Wednesday, July 21, 2021

Retail Value Inc: PR Portfolio Sale, Liquidation De-Risked

Retail Value Inc (RVI) is a retail strip center REIT that was a 2018 spin of SITE Centers (SITC, fka DDR) and has always been on my watchlist.  There were a few of these "good REIT/bad REIT" spins during that era, this is the "bad REIT" as it contained the Puerto Rican assets (along with some of their lower quality continental U.S. properties) that were largely offline due to Hurricane Marie.  From the beginning, RVI was designed to liquidate the portfolio and return capital to shareholders, over the last several years they have made slow progress on this goal by selling the continental U.S. properties piecemeal.  The question in my mind was always what value to put on the Puerto Rico portfolio?  That question has been answered which substantially de-risks the situation, last week, the company announced a bulk portfolio sale of their Puerto Rican assets for $550MM, which post-closing would leave 8 continental U.S. properties and a pile of cash.  By triangulating a few numbers, I have the remaining portfolio trading at approximately a 13% cap rate, which even for secondary/tertiary markets, seems too cheap.

Here's my back of the envelope math, feel free to point out mistakes:

Now there could be some frictional costs that I'm completely omitting, but I'm also not including any ongoing cash flow from the remaining properties, make your own assumptions there.  But here are some of my assumptions:

  • Much of the restricted cash is Hurricane Marie insurance proceeds and reserves for their CMBS financing, the insurance proceeds were to be used to rehab the properties from hurricane damage, in their Q1 10-Q they mention only needing $6MM of restricted cash to complete restoration work.  Additionally, the PR asset sale 8-K mentions that the deal doesn't include restricted cash and the CMBS will be paid off following the closing, I'm assuming the restricted cash becomes unrestricted at that point, but double check my work.
  • In the PR asset sale 8-K, the company mentions their current CMBS mortgage balance is $214.5MM, in order to get there and based on the asset sales that have closed in Q2, it appears they've spent another $20MM in cash towards the CMBS above the asset sales.
  • RVI is externally managed by SITC, the external management agreement is pretty reasonable towards RVI, there's no termination fee or incentive fee, but there is a little incentive fee built into the preferred stock that SITC is holding.  You'll see the preferred stock on the balance sheet at $190MM, but if the total disposition proceeds are above $2B, its $200MM.  I have the current total disposition at around $1.66B, and with the additional sale of the 8 remaining properties, they'll likely cross over that threshold.
  • RVI provides NOI guidance in their quarterly supplemental, it excludes assets sold to-date, they estimate $35-40MM in NOI for the continental U.S. properties.

Doing a very basic scenario analysis for what the remaining properties are worth yields anything from $26.50-$33.90/share in my estimates, versus a $25/share price today.  

Just to smell check these estimates, based on the delta between the 2021 NOI guidance given in the Q4 and Q1 supplemental, the three continental U.S. properties RVI has sold this year for a combined value of $34.4MM generate about $3MM in NOI for a 8.7% cap rate.  The Puerto Rico portfolio is being sold at an approximate 9% cap rate.  Another way to look at it, on a square foot basis, RVI will have 3.779 million square feet remaining, in 2020 they sold properties for $107/sqft, applying a similar number to the remaining portfolio would yield a value equivalent to a 9.3% cap rate.  So somewhere in that 9% range seems reasonable now that we're recovering from covid.

In summary, assuming the PR deal closes (maybe that's the biggest risk, we are in hurricane season), RVI will have no debt, approximately half their market cap in cash and only 8 properties left to sell.  I could see this taking a similar path to the MIC liquidation discussed recently, where they have back-to-back portfolio sales (although they'll probably wait until after the PR deal closes, supposed to be by end of Q3) to clean up the liquidation quickly.  Similar to MIC, not a home run, but with the situation largely de-risked, a potential ~20% upside seems pretty attractive.

Disclosure:  I own shares of RVI

9 comments:

  1. So they have made (/will make) $2 billion in aggregate disposals to kick the prefs from $190 to 200, right? I could figure this out myself too...

    Is cash +$20 for the Senorial disposal? A nice little kicker, if so.

    This stock was a failure by me. Frequently (as recently as June!) thought it was too cheap but never had comfort with the timeline so never bought. Prospect of a large dividend imminently changes that. Thanks for this.

    ReplyDelete
    Replies
    1. I think I included the $20.4MM from Senorial, from the Q1 press release:

      In April 2021, net proceeds from the sale of Marketplace of Brown Deer along with unrestricted cash on hand aggregating $23.6 million were used to repay the mortgage loan. The majority of the net proceeds from the other three asset sales are expected to repay $24.9 million of the mortgage loan in May 2021.

      Brown Deer sold for $10.25MM + $23.6MM cash + $24.9MM in the other three + $20MM from Senorial, that's about the change in debt in Q2.

      Delete
    2. Thanks. And I could/should have answered my own question by looking at the breakdown again!

      Delete
    3. I could have presented it better, wasn't very precise, was trying to translate some chicken scratch notes into a post.

      Delete
  2. Doesn't look like the analysis includes any impact for taxes on the PR portfolio sale gain. Being overly conservative and assuming a zero basis and taxing $550M at 20% shaves off $110M in the net cash amount, therefore lowering the implied cap rate to around 9.6%. I have not looked into what the tax implications are or the appropriate rate, but thought I would just share my thoughts.

    ReplyDelete
    Replies
    1. The basis is at least $600MM, that's what the book value of the PR portfolio was on 12/31 per the 10-K. I also believe that since its a REIT, doesn't pay corporate taxes, but that would be reflected in a divided out of the taxable income which I'm guessing they will do once it is closed. But either way, shouldn't be material, with the caveat that I don't know local PR taxes, could be some leakage there.

      Delete
    2. That's very interesting! I'll have to dig in now. Appreciate the writeup.

      Delete
  3. Thanks for the idea... been following them for a while... I will do my own work here, but in case you know, I had always assumed they were saving the worst for last. It sounds like you think the quality of the remaining assets as similar to the US disposals so far, but could they be the worst of the lot? Thanks again

    ReplyDelete
    Replies
    1. I'm using just the YTD sales, I would assume those would be of similar quality to the remaining properties? But maybe not. Even if they're lower quality than the early sales, still seems pretty cheap at the implied valuation.

      Delete