Jo
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11690
SITE Centers Corp.
(Exact name of registrant as specified in its charter)
Ohio
34-1723097
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3300 Enterprise Parkway
Beachwood, OH
44122
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (216) 755-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Shares, Par Value $0.10 Per Share
SITC
New York Stock Exchange
Depositary Shares, each representing 1/20 of a share of 6.375% Class A Cumulative Redeemable Preferred Shares without Par Value
SITC PRA
Depositary Shares, each representing 1/20 of a share of 6.5% Class J Cumulative Redeemable Preferred Shares without Par Value
SITC PRJ
Depositary Shares, each representing 1/20 of a share of 6.25% Class K Cumulative Redeemable Preferred Shares without Par Value
SITC PRK
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2019, the registrant had 193,803,971 shares of common stock, $0.10 par value per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED September 30, 2019
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements - Unaudited
Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
2
Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018
3
Consolidated Statements of Operations for the Nine Months Ended September 30, 2019 and 2018
4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018
5
Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018
6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
42
Item 4.
Controls and Procedures
43
PART II. OTHER INFORMATION
Legal Proceedings
44
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
45
SIGNATURES
46
1
CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except share amounts)
September 30, 2019
December 31, 2018
Assets
Land
$
857,782
873,548
Buildings
3,209,229
3,251,030
Fixtures and tenant improvements
466,394
448,371
4,533,405
4,572,949
Less: Accumulated depreciation
(1,255,110
)
(1,172,357
3,278,295
3,400,592
Construction in progress and land
76,525
54,917
Total real estate assets, net
3,354,820
3,455,509
Investments in and advances to joint ventures, net
330,879
329,623
Investment in and advances to affiliate
206,668
223,985
Cash and cash equivalents
23,727
11,087
Restricted cash
2,296
2,563
Accounts receivable
60,655
67,335
Other assets, net
120,816
116,229
4,099,861
4,206,331
Liabilities and Equity
Unsecured indebtedness:
Senior notes, net
1,647,474
1,646,007
Term loan, net
99,417
49,655
Revolving credit facilities
—
100,000
1,746,891
1,795,662
Mortgage indebtedness, net
86,392
88,743
Total indebtedness
1,833,283
1,884,405
Accounts payable and other liabilities
214,430
203,662
Dividends payable
44,643
45,262
Total liabilities
2,092,356
2,133,329
Commitments and contingencies
SITE Centers Equity
Class A—6.375% cumulative redeemable preferred shares, without par value, $500 liquidation value;
750,000 shares authorized; 350,000 shares issued and outstanding at September 30, 2019 and
175,000
Class J—6.5% cumulative redeemable preferred shares, without par value, $500 liquidation value;
750,000 shares authorized; 400,000 shares issued and outstanding at September 30, 2019 and
200,000
Class K—6.25% cumulative redeemable preferred shares, without par value, $500 liquidation value;
750,000 shares authorized; 300,000 shares issued and outstanding at September 30, 2019 and
150,000
Common shares, with par value, $0.10 stated value; 300,000,000 shares authorized; 184,718,192 and
184,711,545 shares issued at September 30, 2019 and December 31, 2018, respectively
18,472
18,471
Additional paid-in capital
5,547,534
5,544,220
Accumulated distributions in excess of net income
(4,037,373
(3,980,151
Deferred compensation obligation
8,070
8,193
Accumulated other comprehensive loss
(757
(1,381
Less: Common shares in treasury at cost: 4,469,878 and 3,373,114 shares at September 30, 2019 and
December 31, 2018, respectively
(56,520
(44,278
Total SITE Centers shareholders' equity
2,004,426
2,070,074
Non-controlling interests
3,079
2,928
Total equity
2,007,505
2,073,002
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share amounts)
Three Months
Ended September 30,
2019
2018
Revenues from operations:
Rental income
108,060
126,148
Fee and other income
13,580
16,163
Business interruption income
885
1,784
122,525
144,095
Rental operation expenses:
Operating and maintenance
16,738
18,386
Real estate taxes
16,721
21,211
Impairment charges
2,750
19,890
Hurricane property credit
(157
General and administrative
15,304
15,232
Depreciation and amortization
40,732
49,629
92,245
124,191
Other income (expense):
Interest income
4,616
5,055
Interest expense
(21,160
(26,962
Other income (expense), net
(322
(1,454
(16,866
(23,361
Income (loss) before earnings from equity method investments and other items
13,414
(3,457
Equity in net income (loss) of joint ventures
2,612
(2,920
Reserve of preferred equity interests, net
(6,373
(2,201
Gain on disposition of real estate, net
14,497
124
Income (loss) before tax expense
24,150
(8,454
Tax expense of taxable REIT subsidiaries and state franchise and income taxes
(249
(238
Net income (loss)
23,901
(8,692
Income attributable to non-controlling interests, net
(271
(239
Net income (loss) attributable to SITE Centers
23,630
(8,931
Preferred dividends
(8,382
Net income (loss) attributable to common shareholders
15,248
(17,313
Per share data:
Basic
0.08
(0.09
Diluted
Nine Months
332,555
529,916
48,764
33,879
6,884
382,204
570,679
54,322
85,473
52,262
83,712
3,370
68,394
Hurricane property loss
817
44,348
45,353
123,400
196,515
277,702
480,264
13,658
15,412
(63,973
(115,915
(254
(99,316
(50,569
(199,819
53,933
(109,404
Equity in net income of joint ventures
5,446
9,687
(12,106
(4,537
31,087
39,643
78,360
(64,611
(827
(611
77,533
(65,222
(836
(1,191
76,697
(66,413
(25,148
51,549
(91,561
0.28
(0.50
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited; in thousands)
Other comprehensive income (loss):
Foreign currency translation, net
(105
311
273
(402
Change in fair value of interest-rate contracts
(9
(10
Change in cash flow hedges reclassed to earnings
117
351
Total other comprehensive income (loss)
12
419
624
(61
Comprehensive income (loss)
23,913
(8,273
78,157
(65,283
Total comprehensive income attributable to non-controlling interests
(294
(1,117
Total comprehensive income (loss) attributable to SITE Centers
23,642
(8,567
77,321
(66,400
CONSOLIDATED STATEMENTS OF EQUITY
Preferred Shares
Common
Shares
Additional
Paid-in
Capital
Accumulated Distributions
in Excess of
Net Income
Deferred Compensation Obligation
Accumulated Other Comprehensive Loss
Treasury
Stock at
Cost
Non-
Controlling
Interests
Total
Balance, December 31, 2018
525,000
Issuance of common shares related
to stock plans
(1
-
Repurchase of common shares
(14,069
Stock-based compensation, net
2,188
(147
1,688
3,729
Distributions to non-controlling
interests
(379
Dividends declared-common shares
(72,510
Dividends declared-preferred shares
(16,766
Comprehensive income
53,067
612
565
54,244
Balance, June 30, 2019
5,546,407
(4,016,360
8,046
(769
(56,659
3,114
2,027,251
21
1,106
24
139
1,269
(306
(36,261
271
Balance, September 30, 2019
Balance, December 31, 2017
18,426
5,531,249
(3,183,134
8,777
(1,106
(8,280
6,506
2,897,438
39
5,891
5,930
4,986
(1,059
976
4,903
(837
Redemption of OP Units
880
(1,589
(709
(140,611
Comprehensive (loss) income
(57,482
(351
823
(57,010
Balance, June 30, 2018
18,465
5,543,006
(3,397,993
7,718
(1,457
(7,304
2,692,338
37
(94
756
(750
(88
(213
(37,024
RVI spin-off
(663,406
364
294
Balance, September 30, 2018
18,467
5,542,949
(4,115,736
8,474
(1,093
(8,054
4,984
1,974,991
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:
Adjustments to reconcile net income (loss) to net cash flow provided by operating activities:
Stock-based compensation
9,582
5,344
Amortization and write-off of debt issuance costs and fair market value of debt adjustments
3,055
15,209
Loss on extinguishment of debt
49,049
(5,446
(9,687
12,106
4,537
Operating cash distributions from joint ventures
7,693
6,077
(31,087
(39,643
Cash paid for interest rate hedging activities
(4,538
Assumption of building due to ground lease termination
(2,150
Change in notes receivable accrued interest
206
1,020
Net change in accounts receivable
4,233
(2,908
Transaction costs related to RVI spin-off
(27,203
Net change in accounts payable and accrued expenses
(7,124
15,256
Net change in other operating assets and liabilities
(8,101
(12,581
Total adjustments
111,887
262,691
Net cash flow provided by operating activities
189,420
197,469
Cash flow from investing activities:
Real estate developed and improvements to operating real estate
(80,197
(95,357
Proceeds from disposition of real estate
107,101
301,479
Hurricane property insurance advance proceeds
20,193
Equity contributions to joint ventures
(47,020
(170
Distributions from unconsolidated joint ventures
15,329
30,350
Repayment of joint venture advances
17,418
68,146
Net transactions with RVI
17,000
(33,681
Net cash flow provided by investing activities
29,631
290,960
Cash flow from financing activities:
(Repayment of) proceeds from revolving credit facilities, net
(100,000
105,000
Repayment of senior notes
(947,014
Repayment of term loan and mortgage debt
(1,669
(759,970
Payment of debt issuance costs
(5,006
(32,825
Proceeds from mortgage payable and term loan
50,000
1,350,000
(Repurchase) issuance of common shares in conjunction with equity award plans and dividend reinvestment plan
(708
5,048
Redemption of operating partnership units
(736
Contribution of assets to RVI
(52,358
Distributions to non-controlling interests and redeemable operating partnership units
(685
(1,097
Dividends paid
(134,539
(235,926
Net cash flow used for financing activities
(206,676
(569,878
Effect of foreign exchange rate changes on cash and cash equivalents
(2
Net increase (decrease) in cash, cash equivalents and restricted cash
12,375
(81,449
Cash, cash equivalents and restricted cash, beginning of period
13,650
94,724
Cash, cash equivalents and restricted cash, end of period
26,023
13,273
1.
Nature of Business and Financial Statement Presentation
Nature of Business
SITE Centers Corp. and its related consolidated real estate subsidiaries (collectively, the “Company” or “SITE Centers”) and unconsolidated joint ventures are primarily engaged in the business of acquiring, owning, developing, redeveloping, expanding, leasing, financing and managing shopping centers. Unless otherwise provided, references herein to the Company or SITE Centers include SITE Centers Corp. and its wholly-owned subsidiaries and consolidated joint ventures. The Company’s tenant base primarily includes national and regional retail chains and local tenants. Consequently, the Company’s credit risk is concentrated in the retail industry.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
These financial statements have been prepared by the Company in accordance with GAAP for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the periods presented. The results of operations for the three and nine months ended September 30, 2019 and 2018, are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of Consolidation
The consolidated financial statements include the results of the Company and all entities in which the Company has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). All significant inter-company balances and transactions have been eliminated in consolidation. Investments in real estate joint ventures in which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or loss) of these joint ventures is included in consolidated net income (loss).
The Company has two unconsolidated joint ventures included in the Company’s joint venture investments that are considered VIEs for which the Company is not the primary beneficiary. The Company’s maximum exposure to losses associated with these VIEs is limited to its aggregate investment, which was $164.3 million and $192.2 million as of September 30, 2019 and December 31, 2018, respectively.
Reclassifications
Certain amounts in prior periods have been reclassified in order to conform with the current period’s presentation. The Company reclassified $1.4 million and $11.5 million of contractual lease payments from Fee and Other Income to Rental Income within total revenues on its consolidated statements of operations for the three and nine months ended September 30, 2018, respectively, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-02—Leases, as amended (“Topic 842”), as discussed below.
Statements of Cash Flows and Supplemental Disclosure of Non-Cash Investing and Financing Information
Non-cash investing and financing activities are summarized as follows (in millions):
Dividends declared, but not paid
44.6
45.4
Accounts payable related to construction in progress
14.9
8.2
2.2
Contribution of net assets to RVI
663.4
Receivable and reduction of real estate assets, net - related to hurricane
7.8
Conversion of Operating Partnership Units
0.9
Common Shares
The Company declared common share dividends of $0.20 per share for each of the three months ended September 30, 2019 and 2018, and $0.60 per share and $0.96 per share for the nine months ended September 30, 2019 and 2018, respectively.
New Accounting Standard Adopted
Accounting for Leases
The Company adopted Topic 842, as of January 1, 2019, using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. The Company elected the following practical expedients permitted under the transition guidance within the new standard:
•
The package of practical expedients, which among other things, allowed the Company to carry forward the historical lease classification;
Land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and
To not separate lease and non-lease components for all leases and recording the combined component based on its predominant characteristics as rental income or expense.
The Company did not adopt the practical expedient to use hindsight in determining the lease term.
The Company made the following accounting policy elections in connection with the adoption:
As a lessee — the short-term lease exception for the Company’s office leases;
As a lessor — to include operating lease liabilities in the asset group and include the associated operating lease payments in the undiscounted cash flows when considering recoverability of a long-lived asset group and
As a lessor — to exclude from lease payments taxes assessed by a governmental authority that are both imposed on and concurrent with lease revenue producing activity and collected by the lessor from the lessee (i.e., sales tax).
Upon adoption of the standard, the Company’s consolidated financial statements were impacted as follows:
The Company had ground lease agreements in which the Company is the lessee for land beneath all or a portion of the buildings at three shopping centers and three additional leases where the Company is the lessee (Note 6), where the Company has recorded its rights and obligations under these leases as a right-of-use (“ROU”) asset and lease liability, which is included in Other Assets and Accounts Payable and Other Liabilities, respectively, in the consolidated balance sheet. Previously, the Company accounted for these arrangements as operating leases. These leases will continue to be classified as operating leases due to the election of the package practical expedients. The Company recorded ROU assets and lease liabilities of approximately $22.0 million and $40.3 million, respectively, as of January 1, 2019. The difference between the ROU asset and lease liability was primarily due to the straight-line rent balance that existed as of the date of the application of the standard.
Previously, the Company included real estate taxes paid by a lessee directly to a third party in recoveries from tenants and real estate tax expense, on a gross basis. Upon adoption of the standard, the Company no longer records these amounts in revenue or expense as the standard precludes the Company from recording payments made directly by the lessee. In addition, on January 1, 2019, the Company reversed $1.7 million of real estate taxes paid by certain major tenants previously reflected in Accounts Receivable and Accounts Payable and Other Liabilities on the Company’s consolidated balance sheet as of December 31, 2018.
9
Upon adoption of the practical expedient with regards to not separating lease and non-lease components, where applicable, the Company has prospectively recorded, on a straight-line basis, lease payments associated with fixed expense reimbursements.
The adoption of this standard did not materially impact the Company’s consolidated net income or consolidated cash flows.
The adoption of the new standard also resulted in various presentation changes in the Company’s consolidated statements of operations. The Company aggregated the following components of contractual lease payments into one line item referred to as Rental Income which includes Minimum Rents, Percentage and Overage Rents, Recoveries from Tenants, Ancillary Income and Lease Termination Fees. The prior period presentation was conformed to the current period presentation for comparability related to these revenue components. In addition, effective January 1, 2019, the Company presents bad debt as a component of Rental Income within Revenues. For prior periods, bad debt is included in Operating and Maintenance Expenses. In addition, effective January 1, 2019, the Company no longer records real estate taxes paid by major tenants directly to the applicable governmental authority. For prior periods, these amounts are included in Recoveries from Tenants and Real Estate Taxes.
New Accounting Standard to Be Adopted
Accounting for Credit Losses
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date (ASU 2016-13, Financial Instruments – Credit Losses). The guidance requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2019. In November 2018, the FASB issued ASU 2018-19, to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. The Company is in the process of evaluating the impact of this guidance.
2.
Revenue Recognition
Rental Income
Rental Income on the consolidated statements of operations includes contractual lease payments that generally include the following:
Fixed lease payments, which include fixed payments associated with expense reimbursements from tenants for common area maintenance, taxes and insurance from tenants in shopping centers, are recognized on a straight-line basis over the non-cancelable term of the lease, which generally ranges from one month to 30 years, and include the effects of applicable rent steps and abatements.
Variable lease payments, which include percentage and overage income, which are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.
Variable lease payments associated with expense reimbursements from tenants for common area maintenance, taxes, insurance and other property operating expenses, based upon the tenant’s lease provisions, which are recognized in the period the related expenses are incurred.
Lease termination payments, which are recognized upon the effective termination of a tenant’s lease when the Company has no further obligations under the lease.
Ancillary and other property-related rental payments, primarily composed of leasing vacant space to temporary tenants, kiosk income, and parking income, which are recognized in the period earned.
Upon adoption of Topic 842, Rental Income for the periods beginning on or after January 1, 2019, has been reduced for amounts the Company believes are not probable of being collected.
10
Fee and Other Income
Fee and Other Income on the consolidated statements of operations includes revenue from contracts with customers and other property-related income, primarily composed of theater income, and is recognized in the period earned as follows (in thousands):
Revenue from contracts:
Asset and property management fees
9,751
10,501
32,392
20,982
Leasing commissions
1,036
1,818
3,916
4,752
Development fees
552
393
1,497
1,021
Disposition fees
546
1,622
3,263
Credit facility guaranty and refinancing fees
60
1,860
Total revenue from contracts with customers
11,945
14,394
42,928
28,437
Other property income:
Other
1,635
1,769
5,836
5,442
Total fee and other income
3.
Investments in and Advances to Joint Ventures
At September 30, 2019 and December 31, 2018, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 102 and 106 shopping center properties, respectively. Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):
Condensed Combined Balance Sheets
957,434
1,004,289
2,710,289
2,804,027
230,656
221,412
3,898,379
4,029,728
(968,414
(935,921
2,929,965
3,093,807
54,198
56,498
Real estate, net
2,984,163
3,150,305
Cash and restricted cash
88,934
94,111
Receivables, net
39,820
44,702
164,641
186,693
3,277,558
3,475,811
Mortgage debt
1,844,940
2,212,503
Notes and accrued interest payable to the Company
6,105
5,182
Other liabilities
153,788
161,372
2,004,833
2,379,057
Redeemable preferred equity – SITE Centers (A)
263,316
274,493
Accumulated equity
1,009,409
822,261
Company's share of accumulated equity
172,567
145,786
Redeemable preferred equity, net (B)
162,730
189,891
Basis differentials
(8,114
(8,536
Deferred development fees, net of portion related to the Company's interest
(2,409
(2,700
Amounts payable to the Company
Investments in and Advances to Joint Ventures, net
(A)
Includes PIK that the Company has accrued since March 2017 of $16.1 million and $12.2 million at September 30, 2019 and December 31, 2018, respectively, which, in each case, was fully reserved.
(B)
Amount is net of the valuation allowance of $84.5 million and $72.4 million and the fully reserved PIK of $16.1 million and $12.2 million at September 30, 2019 and December 31, 2018, respectively.
11
Condensed Combined Statements of Operations
Revenues from operations(A)
105,223
103,217
319,906
325,501
Expenses from operations:
Operating expenses
28,798
29,577
89,341
96,272
87,880
12,267
104,790
36,867
34,332
113,340
111,308
22,530
23,126
73,472
72,315
Preferred share expense
5,544
6,249
16,487
19,074
Other expense, net
5,017
5,460
16,358
19,497
98,756
186,624
321,265
423,256
Income (loss) before gain on disposition of real estate
6,467
(83,407
(1,359
(97,755
(Loss) gain on disposition of real estate, net
(440
32,548
15,205
82,924
Net income (loss) attributable to unconsolidated joint ventures
6,027
(50,859
13,846
(14,831
Company's share of equity in net income (loss) of joint ventures
2,404
(7,669
4,851
4,310
Basis differential adjustments(B)
208
4,749
595
5,377
Revenue from operations is subject to leasing or other standards.
The difference between the Company’s share of net income, as reported above, and the amounts included in the Company’s consolidated statements of operations is attributable to the amortization of basis differentials, unrecognized preferred PIK, the recognition of deferred gains, differences in gain (loss) on sale of certain assets recognized due to the basis differentials and other than temporary impairment charges.
Revenues earned by the Company related to all of the Company’s unconsolidated joint ventures and interest income on its preferred interests in the BRE DDR Joint Ventures (as defined below) are as follows (in millions):
4.7
4.0
14.8
14.5
Development fees, leasing commissions and other
1.2
1.5
3.7
5.1
5.9
5.5
18.5
19.6
Other:
4.2
4.8
12.6
14.6
0.8
0.7
2.3
1.9
10.9
11.0
33.4
36.1
The Company’s joint venture agreements generally include provisions whereby each partner has the right to trigger a purchase or sale of its interest in the joint venture or to initiate a purchase or sale of the properties after a certain number of years or if either party is in default of the joint venture agreements. The Company is not obligated to purchase the interests of its outside joint venture partners under these provisions.
BRE DDR Joint Ventures
The Company’s two unconsolidated investments with The Blackstone Group L.P. (“Blackstone”), BRE DDR Retail Holdings III (“BRE DDR III”) and BRE DDR Retail Holdings IV (“BRE DDR IV” and, together with BRE DDR III, the “BRE DDR Joint Ventures”), have substantially similar terms.
An affiliate of Blackstone is the managing member and effectively owns 95% of the common equity of each of the two BRE DDR Joint Ventures, and consolidated affiliates of SITE Centers effectively own the remaining 5%. The Company provides leasing and property management services to all of the joint venture properties. The Company cannot be removed as the property and leasing manager until the preferred equity, as discussed below, is redeemed in full (except for certain specified events).
The Company’s preferred interests are entitled to certain preferential cumulative distributions payable out of operating cash flows and certain capital proceeds pursuant to the terms and conditions of the preferred investments. The preferred distributions are recognized as Interest Income within the Company’s consolidated statements of operations and are classified as a note receivable in
Investments in and Advances to Joint Ventures on the Company’s consolidated balance sheets. The preferred investments have an annual distribution rate of 8.5% including any deferred and unpaid preferred distributions. Blackstone has the right to defer up to 2.0% of the 8.5% preferred fixed distributions as a payment in kind (“PIK”) distribution. Blackstone has made this PIK deferral election since the formation of both joint ventures. The cash portion of the preferred fixed distributions is generally payable first out of operating cash flows and is current for both BRE DDR Joint Ventures. The Company has no expectation that the cash portion of the preferred fixed distribution will become impaired. As a result of the valuation allowances recorded, the Company no longer recognizes as interest income the 2.0% PIK. Although Blackstone has the right to change its payment election, the Company expects future preferred distributions to continue to include the PIK component. The recognition of the PIK interest income will be reevaluated based upon any future adjustments to the aggregate valuation allowance, as appropriate.
The Preferred investments are summarized as follows (in millions, except properties owned):
Preferred Investment (Principal)
Properties Owned
Formation
Initial
Valuation
Allowance
Net of Reserve
Inception
BRE DDR III
2014
300.0
178.9
(73.2
105.7
70
14
BRE DDR IV
2015
82.6
64.1
(11.3
52.8
382.6
243.0
(84.5
158.5
The Company reassessed the aggregate valuation allowance at September 30, 2019, with respect to its preferred investments in the BRE DDR Joint Ventures. Based upon actual timing and values of recent property sales, as well as current market assumptions, the Company adjusted the aggregate valuation allowance by an increase of $6.4 million and $12.1 million for the three and nine months ended September 30, 2019, respectively, resulting in a net valuation allowance of $84.5 million. The valuation allowance is recorded as Reserve of Preferred Equity Interests on the Company’s consolidated statements of operations. The Company will continue to monitor the investments and related valuation allowance, which could be increased or decreased in future periods, as appropriate.
Disposition of Shopping Centers
From January 1, 2019 to September 30, 2019, the Company’s joint ventures sold four shopping centers for $129.5 million, of which the Company’s share of the gain on sale was $1.5 million.
4.
Investment in and Advances to Affiliate
The Company has a preferred investment in Retail Value Inc. (“RVI”) of $190.0 million and had receivables from RVI of $16.7 million and $34.0 million at September 30, 2019 and December 31, 2018, respectively, primarily consisting of restricted cash and insurance premiums owed by RVI pursuant to the terms of the agreement governing the separation of RVI from the Company, which occurred on July 1, 2018.
Revenue from contracts with RVI is included in Fee and Other Income on the consolidated statements of operations and was composed of the following (in millions):
6.5
16.6
0.4
1.8
0.5
1.6
3.2
0.1
Total revenue from contracts with RVI
6.1
8.9
23.5
13
5.
Other Assets, net
Other Assets, Net on the Company’s consolidated balance sheets consists of the following (in thousands):
Intangible assets:
In-place leases, net
21,952
30,703
Above-market leases, net
3,272
6,833
Lease origination costs
3,015
4,045
Tenant relations, net
27,747
35,838
Total intangible assets, net(A)
55,986
77,419
Operating lease ROU assets(B)
21,628
Notes receivable
19,670
19,675
Other assets:
Prepaid expenses
6,593
5,372
Other assets
4,206
3,612
Deposits
4,108
4,384
Deferred charges, net
8,625
5,767
Total other assets, net
The Company recorded amortization expense related to its intangibles, excluding above- and below-market leases, of $4.2 million and $18.1 million for the three months ended September 30, 2019 and 2018, respectively, and $13.5 million and $28.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Operating lease ROU assets are discussed further in Notes 1 and 6.
6.
Leases
Lessee
The Company is engaged in the operation of shopping centers that are either owned or, with respect to certain shopping centers, operated under long-term ground leases that expire at various dates through 2070. The Company also leases office space in the ordinary course of business under lease agreements that expire at various dates through 2029. Certain of the lease agreements include variable payments for reimbursement of common area expenses. The Company determines if an arrangement is a lease at inception.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not include an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date of the standard in determining the present value of lease payments. For each lease, the Company utilized a market-based approach to estimate the incremental borrowing rate (“IBR”), which required significant judgment. The Company estimated base IBRs based on an analysis of (i) yields on the Company’s outstanding public debt, as well as comparable companies, (ii) observable mortgage rates and (iii) unlevered property yields and discount rates. The Company applied adjustments to the base IBRs to account for full collateralization and lease term. Operating lease ROU assets also include any lease payments made. The Company has options to extend certain of the ground and office leases; however, these options were not considered as part of the lease term when calculating the lease liability, as they were not reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Operating lease ROU assets and operating lease liabilities are in the Company’s consolidated balance sheet as follows (in thousands):
Classification
Operating Lease ROU Assets
Other Assets, Net
Operating Lease Liabilities
Accounts Payable and Other Liabilities
40,518
Operating lease expenses, including straight-line expense, are included in Operating and Maintenance Expense for the Company’s ground leases and General and Administrative for its office leases are as follows (in thousands):
Three Months Ended
Nine Months Ended
Operating and Maintenance
788
2,822
General and Administrative(A)
852
2,065
Total lease costs
1,640
4,887
Includes short-term leases and variable lease costs, which are immaterial.
Supplemental balance sheet information related to leases was as follows:
Weighted-Average Remaining Lease Term
35.7 years
Weighted-Average Discount Rate
7.3
%
Cash paid for amounts included in the measurement —
operating cash flows from lease liabilities (in thousands)
2,394
As determined under FASB Accounting Standards Codification (“ASC”) 840, Leases, the scheduled future minimum rental revenues from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises and the scheduled minimum rental payments under the terms of all non-cancelable operating leases, principally ground leases, in which the Company was the lessee as of December 31, 2018, were as follows (in thousands):
Year
Minimum
Rental
Revenues
Payments
306,740
3,253
2020
279,374
4,070
2021
243,379
4,080
2022
202,371
3,928
2023
150,909
3,417
Thereafter
417,296
120,825
1,600,069
139,573
As determined under Topic 842, maturities of lease liabilities were as follows for the 12-month periods ending September 30, (in thousands):
September 30,
4,137
4,150
4,114
3,542
2024
3,516
118,216
Total lease payments
137,675
Less imputed interest
(97,157
Lessor
Space in the shopping centers is leased to tenants pursuant to agreements that provide for terms generally ranging from one month to 30 years and for rents which, in some cases, are subject to upward adjustments based on operating expense levels, sales volume or contractual increases as defined in the lease agreements.
15
The scheduled future minimum rental income from rental properties under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions as determined under Topic 842 for such premises for the 12-month periods ending September 30, were as follows (in thousands):
Year Ending
315,868
288,171
249,158
199,433
152,146
441,305
1,646,081
7.
Revolving Credit Facilities
The following table discloses certain information regarding the Company’s Revolving Credit Facilities (as defined below) (in millions):
Carrying Amount at
Weighted-Average
Interest Rate at
Maturity Date
Unsecured Credit Facility
N/A
January 2024
PNC Facility
In July 2019, the Company amended and restated its unsecured revolving credit facility with a syndicate of financial institutions, arranged by Wells Fargo Securities, LLC, J.P. Morgan Chase Bank, N.A., Citizens Bank, N.A., RBC Capital Markets and U.S. Bank National Association (the “Unsecured Credit Facility”). The Unsecured Credit Facility provides for borrowings of up to $950 million if certain financial covenants are maintained, and an accordion feature for expansion of availability up to $1.45 billion, provided that new or existing lenders agree to the existing terms of the facility and increase their commitment level, and was amended to extend the maturity date to January 2024, subject to two six-month options to extend the maturity to January 2025 upon the Company’s request (subject to satisfaction of certain conditions). The Unsecured Credit Facility includes a competitive bid option on periodic interest rates for up to 50% of the facility. The Unsecured Credit Facility also provides for an annual facility fee, which was 20 basis points on the entire facility at September 30, 2019.
In August 2019, the Company also amended its $20 million unsecured revolving credit facility with PNC Bank, National Association (“PNC”, the “PNC Facility” and, together with the Unsecured Credit Facility, the “Revolving Credit Facilities”) to reflect substantially the same terms as those contained in the Unsecured Credit Facility. Additionally, the Company has provided an unconditional guaranty to PNC with respect to any obligations of RVI outstanding from time to time under a $30 million revolving credit agreement entered into by RVI with PNC. RVI has agreed to reimburse the Company for any amounts paid to PNC pursuant to the guaranty plus interest at a contracted rate and to pay an annual commitment fee to the Company on account of the guaranty.
The Company’s borrowings under the Revolving Credit Facilities bear interest at variable rates at the Company’s election, based on either LIBOR plus a specified spread (0.90% at September 30, 2019) or the Alternative Base Rate, as defined in the respective facility, plus a specified spread (0% at September 30, 2019). The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Service, Inc., S&P Global Ratings, Fitch Investor Services, Inc. and their successors. The Company is required to comply with certain covenants under the Revolving Credit Facilities relating to total outstanding indebtedness, secured indebtedness, value of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these financial covenants at September 30, 2019.
8.
Fair Value Measurements
The Company utilized the methods and assumptions described below in estimating fair value disclosures of debt. The fair market value of senior notes is determined using the trading price of the Company’s public debt. The fair market value for all other debt is estimated using a discounted cash flow technique that incorporates future contractual interest and principal payments and a market interest yield curve with adjustments for duration, optionality and risk profile, including the Company’s non-performance risk and loan to value. The Company’s senior notes and all other debt are classified as Level 2 and Level 3, respectively, in the fair value hierarchy.
16
Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
The carrying values and the estimated fair values are summarized as follows (in thousands):
Carrying
Amount
Fair
Value
Senior Notes
1,753,587
1,639,827
Revolving Credit Facilities and term loans
100,179
149,655
150,533
Mortgage Indebtedness
88,118
89,228
1,941,884
1,879,588
9.
Other Comprehensive Loss
The changes in Accumulated Other Comprehensive Loss by component are as follows (in thousands):
Gains and Losses
on Cash Flow
Hedges
Foreign
Currency
Items
(1,641
260
Other comprehensive income before reclassifications
Change in cash flow hedges reclassed to earnings(A)
Net current-period other comprehensive income
(1,290
533
Amortization classified in Interest Expense in the Company’s consolidated statement of operations for the nine months ended September 30, 2019, which was previously recognized in Accumulated Other Comprehensive Loss.
10.
Impairment Charges and Reserves
The Company recorded impairment charges and reserves based on the difference between the carrying value of the assets or investments and the estimated fair market value as follows (in millions):
Assets marketed for sale(A)
5.8
0.6
Assets included in the spin-off of RVI(B)
14.1
62.6
Undeveloped land(A)
2.8
Reserve of preferred equity interests(C)
6.4
12.1
4.5
Total impairment charges
9.2
22.1
15.5
72.9
The impairments recorded during the nine months ended September 30, 2019, were triggered by indicative bids received.
In 2018, charges were triggered by indicative bids received and changes in market assumptions due to the disposition process beginning in 2017.
(C)
As a result of an aggregate valuation allowance on its preferred equity interests in the BRE DDR Joint Ventures (Note 3).
Items Measured at Fair Value on a Non-Recurring Basis
The Company is required to assess the fair value of certain impaired consolidated and unconsolidated joint venture investments. The valuation of impaired real estate assets and investments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset, as well as the income capitalization approach considering prevailing market capitalization rates, analysis of recent comparable sales transactions, actual sales negotiations and bona fide purchase offers received from third parties and/or consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence. In general, the Company considers multiple valuation techniques when measuring fair value of an investment. However, in certain circumstances, a single valuation technique may be appropriate.
For operational real estate assets, the significant valuation assumptions included the capitalization rate used in the income capitalization valuation, as well as the projected property net operating income. For projects under development or not at stabilization, the significant valuation assumptions included the discount rate, the timing and the estimated costs for the construction completion and project stabilization, projected net operating income and the exit capitalization rate. For the valuation of the preferred equity
17
interests, the significant assumptions used in the discounted cash flow analysis included the discount rate, projected net operating income, the timing of the expected redemption and the exit capitalization rates. For investments in unconsolidated joint ventures, the Company also considered the valuation of any underlying joint venture debt. These valuations were calculated based on market conditions and assumptions made by management at the time the valuation adjustments and impairments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change.
The following table presents information about the Company’s impairment charges and reserves on both financial and nonfinancial assets that were measured on a fair value basis for the nine months ended September 30, 2019. The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine such fair value (in millions).
Level 1
Level 2
Level 3
Impairment
Charges
Long-lived assets held and used
5.0
3.4
Preferred equity interests
The following table presents quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in millions):
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
Description
Valuation Technique
Unobservable Inputs
Range
Impairment of consolidated assets
Indicative Bid(A)
Reserve of preferred equity interests
Discounted Cash Flow
Discount Rate
8.8%-9.6%
Terminal Capitalization
Rate
8.0%-8.9%
NOI Growth Rate
1%
Fair value measurements based upon indicative bids were developed by third-party sources (including offers and comparable sales values), subject to the Company’s corroboration for reasonableness. The Company does not have access to certain unobservable inputs used by these third parties to determine these estimated fair values.
11.
Earnings Per Share
The following table provides a reconciliation of net income (loss) and the number of common shares used in the computations of “basic” earnings per share (“EPS”), which utilizes the weighted-average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares (in thousands, except per share amounts).
Numerators – Basic and Diluted
Plus: Income attributable to non-controlling interests
Less: Preferred dividends
Less: Earnings attributable to unvested shares and operating
partnership units
(174
(119
(520
(971
Net income (loss) attributable to common shareholders after
allocation to participating securities
15,074
(17,432
51,029
(92,532
Denominators – Number of Shares
Basic—Average shares outstanding
180,567
184,655
180,555
184,616
Assumed conversion of diluted securities
940
1,064
Diluted—Average shares outstanding
181,507
181,619
Earnings (Loss) Per Share:
18
Performance Restricted Stock Units (“PRSUs”) issued to certain executives in March 2019 and March 2018 were dilutive and the PRSUs issued in March 2017 were anti-dilutive in the computation of EPS for the three and nine months ended September 30, 2019. PRSUs issued in March 2018 and March 2017 were not considered in the computation of diluted EPS for the three and nine months ended September 30, 2018, as the calculation was anti-dilutive. For the three and nine months ended September 30, 2019, the Company recorded a mark-to-market adjustment of $1.4 million and $2.8 million, respectively, primarily in connection with the PRSUs issued in March 2018.
Stock Repurchase Program
In 2018, the Company’s Board of Directors authorized a $100 million common share repurchase program. In 2019, the Company repurchased 1.2 million shares at a cost of $14.1 million. These shares are recorded as Treasury Shares on the Company’s consolidated balance sheet.
12.
Segment Information
The tables below present information about the Company’s reportable operating segments (in thousands):
Three Months Ended September 30, 2019
Shopping
Centers
Loan
Investments
Other income
13,567
Total revenues
121,627
Rental operation expenses
(33,456
(3
(33,459
Net operating income
88,171
89,066
(2,750
(40,732
Unallocated expenses(A)
(36,464
Income before tax expense
Three Months Ended September 30, 2018
16,149
142,297
(39,597
102,700
104,498
(19,890
Hurricane property credit, net
157
(49,629
(42,194
Equity in net loss of joint ventures
Loss before tax expense
19
Nine Months Ended September 30, 2019
48,722
381,277
(106,574
(106,584
274,703
32
275,620
(3,370
(123,400
(108,321
As of September 30, 2019:
Total gross real estate assets
4,609,930
Notes receivable, net(B)
182,400
(162,730
Nine Months Ended September 30, 2018
33,836
5,100
568,852
(169,185
399,667
401,494
(68,394
Hurricane property (loss) credit, net
(974
(817
(196,515
(161,268
As of September 30, 2018:
5,171,227
223,748
(204,078
Unallocated expenses consist of General and Administrative Expenses and Interest Expense as listed in the Company’s consolidated statements of operations.
Amount includes loans to affiliates classified in Investments in and Advances to Joint Ventures on the Company’s consolidated balance sheets.
20
13.
Subsequent Events
In October 2019, the Company purchased a shopping center in Austin, Texas, for $12.6 million.
In October 2019, the Company issued 13.225 million common shares resulting in net proceeds of approximately $195.0 million.
In October 2019, the Company provided notice of its intent to redeem all $200.0 million aggregate liquidation preference of its 6.5% Class J Cumulative Redeemable Preferred Shares (the “Class J Preferred Shares”) at a redemption price of $500 per Class J Preferred Share (or $25.00 per depositary share) plus accrued and unpaid dividends of $3.7917 per Class J Preferred Share (or $0.1896 per depository share). The Company expects to record a non-cash charge of approximately $7.2 million to net income attributable to common shareholders in the fourth quarter of 2019 relating to the write-off of the Class J Preferred Shares’ original issuance costs.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 SITE Centers Corp. and its related consolidated real estate subsidiaries (collectively, the “Company” or “SITE Centers”) 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, 2018, as well as other publicly available information.
EXECUTIVE SUMMARY
The Company is a self-administered and self-managed Real Estate Investment Trust (“REIT”) in the business of acquiring, owning, developing, redeveloping, expanding, leasing, financing and managing shopping centers. As of September 30, 2019, the Company’s portfolio consisted of 169 shopping centers (including 103 shopping centers owned through joint ventures). At September 30, 2019, the Company owned approximately 43.1 million total square feet of gross leasable area (“GLA”) through all its properties (wholly-owned and joint venture) and managed approximately 13.6 million total square feet of GLA for Retail Value Inc. (“RVI”). At September 30, 2019, the aggregate occupancy of the Company’s operating shopping center portfolio was 91.0%, and the average annualized base rent per occupied square foot was $18.04, both on a pro rata basis.
The following provides an overview of the Company’s key financial metrics (see Non-GAAP Financial Measures described later in this section) (in thousands, except per share amounts):
FFO attributable to common shareholders
55,117
62,880
173,669
145,471
Operating FFO attributable to common shareholders
55,374
61,003
171,079
249,245
Earnings (loss) per share – Diluted
For the nine months ended September 30, 2019, net income attributable to common shareholders increased compared to the same period in the prior year, primarily due to lower debt extinguishment charges, transaction costs, impairment charges and interest expense, partially offset by the dilutive impact of the contribution of assets to the Dividend Trust Portfolio joint venture formed in late 2018 and the spin-off of RVI.
Company Activity
Growth opportunities within the Company’s core property operations include rental rate increases, continued lease-up of the portfolio, and the adaption of existing square footage to generate higher blended rental rates and operating cash flows. Additional growth opportunities include a focus on opportunistic investments and redevelopment. Management intends to use proceeds from the sale of lower growth assets and other investments to fund opportunistic investing and redevelopment activity. During the first nine months of 2019, the Company sold eight shopping centers for $247.9 million (including four shopping centers held in joint ventures), or $135.1 million at the Company’s share, and repurchased 1.2 million common shares for $14.1 million under the Company’s share repurchase program. In addition, in September 2019, the Company received aggregate proceeds of $17.0 million related to the partial repayment of amounts owed by RVI pursuant to the terms of its separation agreement with the Company and in October 2019, the Company also received $12.0 million related to the repayment of a loan investment. In October 2019, the Company acquired a shopping center in Austin, Texas for $12.6 million.
Company Highlights (Prior periods were restated to reflect the impact of asset sales and the spin-off of RVI)
During the nine months ended September 30, 2019, the Company completed the following operational activities:
Leased approximately 2.3 million square feet including 173 new leases and 334 renewals for a total of 507 leases. The Company has addressed substantially all of its 2019 lease expirations;
The Company continued to execute both new leases and renewals at positive rental spreads, which contributed to the increase in the average annualized base rent per square foot. At December 31, 2018, the Company had 398 leases expiring in 2019, with an average base rent per square foot of $15.54. For the comparable leases executed in the nine months ended September 30, 2019, the Company generated positive leasing spreads on a pro rata basis of 13.8% for new
leases and 5.6% for renewals. The Company’s leasing spread calculation only includes deals that were executed within one year of the date the prior tenant vacated and for assets not under redevelopment;
The Company’s total portfolio average annualized base rent per square foot increased to $18.04 at September 30, 2019, on a pro rata basis, as compared to $17.86 at December 31, 2018, and $17.47 at September 30, 2018;
The aggregate occupancy of the Company’s operating shopping center portfolio was 91.0% at September 30, 2019, on a pro rata basis, as compared to 89.9% at December 31, 2018, and 90.4% at September 30, 2018 and
For new leases executed during the nine months ended September 30, 2019, the Company expended a weighted-average cost of $6.33 per rentable square foot for tenant improvements and lease commissions over the lease term. The Company generally does not expend a significant amount of capital on lease renewals.
RESULTS OF OPERATIONS
Consolidated shopping center properties owned as of January 1, 2018, but excluding properties under development or redevelopment and those sold by the Company or included in the spin-off of RVI, are referred to herein as the “Comparable Portfolio Properties.”
Revenues from Operations (in thousands)
$ Change
(18,088
(2,583
(899
(21,570
Rental income(A)
(197,361
Fee and other income(B)
14,885
Business interruption income(C)
(5,999
(188,475
The Company adopted Accounting Standards Update No. 2016-02—Leases, as amended (“Topic 842”), using the modified retrospective approach as of January 1, 2019, and elected to apply the transition provisions of the standard at the beginning of the period of adoption. As the Company adopted the practical expedient with regards to not separating lease and non-lease components, all rental income earned pursuant to tenant leases, including the provision for uncollectible amounts, is reflected as one line item, “Rental Income” in the consolidated statements of operations for the three and nine months ended September 30, 2019. See further discussion of 2018 reclassification impact in Note 1, “Nature of Business and Financial Statement Presentation,” to the Company’s consolidated financial statements included herein.
The following table summarizes the key components of the 2019 rental income as compared to 2018:
Contractual Lease Payments
Base and percentage rental income
80,864
92,759
(11,895
Recoveries from tenants
26,018
31,951
(5,933
Lease termination fees, ancillary and other rental income
1,683
1,438
245
Bad debt
(505
Total contractual lease payments
23
Base and percentage rental income(1)
243,029
384,585
(141,556
Recoveries from tenants(2)
81,466
133,863
(52,397
8,238
11,468
(3,230
Bad debt(3)
(178
(1)
The changes were due to the following (in millions):
Increase (Decrease)
Comparable Portfolio Properties
3.8
Acquisition of shopping centers
2.6
Development or redevelopment properties
(0.6
Transfers to unconsolidated joint ventures in 2018
(34.2
Shopping centers sold or included in RVI spin-off
(114.3
Straight-line rents
1.1
(141.6
The following tables present the statistics for the Company’s assets affecting base and percentage rental income summarized by the following portfolios: pro rata combined shopping center portfolio, wholly-owned shopping center portfolio and joint venture shopping center portfolio.
Pro Rata Combined
Shopping Center Portfolio
Centers owned
169
182
Aggregate occupancy rate
91.0
90.4
Average annualized base rent per occupied square foot
18.04
17.47
Wholly-Owned Shopping Centers
66
78
90.3
18.59
17.83
Joint Venture Shopping Centers
103
104
90.8
91.2
14.90
14.63
At September 30, 2019 and 2018, the wholly-owned Comparable Portfolio Properties’ aggregate occupancy rate was 93.2% and 92.6%, respectively, and the average annualized base rent per occupied square foot was $18.42 and $18.10, respectively.
(2)
The decrease primarily was driven by the RVI spin-off and disposition activity. Recoveries were also impacted by major tenant bankruptcies and related occupancy loss. Recoveries from tenants for the Comparable Portfolio Properties were approximately 80.7% and 81.1% of reimbursable operating expenses and real estate taxes for the nine months ended September 30, 2019 and 2018, respectively. The percentage of recoveries from tenants was impacted by the adoption of Topic 842, which resulted in certain financial statement presentation changes that reduced Rental Income but had no impact on net income.
(3)
Classified in Operating and Maintenance Expense for the three and nine months ended September 30, 2018.
Increased primarily due to fees earned from RVI of $6.1 million and $23.5 million during the three and nine months ended September 30, 2019, respectively, primarily offset by lower fee income received from joint ventures as a result of the sale of joint venture assets. Included in the fees earned during the nine months ended September 30, 2019, the Company recorded $3.2 million for RVI disposition fees and $1.8 million for the RVI refinancing fee.
The components of Fee and Other Income are presented in Note 2, “Revenue Recognition,” to the Company’s consolidated financial statements included herein. Changes in the number of assets under management, including the number of assets owned by RVI, or the fee structures applicable to such arrangements will impact the amount of revenue recorded in future periods. Such changes could occur because the Company’s property management agreements contain termination provisions, and RVI and the Company’s joint venture partners could dispose of shopping centers under the Company’s management. In the third quarter of 2019, the Company agreed to sell its interest in the DDRTC Joint Venture, which owns 22 assets, to its joint venture partner. See “Sources and Uses of Capital” included elsewhere herein.
Represents payments received from the Company’s insurance company related to its claims for business interruption losses incurred at its Puerto Rico properties, which were included in the RVI spin-off.
Expenses from Operations (in thousands)
(1,648
(4,490
(17,140
72
(8,897
(31,946
Operating and maintenance(A)
(31,151
Real estate taxes(A)
(31,450
Impairment charges(B)
(65,024
Hurricane property loss, net
General and administrative(C)
(1,005
Depreciation and amortization(A)
(73,115
(202,562
Operating
and
Maintenance
Real Estate
Taxes
Depreciation
Amortization
(3.6
(6.4
0.3
2.1
(0.2
(1.1
(5.7
(5.9
(17.7
(26.1
(21.2
(53.3
(31.2
(31.5
(73.1
The Company recorded impairment charges in the nine months ended September 30, 2019 related to one operating shopping center marketed for sale and one undeveloped land parcel. Changes in (i) an asset’s expected future undiscounted cash flows due to changes in market or leasing conditions, (ii) various courses of action that may occur or (iii) holding periods each could result in the recognition of additional impairment charges. Impairment charges are presented in Note 10, “Impairment Charges and Reserves,” to the Company’s consolidated financial statements included herein.
25
General and administrative expenses were approximately 5.0% of total revenues for the nine months ended September 30, 2019 and 2018 , including total revenues of unconsolidated joint ventures and managed properties for the comparable periods. The increase in the percentage is a result of the adoption of Topic 842, which resulted in certain financial statement presentation changes that reduced total revenue but had no impact on net income.
Other Income and Expenses (in thousands)
(439
5,802
1,132
6,495
Interest income(A)
(1,754
Interest expense(B)
51,942
Other income (expense), net(C)
99,062
149,250
The decrease in the amount of interest income recognized primarily is due to the decrease in the face amount of the preferred equity investments in the unconsolidated joint ventures with The Blackstone Group L.P. (“Blackstone”) as a result of repayments by the joint ventures from asset sale proceeds (see “Sources and Uses of Capital” included elsewhere herein). The Company had a gross preferred investment including accrued interest of $247.3 million and $269.6 million at September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, the Company received $14.9 million in preferred equity repayments. A portion of the proceeds generated from assets sold by the Blackstone joint ventures in the future are expected to be used to repay the preferred equity. Any repayment of this preferred interest would impact the amount of interest income recorded by the Company in future periods. See Note 3, “Investments in and Advances to Joint Ventures,” in the Company’s consolidated financial statements included herein.
The weighted-average loan receivable outstanding and related weighted-average interest rate, including loans to affiliates, are as follows:
Weighted-average loan receivable outstanding (in millions)
265.3
311.4
Weighted-average interest rate
7.0
6.8
The weighted-average debt outstanding and related weighted-average interest rate are as follows:
Weighted-average debt outstanding (in billions)
3.3
4.4
The reduction in the weighted-average debt outstanding from the prior-year period is a result of the RVI spin-off and the Company’s overall strategy to reduce leverage. The weighted-average interest rate (based on contractual rates and excluding fair market value of adjustments and debt issuance costs) was 4.2% at both September 30, 2019 and September 30, 2018.
Interest costs capitalized in conjunction with redevelopment projects were $0.4 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2018, respectively.
26
For the nine months ended September 30, 2018, the Company recorded $58.4 million of debt extinguishment costs and $36.5 million in transaction costs in anticipation of the spin-off of RVI on July 1, 2018.
Other Items (in thousands)
5,532
(4,172
14,373
Tax expense of taxable REIT subsidiaries and state franchise and
income taxes
(11
(32
Equity in net income of joint ventures(A)
(4,241
Reserve of preferred equity interests, net(B)
(7,569
Gain on disposition of real estate, net(C)
(8,556
(216
355
The decrease primarily was the result of lower gain on sale, impairment charges and the dilutive impact from the sale of joint venture assets in 2018 and 2019 in addition to a newly formed joint venture in the fourth quarter of 2018. Joint venture property sales could significantly impact the amount of income or loss recognized in future periods. In the third quarter of 2019, the Company agreed to sell its interest in the DDRTC Joint Venture, which owns 22 assets, to its joint venture partner. See “Sources and Uses of Capital” included elsewhere herein.
The valuation allowance is more fully described in Note 3, “Investments in and Advances to Joint Ventures,” to the Company’s consolidated financial statements included herein.
The Company sold four shopping centers for a gross sales price of $103.5 million during the nine months ended September 30, 2019.
Net Income (Loss) (in thousands)
32,561
143,110
The increase in net income primarily is attributable to lower debt extinguishment charges, transaction costs, impairment charges and interest expense in 2019, partially offset by the dilutive impact of the contribution of assets to a joint venture formed in late 2018 and the spin-off of RVI.
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NON-GAAP FINANCIAL MEASURES
Funds from Operations and Operating Funds from Operations
Definition and Basis of Presentation
The Company believes that Funds from Operations (“FFO”) and Operating FFO, both non-GAAP financial measures, provide additional and useful means to assess the financial performance of REITs. FFO and Operating FFO are frequently used by the real estate industry, as well as securities analysts, investors and other interested parties, to evaluate the performance of REITs. The Company also believes that FFO and Operating FFO more appropriately measure the core operations of the Company and provide benchmarks to its peer group.
In December 2018, the National Association of Real Estate Investment Trusts (“NAREIT”) issued NAREIT Funds From Operations White Paper - 2018 Restatement (the “2018 FFO White Paper”). The purpose of the 2018 FFO White Paper was not to change the fundamental definition of FFO, but to clarify existing guidance and to consolidate into a single document, alerts and policy bulletins issued by NAREIT since the last FFO white paper was issued in 2002. The 2018 FFO White Paper was effective starting with first quarter 2019 reporting. The changes to the Company’s calculation of FFO resulting from the adoption of the 2018 FFO White Paper relate to the exclusion of gains or losses on the sale of land, as well as related impairments, gains or losses from changes in control and the reserve adjustment of preferred equity interests. The Company adopted changes in its calculation of FFO in 2019 on a retrospective basis.
FFO excludes GAAP historical cost depreciation and amortization of real estate and real estate investments, which assume that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions, and many companies use different depreciable lives and methods. Because FFO excludes depreciation and amortization unique to real estate and gains and losses from property dispositions, it can provide a performance measure that, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, interest costs and acquisition, disposition and development activities. This provides a perspective of the Company’s financial performance not immediately apparent from net income determined in accordance with GAAP.
FFO is generally defined and calculated by the Company as net income (loss) (computed in accordance with GAAP), adjusted to exclude (i) preferred share dividends, (ii) gains and losses from disposition of real estate property and related investments, which are presented net of taxes, (iii) impairment charges on real estate property and related investments, including reserve adjustments of preferred equity interests, (iv) gains and losses from changes in control and (v) certain non-cash items. These non-cash items principally include real property depreciation and amortization of intangibles, equity income (loss) from joint ventures and equity income (loss) from non-controlling interests and adding the Company’s proportionate share of FFO from its unconsolidated joint ventures and non-controlling interests, determined on a consistent basis. The Company’s calculation of FFO is consistent with the definition of FFO provided by NAREIT.
The Company believes that certain charges, income and gains recorded in its operating results are not comparable or reflective of its core operating performance. Operating FFO is useful to investors as the Company removes non-comparable charges, income and gains to analyze the results of its operations and assess performance of the core operating real estate portfolio. As a result, the Company also computes Operating FFO and discusses it with the users of its financial statements, in addition to other measures such as net income (loss) determined in accordance with GAAP and FFO. Operating FFO is generally defined and calculated by the Company as FFO excluding certain charges, income and gains that management believes are not comparable and indicative of the results of the Company’s operating real estate portfolio. Such adjustments include gains/losses on the early extinguishment of debt, hurricane-related activity, certain transaction fee income, transaction costs and other restructuring type costs. The disclosure of these adjustments is regularly requested by users of the Company’s financial statements.
The adjustment for these charges, income and gains may not be comparable to how other REITs or real estate companies calculate their results of operations, and the Company’s calculation of Operating FFO differs from NAREIT’s definition of FFO. Additionally, the Company provides no assurances that these charges, income and gains are non-recurring. These charges, income and gains could be reasonably expected to recur in future results of operations.
These measures of performance are used by the Company for several business purposes and by other REITs. The Company uses FFO and/or Operating FFO in part (i) as a disclosure to improve the understanding of the Company’s operating results among the investing public, (ii) as a measure of a real estate asset company’s performance, (iii) to influence acquisition, disposition and capital investment strategies and (iv) to compare the Company’s performance to that of other publicly traded shopping center REITs.
For the reasons described above, management believes that FFO and Operating FFO provide the Company and investors with an important indicator of the Company’s operating performance. They provide recognized measures of performance other than GAAP
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net income, which may include non-cash items (often significant). Other real estate companies may calculate FFO and Operating FFO in a different manner.
Management recognizes the limitations of FFO and Operating FFO when compared to GAAP’s net income. FFO and Operating FFO do not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties. Management does not use FFO or Operating FFO as an indicator of the Company’s cash obligations and funding requirements for future commitments, acquisitions or development activities. Neither FFO nor Operating FFO represents cash generated from operating activities in accordance with GAAP, and neither is necessarily indicative of cash available to fund cash needs. Neither FFO nor Operating FFO should be considered an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity. FFO and Operating FFO are simply used as additional indicators of the Company’s operating performance. The Company believes that to further understand its performance, FFO and Operating FFO should be compared with the Company’s reported net income (loss) and considered in addition to cash flows determined in accordance with GAAP, as presented in its consolidated financial statements. Reconciliations of these measures to their most directly comparable GAAP measure of net income (loss) have been provided below.
Reconciliation Presentation
FFO and Operating FFO attributable to common shareholders were as follows (in thousands):
(7,763
(5,629
28,198
(78,166
The increase in FFO for the nine months ended September 30, 2019, primarily was attributable to higher debt extinguishment and transaction costs in 2018 partially offset by the dilutive impact of the Dividend Trust Portfolio transaction and the RVI spin-off in 2018. The decrease in Operating FFO primarily was attributable to the dilutive impact of asset sales from the Dividend Trust Portfolio transaction and the RVI spin-off, partially offset by lower interest expense and higher fee income.
29
The Company’s reconciliation of net income (loss) attributable to common shareholders computed in accordance with GAAP to FFO attributable to common shareholders and Operating FFO attributable to common shareholders is as follows (in thousands). The Company provides no assurances that these charges and gains are non-recurring. These charges and gains could reasonably be expected to recur in future results of operations.
Depreciation and amortization of real estate investments
39,329
48,242
118,924
191,997
Equity in net (income) loss of joint ventures
(2,612
2,920
Joint ventures' FFO(A)
8,498
7,036
24,169
20,847
Non-controlling interests (OP Units)
84
587
Impairment of real estate
6,373
2,201
(14,497
(124
RVI disposition and refinancing fees
(546
(1,622
(4,960
Mark-to-market adjustment (PRSUs)
1,418
2,818
Hurricane property (income) loss, net(B)
(885
(1,941
504
Debt extinguishment, transaction, other, net(C)
322
1,475
443
99,337
Separation charges
4,641
Joint ventures – debt extinguishment and other
(52
211
(6
914
Non-operating items, net
257
(1,877
(2,590
103,774
At September 30, 2019 and 2018, the Company had an economic investment in unconsolidated joint venture interests related to 102 and 103 shopping center properties, respectively. These joint ventures represent the investments in which the Company recorded its share of equity in net income or loss and, accordingly, FFO and Operating FFO.
Joint ventures’ FFO and Operating FFO are summarized as follows (in thousands):
Net income (loss) attributable to unconsolidated joint
ventures
Loss (gain) on disposition of real estate, net
440
(32,548
(15,205
(82,924
FFO
43,334
38,805
124,248
118,343
FFO at SITE Centers' ownership interests
Operating FFO at SITE Centers' ownership interests
8,446
7,247
24,163
21,762
The hurricane property loss is summarized as follows (in thousands):
Lost tenant revenue
6,570
Clean up costs and other uninsured expenses
818
(1,784
(6,884
30
Amounts included in other expense are as follows (in thousands):
Debt extinguishment costs, net
33
418
58,433
Transaction costs - RVI spin-off
528
37,044
Transaction and other (income) expense, net
3,860
Net Operating Income and Same Store Net Operating Income
The Company uses Net Operating Income (“NOI”), which is a non-GAAP financial measure, as a supplemental performance measure. NOI is calculated as property revenues less property-related expenses. The Company believes NOI provides useful information to investors regarding the Company’s financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level and, when compared across periods, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and disposition activity on an unleveraged basis.
The Company also presents NOI information on a same store basis, or Same Store Net Operating Income (“SSNOI”). The Company defines SSNOI as property revenues less property-related expenses, which exclude straight-line rental income (including reimbursements) and expenses, lease termination income in excess of lost rent, management fee expense, fair market value of leases and expense recovery adjustments. SSNOI also excludes activity associated with development and major redevelopment and includes assets owned in comparable periods (15 months for quarter comparisons). In addition, SSNOI excludes all non-property and corporate level revenue and expenses. Other real estate companies may calculate NOI and SSNOI in a different manner. The Company believes SSNOI at its effective ownership interest provides investors with additional information regarding the operating performances of comparable assets because it excludes certain non-cash and non-comparable items as noted above. SSNOI is frequently used by the real estate industry, as well as securities analysts, investors and other interested parties, to evaluate the performance of REITs.
The Company believes that SSNOI is not, and is not intended to be, a presentation in accordance with GAAP. SSNOI information has its limitations as it excludes any capital expenditures associated with the re-leasing of tenant space or as needed to operate the assets. SSNOI does not represent amounts available for dividends, capital replacement or expansion, debt service obligations or other commitments and uncertainties. Management does not use SSNOI as an indicator of the Company’s cash obligations and funding requirements for future commitments, acquisitions or development activities. SSNOI does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. SSNOI should not be considered as an alternative to net income (computed in accordance with GAAP) or as an alternative to cash flow as a measure of liquidity. A reconciliation of NOI and SSNOI to their most directly comparable GAAP measure of net income (loss) has been provided:
31
The Company’s reconciliation of net income (loss) computed in accordance with GAAP to NOI and SSNOI for the Company at 100% and at its effective ownership interest of the assets is as follows (in thousands):
At 100%
At the Company's Interest
For the Nine Months Ended September 30,
Fee income
(45,360
(30,424
(13,658
(15,412
63,973
115,915
Other (income) expense, net
254
99,316
Tax expense
827
611
Gain on disposition of real estate
Income from non-controlling interests
836
1,191
Consolidated NOI
230,260
371,070
SITE Centers' consolidated joint venture
(1,314
(1,186
Consolidated NOI, net of non-controlling interests
228,946
369,884
Net income (loss) from unconsolidated joint ventures
4,676
4,246
12,742
11,244
18,195
14,904
2,453
14,028
824
954
2,988
3,295
1,515
(12,638
Unconsolidated NOI
230,565
229,229
43,393
36,033
Total Consolidated + Unconsolidated NOI
460,825
600,299
272,339
405,917
Less: Non-Same Store NOI adjustments
(30,381
(177,353
(25,536
(166,391
Total SSNOI
430,444
422,946
246,803
239,526
SSNOI % Change
3.0
The increase in SSNOI at the Company’s effective ownership interest for the nine months ended September 30, 2019 as compared to 2018 primarily is due to increases in the base rent per occupied square foot through lease renewal activity, rent commencement with respect to new leases, increased percentage and overage rents, a one-time bankruptcy settlement with a tenant and bad debt favorability.
LIQUIDITY, CAPITAL RESOURCES AND FINANCING ACTIVITIES
The Company periodically evaluates opportunities to issue and sell additional debt or equity securities, obtain credit facilities from lenders or repurchase or refinance long-term debt as part of its overall strategy to further strengthen its financial position. The Company remains committed to monitoring liquidity and maintaining low leverage in an effort to lower its overall risk profile.
The Company’s consolidated and unconsolidated debt obligations generally require monthly or semi-annual payments of principal and/or interest over the term of the obligation. While the Company currently believes it has several viable sources to obtain capital and fund its business, including capacity under its credit facilities described below, no assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.
The Company has historically accessed capital sources through both the public and private markets. Acquisitions and redevelopments are generally financed through cash provided from operating activities, Revolving Credit Facilities (as defined below), mortgages assumed, secured debt, unsecured debt, common and preferred equity offerings, joint venture capital and asset sales. Total consolidated debt outstanding was $1.8 billion at September 30, 2019, compared to $1.9 billion at December 31, 2018.
In July 2019, the Company amended and restated its unsecured revolving credit facility with a syndicate of financial institutions, arranged by Wells Fargo Securities, LLC, J.P. Morgan Chase Bank, N.A., Citizens Bank, N.A., RBC Capital Markets and U.S. Bank National Association (the “Unsecured Credit Facility.”) The Unsecured Credit Facility continues to provide for borrowings of up to $950 million (which may be increased to $1.45 billion provided that the new or existing lenders agree to provide the incremental commitments) and was amended to extend the maturity date to January 2024, subject to two six-month options to extend the maturity to January 2025 upon the Company’s request (subject to satisfaction of certain conditions), and to reduce the interest rate margins applicable to drawn amounts. The Company also amended its existing unsecured revolving credit facility with PNC Bank, National Association, which provides for borrowings of up to $20 million (the “PNC Facility,” and together with the Unsecured Credit Facility, the “Revolving Credit Facilities”), to reflect substantially the same terms as those contained in the amended and restated Unsecured Credit Facility. The Company’s borrowings under the Revolving Credit Facilities bear interest at variable rates at the Company’s election, based on either LIBOR plus a specified spread (0.9% at September 30, 2019), or the Alternate Base Rate, as defined in the respective facility, plus a specified spread (0% at September 30, 2019). The Company also pays an annual facility fee (0.20% at September 30, 2019) on the aggregate commitments applicable to each Revolving Credit Facility. The specified spreads and commitment fees vary depending on the Company’s long-term senior unsecured debt ratings from Moody’s Investors Service, Inc. (“Moody’s”), S&P Global Ratings (“S&P”), Fitch Ratings Inc. (“Fitch”) and their successors.
The Revolving Credit Facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness are, or may be, issued contain certain financial and operating covenants including, among other things, leverage ratios and debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets and engage in mergers and certain acquisitions. These credit facilities and indentures also contain customary default provisions including the failure to make timely payments of principal and interest payable thereunder, the failure to comply with the Company’s financial and operating covenants and the failure of the Company or its majority-owned subsidiaries (i.e., entities in which the Company has a greater than 50% interest) to pay, when due, certain indebtedness in excess of certain thresholds beyond applicable grace and cure periods. In the event the Company’s lenders or note holders declare a default, as defined in the applicable agreements governing the debt, the Company may be unable to obtain further funding and/or an acceleration of any outstanding borrowings may occur. As of September 30, 2019, the Company was in compliance with all of its financial covenants in the agreements governing its debt. Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities. The Company believes it will continue to operate in compliance with these covenants in 2019.
Consolidated Indebtedness – as of September 30, 2019
The Company expects to fund its maturing indebtedness obligations from available cash, asset sales and joint venture activity, current operations and utilization of its Revolving Credit Facilities; however, the Company may issue long-term debt and/or equity securities in lieu of, or in addition to, borrowing under its Revolving Credit Facilities. The Company intends to continue to maintain a long-term financing strategy with limited reliance on short-term debt. The Company believes its Revolving Credit Facilities are sufficient for its liquidity strategy and longer-term capital structure needs. The Company has addressed all of its 2019 consolidated debt maturities. In 2020, the Company has $40.4 million of consolidated mortgage debt maturing. The Company had cash and cash equivalents of $23.7 million at September 30, 2019, as well as $970.0 million of borrowing capacity available on the Revolving Credit Facilities at September 30, 2019.
As discussed above, the Company is committed to maintaining low leverage and may utilize proceeds from asset sales and other investments to repay additional debt. No assurance can be provided that these obligations will be refinanced or repaid as currently
anticipated. These sources of funds could be affected by various risks and uncertainties (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018).
The Company continually evaluates its debt maturities and, based on management’s assessment, believes it has viable financing and refinancing alternatives. The Company has sought to manage its debt maturities through executing a strategy to extend debt duration, increase liquidity, maintain low leverage and improve the Company’s credit profile with a focus of lowering the Company's balance sheet risk and cost of capital.
Unconsolidated Joint Ventures Mortgage Indebtedness – as of September 30, 2019
The outstanding indebtedness of the Company’s unconsolidated joint ventures at September 30, 2019, which matures in the subsequent 13-month period (i.e. thru October 31, 2020), is as follows (in millions):
Outstanding
at September 30, 2019
At SITE Centers' Share
DDR Domestic Retail Fund I(A)
293.7
58.7
DDRTC Core Retail Fund, LLC(B)
113.6
17.0
BRE DDR Retail Holdings IV(A)
93.0
DDR SAU Retail Fund LLC(C)
21.1
Total debt maturities through October 2020
521.4
84.6
Expected to be extended at the joint venture’s option in accordance with the loan agreement.
Repaid by the joint venture in October 2019. The Company funded its share of the repayment with an equity contribution.
Expected to enter into an extension agreement.
It is expected that the joint ventures will fund these obligations from refinancing opportunities, including extension options or possible asset sales. No assurance can be provided that these obligations will be refinanced or repaid as currently anticipated.
Cash Flow Activity
The Company’s core business of leasing space to well-capitalized tenants continues to generate consistent and predictable cash flow after expenses, interest payments and preferred share dividends. This capital is available for use at the Company’s discretion for investment, debt repayment and the payment of dividends on common and preferred shares.
The Company’s cash flow activities are summarized as follows (in thousands):
Cash flow provided by operating activities
Cash flow provided by investing activities
Cash flow used for financing activities
Changes in cash flow for the nine months ended September 30, 2019, compared to the prior comparable period are as follows:
Operating Activities: Cash provided by operating activities decreased $8.0 million primarily due to the following:
Impact of asset sales and the spin-off of assets to RVI;
Reduction in interest expense and
Reduction in general and administrative expenses.
Investing Activities: Cash provided by investing activities decreased $261.3 million primarily due to the following:
Decrease in proceeds of $194.4 million from disposition of real estate and
Decrease in net cash received from joint ventures and affiliates of $61.9 million.
Financing Activities: Cash used for financing activities decreased $363.2 million primarily due to the following:
Decrease in net debt repayments of $228.1 million;
Decrease of dividends paid of $101.4 million;
Decrease in contribution of assets to RVI of $52.4 million and
Increase in common share repurchases of $14.1 million.
34
RVI Preferred Shares
In 2018, RVI issued 1,000 shares of its series A preferred stock (the “RVI Preferred Shares”) to the Company, which are noncumulative and have no mandatory dividend rate. The RVI Preferred Shares rank, with respect to dividend rights and rights upon liquidation, dissolution or winding up of RVI, senior in preference and priority to RVI’s common shares and any other class or series of RVI capital stock. Subject to the requirement that RVI distribute to its common shareholders the minimum amount required to be distributed with respect to any taxable year in order for RVI to maintain its status as a REIT and to avoid U.S. federal income taxes, the RVI Preferred Shares will be entitled to a dividend preference for all dividends declared on RVI’s capital stock at any time up to a “preference amount” equal to $190 million in the aggregate, which amount may increase by up to an additional $10 million if the aggregate gross proceeds of RVI asset sales subsequent to July 1, 2018, exceeds $2.0 billion. Notwithstanding the foregoing, the RVI Preferred Shares are entitled to receive dividends only when, as and if declared by the Board of Directors of RVI, and RVI’s ability to pay dividends is subject to any restrictions set forth in the terms of its indebtedness.
In addition, the Company had receivables from RVI of $16.7 million at September 30, 2019, primarily consisting of restricted cash and insurance premiums owed by RVI pursuant to the terms of the agreement governing the separation of RVI from the Company on July 1, 2018, and provided a guaranty, see discussion in “Contractual Obligations and Other Commitments,” included elsewhere herein. In August 2019, RVI made a payment of $17.0 million on this receivable.
Dividend Distribution
The Company satisfied its REIT requirement of distributing at least 90% of ordinary taxable income with declared common and preferred share cash dividends of $133.9 million and $202.8 million for the nine months ended September 30, 2019 and 2018, respectively. Because actual distributions were greater than 100% of taxable income, federal income taxes were not incurred by the Company for the nine months ended September 30, 2019.
The Company declared a quarterly cash dividend of $0.20 per common share for each of the first three quarters of 2019. The Board of Directors of the Company intends to monitor the dividend policy in order to maximize the Company’s free cash flow while still adhering to REIT payout requirements.
Common Shares and Common Share Repurchase Program
The Company has a $250 million continuous equity program. At October 31, 2019, the Company had all $250 million available for the future issuance of common shares under that program.
In November 2018, the Company’s Board of Directors authorized a common share repurchase program. Under the terms of the program, the Company may purchase up to a maximum value of $100 million of its common shares. Through September 30, 2019, the Company had repurchased under this program 4.3 million of its common shares in open market transactions at an aggregate cost of approximately $50.4 million.
SOURCES AND USES OF CAPITAL
Strategic Transaction Activity
The Company remains committed to monitoring liquidity and maintaining low leverage in an effort to lower its overall risk profile. Asset sales and proceeds from the repayment of other investments continue to represent a potential source of proceeds to be used to achieve these objectives.
Equity Transactions
35
Acquisitions
In October 2019, the Company purchased a shopping center in Austin, Texas for $12.6 million.
Proceeds from Transactional Activity
During the nine months ended September 30, 2019, the Company sold four consolidated shopping center properties, aggregating 0.5 million square feet, which generated proceeds totaling $103.5 million. The Company recorded a net gain of $31.1 million. In addition, the Company’s unconsolidated joint ventures sold four shopping center assets, aggregating 1.0 million square feet, which generated proceeds totaling $129.5 million, of which the Company’s proportionate share of the proceeds was $16.7 million. The Company’s pro rata share of proceeds is before giving effect to the repayment of indebtedness and transaction costs. The asset sales from the joint ventures with Blackstone resulted in preferred equity repayments received by the Company of $14.9 million.
In August 2019, the Company received $17.0 million from RVI for repayment of receivables established at the time of the spin‑off transaction. In October 2019, the Company also received $12.0 million related to the repayment of a loan investment.
The Company also reached agreement in the third quarter to sell its 15% stake in the DDRTC Joint Venture to its partner, TIAA-CREF, based on a gross fund value of $1.14 billion which included $298.9 million of mortgage debt at September 30, 2019. The DDRTC Joint Venture is composed of 22 assets, totaling 7.6 million square feet. Fee income from this joint venture is projected at approximately $9 million to $10 million for the year ending December 31, 2019. The Company contributed $17.0 million towards the repayment of certain joint venture debt maturing in October 2019 and the remaining amount of the joint venture’s mortgage debt will be assumed by TIAA-CREF at closing. The transaction is expected to close in early 2020 and the Company will continue to manage the assets until the sale is complete.
Changes in investment strategies for assets may impact the Company’s hold-period assumptions for those properties. The disposition of certain assets could result in a loss or impairment recorded in future periods. The Company evaluates all potential sale opportunities taking into account the long-term growth prospects of the assets, the use of proceeds and the impact to the Company’s balance sheet, in addition to the impact on operating results.
Redevelopment Opportunities
A key component to the Company’s strategic plan will be the evaluation of additional redevelopment potential within the portfolio, particularly as it relates to the efficient use of the real estate. The Company will generally commence construction on various redevelopments only after substantial tenant leasing has occurred. The Company will continue to closely monitor its expected spending in 2019 for redevelopments, as the Company considers this funding to be discretionary spending. The Company does not anticipate expending significant funds on joint venture redevelopment projects in 2019.
The Company’s consolidated land holdings are classified in two separate line items on the Company’s consolidated balance sheets included herein, (i) Land and (ii) Construction in Progress and Land. At September 30, 2019, the $857.8 million of Land primarily consisted of land that is part of the Company’s shopping center portfolio. However, this amount also includes a small portion of vacant land composed primarily of outlots or expansion pads adjacent to the shopping center properties. Approximately 130 acres of this land, which has a recorded cost basis of approximately $15 million, is available for future development.
Included in Construction in Progress and Land at September 30, 2019, was approximately $11 million of recorded costs related to undeveloped land being marketed for sale for which active construction never commenced or previously ceased. The Company evaluates these assets each reporting period and records an impairment charge equal to the difference between the current carrying value and fair value when the expected undiscounted cash flows are less than the asset’s carrying value.
Redevelopment Projects
As part of its strategy to expand, improve and re-tenant various properties, at September 30, 2019, the Company has invested approximately $94 million in various consolidated active redevelopment projects.
36
The Company’s major redevelopment projects are typically substantially complete within two years of the construction commencement date. At September 30, 2019, the Company’s significant consolidated redevelopment projects were as follows (in thousands):
Location
Estimated
Stabilized
Quarter
Gross Cost
Cost Incurred at
Nassau Park Pavilion (Princeton, New Jersey)
4Q19
12,199
11,382
The Collection at Brandon Boulevard (Tampa, Florida)
4Q20
27,732
13,786
1000 Van Ness (San Francisco, California)
2Q20
4,810
West Bay Plaza (Phase II) (Cleveland, Ohio)
2Q22
12,000
Shoppers World (Boston, Massachusetts)
TBD
20,426
1,948
Sandy Plains Village (Atlanta, Georgia)
8,556
1,166
Perimeter Pointe (Atlanta, Georgia)
9,833
846
95,556
29,916
For redevelopment assets completed in 2019, the assets placed in service were completed at a cost of approximately $150 per square foot.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has a number of off-balance sheet joint ventures with varying economic structures. Through these interests, the Company has investments in operating properties and one development project. Such arrangements are generally with institutional investors.
The Company’s unconsolidated joint ventures had aggregate outstanding indebtedness to third parties of $1.8 billion and $2.0 billion at September 30, 2019 and 2018, respectively (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). Such mortgages are generally non-recourse to the Company and its partners; however, certain mortgages may have recourse to the Company and its partners in certain limited situations, such as misuse of funds and material misrepresentations.
CAPITALIZATION
At September 30, 2019, the Company’s capitalization consisted of $1.8 billion of debt, $525.0 million of preferred shares and $2.7 billion of market equity (market equity is defined as common shares and OP Units outstanding multiplied by $15.11, the closing price of the Company’s common shares on the New York Stock Exchange on September 30, 2019), resulting in a debt to total market capitalization ratio of 0.36 to 1.0, as compared to the ratio of 0.44 to 1.0 at September 30, 2018. The closing price of the Company’s common shares on the New York Stock Exchange was $13.39 at September 28, 2018, the last trading day of September. At September 30, 2019 and 2018, the Company’s total debt consisted of $1.7 billion and $2.1 billion of fixed-rate debt, respectively, and $0.1 billion and $0.3 billion of variable-rate debt, respectively. On October 24, 2019, the Company announced that it intends to redeem all of its outstanding 6.50% Series J Cumulative Redeemable Preferred Shares on or about November 25, 2019.
It is management’s strategy to have access to the capital resources necessary to manage the Company’s balance sheet and to repay upcoming maturities. Accordingly, the Company may seek to obtain funds through additional debt or equity financings and/or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and to reduce the Company’s cost of capital by maintaining an investment grade rating with Moody’s, S&P and Fitch. A security rating is not a recommendation to buy, sell or hold securities, as it may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating. The Company may not be able to obtain financing on favorable terms, or at all, which may negatively affect future ratings.
The Company’s credit facilities and the indentures under which the Company’s senior and subordinated unsecured indebtedness are, or may be, issued contain certain financial and operating covenants, including, among other things, debt service coverage and fixed charge coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of the Company’s assets, engage in mergers and certain acquisitions and make distribution to its shareholders. Although the Company intends to operate in compliance with these covenants, if the Company were to violate these covenants, the Company may be subject to higher finance costs and fees or accelerated maturities. In addition, certain of the Company’s credit facilities and indentures permit the acceleration of maturity in the event certain other debt of the Company has been accelerated. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would have a negative impact on the Company’s financial condition and results of operations.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company has no consolidated debt maturing until April 2020. The Company expects to fund future maturities from utilization of its Revolving Credit Facilities, proceeds from asset sales and other investments, cash flow from operations and/or additional debt or equity financings. No assurance can be provided that these obligations will be repaid as currently anticipated or refinanced.
RVI Guaranty
In 2018, the Company provided an unconditional guaranty to PNC Bank with respect to any obligations of RVI outstanding from time to time under a $30 million revolving credit agreement entered into by RVI with PNC Bank. RVI has agreed to reimburse the Company for any amounts paid by it to PNC Bank pursuant to the guaranty plus interest at a contracted rate and to pay an annual commitment fee to the Company on account of the guaranty.
Other Guaranties
In conjunction with the redevelopment of shopping centers, the Company had entered into commitments with general contractors aggregating approximately $16.9 million for its consolidated properties at September 30, 2019. These obligations, composed principally of construction contracts, are generally due within 12 to 24 months, as the related construction costs are incurred, and are expected to be financed through operating cash flow, new construction loans, asset sales or borrowings under the Revolving Credit Facilities. These contracts typically can be changed or terminated without penalty.
The Company routinely enters into contracts for the maintenance of its properties. These contracts typically can be canceled upon 30 to 60 days’ notice without penalty. At September 30, 2019, the Company had purchase order obligations, typically payable within one year, aggregating approximately $2.3 million related to the maintenance of its properties and general and administrative expenses.
INFLATION
Most of the Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive additional rental income from escalation clauses that generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales. Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices. In addition, many of the Company’s leases are for terms of less than 10 years, permitting the Company to seek increased rents at market rates upon renewal. Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.
ECONOMIC CONDITIONS
Despite recent tenant bankruptcies and e-commerce distribution, the Company continues to believe there is healthy tenant demand for quality locations within well-positioned shopping centers. Further, the Company continues to see demand from a broad range of tenants for its space, particularly in the off-price sector, which the Company believes is a reflection of increasingly value-oriented consumers. This is evidenced by the continued stable leasing volumes, as new leases and renewals aggregating approximately two million square feet of space for the nine months ended September 30, 2019, as well as approximately four million square feet of space for new leases and renewals for the year ended December 31, 2018, on a pro rata basis. The Company also benefits from a diversified tenant base, with only two tenants whose annualized rental revenue equals or exceeds 3% of the Company’s annualized consolidated revenues plus the Company’s proportionate share of unconsolidated joint venture revenues (TJX Companies at 6.0% and Bed Bath & Beyond at 3.4%). Other significant tenants include Best Buy, Ross Stores, GAP, Nordstrom Rack, Kroger, Whole Foods, Home Depot and Lowe’s, all of which have relatively strong credit ratings, remain well-capitalized and have outperformed other retail categories. The Company expects these tenants to continue to provide a stable revenue base given the long-term nature of these leases. Moreover, the majority of the tenants in the Company’s shopping centers provide day-to-day consumer necessities with a focus on value and convenience, versus discretionary items, which the Company believes will enable many of its tenants to outperform even in a cyclical downturn.
The retail sector continues to be affected by increasing competition, including the impact of e-commerce. These dynamics are expected to continue to lead to tenant bankruptcies, closures and store downsizing. In many cases, the loss of a weaker tenant or downsizing of space creates a value-add opportunity such as re-leasing space at higher rents to stronger retailers or redevelopment. The loss of a tenant or downsizing of space can adversely affect the Company (see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018).
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The Company believes that its shopping center portfolio is strong, as evidenced by the historical occupancy rates and consistent growth in the average annualized base rent per occupied square foot. Historical occupancy has generally ranged from 89% to 96% since the Company’s initial public offering in 1993. At September 30, 2019, the shopping center portfolio occupancy was 91.0% and total portfolio average annualized base rent per occupied square foot was $18.04, on a pro rata basis. The shopping center portfolio occupancy was 89.9% and the total portfolio average annualized base rent per occupied square foot was $17.86 at December 31, 2018, on a pro rata basis. At September 30, 2018, on a pro rata basis and restated to reflect the assets owned at December 31, 2018, the shopping center portfolio occupancy was 90.2% and the total portfolio average annualized base rent per occupied square foot was $17.77. The Company’s portfolio has been impacted by anchor tenant bankruptcies, lease expirations and asset sales. The Company has had to invest capital to re-lease anchor units; however, the per square foot cost to do so has been predominantly consistent with the Company’s historical trends. The weighted-average cost of tenant improvements and lease commissions estimated to be incurred over the expected lease term for new and renewal leases executed during the nine months ended September 30, 2019 and 2018, on a pro rata basis, was $2.43 and $2.28 per rentable square, respectively. The Company generally does not expend a significant amount of capital on lease renewals. The quality of the property revenue stream is high and consistent, as it is generally derived from tenants with good credit profiles under long-term leases, with very little reliance on overage rents generated by tenant sales performance. The Company recognizes the risks posed by the economy, but believes that the position of its transformed portfolio and the general diversity and credit quality of its tenant base should enable it to successfully navigate through a potentially challenging retail environment.
NEW ACCOUNTING STANDARDS
New Accounting Standards are more fully described in Note 1, “Nature of Business and Financial Statement Presentation,” to the Company’s consolidated financial statements included herein.
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 Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations. 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 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, 2018.
Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:
The Company is subject to general risks affecting the real estate industry, including the need to enter into new leases or renew leases on favorable terms to generate rental revenues, and any economic downturn may adversely affect the ability of the Company’s tenants, or new tenants, to enter into new leases or the ability of the Company’s existing tenants to renew their leases at rates at least as favorable as their current rates;
The Company could be adversely affected by changes in the local markets where its properties are located, as well as by adverse changes in national economic and market conditions;
The Company may fail to anticipate the effects on its properties of changes in consumer buying practices, including sales over the internet and the resulting retailing practices and space needs of its tenants, or a general downturn in its tenants’ businesses, which may cause tenants to close stores or default in payment of rent;
The Company is subject to competition for tenants from other owners of retail properties, and its tenants are subject to competition from other retailers and methods of distribution. The Company is dependent upon the successful operations
and financial condition of its tenants, in particular its major tenants, and could be adversely affected by the bankruptcy of those tenants;
The Company relies on major tenants, which makes it vulnerable to changes in the business and financial condition of, or demand for its space by, such tenants;
The Company may not realize the intended benefits of acquisition or merger transactions. The acquired assets may not perform as well as the Company anticipated, or the Company may not successfully integrate the assets and realize improvements in occupancy and operating results. The acquisition of certain assets may subject the Company to liabilities, including environmental liabilities;
The Company may fail to identify, acquire, construct or develop additional properties that produce a desired yield on invested capital, or may fail to effectively integrate acquisitions of properties or portfolios of properties. In addition, the Company may be limited in its acquisition opportunities due to competition, the inability to obtain financing on reasonable terms or any financing at all and other factors;
The Company may fail to dispose of properties on favorable terms, especially in regions experiencing deteriorating economic conditions. In addition, real estate investments can be illiquid, particularly as prospective buyers may experience increased costs of financing or difficulties obtaining financing due to local or global conditions, and could limit the Company’s ability to promptly make changes to its portfolio to respond to economic and other conditions;
The Company may abandon a development or redevelopment opportunity after expending resources if it determines that the development opportunity is not feasible due to a variety of factors, including a lack of availability of construction financing on reasonable terms, the impact of the economic environment on prospective tenants’ ability to enter into new leases or pay contractual rent, or the inability of the Company to obtain all necessary zoning and other required governmental permits and authorizations;
The Company may not complete development or redevelopment projects on schedule as a result of various factors, many of which are beyond the Company’s control, such as weather, labor conditions, governmental approvals, material shortages or general economic downturn, resulting in limited availability of capital, increased debt service expense and construction costs and decreases in revenue;
The Company’s financial condition may be affected by required debt service payments, the risk of default and restrictions on its ability to incur additional debt or to enter into certain transactions under its credit facilities and other documents governing its debt obligations. In addition, the Company may encounter difficulties in obtaining permanent financing or refinancing existing debt. Borrowings under the Company’s Revolving Credit Facilities are subject to certain representations and warranties and customary events of default, including any event that has had or could reasonably be expected to have a material adverse effect on the Company’s business or financial condition;
Changes in interest rates could adversely affect the market price of the Company’s common shares, as well as its performance and cash flow;
Debt and/or equity financing necessary for the Company to continue to grow and operate its business may not be available or may not be available on favorable terms;
Disruptions in the financial markets could affect the Company’s ability to obtain financing on reasonable terms and have other adverse effects on the Company and the market price of the Company’s common shares;
The Company is subject to complex regulations related to its status as a REIT and would be adversely affected if it failed to qualify as a REIT;
The Company must make distributions to shareholders to continue to qualify as a REIT, and if the Company must borrow funds to make distributions, those borrowings may not be available on favorable terms or at all;
Joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that a partner or co-venturer may become bankrupt, may at any time have interests or goals different from those of the Company and may take action contrary to the Company’s instructions, requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT. In addition, a partner or co-venturer may not have access to sufficient capital to satisfy its funding obligations to the joint venture. The partner could cause a default under the joint venture loan for reasons outside the Company’s control. Furthermore, the Company could be
40
required to reduce the carrying value of its equity investments, including preferred investments, if a loss in the carrying value of the investment is realized;
The Company’s decision to dispose of real estate assets, including undeveloped land and construction in progress, would change the holding period assumption in the undiscounted cash flow impairment analyses, which could result in material impairment losses and adversely affect the Company’s financial results;
The outcome of pending or future litigation, including litigation with tenants or joint venture partners, may adversely affect the Company’s results of operations and financial condition;
Property damage, expenses related thereto, and other business and economic consequences (including the potential loss of revenue) resulting from extreme weather conditions in locations where the Company owns properties;
Sufficiency and timing of any insurance recovery payments related to damages and lost revenues from extreme weather conditions;
The Company is subject to potential environmental liabilities;
The Company may incur losses that are uninsured or exceed policy coverage due to its liability for certain injuries to persons, property or the environment occurring on its properties;
The Company could incur additional expenses to comply with or respond to claims under the Americans with Disabilities Act or otherwise be adversely affected by changes in government regulations, including changes in environmental, zoning, tax and other regulations;
The Company’s Board of Directors, which regularly reviews the Company’s business strategy and objectives, may change the Company’s strategic plan based on a variety of factors and conditions, including in response to changing market conditions and
The Company and its vendors 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 or penalties.
41
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risk exposure is interest rate risk. The Company’s debt, excluding unconsolidated joint venture debt, is summarized as follows:
(Millions)
Weighted-
Average
Maturity
(Years)
Interest
Percentage
of Total
Fixed-Rate Debt
1,733.9
5.6
4.3
94.6
1,734.7
6.3
92.1
Variable-Rate Debt
99.4
5.4
149.7
3.1
7.9
The Company’s unconsolidated joint ventures’ indebtedness at its carrying value is summarized as follows:
Joint
Venture
Debt
Company's
Proportionate
Share
1,125.4
216.5
1,156.0
218.6
719.5
90.7
1,056.5
141.3
The Company intends to use retained cash flow, proceeds from asset sales, equity and debt financing and variable-rate indebtedness available under its Revolving Credit Facilities to repay indebtedness and fund capital expenditures at the Company’s shopping centers. Thus, to the extent the Company incurs additional variable-rate indebtedness, its exposure to increases in interest rates in an inflationary period could increase. The Company does not believe, however, that increases in interest expense as a result of inflation will significantly impact the Company’s distributable cash flow.
The carrying value and the fair value of the Company’s fixed-rate debt are adjusted to include the Company’s proportionate share of the joint venture fixed-rate debt. An estimate of the effect of a 100 basis-point increase at September 30, 2019 and December 31, 2018, is summarized as follows (in millions):
100 Basis-Point
Increase in
Market Interest
Company's fixed-rate debt
1,841.7
1,753.5
1,729.1
1,638.7
Company's proportionate share of
joint venture fixed-rate debt
220.5
212.5
214.9
206.1
The sensitivity to changes in interest rates of the Company’s fixed-rate debt was determined using a valuation model based upon factors that measure the net present value of such obligations that arise from the hypothetical estimate as discussed above.
A 100 basis-point increase in short-term market interest rates on variable-rate debt at September 30, 2019, would result in an increase in interest expense of approximately $0.8 million for the Company and $0.7 million representing the Company’s proportionate share of the joint ventures’ interest expense relating to variable-rate debt outstanding for the nine months ended September 30, 2019. The estimated increase in interest expense for the year does not give effect to possible changes in the daily balance of the Company’s or joint ventures’ outstanding variable-rate debt.
The Company and its joint ventures intend to continually monitor and actively manage interest costs on their variable-rate debt portfolio and may enter into swap positions based on market fluctuations. In addition, the Company believes it has the ability to obtain funds through additional equity and/or debt offerings and joint venture capital. Accordingly, the cost of obtaining such protection agreements versus the Company’s access to capital markets will continue to be evaluated. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes. As of September 30, 2019, the Company had no other material exposure to market risk.
CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation, pursuant to Securities Exchange Act of 1934 Rules 13a-15(b) and 15d-15(b), of the effectiveness of our disclosure controls and procedures. Based on their evaluation as required, the CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of the end of such period to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
During the three months ended September 30, 2019, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal proceedings, which, taken together, are not expected to have a material adverse effect on the Company. The Company is also subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.
RISK FACTORS
None.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
(b)
(c)
(d)
Number of
Purchased(1)
Price Paid
per Share
Total Number
of Shares Purchased
as Part of
Publicly Announced
Plans or Programs
Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or Programs
July 1–31, 2019
1,486
13.48
August 1–31, 2019
61
13.96
September 1–30, 2019
13.90
1,568
13.50
49.6
Common shares surrendered or deemed surrendered to the Company to satisfy statutory minimum tax withholding obligations in connection with the vesting and/or exercise of awards under the Company’s equity-based compensation plans.
On November 29, 2018, the Company announced that its Board of Directors authorized a common share repurchase program. Under the terms of the program authorized by the Board, the Company may purchase up to a maximum value of $100 million of its common shares and the program has no expiration date. As of October 31, 2019, the Company had repurchased 4.3 million of its common shares in the aggregate at a cost of $50.4 million and a weighted-average cost of $11.74 per share under the program.
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
Not applicable.
EXHIBITS
10.1
Third Amended and Restated Credit Agreement, dated as of July 26, 2019, among SITE Centers Corp., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 29, 2019 (File No. 001-11690))
31.1
Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 2
31.2
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 2
32.1
Certification of chief executive officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 2002 1,2
32.2
Certification of chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of this report pursuant to the Sarbanes-Oxley Act of 2002 1,2
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 2
101.SCH
Inline XBRL Taxonomy Extension Schema Document 2
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document 2
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document 2
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document 2
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document 2
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 has been formatted in Inline XBRL
Pursuant to SEC Release No. 34-4751, these exhibits are deemed to accompany this report and are not “filed” as part of this report.
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018, (iv) Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 and (vi) Notes to Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SITE CENTERS CORP.
By:
/s/ Christa A. Vesy
Name:
Christa A. Vesy
Title:
Executive Vice President and Chief Accounting Officer (Authorized Officer)
Date: November 4, 2019