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.
(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.
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 commenced reporting
the financial results of the Puerto Rico segment as discontinued operations for
all periods presented. On April 12, 2022, RVI completed the sale of its last
real estate asset, Crossroads Center, and no longer owns an interest in any real
property.
On April 7, 2022, the Company de-listed its common shares from the New York
Stock Exchange (the "NYSE") in anticipation of the sale of the Company's final
real estate asset and the winding up of its business. On June 30, 2022, the
Company filed a certificate of dissolution with the Secretary of State of the
State of Ohio. Pursuant to the Ohio Revised Code, the Company will continue to
exist for a period of five years following the filing of the certificate 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. In connection with the filing of the certificate of
dissolution and in recognition of the substantial completion of the Company's
original strategy, the Company's independent directors resigned from the
Company's Board of Directors on July 1, 2022, and the Board of Directors is now
comprised exclusively of management directors.
EXECUTIVE SUMMARY
The Company remains focused on maximizing the collection of its remaining
accounts receivable, the payment of known and contingent liabilities (including
wind-up expenses) and the distribution of available funds to the Company's
common shareholders. The dissolution and wind-up process and the amount and
timing of additional distributions to shareholders entail risks and
uncertainties. Accordingly, it is not possible to predict the timing or
aggregate amount that ultimately will be distributed to shareholders, and no
assurance can be given that future distributions will equal or exceed the
estimate of net assets in liquidation presented in the Company's Consolidated
Statement of Net Assets. See further discussion below under "Liquidity, Capital
Resources and Financing Activities - Winding up and Dissolution."
Transaction Update
On April 12, 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 $37.4 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 (June 30, 2027) or the
earlier termination thereof. In addition, pursuant to the New Management
Agreement, the Company paid the Manager a property management fee of $88,000 on
account of Crossroads Center, which was sold in April 2022. In April 2022, in
accordance with the terms of the New Management Agreement, the Company paid SITE
Centers a
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$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
Period from May 1, 2022 through September 30, 2022
As a result of the adoption of the liquidation basis accounting as of May 1,
2022, the results of operations for the current-year period are not comparable
to the prior-year period. The decrease in net assets in liquidation for the
period from May 1, 2022 through September 30, 2022 is primarily a result of
distributions to common shareholders of $31.0 million and the payment of
additional expenses associated with the wind-up of the operations partially
offset by payments received that were in excess of estimated receivables or were
not anticipated.
Period from January 1, 2022 through April 30, 2022
For the four months ended April 30, 2022, the Company had one operating
property, Crossroads Center, which was sold in April 2022. The operations of
this property account for a majority of the revenues and operating expenses
reported for the four months ended April 30, 2022. The change in income as
compared to the three and nine months ended September 30, 2021 is a result of
the sale of all of the Company's remaining real estate assets in 2021, except
for Crossroads Center. 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 four months
ended April 30, 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
its sales information until the first quarter of 2022.
LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES
The Company maintains a cash balance to satisfy projected expenses and known and
unknown claims which might arise during the winding-up and dissolution process.
The Company's capital sources include unrestricted cash and future cash flow
from collection of accounts receivable. See further discussion below under
"Liquidity, Capital Resources and Financing Activities - Winding up and
Dissolution." The Company's liquidity is reflected as follows (in millions):
Net assets in liquidation at September 30, 2022 $ 5.6
Less: Potential liability under purchase and sale agreement
(disclosed below)
(0.8 )
Pro forma net assets in liquidation at September 30, 2022 $ 4.8
In addition to the Liability for Estimated Wind-Up Expenses included in the
Consolidated Statement of Net Assets, the Company may be subject to other
expenses such as insurance deductibles and legal costs incurred in connection
with the collection of the remaining accounts receivable or any litigation which
may arise during the winding-up and dissolution process. These costs cannot be
reasonably estimated and thus are not included as a deduction of the Net Assets
in Liquidation at September 30, 2022. There is no assurance that the
distributions will equal or exceed the estimate of net assets in liquidation
presented above.
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
was paid in May 2022 funded primarily with proceeds from the sale of the
Company's last property, Crossroads Center. In June 2022, the Company declared a
cash dividend of $1.16 per common share that was paid in July 2022 and was
funded primarily with collections of accounts receivable and prior reserves for
potential claims by purchasers under property sale agreements that did not
materialize prior to the expiration of their general survival periods ("Survival
Period Reserves"). In September 2022, the Company declared a cash dividend of
$0.31 per common share that was paid on October 26, 2022 and was funded
primarily with the collection of a note receivable, Survival Period Reserves and
other cash on hand. From January 1, 2022, through October 26, 2022, the Company
paid cash dividends totaling $6.87 per common share or $145.1 million in the
aggregate.
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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
liquidity, which will be affected by various factors, including its known
expenses (including management fees and other obligations owing to SITE
Centers), projected expenses and contingency reserves relating to the Company's
wind-up. The Company may elect to surrender its REIT status in connection with
the 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 will affect the timing and amount of any 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 utilized to satisfy projected expenses and known and
unknown claims which might arise during the Company's winding-up and dissolution
process. Accordingly, it is not possible to predict the timing or aggregate
amount that ultimately will be distributed to shareholders, and no assurance can
be given that future distributions will equal or exceed the estimate of net
assets in liquidation presented in the Company's Consolidated Statement of Net
Assets.
In connection with the sale of Crossroads Center, the Company's last property,
on April 12, 2022, the Company adopted liquidation accounting effective May 1,
2022, which was 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.
The Company filed a certificate of dissolution with the Secretary of State of
the State of Ohio on June 30, 2022. Pursuant to Ohio law, the Company will
continue to exist for a period of five years following the filing of the
certificate 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
retained a portion of the proceeds from its final asset sales in order to
establish a reserve fund 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 until all 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 was filed. Subject to uncertainties
inherent in winding up its business, it is also likely that the Company will
make one or more small interim distributions to shareholders during the
five-year dissolution period as specific expenses and contingent claims are
satisfied, resolved or fail to materialize. The Company is unable to provide any
assurances with respect to the amount of any future distributions or the timing
thereof.
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
most 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. As of October 27, 2022, the
survival period for all of the Company's sale agreements had expired, except for
the survival period applicable to the sale of the Company's final property which
is capped at approximately $0.8 million and expires in January 2023. This
potential liability is not included in the Consolidated Statement of Net Assets
(see table above). The Company also maintains cash balances to pay, among other
items, fees to SITE Centers under the New Management Agreement, professional
fees (accountants and law firms) and potential insurance deductibles (including
a $1.5 million deductible applicable to any claims made with respect to a tail
insurance policy for directors and officers, that is not accrued for in the
Consolidated Statement of Net Assets) and vendor expenses. 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.
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On April 7, 2022, the Company de-listed its common shares from the NYSE in
anticipation of the Company's sale of Crossroads Center and the winding up of
its business. 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. On July 1, 2022, the
independent members of the Company's Board of Directors resigned, and the Board
of Directors is now comprised exclusively of management 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 its 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, which may further
impact the trading market for the Company's common shares. 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.
Cash Flow Activity
The Company's cash flow activities are summarized as follows (in thousands):
Four Months Nine Months
Ended April 30, Ended September 30,
2022 2021
Cash flow provided by operating activities $ 3,099 $ 60,556
Cash flow provided by investing activities 36,196 586,262
Cash flow used for financing activities (69,053 ) (358,657 )
The Company's cash flow compared to the prior comparable period are described as
follows:
Operating Activities: Cash provided by operating activities decreased $57.5
million primarily due to the following:
•
Decrease in operating income due to asset sales, partially offset by
•
Reduction of interest payments.
Investing Activities: Cash provided by investing activities decreased $550.1
million primarily due to the following:
•
Decrease in proceeds from disposition of real estate of $559.1 million,
partially offset by
•
Decrease in payments for real estate improvements of $9.0 million.
Financing Activities: Cash used for financing activities decreased by $289.6
million primarily due to the following:
•
Decrease in repayment of mortgage debt and credit facility costs of $354.3
million, partly offset by
•
Increase in dividends paid of $64.7 million.
CAPITALIZATION
At September 30, 2022, the Company's capitalization consisted of $9.7 million of
market equity (market equity is defined as common shares outstanding multiplied
by $0.46, the last reported trading price of the Company's common shares on the
OTC Pink Market at September 30, 2022). In September 2022, the Board of
Directors of the Company declared a dividend on the Company's common shares in
the aggregate amount of $6.5 million ($0.31 per common share), which was paid on
October 26, 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
the wind-up of the Company's operations and the timing or amount of any future
distributions to shareholders. 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
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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 (including
amounts available for distribution to shareholders) 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 former
tenants and purchasers of its properties;
•
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;
•
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
•
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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