Retail Value Inc. (NYSE: RVI)
Written on March 16, 2021
Price at time of writing: $17.30
Disclaimer: This report is not financial advice - please do your own due diligence.
Author's Note: I wrote this memo before noticing that the CEO David Lukes, had sold his remaining stake in RVI for $17.30 on March 16th, 2021. Insider selling is usually a noisy signal, but given the near-term situation of RVI, I view this sale as a clear signal that Lukes is not too excited about RVI’s prospects, even at current prices. Put simply, I do not want to be on the other side of his trade. Regardless, I decided to publish the memo for journaling purposes.
Business Description
Retail Value Inc is a strip-mall REIT in liquidation with over 8 million square feet in gross leasable area. RVI originated as a 2018 spinoff from DDR, now known as SITE centers. RVI currently owns 22 properties: 11 in the Continental US and 11 Puerto Rico, with a roughly equal split in leasable area amongst the two. Since 2018, it has sold 33 properties. While the Puerto Rico properties charge higher rent psf, they have been more difficult to sell as a result of the hurricane and economic risk associated with them.
RVI has little to no corporate overhead - it is instead managed by its parent company SITE, for which RVI pays a management fee. While this would normally be a huge red flag, the terms of the deal are actually shareholder-friendly towards RVI. The bulk of the management fee comes in the form of a revenue cut (3.5% and 5.5% cut of gross revenue of the non-Puerto Rico properties and the Puerto Rico properties, respectively), a management fee (0.5% of gross asset value), and a disposition fee (1% of any change in control transactions). RVI’s total payments towards SITE totaled $26M and $32M in 2020 and 2019, respectively. We are happy with this agreement because the fees go down as the asset base shrinks.
As mentioned earlier, SITE and RVI share the same management, led by CEO David Lukes. Lukes was hired from Equity One (a REIT that was sold to Regency Centers) to proceed with DDR’s liquidation. When Hurricane Maria hit Puerto Rico, however, DDR decided to spin off its ‘bad assets’ to continue with a more orderly liquidation.
RVI’s largest shareholder is German billionaire Alexander Otto, who owns 3,390,305 shares valued at ~$57M. His other major holdings are in other REITS: a $470M stake in PRGE and a $300M stake in SITE. The second largest shareholder is Luxor Capital Group, who invested in the ~30’s range but cut their stake in half in December 2020. RVI’s management owners own roughly 1% of RVI’s assets as a result of the spin-off.
Why the Opportunity Exists (or Existed...)
RVI’s $406 million worth of liabilities consist of $345 million of mortgage debt, and $61 million of payables. It has also issued $190 million worth of preferred shares.
The $1.2 billion asset side of the balance sheet is fairly straightforward as well. It consists of land and buildings worth $971 million net of depreciation, $57 million of cash, $116 million of restricted cash, and $51 million of receivables.
It is worth mentioning that the assets have also suffered from numerous writedowns, including a $115 million impairment charge in 2020.
The equity trades at $17, and given the 21,083,252 shares outstanding, the market cap is ~360 million. Book value is $604 million, which implies a 40% discount to book. Since its inception in 2018, the stock has traded between 0.9-1.1x book value.
The stock has been beaten down for three reasons:
1) COVID-19
2) Secular Shift to E-Commerce
3) Perceived Over-Levered Balance Sheet
1) COVID-19
Strip malls were an obvious victim of COVID-19. Rent collections from 2020, however, are solid and trending upwards. From the 10-K:
“As of March 4, 2021, approximately 98% of the Company’s tenants, based on average base rents, were open for business, up from a low of approximately 34% in early April 2020. The COVID-19 pandemic had no impact on the Company’s collection of rents for the first quarter of 2020, but it had a significant impact on collection of rents for April 2020 through January 31, 2021. The quarterly rent payment rates as of March 4, 2021, represented approximately 81% of second-quarter 2020 rents, 90% of third-quarter 2020 rents, 92% of fourth-quarter 2020 rents and 95% of January 20201 rents.”
2) Secular shift to E-commerce
Again, it is no mystery that e-commerce is taking market share from brick and mortar. RVI’s largest tenants, however, are stable and well-known brands. RVI’s largest tenants as a % of annual base rent are Walmart (5%), Petsmart (3.4%), Bed Bath and Beyond (3%). Moreover, RVI’s malls are 88-90% occupied.
3) Perceived over-levered balance sheet
The company’s debt load is significantly front-loaded, as it owes $65 million in interest and debt expenses in 2021, and $306 million in 2022.
However, the company is guiding towards $84-96M of NOI in 2021, which more than covers the debt expenses for 2021. The company was recently allowed to defer a debt maturity that was due in 2021 due to RVI’s high debt yield, and they have the option of exercise that deferral option again in 2022.
For the reasons listed above, we believe that the stock is materially undervalued at current prices.
Catalyst
As management continues to sell more assets, we expect the stock to rerate and close its discount to book value. In spite of the pandemic, RVI’s management managed to sell 5 malls in 2020, including the sale of their first Puerto Rico asset at a 30% discount to appraisal value. Pre-COVID-19, sales were normally executing at a 10% discount to appraisal value.
Even if management sells its remaining assets at 20% discount to balance sheet cost (which would be worse than during COVID-19), that still leaves 20-25% near-term upside.
Our view is that RVI will be acquired or taken private within the next twelve months if the stock continues to trade at these levels. It would be incredibly accretive for SITE or Alexander Otto to purchase RVI even at a 20-25% premium to today’s price. SITE has a healthy balance sheet and could easily fund the acquisition using debt and/or shares.