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