The accompanying notes are an integral part of these condensed combined and consolidated financial statements.
The accompanying notes are an integral part of these condensed combined and consolidated financial statements.
The accompanying notes are an integral part of these condensed combined and consolidated financial statements.
The accompanying notes are an integral part of these condensed combined and consolidated financial statements.
The accompanying notes are an integral part of these condensed combined and consolidated financial statements.
Notes to Combined and Consolidated Financial Statements
On July 1, 2018, SITE Centers Corp., formerly known as DDR Corp. (“SITE Centers” or the “Manager”), completed the separation of Retail Value Inc., an Ohio corporation formed in December 2017 that owned and operated a portfolio of 48 real estate assets at the time of the separation that included 36 continental U.S. assets and 12 Puerto Rico assets (collectively, “RVI” the “RVI Predecessor” or the “Company”), into an independent public company. At September 30, 2019, RVI owned 29 properties that included 17 continental U.S. assets and 12 Puerto Rico assets comprising 12 million square feet of gross leasable area (“GLA”) and located in 11 states and Puerto Rico. These properties serve as direct or indirect collateral for a mortgage loan which, as of September 30, 2019, had an aggregate principal balance of $674.3 million.
In connection with the separation from SITE Centers, on July 1, 2018, the Company and SITE Centers entered into a separation and distribution agreement (the “Separation and Distribution Agreement”) pursuant to which, among other things, SITE Centers agreed to transfer properties and certain related assets, liabilities and obligations to RVI, and to distribute 100% of the outstanding common shares of RVI to holders of record of SITE Centers’ common shares as of the close of business on June 26, 2018, the record date. On July 1, 2018, holders of SITE Centers’ common shares received one common share of RVI for every ten shares of SITE Centers’ common stock held on the record date. In connection with the separation from SITE Centers, SITE Centers retained 1,000 shares of RVI’s series A preferred stock having an aggregate dividend preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by RVI asset sales.
On July 1, 2018, the Company and SITE Centers also entered into an external management agreement (the “External Management Agreement”) which, together with various property management agreements, governs the fees, terms and conditions pursuant to which SITE Centers manages RVI and its properties. SITE Centers provides RVI with day-to-day management, subject to supervision and certain discretionary limits and authorities granted by the RVI Board of Directors. The Company does not have any employees. In general, either SITE Centers or RVI may terminate the management agreements on December 31, 2019, or at the end of any six-month renewal period thereafter. SITE Centers and RVI also entered into a tax matters agreement that governs the rights and responsibilities of the parties following RVI’s separation from SITE Centers with respect to various tax matters, and provides for the allocation of tax-related assets, liabilities and obligations.
Principles of Consolidation
The Company
For periods after July 1, 2018, the consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest. All significant inter-company balances and transactions have been eliminated in consolidation.
RVI Predecessor
For periods prior to July 1, 2018, the accompanying historical condensed combined financial statements and related notes of the Company do not represent the statement of operations and cash flows of a legal entity, but rather a combination of entities under common control that have been “carved-out” of SITE Centers’ consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All inter-company transactions and balances have been eliminated in combination.
For periods prior to July 1, 2018, these combined financial statements reflect the revenues and direct expenses of the RVI Predecessor and include material assets and liabilities of SITE Centers that are specifically attributable to the Company. RVI Predecessor equity in these combined financial statements represents the excess of total assets over total liabilities. RVI Predecessor equity is impacted by contributions from and distributions to SITE Centers, which are the result of treasury activities and net funding provided by or distributed to SITE Centers prior to the separation from SITE Centers, as well as the allocated costs and expenses described below. The combined financial statements also include the consolidated results of certain of the Company’s wholly-owned subsidiaries, as applicable. All significant inter-company balances and transactions have been eliminated in consolidation.
7
For periods prior to July 1, 2018, the combined financial statements include certain direct costs historically paid by the properties but contracted through SITE Centers, including but not limited to, management fees, insurance, compensation costs and out-of-pocket expenses directly related to the management of the properties (Note 11). Further, the combined financial statements include an allocation of indirect costs and expenses incurred by SITE Centers related to the Company, primarily consisting of compensation and other general and administrative costs that have been allocated using the relative percentage of property revenue of the Company and SITE Centers’ management’s knowledge of the Company. In addition, the combined financial statements include an allocation of interest expense on SITE Centers’ unsecured debt, excluding debt that is specifically attributable to the Company; interest expense was allocated by calculating the unencumbered net assets of each property held by the Company as a percentage of SITE Centers’ total consolidated unencumbered net assets and multiplying that percentage by the interest expense on SITE Centers unsecured debt. The amounts allocated in the accompanying combined financial statements are not necessarily indicative of the actual amount of such indirect expenses that would have been recorded had the RVI Predecessor been a separate independent entity. SITE Centers believes the assumptions underlying SITE Centers’ allocation of indirect expenses are reasonable.
3.
|
Summary of Significant Accounting Policies
|
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior periods have been reclassified in order to conform with the current period’s presentation. The Company reclassified $2.2 million and $7.6 million of contractual lease payments from Other Income to Rental Income within total revenues on its combined statements of operations for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018 to June 30, 2018, respectively, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-02—Leases, as amended (“Topic 842”), as discussed below.
Rental Income
Rental Income on the combined and consolidated statements of operations includes contractual lease payments that generally include the following:
|
•
|
Fixed lease payments, which include fixed payments associated with expense reimbursements from tenants for common area maintenance, taxes and insurance from tenants in shopping centers, are recognized on a straight-line basis over the non-cancelable term of the lease, which generally ranges from one month to 30 years, and include the effects of applicable rent steps and abatements.
|
|
|
•
|
Variable lease payments, which include percentage and overage income, which are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.
|
|
|
•
|
Variable lease payments associated with expense reimbursements from tenants for common area maintenance, taxes, insurance and other property operating expenses, based upon the tenant’s lease provisions, which are recognized in the period the related expenses are incurred.
|
|
|
•
|
Lease termination payments, which are recognized upon the effective termination of a tenant’s lease when the Company has no further obligations under the lease.
|
|
|
•
|
Ancillary and other property-related rental payments, primarily composed of leasing vacant space to temporary tenants, kiosk income and parking income, which are recognized in the period earned.
|
|
Upon adoption of Topic 842, Rental Income for the periods beginning on or after January 1, 2019, has been reduced for amounts the Company believes are not probable of being collected. Rental income is recognized on a straight-line basis over the lease term. Rental income is not recognized when collection is not reasonably assured as the customer is placed on non-accrual status and rental income is recognized as cash payments are received.
8
Statements of Cash Flows and Supplemental Disclosure of Non-Cash Investing and Financing Information
Non-cash investing and financing activities are summarized as follows (in millions):
|
For the Nine
|
|
|
For the Period from
|
|
|
For the Period from
|
|
|
Months Ended
|
|
|
July 1, 2018 to
|
|
|
January 1, 2018 to
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
June 30, 2018
|
|
|
The Company
|
|
|
RVI Predecessor
|
|
Contribution of net assets from SITE Centers
|
$
|
—
|
|
|
$
|
677.4
|
|
|
$
|
—
|
|
Accounts payable related to construction in progress
|
|
10.9
|
|
|
|
17.2
|
|
|
|
10.1
|
|
Stock dividends
|
17.2
|
|
|
|
—
|
|
|
|
—
|
|
Assumption of buildings due to ground lease termination
|
|
0.8
|
|
|
|
—
|
|
|
|
2.2
|
|
Receivable and reduction of real estate assets, net -
related to hurricane
|
|
—
|
|
|
|
—
|
|
|
|
6.1
|
|
New Accounting Standard Adopted
Accounting for Leases
The Company adopted Topic 842 as of January 1, 2019, using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. The Company elected the following practical expedients permitted under the transition guidance within the new standard:
|
•
|
The package of practical expedients, which among other things, allowed the Company to carry forward the historical lease classification;
|
|
•
|
Land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and
|
|
•
|
To not separate lease and non-lease components for all leases and recording the combined component based on its predominant characteristics, as rental income or expense.
|
The Company did not adopt the practical expedient to use hindsight in determining the lease term.
The Company made the following accounting policy elections as a lessor in connection with the adoption:
|
•
|
To include operating lease liabilities in the asset group and include the associated operating lease payments in the undiscounted cash flows when considering recoverability of a long-lived asset group and
|
|
•
|
To exclude from lease payments taxes assessed by a governmental authority that are both imposed on and concurrent with lease revenue producing activity and collected by the lessor from the lessee (i.e., sales tax).
|
The adoption of the standard impacted the Company’s consolidated financial statements as follows:
|
•
|
The Company had ground lease agreements in which the Company is the lessee for land beneath all or a portion of the buildings at two shopping centers (Note 5), where the Company has recorded its rights and obligations under these leases as a right-of-use (“ROU”) asset and lease liability, which is included in Other Assets and Accounts Payable and Other Liabilities, respectively, in the consolidated balance sheet. Previously, the Company accounted for these arrangements as operating leases. These leases will continue to be classified as operating leases due to the election of the package practical expedients. The Company recorded ROU assets and lease liabilities of approximately $1.9 million and $3.0 million, respectively, as of January 1, 2019. The difference between the ROU asset and lease liability was due to the straight-line rent balance that existed as of the date of application of the standard.
|
|
•
|
Previously, the Company included real estate taxes paid by a lessee directly to a third party in recoveries from tenants and real estate tax expense, on a gross basis. Upon adoption of the standard, the Company no longer records these amounts in revenue or expense as the standard precludes the Company from recording payments made directly by the lessee. In addition, on January 1, 2019, the Company reversed $0.6 million of real estate taxes paid by certain major tenants previously reflected in Accounts Receivable and Accounts Payable and Other Liabilities on the Company’s consolidated balance sheet as of December 31, 2018.
|
|
•
|
The Company recorded an adjustment for the cumulative effect due to a change in accounting principal of $0.7 million in equity related to the change in its collectability assessment of operating lease receivables under Topic 842.
|
9
|
•
|
Upon adoption of the practical expedient with regards to not separating lease and non-lease components, where applicable, the Company has prospectively recorded, on a straight-line basis, lease payments associated with fixed expense reimbursements.
|
|
•
|
The adoption of this standard did not materially impact the Company’s consolidated net income or consolidated cash flows.
|
The adoption of the new standard also resulted in various presentation changes in the Company’s consolidated statements of operations. The Company aggregated the following components of contractual lease payments into one line item referred to as Rental Income: Minimum Rents, Percentage and Overage Rents, Recoveries from Tenants, Ancillary Income and Lease Termination Fees. The prior period presentation was conformed to the current period presentation for comparability related to these revenue components. In addition, effective January 1, 2019, the Company presents bad debt as a component of Rental Income within Revenues. For prior periods, bad debt is included in Operating and Maintenance Expenses. In addition, effective January 1, 2019, the Company no longer records real estate taxes paid by major tenants directly to the applicable governmental authority. For prior periods, these amounts are included in Recoveries from Tenants and Real Estate Taxes.
New Accounting Standard to Be Adopted
Accounting for Credit Losses
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date (ASU 2016-13, Financial Instruments – Credit Losses). The guidance requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2019. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. The Company is in the process of evaluating the impact of this guidance.
Other Assets, Net on the Company’s consolidated balance sheets consists of the following (in thousands):
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Intangible assets:
|
|
|
|
|
|
|
|
In-place leases, net
|
$
|
6,323
|
|
|
$
|
11,926
|
|
Above-market leases, net
|
|
1,036
|
|
|
|
2,001
|
|
Lease origination costs, net
|
|
1,023
|
|
|
|
1,713
|
|
Tenant relations, net
|
|
10,696
|
|
|
|
16,242
|
|
Total intangible assets, net(A)
|
|
19,078
|
|
|
|
31,882
|
|
Operating lease ROU assets(B)
|
|
1,763
|
|
|
|
—
|
|
Other assets:
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
7,397
|
|
|
|
10,011
|
|
Deposits
|
|
140
|
|
|
|
194
|
|
Deferred charges, net
|
|
130
|
|
|
|
179
|
|
Other assets(C)
|
|
35
|
|
|
|
1,294
|
|
Total other assets, net
|
$
|
28,543
|
|
|
$
|
43,560
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities:
|
|
|
|
|
|
|
|
Below-market leases, net(A)
|
$
|
(20,465
|
)
|
|
$
|
(33,914
|
)
|
(A)
|
In the event a tenant terminates its lease prior to the contractual expiration, the unamortized portion of the related intangible asset or liability is adjusted to reflect the updated lease term.
|
(B)
|
Operating lease ROU assets are discussed further in Notes 1 and 5.
|
(C)
|
Included $1.2 million fair value of an interest rate cap at December 31, 2018, which was terminated in March 2019.
|
10
Lessee
The Company is engaged in the operation of shopping centers that are either owned or, with respect to certain shopping centers, operated under long-term ground leases that expire at various dates through 2033. The Company determines if an arrangement is a lease at inception.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the term of the lease. As most of the Company’s leases do not include an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date of the standard in determining the present value of lease payments. For each lease, the Company utilized a market-based approach to estimate the incremental borrowing rate (“IBR”), which required significant judgment. The Company estimated base IBRs based on an analysis of (i) yields on comparable companies, (ii) observable mortgage rates and (iii) unlevered property yields and discount rates. The Company applied adjustments to the base IBRs to account for full collateralization and lease term. Operating lease ROU assets also include any lease payments made. The Company has options to extend certain of the ground leases; however, these options were not considered as part of the lease term when calculating the lease liability as they were not reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Operating lease ROU assets and operating lease liabilities are in the Company’s consolidated balance sheet as follows (in thousands):
|
|
|
|
Classification
|
|
September 30, 2019
|
|
Operating Lease ROU Assets
|
|
Other Assets, Net
|
|
$
|
1,763
|
|
|
|
|
|
|
|
|
Operating Lease Liabilities
|
|
Accounts Payable and Other Liabilities
|
|
$
|
2,890
|
|
Operating lease expenses, including straight-line expense, are included in Operating and Maintenance Expense for the Company’s ground leases and aggregated $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively. Supplemental information related to leases was as follows:
|
|
September 30, 2019
|
|
Weighted-Average Remaining Lease Term
|
|
11.6 years
|
|
Weighted-Average Discount Rate
|
|
|
6.6
|
%
|
Cash paid for amounts included in the measurement —
operating cash flows from lease liabilities (in thousands)
|
|
$
|
303
|
|
As determined under FASB Accounting Standards Codification (“ASC”) 840, Leases, the scheduled future minimum rental revenues from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises, and the scheduled minimum rental payments under the terms of all non-cancelable operating leases, principally ground leases, in which the Company was the lessee as of December 31, 2018, were as follows (in thousands):
Year
|
|
Minimum
Rental
Revenues
|
|
|
Minimum
Rental
Payments
|
|
2019
|
|
$
|
169,109
|
|
|
$
|
405
|
|
2020
|
|
|
143,736
|
|
|
|
414
|
|
2021
|
|
|
118,947
|
|
|
|
423
|
|
2022
|
|
|
92,495
|
|
|
|
433
|
|
2023
|
|
|
65,225
|
|
|
|
217
|
|
Thereafter
|
|
|
195,610
|
|
|
|
2,806
|
|
|
|
$
|
785,122
|
|
|
$
|
4,698
|
|
11
As determined under Topic 842, maturities of lease liabilities were as follows for the 12-month periods ending September 30, (in thousands):
Year
|
|
September 30,
|
|
2020
|
|
$
|
412
|
|
2021
|
|
|
421
|
|
2022
|
|
|
430
|
|
2023
|
|
|
271
|
|
2024
|
|
|
225
|
|
Thereafter
|
|
|
2,637
|
|
Total lease payments
|
|
|
4,396
|
|
Less imputed interest
|
|
|
(1,506
|
)
|
Total
|
|
$
|
2,890
|
|
Lessor
Space in the shopping centers is leased to tenants pursuant to agreements that provide for terms generally ranging from one month to 30 years and for rents which, in some cases, are subject to upward adjustments based on operating expense levels, sales volume or contractual increases as defined in the lease agreements.
The scheduled future minimum rental revenues from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions, as determined under Topic 842 for such premises for the 12-month periods ending September 30, were as follows (in thousands):
Year Ending
|
|
September 30,
|
|
2020
|
|
$
|
145,376
|
|
2021
|
|
|
124,284
|
|
2022
|
|
|
101,298
|
|
2023
|
|
|
75,791
|
|
2024
|
|
|
52,416
|
|
Thereafter
|
|
|
194,695
|
|
Total
|
|
$
|
693,860
|
|
The Company maintains a Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as lender and administrative agent (“PNC”). The Revolving Credit Agreement provides for borrowings of up to $30.0 million. Borrowings under the Revolving Credit Agreement may be used by the Company for general corporate purposes and working capital. The Company’s borrowings under the Revolving Credit Agreement bear interest at variable rates at the Company’s election, based on either (i) LIBOR plus a specified spread ranging from 1.05% to 1.50% depending on the Company’s Leverage Ratio (as defined in the Revolving Credit Agreement) or (ii) the Alternate Base Rate (as defined in the Revolving Credit Agreement) plus a specified spread ranging from 0.05% to 0.50% depending on the Company’s Leverage Ratio. The Company is also required to pay a facility fee on the aggregate revolving commitments at a rate per annum that ranges from 0.15% to 0.30% depending on the Company’s Leverage Ratio.
The Revolving Credit Agreement matures on the earliest to occur of (i) March 9, 2021, (ii) the date on which the External Management Agreement is terminated, (iii) the date on which DDR Asset Management, LLC or another wholly-owned subsidiary of SITE Centers ceases to be the “Service Provider” under the External Management Agreement as a result of assignment or operation of law or otherwise and (iv) the date on which the principal amount outstanding under the Company’s mortgage loan is repaid or refinanced (Note 7).
The Company’s obligations under the Revolving Credit Agreement are guaranteed by SITE Centers in favor of PNC. In consideration thereof, on July 2, 2018, the Company entered into a guaranty fee and reimbursement letter agreement with SITE Centers pursuant to which the Company has agreed to pay to SITE Centers the following amounts: (i) an annual guaranty commitment fee of 0.20% of the aggregate commitments under the Revolving Credit Agreement, (ii) for all times other than those referenced in clause (iii) below, when any amounts are outstanding under the Revolving Credit Agreement, an amount equal to 5.00% per annum times the average aggregate outstanding daily principal amount of such loans plus the aggregate stated average daily amount of
12
outstanding letters of credit and (iii) in the event SITE Centers pays any amounts to PNC pursuant to SITE Centers’ guaranty (credit facility guaranty fee) and the Company fails to reimburse SITE Centers for such amount within three business days, an amount in cash equal to the amount of such paid obligations plus default interest which will accrue from the date of such payment by SITE Centers until repaid by the Company at a rate per annum equal to the sum of the LIBOR rate plus 8.50%.
At September 30, 2019, there were no amounts outstanding under the Revolving Credit Agreement.
On March 11, 2019, certain wholly-owned subsidiaries of the Company entered into a mortgage loan with an initial aggregate principal amount of $900 million. Substantially all proceeds from the mortgage loan were used to refinance and prepay all amounts outstanding under the Company’s February 2018 mortgage loan in the original aggregate principal amount of $1.35 billion. The outstanding aggregate principal amount of the mortgage loan was $674.3 million at September 30, 2019. The borrowers’ obligations are evidenced by promissory notes which are secured by, among other things: (i) mortgages encumbering the borrowers’ properties located in the continental U.S. (which comprise substantially all of the Company’s properties located in the continental U.S.) and Plaza Del Sol located in Bayamon, Puerto Rico (collectively, the “Mortgaged Properties”); (ii) a pledge of the equity of the Company’s subsidiaries that own each of the Company’s properties located in Puerto Rico (collectively, the “Pledged Properties”) and a pledge of related rents and other cash flows, insurance proceeds and condemnation awards; and (iii) a pledge of any reserves and accounts of any borrower.
The loan facility will mature on March 9, 2021, subject to three one-year extensions at borrowers’ option based on certain conditions of the agreement. The initial weighted-average interest rate applicable to the notes was equal to one-month LIBOR plus a spread of 2.30% per annum, provided that such spread is subject to an increase of 0.25% per annum in connection with any exercise of the third extension option. Application of voluntary prepayments, as described below, will cause the weighted-average interest rate to increase over time. At September 30, 2019, the interest rate of the Company’s mortgage loan was 4.7%.
The loan facility is structured as an interest only loan throughout the initial two-year term and any exercised extension options. As a result, so long as the borrowers maintain a minimum debt yield of 10% with respect to the Mortgaged Properties and no event of default exists, any property cash flows available following payment of debt service and funding of certain required reserve accounts (including reserves for payment of real estate taxes, insurance premiums, ground rents, tenant improvements and capital expenditures), will be available to the borrowers to pay operating expenses and for other general corporate purposes. The debt yield with respect to the Mortgaged Properties was 13.9% as of September 30, 2019.
Subject to certain conditions described in the mortgage loan agreement, the borrowers may prepay principal amounts outstanding under the loan facility in whole or in part by providing (i) advance notice of prepayment to the lenders and (ii) remitting the prepayment premium described in the mortgage loan agreement. No prepayment premium is required with respect to any prepayments made after April 9, 2020. Additionally, no prepayment premium will apply to prepayments made in connection with permitted property sales. Each Mortgaged Property has a portion of the original principal amount of the mortgage loan allocated to it. The amount of proceeds from the sale of an individual Mortgaged Property required to be applied towards prepayment of the notes (i.e., the property’s “release price”), will depend upon the principal amount of the mortgage loan allocated to it and the debt yield at the time of the sale. All proceeds for the sales of Pledged Properties other than Plaza Del Sol are required to be applied towards prepayment of the notes.
Voluntary prepayments made by the borrowers will be applied to tranches of notes (i) absent an event of default, in descending order of seniority (i.e., such prepayments will first be applied to the most senior tranches of notes) and (ii) following any event of default, in such order as the loan servicer determines in its sole discretion. As a result, the Company expects that the weighted average interest rate of the notes will increase during the term of the loan facility.
In the event of a default, the contract rate of interest on the notes will increase to the lesser of (i) the maximum rate allowed by law or (ii) the greater of (A) 4% above the interest rate otherwise applicable and (B) the Prime Rate (as defined in the mortgage loan) plus 1.0%. The notes contain other terms and provisions that are customary for instruments of this nature. The mortgage loan agreement also includes customary events of default, including among others, principal and interest payment defaults and breaches of affirmative or negative covenants, the mortgage loan agreement does not contain any financial maintenance covenants.
In connection with the refinancing, the Company incurred $20.2 million of aggregate financing costs which included a $1.8 million debt financing fee paid to SITE Centers. This refinancing was treated as a loan modification versus a debt extinguishment pursuant to the applicable accounting guidance. As a result, only the portion of the financing costs incurred related to the new lender group was capitalized. The remaining financing costs not capitalized as a loan cost were recorded as debt extinguishment costs in the
13
consolidated statement of operations along with the write-off of an allocation of the related unamortized deferred financing costs aggregating $12.7 million.
8.
|
Financial Instruments and Fair Value Measurements
|
The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments:
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable and Other Liabilities
The carrying amounts reported in the Company’s consolidated balance sheets for these financial instruments approximated fair value because of their short-term maturities.
Debt
The fair market value of debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile, including the Company’s non-performance risk and loan to value and is classified as Level 3 in the fair value hierarchy.
Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The carrying amount of debt was $654.7 million and $967.6 million at September 30, 2019 and December 31, 2018, respectively. The fair value of debt was $699.2 million and $1,016.1 million at September 30, 2019 and December 31, 2018, respectively.
Interest Rate Cap
In March 2018, the Company entered into an interest rate cap in connection with entering into the mortgage loan, which was terminated with the new mortgage financing (Note 7). At December 31, 2018, the notional amount of the interest rate cap was $1.0 billion. The fair value of the interest rate cap was $1.2 million at December 31, 2018, and was included in Other Assets. In March 2019, in connection with the mortgage refinancing, the interest rate cap was terminated and the Company received $0.3 million upon final settlement.
9.
|
Commitments and Contingencies
|
Hurricane Loss
In 2017, Hurricane Maria made landfall in Puerto Rico. At September 30, 2019, the Company owned 12 assets in Puerto Rico, aggregating 4.4 million square feet of Company-owned GLA. One of the 12 assets (Plaza Palma Real, consisting of approximately 0.4 million of Company-owned GLA) was severely damaged in Hurricane Maria. At September 30, 2019, three anchor tenants and a few other tenants totaling 0.3 million square feet were open for business approximating 61% of Plaza Palma Real’s Company-owned GLA. The other 11 assets sustained varying degrees of damage, consisting primarily of roof, HVAC system damage and water intrusion. Although some of the tenant spaces remain untenantable, a majority of the Company’s leased space that was open prior to the storm was open for business by mid-2018.
Restoration work is underway at all of the shopping centers. The Company anticipates that the repair and restoration work will be substantially complete by mid-2020. The timing and schedule of additional repair work to be completed are highly dependent upon any changes in the scope of work, the availability of building materials, supplies and skilled labor.
In August 2019, the Company reached a settlement with its insurer with respect to the Company’s claims relating to the hurricane. Pursuant to the settlement, the insurer agreed to pay the Company $154.4 million on account of property damage caused by the hurricane, of which $83.9 million had been paid to the Company prior to the settlement, and $31.3 million on account of the Company’s business interruption claim, of which $24.3 million had been paid to the Company prior to the settlement. As a result, in the third quarter of 2019, the insurer made a net payment of $77.5 million to the Company in full settlement of the Company’s claims related to the hurricane. Pursuant to the terms of the Separation and Distribution Agreement, $0.8 million of this amount was paid to SITE Centers on account of unreimbursed business interruption losses incurred through June 30, 2018. The property damage settlement proceeds are reflected in the Company’s consolidated balance sheet as Restricted Cash and will be disbursed to the Company in accordance with the terms of the Company’s mortgage financing.
14
The Company’s Property Insurance Receivable was $29.4 million at December 31, 2018. The December 31, 2018 balance represented the estimated insurance recoveries related to the net book value of the property damage written off, as well as other expenses, as the Company believed it was probable that the insurance recovery, net of the deductible, would exceed the net book value of the damaged property. Hurricane Property Insurance Income on the Company’s Statement of Operations for the three and nine months ended September 30, 2019 includes $70.5 million and $74.5 million, respectively, resulting from the excess payments made by the insurer over the $78.8 million of the estimated net book value written off. The Company received $104.3 million of the $154.4 million during the nine months ended September 30, 2019, toward its final settled property insurance claim.
For the three and nine months ended September 30, 2019, rental revenues of $0.2 million and $2.9 million, respectively, and for the period from July 1, 2018 to September 30, 2018 and for the period from January 1, 2018, to June 30, 2018, rental revenues of $2.4 million and $6.6 million, respectively, were not recorded because of lost tenant revenue attributable to the hurricane that has been partially defrayed by insurance proceeds. The Company records revenue for covered business interruption in the period it determines it is probable it will be compensated and all the applicable contingencies with the insurance company have been resolved. For all periods presented, the Company recorded insurance proceeds received as Business Interruption Income on the Company’s combined and consolidated statements of operations.
Legal Matters
The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.
Impairment charges were recorded on assets based on the difference between the carrying value of the assets and the estimated fair market value. These impairments primarily were triggered by indicative bids received and changes in market assumptions due to the disposition process.
Items Measured at Fair Value on a Non-Recurring Basis
The valuation of impaired real estate assets and investments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset, as well as the income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties. In general, the Company considers multiple valuation techniques when measuring fair value of real estate. However, in certain circumstances, a single valuation technique may be appropriate.
For operational real estate assets, the significant assumptions included the capitalization rate used in the income capitalization valuation, as well as the projected property net operating income. These valuation adjustments were calculated based on market conditions and assumptions made by SITE Centers or the Company at the time the valuation adjustments and impairments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change.
The following table presents information about the Company’s impairment charges on nonfinancial assets that were measured on a fair-value basis for the nine months ended September 30, 2019. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Total Impairment Charges
|
|
Long-lived assets held and used
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73.1
|
|
|
$
|
73.1
|
|
|
$
|
33.0
|
|
15
The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair Value at September 30, 2019
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range
|
Impairment of assets
|
|
$
|
47.1
|
|
|
Income Capitalization
Approach
|
|
Market Capitalization
Rate
|
|
8.1%-9.1%
|
|
|
|
26.0
|
|
|
Discounted
Cash Flow
|
|
Discount Rate
|
|
9.5%-18.1%
|
|
|
|
|
|
|
|
|
Terminal Capitalization Rate
|
|
7.0%-10.0%
|
11.
|
Transactions with SITE Centers
|
The following table presents fees and other amounts charged by SITE Centers (in thousands):
|
For the Three
|
|
|
For the Period from
|
|
|
Months Ended
|
|
|
July 1, 2018 to
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Management fees
|
$
|
2,676
|
|
|
$
|
3,283
|
|
Asset management fees
|
|
2,428
|
|
|
|
3,269
|
|
Leasing commissions
|
|
366
|
|
|
|
665
|
|
Maintenance services and other
|
|
360
|
|
|
|
406
|
|
Disposition fees
|
|
546
|
|
|
|
1,622
|
|
Credit facility guaranty and debt refinancing fees
|
|
60
|
|
|
|
60
|
|
Legal fees
|
|
221
|
|
|
|
266
|
|
|
$
|
6,657
|
|
|
$
|
9,571
|
|
|
For the Nine
|
|
|
For the Period from
|
|
|
For the Period from
|
|
|
Months Ended
|
|
|
July 1, 2018 to
|
|
|
January 1, 2018 to
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
June 30, 2018
|
|
|
The Company
|
|
|
RVI Predecessor
|
|
Management fees(A)
|
$
|
8,671
|
|
|
$
|
3,283
|
|
|
$
|
6,819
|
|
Asset management fees (B)
|
|
8,068
|
|
|
|
3,269
|
|
|
|
—
|
|
Leasing commissions(C)
|
|
1,811
|
|
|
|
665
|
|
|
|
982
|
|
Insurance premiums(D)
|
|
—
|
|
|
|
—
|
|
|
|
2,084
|
|
Maintenance services and other(E)
|
|
1,115
|
|
|
|
406
|
|
|
|
1,085
|
|
Disposition fees(F)
|
|
3,160
|
|
|
|
1,622
|
|
|
|
1,058
|
|
Credit facility guaranty and debt refinancing fees(G)
|
|
1,860
|
|
|
|
60
|
|
|
|
—
|
|
Legal fees(H)
|
|
578
|
|
|
|
266
|
|
|
|
—
|
|
|
$
|
25,263
|
|
|
$
|
9,571
|
|
|
$
|
12,028
|
|
(A)
|
Beginning on July 1, 2018, property management fees are generally calculated based on a percentage of tenant cash receipts collected during the three months immediately preceding the most recent June 30 or December 31. Prior to the spin-off, calculated pursuant to the respective management agreements.
|
(B)
|
Asset management fees are generally calculated at 0.5% per annum of the gross asset value as determined on the immediately preceding June 30 or December 31.
|
(C)
|
Leasing commissions represent fees charged for the execution of the leasing of retail space. Leasing commissions are included within Real Estate Assets on the consolidated balance sheets.
|
(D)
|
For periods prior to July 1, 2018, SITE Centers contracted with authorized insurance companies for the liability and property insurance coverage for the continental U.S. properties. The Company remitted to SITE Centers insurance premiums associated with these insurance policies. Insurance premiums are included within Operating and Maintenance on the combined statements of operations.
|
(E)
|
Maintenance services represent amounts charged to the properties for the allocation of compensation and other benefits of personnel directly attributable to the management of the properties. Amounts are recorded in Operating and Maintenance Expense on the combined and consolidated statements of operations.
|
16
(F)
|
Disposition fees equal 1% of the gross sales price of each asset sold. Disposition fees are included within Gain on Disposition of Real Estate on the combined and consolidated statements of operations.
|
(G)
|
The Company paid a debt financing fee equal to 0.20% of the aggregate principal amount of the mortgage refinancing closed in March 2019 (Note 7). For periods after July 1, 2018, the credit facility guaranty fee equals 0.20% per annum of the aggregate commitments under the Revolving Credit Agreement plus an amount equal to 5.0% per annum times the average aggregate daily principal amount of loans plus the aggregate stated average daily amount of letters of credit outstanding under the Revolving Credit Agreement (Note 6). Credit facility guaranty fees are included within Interest Expense on the consolidated statements of operations.
|
(H)
|
Legal fees charged for collection activity, negotiating and reviewing tenant leases and contracts for asset dispositions.
|
As of September 30, 2019 and December 31, 2018, the Company had amounts payable to SITE Centers of $16.7 million and $34.0 million, respectively. The amounts are included as Payables to SITE Centers on the consolidated balance sheets and primarily represent amounts owed to SITE Centers for restricted cash escrows held by the mortgage lender at the time of the Company’s separation from SITE Centers.
The following table provides the net income and the number of common shares used in the computations of “basic” earnings per share (“EPS”), which utilizes the weighted-average number of common shares outstanding, and “diluted” EPS (in thousands, except per share amounts):
|
For the Three
|
|
|
For the Period from
|
|
|
For the Nine
|
|
|
Months Ended
|
|
|
July 1, 2018 to
|
|
|
Months Ended
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
September 30, 2019
|
|
Numerators – Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders after
allocation to participating securities
|
$
|
72,268
|
|
|
$
|
5,953
|
|
|
$
|
85,875
|
|
Denominators – Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted—Average shares outstanding
|
|
19,052
|
|
|
|
18,464
|
|
|
|
18,993
|
|
Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
3.79
|
|
|
$
|
0.32
|
|
|
$
|
4.52
|
|
Dividends
In December 2018, the Company declared a 2018 dividend on its common shares of $1.30 per share that was paid in a combination of cash and the Company’s common shares, subject to a Puerto Rico withholding tax of 10%. The aggregate amount of cash paid to shareholders was limited to 20% of the total dividend paid. In connection with the 2018 dividend, in January 2019, the Company issued 578,238 common shares, based on the volume-weighted average trading price of $29.8547 per share, and paid $6.7 million in cash, which included the Puerto Rico withholding tax.
The Company has two reportable operating segments: continental U.S. and Puerto Rico. The table below presents information about the Company’s reportable operating segments (in thousands):
|
For the Three Months Ended September 30, 2019
|
|
|
Continental U.S.
|
|
|
Puerto Rico
|
|
|
Other
|
|
|
Total
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenue and other property revenue
|
$
|
29,857
|
|
|
$
|
31,003
|
|
|
|
|
|
|
$
|
60,860
|
|
Rental operation expenses
|
|
(8,801
|
)
|
|
|
(7,918
|
)
|
|
|
|
|
|
|
(16,719
|
)
|
Net operating income
|
|
21,056
|
|
|
|
23,085
|
|
|
|
|
|
|
|
44,141
|
|
Property and asset management fees
|
|
(2,650
|
)
|
|
|
(2,454
|
)
|
|
|
|
|
|
|
(5,104
|
)
|
Impairment charges
|
|
(15,310
|
)
|
|
|
(4,480
|
)
|
|
|
|
|
|
|
(19,790
|
)
|
Hurricane property insurance income (loss), net
|
|
|
|
|
|
72,602
|
|
|
|
|
|
|
|
72,602
|
|
Depreciation and amortization
|
|
(10,282
|
)
|
|
|
(7,394
|
)
|
|
|
|
|
|
|
(17,676
|
)
|
Unallocated expenses(A)
|
|
|
|
|
|
|
|
|
$
|
(12,460
|
)
|
|
|
(12,460
|
)
|
Gain on disposition of real estate, net
|
|
10,483
|
|
|
|
|
|
|
|
|
|
|
|
10,483
|
|
Income before tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,196
|
|
17
|
For the Period from July 1, 2018 to September 30, 2018
|
|
|
Continental U.S.
|
|
|
Puerto Rico
|
|
|
Other
|
|
|
Total
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenue and other property revenue
|
$
|
44,692
|
|
|
$
|
24,963
|
|
|
|
|
|
|
$
|
69,655
|
|
Rental operation expenses
|
|
(12,961
|
)
|
|
|
(6,477
|
)
|
|
|
|
|
|
|
(19,438
|
)
|
Net operating income
|
|
31,731
|
|
|
|
18,486
|
|
|
|
|
|
|
|
50,217
|
|
Property and asset management fees
|
|
(3,933
|
)
|
|
|
(2,619
|
)
|
|
|
|
|
|
|
(6,552
|
)
|
Impairment charges
|
|
(4,420
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,420
|
)
|
Hurricane property insurance income (loss), net
|
|
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
(155
|
)
|
Depreciation and amortization
|
|
(16,118
|
)
|
|
|
(6,020
|
)
|
|
|
|
|
|
|
(22,138
|
)
|
Unallocated expenses(A)
|
|
|
|
|
|
|
|
|
$
|
(20,506
|
)
|
|
|
(20,506
|
)
|
Gain on disposition of real estate, net
|
|
9,835
|
|
|
|
|
|
|
|
|
|
|
|
9,835
|
|
Income before tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets
|
$
|
1,563,394
|
|
|
$
|
1,011,223
|
|
|
|
|
|
|
$
|
2,574,617
|
|
|
For the Nine Months Ended September 30, 2019
|
|
|
Continental U.S.
|
|
|
Puerto Rico
|
|
|
Other
|
|
|
Total
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenue and other property revenue
|
$
|
101,920
|
|
|
$
|
81,436
|
|
|
|
|
|
|
$
|
183,356
|
|
Rental operation expenses
|
|
(29,768
|
)
|
|
|
(22,533
|
)
|
|
|
|
|
|
|
(52,301
|
)
|
Net operating income
|
|
72,152
|
|
|
|
58,903
|
|
|
|
|
|
|
|
131,055
|
|
Property and asset management fees
|
|
(9,100
|
)
|
|
|
(7,639
|
)
|
|
|
|
|
|
|
(16,739
|
)
|
Impairment charges
|
|
(28,510
|
)
|
|
|
(4,480
|
)
|
|
|
|
|
|
|
(32,990
|
)
|
Hurricane property insurance income (loss), net
|
|
|
|
|
|
76,233
|
|
|
|
|
|
|
|
76,233
|
|
Depreciation and amortization
|
|
(34,676
|
)
|
|
|
(20,733
|
)
|
|
|
|
|
|
|
(55,409
|
)
|
Unallocated expenses(A)
|
|
|
|
|
|
|
|
|
$
|
(57,500
|
)
|
|
|
(57,500
|
)
|
Gain on disposition of real estate, net
|
|
41,648
|
|
|
|
|
|
|
|
|
|
|
|
41,648
|
|
Income before tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross real estate assets
|
$
|
1,049,465
|
|
|
$
|
1,076,061
|
|
|
|
|
|
|
$
|
2,125,526
|
|
|
For the Period from January 1, 2018 to June 30, 2018
|
|
|
Continental U.S.
|
|
|
Puerto Rico
|
|
|
Other
|
|
|
Total
|
|
RVI Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenue and other property revenue
|
$
|
103,264
|
|
|
$
|
51,970
|
|
|
|
|
|
|
$
|
155,234
|
|
Rental operation expenses
|
|
(30,228
|
)
|
|
|
(13,951
|
)
|
|
|
|
|
|
|
(44,179
|
)
|
Net operating income
|
|
73,036
|
|
|
|
38,019
|
|
|
|
|
|
|
|
111,055
|
|
Property and asset management fees
|
|
(3,589
|
)
|
|
|
(3,230
|
)
|
|
|
|
|
|
|
(6,819
|
)
|
Impairment charges
|
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
(48,680
|
)
|
Hurricane property insurance income (loss), net
|
|
|
|
|
|
(868
|
)
|
|
|
|
|
|
|
(868
|
)
|
Depreciation and amortization
|
|
(37,339
|
)
|
|
|
(12,805
|
)
|
|
|
|
|
|
|
(50,144
|
)
|
Unallocated expenses(A)
|
|
|
|
|
|
|
|
|
$
|
(187,586
|
)
|
|
|
(187,586
|
)
|
Gain on disposition of real estate, net
|
|
13,096
|
|
|
|
|
|
|
|
|
|
|
|
13,096
|
|
Loss before tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(169,946
|
)
|
(A)
|
Unallocated expenses consist of General and Administrative Expenses, Interest Expense and Other Expenses as listed in the Company’s combined and consolidated statements of operations.
|
18