ohio law, if the Company makes distributions to its shareholders without making adequate provisions for payment of creditors’ claims, the Company’s shareholders could be liable to creditors to the extent of any payments due to creditors (up to the aggregate amount previously received by the shareholder from the Company). Therefore, the Company will likely establish a reserve fund with a portion of the proceeds from its final asset sales in order to satisfy and discharge expenses projected to be incurred, and any unknown or contingent claims, debts or obligations which might arise, during the five-year period subsequent to the filing of the articles of dissolution. As a result, although the Company would likely distribute a significant portion of proceeds from the sales of its final assets shortly after the consummation thereof, it is likely that the Company would not make a final distribution of proceeds  until such expenses and contingent claims are paid, resolved or fail to materialize, which could be several years following the date of such final sales.  It is also possible that the Company may make one or more interim distributions to shareholders from the reserve fund during the five-year dissolution period as specific expenses and contingent claims are satisfied, resolved or fail to materialize.

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For example, contracts governing property dispositions typically allow the purchaser to true-up common area maintenance charges with the seller at the end of the year in which the disposition occurred and to make claims for breaches of representations and other provisions under the sale agreement for a period of nine to 12 months following the disposition, subject to a cap, which is typically 2% to 3% of the gross sales price.  The Company would also need to withhold amounts from sale proceeds to pay, among other items, fees to SITE Centers (including with respect to the administration of the wind-down and dissolution process), professional fees (accountants and law firms), insurance premiums and deductibles (including with respect to a tail policy for directors and officers), vendor expenses and costs to file withdrawals and dissolutions with respect to the Company’s subsidiaries. See “Risk Factors—Risks Related to the Company’s Common Shares—The Company May Establish a Reserve Fund with Proceeds of Its Final Asset Sales in Order to Satisfy Claims” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

In addition, the Company will likely seek to delist its shares from the New York Stock Exchange (the “NYSE”) on a voluntary basis shortly following the sale of its final assets in an effort to reduce its operating expenses and maximize its liquidating distributions. Under the rules of the NYSE, the NYSE also has discretionary authority to delist the Company’s common shares on an involuntary basis if the Company proceeds with a plan of dissolution, termination and liquidation. In addition, the NYSE may also commence delisting proceedings against the Company if (i) the average closing price of the Company’s common shares falls below $1.00 per share over a 30-day consecutive trading period, (ii) the Company’s average market capitalization falls below $15 million over a 30-day consecutive trading period or (iii) the Company loses its REIT qualification. If the common shares are delisted, shareholders may have difficulty trading their common shares on the secondary market.  See “Risk Factors—Risks Related to the Company’s Common Shares—If an Active Trading Market for the Company’s Common Shares Is Not Sustained, Ability to Sell Shares When Desired and the Prices Obtained Will Be Adversely Affected” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Through any winding-up and dissolution, the Company will be required to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), even if compliance with these reporting requirements is economically burdensome. In order to curtail expenses, the Company eventually may seek relief from the Securities and Exchange Commission (“SEC”) from the reporting requirements under the Exchange Act. The Company anticipates that, if such relief is granted, it would continue to file Current Reports on Form 8-K to disclose material events relating to its winding-up and dissolution, along with any other reports that the SEC might require, but would discontinue filing Quarterly Reports on Form 10-Q and would not be required to file audited financial statements.  The Company would continue to incur professional fees in connection with such delisting and deregistration processes, which would also affect the amounts available for distribution to shareholders in connection with the winding-up of the Company’s business and affairs.

Dispositions

For the six months ended June 30, 2021, the Company sold five shopping centers, in separate transactions, aggregating 1.1 million square feet, for an aggregate sales price of $59.2 million and net proceeds prior to debt repayment of $56.0 million.

The Company has entered into a Purchase and Sale Agreement, dated as of June 30, 2021 (the “Puerto Rico Purchase Agreement”), by and among the Company and RVT PR Mezz Borrower 1 LLC, a wholly-owned subsidiary of the Company (collectively, the “Sellers”), and Kildare Acquisitions US, LLC (the “Purchaser”). Pursuant to the Puerto Rico Purchase Agreement, the Sellers have agreed to sell to the Purchaser all of their interests in the limited liability companies that own all of the Company’s remaining assets located in Puerto Rico (comprising approximately 3.5 million square feet of Company-owned gross leasable area) for $550 million in cash, subject to adjustment for certain closing pro-rations, allocations and adjustments.  The sale does not include any cash or restricted cash held by or on behalf of the limited liability companies at closing and the Sellers will retain the right to pursue and collect amounts from tenants relating to pre-closing periods (including amounts relating to pre-closing periods, which have been deferred and are to be repaid by tenants sometime after the closing date).  Closing remains subject to customary conditions, including but not limited to delivery of estoppel letters from tenants, the accuracy of Sellers’ representations in all material respects and the absence of condemnation or casualty events exceeding $30 million in the aggregate. In connection with the expiry of the Purchaser’s general due diligence period, the Purchaser posted a deposit of $15 million with the escrow agent for the transaction, which deposit is nonrefunable (except in certain limited circumstances as set forth in the Puerto Rico Purchase Agreement) and will be credited to the Purchaser against the purchase price at closing.  Closing of the transaction is expected to occur by the end of the third quarter of 2021.

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Cash Flow Activity

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

 

Six Months

 

 

Ended June 30,

 

 

2021

 

 

2020

 

Cash flow provided by operating activities

$

47,609

 

 

$

20,210

 

Cash flow provided by investing activities

 

49,948

 

 

 

154,399

 

Cash flow used for financing activities

 

(144,112

)

 

 

(165,554

)

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

Operating Activities: Cash provided by operating activities increased $27.4 million primarily due to the following:

 

Timing and increase in cash collected from tenants;

 

Reduction of interest payments and

 

Decrease in operating income due to asset sales.

Investing Activities:  Cash provided by investing activities decreased $104.5 million primarily due to the following:

 

Decrease in proceeds from dispositions of real estate of $111.4 million and

 

Decrease in payments for real estate improvements of $7.0 million.

Financing Activities:  Cash used for financing activities decreased by $21.4 million primarily due to the following:

 

Decrease in debt repayments of $14.9 million and

 

Decrease in dividends paid of $6.6 million.

CAPITALIZATION

At June 30, 2021, the Company’s capitalization consisted of $214.5 million of mortgage debt, $190.0 million of RVI Preferred Shares and $459.0 million of market equity (market equity is defined as common shares outstanding multiplied by $21.75, the closing price of the Company’s common shares on the NYSE at June 30, 2021), resulting in a debt to total market capitalization ratio of 0.25 to 1.0, as compared to the ratio of 0.54 to 1.0 at June 30, 2020.  The closing price of the Company’s shares on the NYSE was $12.36 at June 30, 2020.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The Company had aggregate outstanding mortgage indebtedness of $214.5 million at June 30, 2021, with a maturity of March 2022, subject to two one-year extension options.  In addition, the Company has two long-term ground leases in which it is the lessee.  The Company anticipates utilizing a portion of the net proceeds from the pending sale of its Puerto Rico assets discussed Under “—Liquidity and Capital Resources—Dispositions” above to repay the entire balance of the of the mortgage loan, as required under the mortgage agreement in the third quarter of 2021.

The Company’s interest in Crossroads Plaza shopping center in Gulfport, Mississippi is subject to a ground lease with an expiration date of November 2033. The Company has one, 25-year option remaining which would extend the term to 2058 at fair market ground rent (as determined by an independent appraiser at the time of the option’s exercise).  A portion of the Company’s interest in Peach Street Marketplace shopping center in Erie Pennsylvania is subject to a ground lease with an expiration date of December 2022.  The Company has extension options which would extend the term to 2096.

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 generally equal to the sum of the LIBOR rate (or other applicable benchmark rate) plus 8.75% per annum. SITE Centers continued to provide the guaranty in connection with the February 2021 extension of the Revolving Credit Agreement’s maturity date to February 9, 2022.

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Other Commitments

The Company has entered into agreements with general contractors related to its shopping centers having aggregate commitments of approximately $2.7 million at June 30, 2021.  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 June 30, 2021, the Company had purchase order obligations, typically payable within one year, aggregating approximately $1.4 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.  As of June 30, 2021, the Company had expended approximately $126 million in connection with repairing property damage caused by the hurricane.  Included in restricted cash at June 30, 2021 are the remaining property damage settlement proceeds of $30.7 million along with other related hurricane reserves required by the mortgage lender of $6.5 million. The Company estimates that it will incur between $1 million and $2 million to complete its restoration efforts subject to the mortgage lender’s satisfaction that all necessary restoration work has been completed.  The Company anticipates that the repair and restoration work will be substantially complete in the third quarter of 2021, the timing of which has been delayed by the impact of the COVID-19 pandemic.  The timing and schedule of additional repair work to be completed are highly dependent upon any changes in the scope of work, and the availability of building materials, supplies and skilled labor. In addition, the timing of completing the remaining repair work could be delayed by any additional stay-at-home directives or temporary closures of non-essential businesses as a result of the impacts of the COVID-19 pandemic.

ECONOMIC CONDITIONS

Portfolio Composition and Retail Environment. Though leasing prospects are heavily dependent on local conditions, uncertainty and tenant concern around the COVID-19 pandemic caused a slow-down in lease activity from March 2020 through June 30, 2021.  The Company’s portfolio has a diversified tenant base, with only two tenants whose annualized rental revenue equals or exceeds 3% of the Company’s annualized revenues at June 30, 2021 (Walmart/Sam’s Club at 6.0% and PetSmart at 3.2%).  Other significant tenants include TJX Companies (T.J. Maxx, Marshalls and HomeGoods) and Best Buy.  All of these tenants have relatively strong financial positions, having outperformed other retail categories on a relative basis over time, and the Company believes they remain well capitalized. Historically, these tenants have provided a stable revenue base, and the Company believes that they will continue doing so going forward, given the long-term nature of these leases. Moreover, the majority of the tenants in the Company’s continental U.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 89.7% and 87.2% at June 30, 2021 and 2020, respectively.  The total portfolio average annualized base rent per occupied square foot was $16.26 at June 30, 2021, as compared to $16.14 at June 30, 2020.  

At June 30, 2021, the Company owned nine assets on the island of Puerto Rico (including four enclosed malls) aggregating 3.5 million square feet, representing 48% of Company-owned GLA and approximately 57% of the Company’s total consolidated revenue and approximately 56% of the Company’s total consolidated revenue less operating expenses (i.e., net operating income) for the six months ended June 30, 2021.  The Company believes that the tenants at its Puerto Rico properties (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.  However, new demand for space at the Puerto Rico properties has been more limited, especially with respect to big-box and national tenants as many of those tenants continue to evaluate their presence and operating plans on the Island.  Limited leasing demand may continue to put pressure on leasing spreads on both new leases and renewals as the Company seeks to prioritize occupancy over rental rate growth.  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, which may further adversely impact retail tenants’ interest in maintaining or expanding their operations in Puerto Rico.    

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.  In

28

 


 

addition to the impacts of increased competition, e-commerce and adverse conditions in Puerto Rico, beginning in March 2020, the retail sector in both the continental U.S. and Puerto Rico has been significantly impacted by the COVID-19 pandemic. Though the impact of the COVID-19 pandemic 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 reduction in sales and foot traffic, and many tenants were forced to limit their operations or close their businesses for a period of time.  As of July 30, 2021, 100% of the Company’s tenants (based on average base rents) were open for business, up from a low of approximately 34% in early April 2020 related to the impact of the COVID-19 pandemic.  Tenant operations in Puerto Rico have been particularly impacted by local government mandates and operating restrictions.  These restrictions were lifted in July 2021, though the COVID-19 pandemic continues to pose challenges to tenant revenues and the overall leasing environment in Puerto Rico.

The COVID-19 pandemic had a significant impact on the Company’s collection of rents from April 2020 through the end of 2020.  The Company’s collection rates have shown significant improvement in the first half of 2021, relative to 2020 levels, and a substantial majority of the Company’s tenants, including cash basis tenants, are paying their monthly rent and repaying deferred rents relating to prior periods.  As of July 23, 2021, the Company’s quarterly rent payment rates for assets owned as of June 30, 2021, are as follows:

 

 

Second Quarter

2020

 

 

Third Quarter

2020

 

 

Fourth Quarter

2020

 

 

First Quarter

2021

 

 

Second Quarter

2021

 

Continental U.S.

 

94%

 

 

98%

 

 

97%

 

 

99%

 

 

99%

 

Puerto Rico

 

81%

 

 

93%

 

 

93%

 

 

97%

 

 

97%

 

The Company calculates the aggregate percentage of rents paid for assets owned as of June 30, 2021 by comparing the amount of tenant payments received as of the date presented to the amount billed to tenants during the period.  The billed amount includes abated rents, rents subject to deferral arrangements and rents owing from bankrupt tenants that were in possession of the space and billed.  For purposes of reporting the percentage of aggregate base rents collected for a given period, when rents subject to deferral arrangements are later paid, those payments are allocated to the period in which the rent was originally owed.  

The Company has reached satisfactory resolution with the majority of tenants that still owe unpaid rents as a result of disruptions to their business related to the COVID-19 pandemic.  These resolutions typically have taken the form of rent deferral arrangements and, in circumstances where tenants have agreed to extend lease terms or other material concessions, rent abatements (especially in Puerto Rico).  The majority of deferred amounts are scheduled to be repaid by the end of 2021.  The Company continues to evaluate its options with respect to tenants with which the Company has not reached satisfactory resolution of unpaid rents and has commenced collection actions against several tenants.  As of July 23, 2021, agreed-upon rent-deferral and abatement arrangements relating to 2020 and 2021 base rents that remain unpaid for assets owned as of June 30, 2021, represented the following percentages of aggregate quarterly base rents:

 

 

Second Quarter

2020

 

 

Third Quarter

2020

 

 

Fourth Quarter

2020

 

 

First Quarter

2021

 

 

Second Quarter

2021

 

Continental U.S.

 

2%

 

 

0%

 

 

1%

 

 

0%

 

 

0%

 

Puerto Rico

 

6%

 

 

2%

 

 

1%

 

 

0%

 

 

0%

 

The Company is unable to forecast the duration of the disruption to tenant and Company operations caused by the COVID-19 pandemic or the ultimate level of collections of rents and other unpaid amounts owed by tenants that were deferred or unpaid during 2020.  However, the level and pace of collections of such deferred rents and other unresolved amounts exceeded management’s expectations during the first half of 2021, especially with respect to collections from tenants previously placed on the cash basis of accounting.  If new surges in contagion were to occur, or if new COVID-19 variants were to be discovered which are more infectious or resistant to vaccines, or if there are decreases in the effectiveness of such vaccines, the Company’s recent success in the collection of deferred rents and unresolved amounts could be adversely impacted and such developments could lead to new restrictions on tenant operations, nonpayment of contractual and previously deferred rents, additional tenant requests for rent relief and additional tenant closures and bankruptcies, all of which could adversely impact the Company’s results of operations in the future.  Certain tenant categories remain especially vulnerable to the impacts of the COVID-19 pandemic, including movie theaters, restaurants and entertainment.

Disposition Outlook. In addition to its goal of maximizing cash flow from property operations, the Company seeks to realize value through the regular sale of assets to a variety of buyers.  In recent years, the market upon which this aspect of the business plan relies has 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,

29

 


 

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.  

The COVID-19 pandemic created uncertainty and delays with respect to the Company’s execution of the disposition portion of its business plan as many prospective purchasers suspended their acquisition activities during much of 2020 due to, among other factors, the uncertainty of tenant operations and the availability and terms of financing. The financing market has improved considerably in the first half of 2021 despite underwriting standards that remain tighter than pre-pandemic levels. It remains unclear, however, whether purchasers’ expectations with respect to economic returns from investments in retail real estate have been altered by the pandemic and the resulting changes to property cash flows. The Company is currently unable to quantify or predict the magnitude of the impact of the COVID-19 pandemic on the timing and pricing of disposition activity with respect to its remaining assts.

 

For additional information regarding risks relating to the Puerto Rico economy, the COVID-19 pandemic, the impact of e‑commerce and other relevant business uncertainties see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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, 2020.  The impact of the COVID-19 pandemic 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:

 

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.  There can be no assurance sales of assets under contract will close on expected timeliness or at all;

 

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

 

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

 

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

30

 


 

 

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;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company and its tenants could be negatively affected by the impacts of pandemics and other public health crises, including the COVID-19 pandemic;

 

The Company is subject to potential environmental liabilities;

 

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

 

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

 

Changes in accounting or other standards may adversely affect the Company’s business;

31

 


 

 

 

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;

 

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

 

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

 

The Company and its vendors, 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.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk.  At June 30, 2021 and December 31, 2020, the Company’s outstanding indebtedness was composed of all variable-rate debt.  At June 30, 2021, the Company’s carrying value of the variable-rate debt was $207.2 million and its fair value was $222.8 million.  At December 31, 2020, the Company’s carrying value of the variable-rate debt was $344.5 million and its fair value was $362.7 million.  If interest rates were to increase by 1.00%, or 100 basis-points, the fair value of the debt would be $222.6 million and $362.5 million at June 30, 2021 and December 31, 2020, 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 June 30, 2021, would result in an increase in interest expense of approximately $1.1 million for the six-month period ended June 30, 2021.  

The Company intends to use proceeds from asset sales to repay its indebtedness and, following the repayment of its 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 June 30, 2021, the Company had no other material exposure to market risk.

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 June 30, 2021, 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 June 30, 2021, 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 June 30, 2021, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.

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

Item 1A.

RISK FACTORS

None.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

 

(b)

 

 

(c)

 

 

(d)

 

 

Total

Number of

Shares

Purchased(1)

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares Purchased

as Part of

Publicly Announced

Plans or Programs

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares that May Yet

Be Purchased Under

the Plans or Programs

 

April 1–30, 2021

 

 

 

$

 

 

 

 

 

$

 

May 1–31, 2021

 

1,620

 

 

 

18.02

 

 

 

 

 

 

 

June 1–30, 2021

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,620

 

 

$

18.02

 

 

 

 

 

$

 

 

(1)

Consists of common shares surrendered or deemed surrendered to the Company to satisfy statutory minimum tax withholding obligations in connection with the issuance and vesting of equity grants to certain of its directors.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

Item 5.

OTHER INFORMATION

None.

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Item 6.EXHIBITS

3.1

 

Second Amended and Restated Articles of Incorporation, as amended by Amendment No. 1 to the Second Amended and Restated Articles of Incorporation1

 

 

 

3.2

 

Amended and Restated Code of Regulations, as amended by Amendment No. 1 to the Amended and Restated Code of Regulations1

 

 

 

31.1

 

Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 19341

 

 

 

31.2

 

Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 19341

 

 

 

32.1

 

Certification of chief executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 20021, 2

 

 

 

32.2

 

Certification of chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 20021, 2

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document1

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document 1

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document 1

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document 1

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document 1

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document 1

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 has been formatted in Inline XBRL and included in Exhibit 101.

1

Submitted electronically herewith.

2

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

Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline Extensible Business Reporting Language): (i)  Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, (ii)  Consolidated Statements of Operations and Other Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020, (iii) Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2021 and 2020, (iv)  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 and (v) Notes to Condensed Consolidated Financial Statements.

34

 


 

 

SIGNATURES

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

 

 

 

Retail Value Inc.

 

 

 

 

 

 

By:

 

/s/ Christa A. Vesy

 

 

 

 

Name:

 

Christa A. Vesy

 

 

 

 

Title:

 

Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Treasurer

(Authorized Officer)

Date:  August 3, 2021

 

 

 

 

 

 

 

 

35