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") (OTC Pink Market: RVIC) 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, 2021, as well as other publicly available information. On April 7,
2022, the Company de-listed its common shares from the New York Stock Exchange
(the "NYSE") in anticipation of the Company's sale of Crossroads Center. See
further discussion below "Liquidity, Capital Resources and Financing Activities
- Winding up and Dissolution."
The Company was formed in December 2017 as a wholly-owned subsidiary of SITE
Centers Corp. ("SITE Centers" or the "Manager"). On July 1, 2018, the date of
the Company's spin-off from SITE Centers into a separate publicly traded
company, the Company owned 48 properties and had two reportable segments:
continental U.S. and Puerto Rico. As a result of the sale of the Company's
remaining Puerto Rico assets in August 2021, the Company ceased reporting
financial results for the Puerto Rico segment and instead reports the financial
results of the Puerto Rico segment as discontinued operations for all periods
presented. At March 31, 2022, RVI's only remaining real estate investment was
Crossroads Center in Gulfport, Mississippi comprising 0.6 million square feet of
Company-owned gross leasable area ("GLA") which was 92.1% occupied. This asset
was sold on April 12, 2022.
EXECUTIVE SUMMARY
The Company remains focused on maximizing the collection of its accounts
receivable, the proceeds of which are expected to be used for wind-up expenses
and distributions to the Company's common shareholders. See discussion below
under "Liquidity, Capital Resources and Financing Activities - Winding up and
Dissolution."
Transaction Update
In April 2022, the Company sold its remaining real estate investment, Crossroads
Center in Gulfport, Mississippi, for a sale price of $38.5 million. Net proceeds
from the transaction were approximately $37.2 million.
Manager
The Company is party to an external management agreement (the "New Management
Agreement") with SITE Centers, which governs the fees, terms and conditions
pursuant to which SITE Centers serves as the Company's manager. The Company does
not have any employees.
Effective January 1, 2022, pursuant to the terms of the New Management
Agreement, the Company will pay the Manager an asset management fee for services
rendered in connection with corporate management of the Company in an aggregate
amount of (i) $500,000 for calendar year 2022, (ii) $300,000 per annum
commencing on January 1, 2023 until the end of the calendar quarter in which the
Company's shares are deregistered under the Securities Exchange Act of 1934 (the
"Exchange Act") and/or the Company's reporting obligations under the Exchange
Act are suspended or terminated, and (iii) $100,000 per annum, commencing from
the calendar quarter immediately following the calendar quarter in which the
Company's shares are deregistered under the Exchange Act and/or the Company's
reporting obligations under the Exchange Act are suspended or terminated until
the expiry of the term of the New Management Agreement (i.e., five years from
the date that the Company files a certificate of dissolution with the Secretary
of State of the State of Ohio) or the earlier termination thereof. In addition,
pursuant to the New Management Agreement, the Company paid the Manager a
property management fee of $22,000 per month through April 2022 on account of
Crossroads Center. In April 2022, in accordance with the terms of the New
Management Agreement, the Company paid SITE a $385,000 disposition fee for the
sale of Crossroads Center and a $500,000 incentive payment in recognition of the
successful completion of the Company's disposition program (including the sale
of Crossroads Center).
The New Management Agreement also obligates the Company to pay or reimburse the
Manager for all commercially reasonable third-party costs and expenses incurred
in the performance of its duties under the New Management Agreement, including,
but not limited to, all fees and expenses paid to outside advisors (legal and
accounting), consultants, architects, engineers and other professionals
reasonably required for the performance of the Manager's duties.
RESULTS OF OPERATIONS
For the three months ended March 31, 2022, the Company had one operating
property, Crossroads Center, which was sold in April 2022. The operations of
this property account for substantially all of the revenues and operating
expenses reported for the three months ended March 31, 2022. The change in
income as compared to the three months ended March 31, 2021 is a result of the
sale of
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real estate assets in 2021. The general and administrative expenses primarily
represent legal, audit, tax and compliance services and director compensation.
The decrease in interest expense primarily was due to the repayment of the
Company's mortgage loan in August 2021. Debt extinguishment costs (primarily
related to the non-cash write-off of unamortized deferred financing costs) were
incurred in connection with the prepayment of the mortgage loan with asset sale
proceeds. Additionally, included in discontinued operations for the three months
ended March 31, 2022, is 2021 overage rent (for the Company's ownership period
of the asset) from a major tenant in Puerto Rico that was not required to report
the sales information until the first quarter of 2022.
LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES
The Company maintains and administers a reserve fund to satisfy projected
expenses and known and unknown claims which might arise during the anticipated
winding up and dissolution process. The Company's capital sources include
unrestricted cash on the balance sheet related to retained asset sale proceeds
and future cash flow from collection of accounts receivable. See further
discussion below "Liquidity, Capital Resources and Financing Activities -
Winding up and Dissolution." The Company's liquidity is reflected as follows (in
millions):
Unrestricted cash available at March 31, 2022 $ 44.8
April 2022: net proceeds from sale of Crossroads Center 37.2
April 2022: declaration of RVI common share dividend ($2.13 per
share)
(45.0 )
Pro forma cash available at March 31, 2022 37.0
Less: Potential liabilities under purchase and sale agreements
(disclosed below)
(21.7 )
Less: Estimate of wind-up costs (mid-point of range disclosed
below)
(10.0 )
Pro forma net cash available at March 31, 2022 $ 5.3
Common Share Dividends
In December 2021, the Company declared a cash dividend of $3.27 per common share
that was paid in January 2022 funded primarily with asset sale proceeds. In
April 2022, the Company declared a cash dividend of $2.13 per common share that
is payable on May 10, 2022, which will be funded primarily with proceeds from
the sale of the last property, Crossroads Center.
Dividend Distributions
The Company currently operates in a manner that allows it to qualify as a REIT
and generally not be subject to U.S. federal income and excise tax. 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. 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 its expenses (including management fees and other obligations owing to
SITE Centers) and projected expenses and contingencies relating to the Company's
anticipated wind-up. The Company may elect to surrender its REIT status in
connection with the anticipated wind-up of its operations in the event the
Company determines that the anticipated benefits to the Company and its
shareholders of maintaining REIT qualification do not exceed the related
compliance costs or if the nature of the Company's remaining operations makes
compliance with REIT requirements impracticable.
Winding Up and Dissolution
There are many factors that may affect the timing and amount of additional
distributions to shareholders, including, among other things, the Company's
ability to collect amounts currently owed to it by third parties and the amount
of current cash balances and sale proceeds utilized to satisfy projected
expenses and known and unknown claims which might arise during the anticipated
winding up and dissolution process.
In connection with the sale of Crossroads Center, the Company's last property,
on April 12, 2022, the Company intends to adopt liquidation accounting effective
May 1, 2022, which is the beginning of the fiscal month after the sale date.
The liquidation basis of accounting is appropriate when the liquidation of a
company appears imminent, and the net realizable value of its assets is
reasonably determinable. Under this basis of accounting, assets and liabilities
are stated at their net realizable value (or liquidation value) and estimated
costs through the liquidation date are accrued to the extent reasonably
determinable.
Following the Company's receipt of preclearance from the Ohio Department of
Taxation (expected in the summer of 2022), the Company expects to file a
certificate of dissolution with the Secretary of State of the State of
Ohio. Pursuant to Ohio law, the Company would continue to exist for a period of
five years following the filing of the certificate of dissolution for the
purpose of
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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 established 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 wind-up period subsequent
to the filing of the certificate of dissolution. It is likely that the Company
will not make a final distribution of reserve funds until such expenses and
contingent claims are paid, resolved or fail to materialize, which could be one
or more years following the date on which the certificate of dissolution is
filed. It is also likely that the Company will 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.
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. Potential liability for most
representations included in the sale agreements governing the Puerto Rico
portfolio disposition and the October 2021 five-property continental U.S.
portfolio disposition expires on May 24, 2022 and June 28, 2022, respectively,
and is capped at $15 million and $4 million, respectively. As of April 22, 2022,
potential liability for breaches of representations included in the sale
agreements governing other recent asset sales is approximately $2.7 million in
the aggregate for a total of $21.7 million when combined with the aforementioned
$19 million. The Company will also need to reserve amounts to pay, among other
items, fees to SITE Centers under the New Management Agreement, professional
fees (accountants and law firms), insurance premiums and potential deductibles
(including with respect to a tail insurance policy for directors and officers),
vendor expenses and costs to resolve and streamline the Company's subsidiaries
and corporate structure. As of March 31, 2022, the Company estimates that such
wind-up costs (excluding the payment of any claims for breaches of
representations under sale agreements) could approximate between $7 million and
$13 million. See "Risk Factors-Risks Related to the Company's Strategy-The
Company Expects to 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, 2021.
On April 7, 2022, the Company de-listed its common shares from the NYSE in
anticipation of the Company's sale of Crossroads Center. As a result,
shareholders may have difficulty trading their common shares and the Company's
Board of Directors is no longer required to be comprised of a majority of
independent directors. 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, or if the Company's Common Shares are Delisted from the NYSE,
Shareholders' 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, 2021.
Through any winding up and dissolution, the Company will be required to continue
to comply with the applicable reporting requirements of the Exchange Act, even
if compliance with these reporting requirements is economically burdensome. In
order to curtail expenses, the Company eventually expects to seek relief from
the Securities and Exchange Commission from the reporting requirements under the
Exchange Act. If such relief is granted, shareholders will have access to
substantially limited public information about the Company. The Company will
continue to incur professional fees prior to and in connection with such
deregistration processes, which will also affect the amounts available for
distribution to shareholders in connection with the winding up of the Company's
business and affairs.
Dispositions
In April 2022, the Company sold Crossroads Center, in Gulfport, Mississippi, for
$38.5 million in cash resulting in net proceeds of approximately $37.2 million.
Cash Flow Activity
The Company's cash flow activities are summarized as follows (in thousands):
Three Months
Ended March 31,
2022 2021
Cash flow provided by operating activities $ 3,228 $ 22,451
Cash flow used for investing activities (771 ) (3,317 )
Cash flow used for financing activities (69,053 ) (55,624 )
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The Company's cash flow compared to the prior comparable period are described as
follows:
Operating Activities: Cash provided by operating activities decreased $19.2
million primarily due to the following:
• Decrease in operating income due to asset sales and
• Reduction of interest payments.
Investing Activities: Cash used for investing activities decreased $2.5 million
primarily due to the following:
• Decrease in payments for real estate improvements of $2.5 million.
Financing Activities: Cash used for financing activities increased by $13.4
million primarily due to the following:
• Increase in dividends paid of $64.7 million and
• Decrease in repayment of mortgage debt of $51.2 million.
CAPITALIZATION
At March 31, 2022, the Company's capitalization consisted of $64.6 million of
market equity (market equity is defined as common shares outstanding multiplied
by $3.06, the closing price of the Company's common shares on the NYSE at March
31, 2022). In April 2022, the Board of Directors of the Company declared a
dividend on the Company's common shares in the aggregate amount of $45.0 million
($2.13 per common share) payable on May 10, 2022.
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 Exchange Act, both as
amended, with respect to the Company's expectations for future
periods. Forward-looking statements include, without limitation, statements
related to acquisitions (including any related pro forma financial information)
and other business development activities, future capital expenditures,
financing sources and availability and the effects of environmental and other
regulations. Although the Company believes that the expectations reflected in
these forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be achieved. For this purpose, any
statements contained herein that are not statements of historical fact should be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "will," "believes," "anticipates," "plans," "expects," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Readers should exercise caution in interpreting and relying on
forward-looking statements because such statements involve known and unknown
risks, uncertainties and other factors that are, in some cases, beyond the
Company's control and that could cause actual results to differ materially from
those expressed or implied in the forward-looking statements and that could
materially affect the Company's actual results, performance or achievements. For
additional factors that could cause the results of the Company to differ
materially from those indicated in the forward-looking statements, see Item 1A.
Risk Factors in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021.
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 occurrence and outcome of litigation, including litigation with tenants
and purchasers of its properties, may adversely affect amounts available
for distribution to shareholders;
• The Company may be unable to collect amounts owed to it by third parties;
• The Company is subject to potential environmental liabilities;
• Changes in accounting or other standards may adversely affect the Company's
business;
• The Company's Board of Directors, which regularly reviews the Company's
business strategy and objectives, may change its strategic plan;
• A change in the Company's relationship with SITE Centers and SITE Centers'
ability to retain qualified personnel and adequately manage the Company;
• Potential conflicts of interest with SITE Centers and the Company's ability
to replace SITE Centers as manager (and the fees to be paid to any
replacement manager) in the event the New Management Agreement is
terminated and
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• The Company and its vendors, including SITE Centers, could sustain a
disruption, failure or breach of their respective networks and systems,
including as a result of cyber-attacks, which could disrupt the Company's
business operations, compromise the confidentiality of sensitive
information and result in fines and penalties.
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