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

43 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.

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    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.

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

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

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  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.

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    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.

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

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  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

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    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.

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  4. This one looks like a good set-up. Q2 2021 results solid and they bumped the US NOI range to $38m - $41m. Highlighted in the release that increase in ABR PSF and occupancy partially due to selling properties with below average metrics (supporting that what they own now is not the worst of the bunch) and part due to leasing. Most important property is Wrangleboro in Mays Landing, NJ, which maintained occupancy and saw a slight increase in ABR PSF. Two other properties in MI and MN had good lease up in the quarter (from 82% to 93% and from 91% to 97% occupancy respectively).

    My math pretty much the same as yours, ~14% implied cap rate on the midpoint of their NOI range pro forma for the Puerto Rico sale ($550m less 5% sale costs, 1 point of which is SITE's disposition fee), repayment of CMBS and redemption of preferred.

    Added language around wind-up in the 10-Q - lay out 2% - 3% reserve for dissolution costs on the remaining asset sales. I estimate NAV of $630 or ~$30 a share with US properties worth ~$430m (~9% cap), $230m of cash less c. $30m of other assets / liabilites along with 3% of the remaining property value as wind-up costs. I am forever scarred by underestimating the costs and negative surprises winding up a REIT after the NYRT saga years back!

    At $24.50 per share today that's about a 18% discount to NAV with about a third of NAV in net cash. Feels like a pretty decent risk reward!

    Anyone getting to numbers that are much different? Would love to hear what I am missing. In the meantime, time to bookmark https://www.nhc.noaa.gov/gtwo.php

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    1. Ha, yes, please no major hurricanes between now and close. And thank for the thoughtful comment and checking my work, I did notice the bumped up NOI range as well which was good to see.

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  5. When do you think the remaining US assets will be sold?

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    1. Maybe by year end? I don’t have a strong sense of the timing.

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  6. 8K filed disclosing sale of 5 Continental US properties for $264m. Book value of these properties at 12/31/20 is $243.3m. These properties account for about 69% of the June 30/21 ABR rent from the Continental US properties.

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  7. 8k filed today. 5 (3252 m square feet) of 8 (4642 m sq ft) remaining US properties sold for $264m. remaining properties: in MI, MS and TX.

    these account for about 70% of residual noi post PR, or about $26m of NOI (assuming $37.5m post PR NOI).

    comes out to $81 per square foot and 9.8% cap rate. kudos for being pretty spot on MDC!

    according to 8k, there is potential of up to $5.7m reduction in net proceeds to sellers based on leasing contingencies.

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    1. Any reason why you are looking at total gla and not owned gla?

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    2. Teaching myself corporate finance analysis and didn't realize there was a difference. Calculated square footage from properties listed for sale on their website (they list square foot/property, which, looking through their quarterly I now realize is total, not owned). Not finding on google definition of owned vs total. Can you shed some light?

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    3. RVI doesn't own the entire strip center in most circumstances, you'll see it footnoted in their quarterly supplemental which major tenants are unowned by RVI. For example, Target, Home Depot, a few others anchor their strip centers but RVI doesn't own those boxes. So they might get the benefit of the foot traffic, but not the rent.

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    4. Returned to mention that, after digging more into the quarterly, I found the "U", or unowned. As you say, looks like a lot of their anchors own their portion of the strip. Thanks

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  8. Slightly disappointed with this sale, hard to quite tell what the cap rate is, but I triangulated the value against what the CMBS appraisal was pre-covid, if they get a similar rate for the remaining three strip centers, I get like $28. Wasn't what I was hoping for but in the end, won't be terrible either, but a decent low risk IRR.

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  9. My NOI estimate for the sold portfolio is similar to EJL - I estimate $26.6m of NOI or a 10.1% cap rate. I have estimated value for those assets at ~$300m or a 8.9% cap rate so the sale is about 10% under what I had estimated.

    I think the remaining three assets worse on average than they just sold. Particularly Crossroads in Gulfport, which is on a ground lease. Willowbrook looks OK location-wise but onlu 70% leased and major tenant is AMC.

    I have adjusted my previous valuation for the remaining 3 assets down ~10%, which gets to a valuation of $100m at a 11.8% cap rate. I estimate they will have $480m of cash P/F for the PR and US portfolio sales (maybe a bit more with retained CF from both portfolios in Q3) which is ~$22.70 per share. I estimate NAV is $26.25 per share so I plan to hold onto the small position I have to see how it shakes out. I think the last 3 assets will be sold pretty quickly, probably property by property.

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    1. Thanks for the thoughtful comment, that Crossroads in Gulfport also has a Cinemark, so 2 of the remaining 3 strip centers are anchored by a movie theater.

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  10. Assets
    Cash 67
    Restricted 59
    PR 550
    8 US 246 (lower end)
    3 US 105 (my estimate)

    Debt
    Secured 214.5
    Prefs 200

    Net 610.5
    Share Out 2.11m

    Per share: $28.91

    This excludes continued rent collection, including as noted in 10Q, post hoc ability to collect previously deferred rents.

    Also there are a couple items on the b/s that aren't negligible (accts rec and "other assets", currently too tired to figure out what the latter represents). Conservatism I excluded these as well.

    Any idea as to the etiology of my overshoot c/w both of your estimates?

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    1. Had to look up etiology - nice vocab usage - but the delta between my estimate and yours is effectively frictional costs along with the other assets / liabilities on the BS at Q2 2021.

      PR sale - I assume 1% disposal fee to STIC, 4% of other sale costs and $2m of hurricane resoration expense - total of ~$30m or ~$1.40 per share.

      Other net assets / liabilities of negative ~$20m on the BS or ~0.90 per share.

      Then I estimate the remaining portfolio is worth $100m and 2% sale costs (half of which is disposal fee to SITC) and 3% wind-down dissolution reserve and costs which is a ~$10m delta or ~$0.50 per share.

      If frictional costs are less than my (what I hope are) conservative estimates, the outturn could get closer to your estimate. In my experience, however, these costs always end up being fairly significant...

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    2. Makes sense. Thank you for expanding.

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    3. Based on the PR portfolio closing announcement and assuming net proceeds of $539m are before the STIC disposition fee (1% of price), total sale costs more like $20m vs. my $30m estimate, which adds about $0.50 to NAV estimate.

      Thinking through Q3 2021 retained cash flow, a reasonable estimate looks like $15m (Q2 2021 FFO was $20m, less one month of PR NOI at 2021 guidance midpoint of $51.5m for the year) or ~$0.70 per share.

      That would put my liquidation proceeds estimate somewhere around $27.50 per share so ballpark 10% upside from the share price today. Cash per share pro forma for the close of the US portfolio transaction would be ~$24 by my estimates, so that's probably a reasonable estimate of the downside (~3%).

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  11. I realize I'm a month late here, but it seems as if you gents have picked this over pretty well. One thing I'd like to point out: it looks like the mandatory dividend on the preferred stock will be $190m and not $200m. Two dispositions counted in the messages above were prior to 7/1/18 and so aren't part of the calculation. That means gross divestitures of $1,554.5m including PR plus another $264 from the five US assets announced 8/20/21. To hit the $2B target, they will have to receive $182m for the three remaining centers or $157/psf. Since they received only $101/psf for the 5 centers announced 8/20/21, it is hard to believe they will hit $2B gross dispositions. So...that's another $0.47 per share.

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    1. Thanks, I missed that, maybe this is a little less disappointing than I thought.

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  12. I recently discovered your blog and love the information you share. I'm newer to investing and the posts I've read from you have helped my learning process a lot so far.

    Just curious, how did you come up with the implied cap rate of 13.3%? I understand what a cap rate is and where you found the NOI Estimate. While trying to work through your numbers I don't understand how you triangulated the 13.3%. What numbers did you use or what document did you reference to calculate that number? Perhaps its my ignorance but I enjoy learning from your process and want to make sure I'm fully understanding.

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    1. Thanks for the kind words. The one screenshot tries to lay it out, although some comments have pointed out a few adjustments/flaws that I made, but the goal was to get to what the market is valuing the remaining assets at ($281MM in my screenshot) and what the NOI estimate is for those remaining assets. We've since had asset sales, so the math is probably both wrong and now stale.

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    2. Okay I understand now. Appreciate the response!

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  13. Did you guys see the 22 dollar div announcement afterhours on Friday? Also some news on property sales as well. Its on the website.

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  14. Looks like they're selling these 5 US assets for ~$100/SF gross, on the net proceeds its $92/SF net and an 11.4% cap rate. Using those numbers for the last three US properties, I'm seeing about $100 million in assets left, not sure I see that the remaining three should be valued any differently (based on rent roll, tenant exposure, asset quality).

    My rough math, paying off all liabilities, I get to roughly $1.5/share in net cash, but gaining the $22.04/share in common dividends, and $4.9/share in value left on the last 3 properties, roughly $28.50/share, maybe 8% above Friday's close, probably leaving out some liquidation leakage.

    That roughly sum up to your read, MDC?

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    1. Roughly my target price yes, might get interesting once the special dividend goes ex, still haven't quite figured out if I'm going to lean into this one or not. But with the $22.04/share dividend, the IRR is still pretty attractive.

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    2. I think your rough math is about right, I believe that management have indicated that they are going to reserve 3% of sale proceeds for liquidation costs. Not all will necessarily be spent but probably some will.

      I sold the little bit I owned at ~$26.35 - I am concerned around the quality of the last couple of assets - ground leases, cinema anchors, tertiary markets (except for Houston) - there is a good chance they could get a lot less than this recent sale for what they have left.

      Agree with MDC however that the stub might get interesting again ex special dividend as there may be a rush to the exit... But I am happier to have no current exposure but the option to be opportunistic if the price is right.

      Now that I have said all this, I am sure an announcement is coming on the sale of the last couple assets at a great price!

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  15. Thoughts for the stub, trading this morning at $6.32?

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    1. Seems a little rich to me since we don't know the timing for the remaining sales/distributions, wild trading if you were able to sell pre-market at even higher numbers. Maybe RAV will chime in, they have a better sense of the stub than me.

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  16. Have been following for the last several months and really appreciate your work! My day job is running a commercial real estate investment firm, so this thesis especially drew my interest.
    I agreed w/ the original thesis and took the plunge in July and have continued to hold my position. Looking at the remaining stub, had a few thoughts:

    Currently trading at ~$130M market cap / valuation
    Q3 '21 annualized NOI for the remaining 3 assets is ~$10.7M (imperfect, but a rough estimate)
    Equates to an ~8% cap, and ~$115 psf
    Feels quite rich for these 3 assets

    Green Ridge is selling for $23.3M, $108psf

    Backing into the remaining 2 property stub...

    Implied market cap / value of ~$110M, on 940k SF, ~$116psf
    Feels quite rich, given asset quality/location/tenant roster/ground lease of remaining 2 assets
    Hard to back into a cap rate, since we don't know how much NOI Green Ridge is generating
    But lets make a rough assumption it traded at a 10% cap, which would be $2.3M of NOI
    That would leave ~$8.4M of NOI for the remaining 2 assets.
    On a $109M implied market cap, that's a ~7.75% cap. Again, feels rich.

    The last nuance is how much cash they have on their books that could be distributed.

    At end of Q3 they had $461M. They sold the continental portfolio for $264M gross. Lets call it ~$250M net proceeds. That would give them ~$710M cash pre-dividends. They paid ~$655M in total in dividends in October. That would leave ~$55M of cash for wind-up/distribution. Assuming that any TIs/LC's for the remaining 2 properties can be covered by operating cash flow.

    Coming full circle, lets say the remaining properties are closer to 10% caps on estimated remaining NOI of ~$8.4M. ~$84M of value. Tack on $55M of cash, that's ~$140M valuation + cash. Subtract out closing costs and liquidation costs, lets say 10% to be conservative, that's ~$125M net proceeds vs. today's market cap of ~$130-130M. Roughly a wash. You could use an 9% cap, or even an 8% cap, and assume liquidation costs are less, but its not overly material.

    Granted this is a really rough back of the envelope analysis. But I think its directionally correct. In my opinion for there to be materially higher proceeds (say ~$150M within the next 6 months, or ~$160-170M within the next 12 months), 1) the remaining two assets would need sell for a sub-8% cap rate; and/or 2) Green Ridge's NOI is way less than anticipated and it traded at a very low cap rate, meaning the remaining 2 assets have much higher NOI than anticipated; and/or 3) the liquidation/wind-up costs are significantly lower than expected.

    Exited the position today to reallocate to other opportunities. Enjoyed the ride and the nice short-term pop! Great original write-up, thanks again!

    Also would love to hear any thoughts on the above analysis and any holes in it.

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    1. Thanks, I think this is directionally right, the two remaining strip centers also have movie theaters as their primary tenant. Might be some upside left, but I've also sold and reallocated to other ideas.

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    2. With Willowbrook now under contract, NAV of the stub is getting more clear and is continuing to triangulate in on the estimates in these comments.

      Green Ridge and Willowbrook: $60.4m - based on occupancy / ABR @ Q3 I estimate a 9.6% cap on NOI of $5.8m and $100 PSF
      Cash: $47.9m after repaying pref and dividend (from 10-Q)
      Crossroads Center: I est. $39.6m - this is a 12% cap on est. NOI of $4.8m and $72 PSF. Crossroads is ground-leased with 22 years remaining (25 year option) - rent is $205k from Nov 2021 and rises 5% annually. Its decently well-occupied (>90%) but tenant line-up doesn't inspire confidence.
      Wind-down costs: $13m - top end of estimate range provided in 10-Q of $7m - $13m
      Sale costs for assets U/C and Crossroads: $2m - at 2% of value, 100 bps of which is disposal fee to SITC
      Other balance sheet assets / liabilities: $0.4

      $60.4m + $47.9m + $39.6m - $13m - $2m - $0.4m = NAV of ~$132m or ~$6.30 per share. I don't have high confidence in the value of Crossroads given the ground lease + tertiary market + retail anchored by cinema and 2nd tier big box retailers but the other pieces are largely fixed.

      At just under $6 / share today this is a ~5% discount to NAV. If it were to trade down to the $5.70 range, that would start to look like an attractive (but not risk free) spread to the likely liquidation value.

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    3. Thanks RAV, I appreciate your updates on the situation.

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  17. Hi, have you updated your analysis after the sales. Crossroads generates $6.5m of annual rent, but it looks like crossroads the company "owns" it as a lessee until 2033 (renewable at market prices (?) for another 25 years). Not clear what is the expense associated with that lease.

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