RPT REALTY The following discussion should be read in conjunction with the consolidated financial statements, the notes thereto, and the comparative summary of selected financial data included in this report.
Overview
RPT Realty owns and operates a national portfolio of open-air shopping destinations principally located in topU.S. markets. The Company's shopping centers offer diverse, locally-curated consumer experiences that reflect the lifestyles of their surrounding communities and meet the modern expectations of the Company's retail partners. As ofDecember 31, 2020 , our property portfolio consisted of 49 shopping centers (including five shopping centers owned through R2G) representing 11.9 million square feet of GLA. As ofDecember 31, 2020 , the Company's pro-rata share of the aggregate portfolio was 92.8% leased.
Our goal is to be a dominant shopping center owner, with a focus on the following:
•Own and manage high quality open-air shopping centers predominantly concentrated in the topU.S. metropolitan statistical areas ("MSA"); •Curate our real estate to maximize its value while being aligned with the future of the shopping center industry by leveraging technology, optimizing distribution points for brick-and-mortar and e-commerce purchases, engaging in best-in-class sustainability programs and developing a personalized appeal to attract and engage the next generation of shoppers; •Increase the value of our properties and create long-term value and growth for our shareholders; •Cultivate value creation redevelopment and expansion pipeline; •Maximize balance sheet liquidity and flexibility; •Maximize revenue by leasing to a strong and diverse tenant mix at increased rent, when possible; and •Attract, retain and promote motivated high performing employees. Key methods to achieve our strategy: •Deliver above average relative shareholder return and generate outsized consistent and sustainable Same Property Net Operating Income ("Same Property NOI") and Operating Funds from Operations ("Operating FFO") per share growth; •Evaluate select redevelopment projects with significant pre-leasing for which we expect to achieve attractive returns on investment; •Sell assets that no longer meet our long-term strategy and redeploy the proceeds to lease, redevelop and acquire assets in our core and target markets; •Achieve lower leverage while maintaining low variable interest rate risk; •Maintain strong tenant and retailer relationships to minimize tenant turnover to attract diverse tenancy; and •Retain access to diverse sources of capital, maintain liquidity through borrowing capacity under our unsecured line of credit and minimize the amount of debt maturities in a single year.
The following highlights the Company's significant transactions, events and
results that occurred during the year ended
Financial Results:
•Net (loss) income available to common shareholders was$(16.9) million , or$(0.21) per diluted share, for the year endedDecember 31, 2020 , as compared to$84.8 million , or$1.04 per diluted share, for the same period in 2019. •FFO was$66.5 million , or$0.81 per diluted share, for the year endedDecember 31, 2020 , as compared to$88.0 million , or$1.00 per diluted share, for the same period in 2019. •Operating FFO was$64.2 million , or$0.78 per diluted share, for the year endedDecember 31, 2020 , as compared to$90.9 million , or$1.04 per diluted share, for the same period in 2019. 34 -------------------------------------------------------------------------------- •Same property net operating income decreased (7.5)% for the year endedDecember 31, 2020 , as compared to the same period in 2019. •Executed 149 new leases and renewals, totaling approximately 1.1 million square feet in the aggregate portfolio. •As ofDecember 31, 2020 , the Company's aggregate portfolio leased rate was 92.8%, as compared to 94.7% atDecember 31, 2019 .
Acquisition Activity (See Note 4 of the notes to consolidated financial statements in this report):
•We had no acquisitions during the year ended
Disposition Activity (See Note 4 and Note 5 of the notes to consolidated financial statements in this report):
•Disposed of two land parcels for aggregate gross proceeds of$1.4 million . These transactions resulted in an aggregate gain on sale of real estate of$0.3 million and an aggregate impairment provision of$0.6 million .
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies require our most subjective judgment and use of estimates in the preparation of our consolidated financial statements.
Revenue Recognition and Accounts Receivable
Most of our leases contain non-contingent rent escalations for which we recognize income on a straight-line basis over the non-cancelable lease term. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset which is included in the "Other Assets" line item in our consolidated balance sheets. We review our unbilled straight-line rent receivable balance to determine the future collectability of revenue that will not be billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors. Our evaluation is based on our assessment of tenant credit risk changes indicating that expected future straight-line rent may not be realized. Depending on circumstances, we may provide a reserve against the previously recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be received. Additionally, we monitor the collectability of our accounts receivable from specific tenants on an ongoing basis, analyze historical experience, customer creditworthiness, current economic trends and changes in tenant payment terms when evaluating the likelihood of tenant payment. For operating leases in which collectibility of rental income is not considered probable, rental income is recognized on a cash basis and allowances are taken for those balances that we have reason to believe may be uncollectible in the period it is determined not to be probable of collection.
For more information refer to Note 1 of the notes to the consolidated financial statements in this report.
Acquisitions
Acquisitions of properties are accounted for utilizing the acquisition method
(which requires all assets acquired and liabilities assumed be measured at
acquisition date fair value) and, accordingly, the results of operations of an
acquired property are included in our results of operations from the date of
acquisition. Estimates of fair values are based upon future cash flows and other
valuation techniques in accordance with our fair value measurements policy,
which are used to allocate the purchase price of acquired property among land,
buildings on an "as if vacant" basis, tenant improvements, identifiable
intangibles and any gain on purchase. Identifiable intangible assets and
liabilities include the effect of above-and below-market leases, the value of
having leases in place ("as-is" versus "as if vacant" and absorption costs),
other intangible assets such as assumed tax increment revenue bonds and
out-of-market assumed mortgages. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of 40 years for
buildings, and over the remaining terms of any intangible asset contracts
35
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and the respective tenant leases, which may include bargain renewal options. The
impact of these estimates, including estimates in connection with acquisition
values and estimated useful lives, could result in significant differences
related to the purchased assets, liabilities and subsequent depreciation or
amortization expense. For more information, refer to Note 1 of the notes to
the consolidated financial statements in this report.
Impairment
We review our investment in real estate, including any related intangible assets, for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of the property may not be recoverable. These changes in circumstances include, but are not limited to, changes in occupancy, rental rates, tenant sales, net operating income, geographic location, real estate values and expected holding period. The viability of all projects under construction or development, including those owned by unconsolidated joint ventures, is regularly evaluated under applicable accounting requirements, including requirements relating to abandonment of assets or changes in use. To the extent a project or an individual component of the project, is no longer considered to have value, the related capitalized costs are charged against operations.
Impairment provisions resulting from any event or change in circumstances, including changes in our intentions or our analysis of varying scenarios, could be material to our consolidated financial statements.
We recognize an impairment of an investment in real estate when the estimated undiscounted cash flow are less than the net carrying value of the property. Impairment may be impacted by macroeconomic conditions, including those caused by global pandemics, such as COVID-19, which may result in property operational disruption and indicate that the carrying amount may not be recoverable. If it is determined that an investment in real estate is impaired, then the carrying value is reduced to the estimated fair value as determined by cash flow models and discount rates or comparable sales in accordance with our fair value measurement policy. Refer to Note 1 of the notes to the consolidated financial statements in this report.
Results of Operations
Comparison of the Year Ended
The following summarizes certain line items from our audited statements of operations which we believe are important in understanding our operations and/or those items that have significantly changed during the year endedDecember 31, 2020 as compared to 2019: Year Ended December 31, 2020 2019 Dollar Change Percent Change (In thousands) Total revenue$ 191,712 $ 234,088 $ (42,376) (18.1) % Real estate taxes 33,086 35,961 (2,875) (8.0) % Recoverable operating expenses 21,915 25,256 (3,341) (13.2) % Non-recoverable operating expense 8,962 10,292 (1,330) (12.9) % Depreciation and amortization 77,213 78,647 (1,434) (1.8) % Transaction costs 186 - 186 NM General and administrative expense 25,801 27,634 (1,833) (6.6) % Provision for impairment 598 - 598 NM Insured expenses, net (2,745) 2,276 (5,021) NM Gain on sale of real estate 318 81,856 (81,538) NM Earnings from unconsolidated joint ventures 1,590 581 1,009 NM Interest expense 39,317 40,057 (740) (1.8) % Other gain on unconsolidated joint ventures - 237 (237) NM Loss on extinguishment of debt - (2,571) 2,571 NM NM - Not meaningful 36
-------------------------------------------------------------------------------- Total revenue in 2020 decreased$42.4 million , or (18.1)%, from 2019. The decrease is primarily due to the following: •$22.1 million decrease related to five properties that were contributed to R2G during the fourth quarter of 2019; and •$16.7 million decrease due to increased rental income not probable of collection as well as related straight-line rent reserves and rent abatement in the current period, primarily due to the COVID-19 pandemic; and •$3.3 million decrease from acceleration of below market leases in the prior period attributable to tenants who vacated prior to the original estimated lease end dates; and •$1.2 million decrease in recovery income at existing properties as compared to the prior period; partially offset by •$1.1 million increase related to the net impact of two properties sold during the first quarter of 2019 and one property acquired during the fourth quarter of 2019; and •$1.2 million increase related to management and leasing fees collected due to R2G. Real estate tax expense in 2020 decreased by$2.9 million , or (8.0)%, from 2019, primarily due to properties contributed to R2G during the fourth quarter of 2019. Recoverable operating expense in 2020 decreased by$3.3 million , or (13.2)%, from 2019, primarily due to properties contributed to R2G during the fourth quarter of 2019, as well as lower common area maintenance expenses at existing properties. Non-recoverable operating expense in 2020 decreased by$1.3 million , or (12.9)%, from 2019, primarily due to lower legal fees associated with a tenant dispute that concluded during the second quarter of 2020, less travel expense and properties contributed to R2G during the fourth quarter of 2019. Depreciation and amortization expense in 2020 decreased by$1.4 million , or (1.8)%, from 2019. The decrease is primarily due to properties contributed to R2G during the fourth quarter of 2019, partially offset by higher asset write offs in the current year for tenants that vacated prior to their original lease end date. During 2020 we recorded transaction costs of$0.2 million related to legal and professional fees associated with a property acquisition and property sale of a center that were terminated. General and administrative expense in 2020 decreased by$1.8 million , or (6.6)%, from 2019. The net decrease is primarily a result of lower severance and management reorganization expense, which in the prior year was largely comprised of severance to a former executive officer and performance award expense related to the Company's former Chief Executive Officer, as well as lower bonus expense and lower travel expense in the current year. These decreases were partially offset by higher wages and payroll related expenses, higher stock-based compensation expense and higher legal fees. During 2020 we recorded an impairment provision totaling$0.6 million , related to land held for development. The adjustment was triggered by changes in the expected use of the land and in the associated sales price assumptions. Refer to Note 1 of the notes to the consolidated financial statements in this report for further information related to impairment provisions. We did not record any impairments in 2019. During 2020 the Company recorded an insured benefit of$2.7 million related to insurance proceeds received in connection with a property damaged by a hail storm in 2019. During fourth quarter of 2019 the Company wrote off the corresponding damaged real estate assets, net of insurance proceeds received as ofDecember 31, 2019 . Gain on sale of real estate was$0.3 million in 2020. In the comparable period in 2019 we had a gain on sale of real estate of$81.9 million . The decrease is primarily a result of the five properties contributed to R2G during the fourth quarter of 2019. Earnings from unconsolidated joint ventures in 2020 increased$1.0 million from 2019 primarily due to R2G which was formed in the fourth quarter of 2019, partially offset by the gain on sale of theNora Plaza property by one of our joint ventures in the prior period. Interest expense in 2020 decreased by$0.7 million , or (1.8)%, from 2019. The decrease is primarily as a result of a 50 basis point decrease in our weighted average interest rate, partially offset by a 12.9% increase in our average outstanding debt. The increase in our average outstanding debt is the result of$225.0 million of borrowings inMarch 2020 on our unsecured revolving credit facility to strengthen the Company's liquidity position due to the COVID-19 pandemic. The Company has subsequently repaid$125.0 million during the remainder of 2020, leaving$100.0 million outstanding. 37 -------------------------------------------------------------------------------- Other gain on unconsolidated joint ventures in 2020 decreased by$0.2 million primarily due to the sale of theNora Plaza property by one of our joint ventures in the prior period. The gain represents the difference between our share of the distributed proceeds and the carrying value of our equity investment in such joint venture. During 2019 we recorded loss on extinguishment of debt of$2.6 million , which represented the write-off of unamortized deferred financing costs associated with the junior subordinated notes that were redeemed in full inApril 2019 and term loans that were repaid inNovember 2019 , as well as deferred financing costs and a prepayment penalty associated with our senior unsecured notes that were repaid inDecember 2019 .
Comparison of the Year Ended
The following summarizes certain line items from our audited statements of operations which we believe are important in understanding our operations and/or those items which have significantly changed during the year endedDecember 31, 2019 as compared to 2018: Year Ended December 31, 2019 2018 Dollar Change Percent Change (In thousands) Total revenue$ 234,088 $ 260,622 $ (26,534) (10.2) % Real estate taxes 35,961 42,306 (6,345) (15.0) % Recoverable operating expenses 25,256 26,177 (921) (3.5) % Non-recoverable operating expenses 10,292 7,286 3,006 41.3 % Depreciation and amortization 78,647 87,327 (8,680) (9.9) % Transaction costs - 233 (233) NM General and administrative expense 27,634 31,383 (3,749) (11.9) % Provision for impairment - 13,650 (13,650) NM Insured expenses, net 2,276 - 2,276 NM Gain on sale of real estate 81,856 3,994 77,862 NM Earnings from unconsolidated joint ventures 581 589 (8) (1.4) % Interest expense 40,057 43,439 (3,382) (7.8) % Other gain on unconsolidated joint ventures 237 5,208 (4,971) (95.4) % Loss on extinguishment of debt (2,571) (134) (2,437) NM NM - Not meaningful Total revenue in 2019 decreased by$26.5 million , or (10.2)%, from 2018. The decrease is primarily due to the following: •$28.6 million decrease related to properties sold in 2019 and 2018; •$5.2 million decrease from acceleration of a below market lease in the prior period attributable to a specific tenant who vacated prior to the original lease termination date; primarily offset by a •$3.3 million increase from acceleration of below market leases in the current period attributable to tenants who vacated prior to the original estimated lease termination date; and a •$3.8 million increase related to our existing centers largely attributable to higher minimum rent primarily from occupancy gains, contractual rent increases and lease renewals and higher recovery income mainly as a result of an increase in recoverable expenses at existing centers.
Real estate tax expense in 2019 decreased by
Recoverable operating expense in 2019 decreased by$0.9 million , or (3.5)% from 2018, primarily due to properties sold during 2019 and 2018, partially offset by higher common area maintenance expenses at existing properties. 38 -------------------------------------------------------------------------------- Non-recoverable operating expense in 2019 decreased by$3.0 million , or 41.3% from 2018, primarily due to higher internal leasing costs as a result of the adoption of ASC 842 which eliminated the capitalization of these costs in the current year as well as higher legal fees associated with a tenant dispute, partially offset by properties sold during 2019 and 2018.
Depreciation and amortization expense in 2019 decreased by
During 2018 we recorded acquisition costs of$0.2 million related to legal and professional fees associated with a potential shopping center acquisition that was not ultimately pursued during the year. General and administrative expense in 2019 decreased$3.7 million , or (11.9)%, from 2018. The net decrease is primarily a result of lower severance and management reorganization expense, which includes severance costs associated with former executives as well as sign-on bonuses and recruiting fees attributable to the new executive team, partially offset by an increase in bonus expense and higher share-based compensation expense. During 2018 we recorded an impairment provision totaling$13.7 million , of which$13.5 million was on shopping centers classified as income producing and$0.2 million on land available for development. The adjustments related to shopping centers were triggered by changes in associated market prices and expected hold period assumptions, as well as a purchase price reduction at one property. The provision related to land held for development was triggered by changes in the expected use of the land and higher costs. Refer to Note 1 of the notes to the consolidated financial statements included in this report for further information related to impairment provisions. We did not record any impairments in 2019. During 2019 the Company wrote off real estate assets that were damaged by a hail storm at one property, which resulted in a charge of$2.3 million , net of$3.5 million of insurance proceeds received as ofDecember 31, 2019 . The damage incurred will be fully covered by insurance. Gain on sale of real estate was$81.9 million in 2019. In the comparable period in 2018 we had a gain of$4.0 million . The increase is primarily a result of the five properties contributed to R2G during the fourth quarter of 2019.
Earnings from unconsolidated joint ventures in 2019 remained flat from 2018.
Interest expense in 2019 decreased by$3.4 million , or (7.8)%, from 2018. The decrease is primarily a result of a 9.2% decrease in our average outstanding debt, partially offset by lower capitalized interest. The decline in our average outstanding debt is the result of using proceeds from asset sales in the fourth quarter of 2018 and first quarter of 2019 to pay down our revolving credit line and redeem our junior subordinated notes. Other gain on unconsolidated joint ventures in 2019 decreased by$5.0 million primarily due to the sale of theMartin Square property by our joint venture,Ramco/Lion Venture LP , in the prior period. The gain represents the difference between our share of the distributed proceeds and the carrying value of our equity investment in such joint venture. 39 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary uses of capital include principal and interest payments on our outstanding indebtedness, ongoing capital expenditures such as leasing capital expenditures and building improvements, shareholder distributions, operating expenses of our business, debt maturities, acquisitions and discretionary capital expenditures such as targeted remerchandising, expansions, redevelopment and development. We generally strive to cover our principal and interest payments, operating expenses, shareholder distributions, and ongoing capital expenditures from cash flow from operations, although from time to time we have borrowed or sold assets to finance a portion of those uses. We believe the combination of cash flow from operations, cash balances, favorable relationships with our lenders, issuance of debt, property dispositions and issuance of equity securities will provide adequate capital resources to fund all of our expected uses over at least the next 12 months. Although we believe that the combination of factors discussed above will provide sufficient liquidity, no such assurance can be given. As discussed herein, the COVID-19 pandemic has adversely impacted states and cities where the Company's tenants operate their businesses and where the Company's properties are located and has had an adverse impact on our short-term cash flow due to a significant number of tenants not paying rent for the second, third and fourth quarters of 2020. COVID-19 could continue to have a material adverse effect on our financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of our tenants' businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to us in full, timely or at all. Continued nonpayment of rent or closures by our tenants of their stores could reduce our cash flows, which would adversely impact our liquidity and the achievement of our financial forecast. We believe our current capital structure provides us with the financial flexibility to fund our current capital needs. We intend to continue to enhance our financial and operational flexibility by extending the duration of our debt, laddering our debt maturities, expanding our unencumbered asset base, and improving our leverage profile. In addition, we believe we have access to multiple forms of capital which includes unsecured corporate debt, secured mortgage debt, and preferred and common equity. However, there can be no assurances in this regard and additional financing and capital may not ultimately be available to us going forward, on favorable terms or at all. AtDecember 31, 2020 and 2019, we had$211.5 million and$114.6 million , respectively, in cash and cash equivalents and restricted cash. Restricted cash generally consists of funds held in escrow by mortgage lenders to pay real estate taxes, insurance premiums and certain capital expenditures. As ofDecember 31, 2020 , we had$37.0 million of debt maturing in 2021, and we had$250.0 million available to be drawn on our$350.0 million unsecured revolving credit facility subject to compliance with applicable financial covenants. The current amount of outstanding indebtedness is close to the maximum permitted amount under the covenants contained in our revolving credit facility, and as a result our ability to retain our outstanding borrowings and utilize the limited remaining amount available under our revolving credit facility would depend on our continued compliance with financial covenants and other terms of our revolving credit agreement, which may be impacted by certain factors including tenant store closures and the nonpayment of rent, unless we obtain waivers or modifications to our loan document covenants. These covenants are generally based on our financial results from the most recently completed four fiscal quarters and, as a result, the impact on these financial covenants from adverse short-term impacts on operating results is partially mitigated by previous and/or subsequent operating results. Refer to Note 8 of the notes to the consolidated financial statements for further discussion on our covenants. Our long-term, post-COVID-19 pandemic, liquidity needs consist primarily of funds necessary to pay indebtedness at maturity, potential acquisitions of properties, redevelopment of existing properties, the development of land and discretionary capital expenditures. We continually search for investment opportunities that may require additional capital and/or liquidity. We will continue to pursue the strategy of selling non-core properties or land that no longer meet our investment criteria or advance our business strategy. Our ability to obtain acceptable selling prices and satisfactory terms and financing will impact the timing of any future sales. We anticipate using net proceeds from the sale of properties or land to reduce outstanding debt and support current and future growth oriented initiatives. To the extent that asset sales are not sufficient to meet our long-term liquidity needs, we expect to meet such needs by raising debt or issuing equity. We have on file with theSEC an automatic shelf registration statement relating to the offer and sale of an indeterminable amount of debt securities, preferred shares, common shares, depository shares, warrant and rights. From time to time, we may issue securities under this registration statement for working capital and other general corporate purposes. 40 --------------------------------------------------------------------------------
The following is a summary of our cash flow activities:
Year Ended December 31,
2020 2019 2018
(In thousands)
Cash provided by operating activities $ 63,059 $ 90,593 $ 106,322
Cash (used in) provided by investing activities (18,929) 95,095 42,262
Cash provided by (used in) financing activities 52,802 (115,858)
(116,753)
Operating Activities
Net cash flow provided by operating activities decreased by $27.5 million in
2020 compared to 2019 primarily due to the following:
•Lower rental income receipts of $17.6 million as a result of the COVID-19
pandemic; and
•Impact of shopping centers contributed to R2G in 2019.
Investing Activities
Net cash used in investing activities was$18.9 million in 2020, compared to net cash provided by investing activities of$95.1 million in 2019. The$114.0 million change in net cash from investing activities was primarily due to the following: •Net proceeds from the sale of real estate, including those completed by our joint ventures, decreased$185.9 million ; partially offset by •Development and capital improvements, including those covered by insurance, decreased$33.5 million ; •Acquisitions of real estate decreased$33.9 million ; and •Investment in unconsolidated joint ventures decreased$4.7 million . During 2020, we sold two land parcels for aggregate net proceeds of$1.3 million . During 2019, we sold two shopping centers and one land parcel for aggregate net proceeds of$67.9 million . In addition, onDecember 10, 2019 , we announced the formation of R2G. We contributed five properties valued at$244.0 million to R2G and received$118.3 million in gross proceeds ($117.3 million net) for the 48.5% stake in R2G that was acquired by GIC. Refer to Note 4
of
the notes to the consolidated financial statements in this report for additional information related to dispositions.
We had no acquisition activity during 2020. In 2019 we acquired one property,
Our development and capital improvements spend in 2020 decreased by$33.5 million compared to 2019. The decrease was primarily a result of the Company's strategy to defer all but essential maintenance capital expenditures in order to preserve liquidity in response to the COVID-19 pandemic. AtDecember 31, 2020 , we did not have any active development or redevelopment projects ongoing.
Financing Activities
Net cash provided by financing activities was$52.8 million in 2020, compared to net cash used in financing activities of$115.9 million in 2019. The$168.7 million change in net cash from financing activities was primarily due to the following: •Net borrowing on our revolving credit facility in 2020 of$100.0 million ; •Suspension of our common dividend and distributions paid to operating partnership unit holders in 2020 due to the COVID-19 pandemic of$36.1 million ; and •Redemption of all of our outstanding junior subordinated notes due 2038 for an aggregate purchase price of$28.6 million in 2019. 41 -------------------------------------------------------------------------------- OnNovember 6, 2019 , theOperating Partnership entered into the credit agreement, which consists of an unsecured revolving credit facility of up to$350.0 million and term loan facilities of$310.0 million . As ofDecember 31, 2020 ,$250.0 million was available to be drawn on our$350.0 million unsecured revolving credit facility, subject to our compliance with certain covenants. It is anticipated that additional funds borrowed under our unsecured revolving line of credit will be used for general corporate purposes, including working capital, capital expenditures, the repayment of indebtedness or other corporate activities. For further information on the unsecured revolving line of credit and other debt, refer to Note 8 of notes to the consolidated financial statements in this report.
Dividends and Equity
We currently qualify, and intend to continue to qualify in the future, as a REIT under the Code. As a REIT, we must distribute to our shareholders at least 90% of our REIT taxable income annually, excluding net capital gains. Distributions paid are at the discretion of our Board and depend on our actual net income available to common shareholders, cash flow, financial condition, capital requirements, restrictions in financing arrangements, the annual distribution requirements under REIT provisions of the Code and such other factors as our Board deems relevant. We paid cash dividends of$0.44 per common share to shareholders in 2020, as compared to cash dividends of$0.88 per common share to shareholders in 2019. Additionally, we paid cash dividends of$3.625 per share of our 7.25% Series D Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest to preferred shareholders in 2020 and 2019. Our dividend policy is to make distributions to shareholders of at least 90% of our REIT taxable income, excluding net capital gains, in order to maintain qualification as a REIT. Distributions paid by us are generally expected to be funded from cash flows from operating activities. To the extent that cash flows from operating activities are insufficient to pay total distributions for any period, alternative funding sources are used. Examples of alternative funding sources include proceeds from sales of real estate and bank borrowings. During 2020, our cash flow from operations exceeded the sum of our principal and interest payments, operating expenses, shareholder distributions and recurring capital expenditures by$7.4 million . In light of the disruption caused by the COVID-19 pandemic, theBoard of Trustees temporarily suspended the quarterly common dividend and quarterly operating unit holder distributions to retain cash starting with the second quarter of 2020. OnFebruary 11, 2021 , the Company'sBoard of Trustees reinstated the first quarter 2021 common cash dividend at$0.075 per share payable onApril 1, 2021 , to the holders of record of Common Shares as of the close of business onMarch 19, 2021 . In addition, the Company will reinstate a distribution of$0.075 per unit to the operating partnership unit holders for the first quarter of 2021.The Board of Trustees will continue to evaluate the Company's dividend policy throughout the remainder of 2021 based upon the Company's financial performance and economic outlook and intends to maintain a quarterly common dividend of at least the amount required to continue qualifying as a REIT forU.S. federal income tax requirements. InFebruary 2020 , the Company entered into an Equity Distribution Agreement ("Equity Distribution Agreement") pursuant to which the Company may offer and sell, from time to time, the Company's common shares having an aggregate gross sales price of up to$100.0 million . Sales of the shares of common stock may be made, in the Company's discretion, from time to time, in "at-the-market" offerings as defined in Rule 415 of the Securities Act. The Equity Distribution Agreement also provides that the Company may enter into forward contracts for shares of its common stock with forward sellers and forward purchasers. For the year endedDecember 31, 2020 , we did not issue any common shares through the arrangement. As ofDecember 31, 2020 , we have full capacity remaining under the agreement. The sale of such shares issuable pursuant to the Equity Distribution Agreement was registered with theSEC pursuant to a prospectus supplement filed inFebruary 2020 and the accompanying base prospectus statement forming part of the Company's shelf registration statement on Form S-3 (No. 333-232007) which was filed with theSEC inJune 2019 .
Debt
AtDecember 31, 2020 , we had$1.0 billion of debt outstanding consisting of$535.0 million in senior unsecured notes,$310.0 million of unsecured term loan facilities, and$85.3 million of fixed rate mortgage loans encumbering certain properties, and$100.0 million of borrowings on our revolving credit facility.
Our
Our
In addition, we have eleven interest rate swap agreements in effect for an
aggregate notional amount of
42
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forward starting interest rate swap agreements for an aggregate notional amount
of $75.0 million converting our floating rate corporate debt to fixed rate debt.
After taking into account the impact of converting our variable rate debt to
fixed rate debt by use of the interest rate swap agreements, at December 31,
2020 , we had $100.0 million of variable rate debt outstanding.
Our revolving credit facility, senior unsecured notes and term loan facilities
contain representations, warranties and covenants, and events of default. These
include financial covenants such as total leverage, fixed charge coverage ratio,
unsecured leverage ratio, tangible net worth and various other calculations,
which are detailed in the specific agreements governing our indebtedness, many
of which are exhibits to this Annual Report on Form 10-K. Additionally, our
senior unsecured notes only permitted us to include an unencumbered real estate
asset in the measurement of our unsecured leverage ratio if such asset satisfied
80% and 85% occupancy tests for the prior quarter. Such occupancy tests were
generally based on the percentage of tenants operating, paying rent and not
otherwise in default based on leases requiring current rental payments.
Accordingly, as a result of the various uncertainties and factors surrounding
COVID-19 and its impact on our tenants and their businesses and, therefore, its
potential impact on our ability to maintain compliance with our loan covenants,
on June 30, 2020 , we entered into amendments to the note purchase agreements
governing all of our outstanding senior unsecured notes. The following is a
summary of the material amendments to the note purchase agreements:
•The occupancy tests relating to the minimum ratio of consolidated total
unencumbered asset value to unsecured indebtedness were eliminated during the
period from June 30, 2020 through and including September 30, 2021 (the
"Specified Period") and were otherwise reduced during the fiscal quarters ended
December 31, 2021 and March 31, 2022 ;
•The minimum ratio of consolidated total unencumbered asset value to unsecured
indebtedness that the Operating Partnership is required to maintain was reduced
during the Specified Period; and
•The Operating Partnership agreed to a minimum liquidity requirement during the
Specified Period.
Off Balance Sheet Arrangements
We consolidate entities in which we own less than 100% equity interest if we have a controlling interest or are the primary beneficiary in a variable interest entity, as defined in the Consolidation Topic of FASB ASC 810. From time to time, we enter into joint venture arrangements from which we believe we can benefit by owning a partial interest in one or more properties. As ofDecember 31, 2020 , our investments in unconsolidated joint ventures were approximately$126.3 million representing our ownership interest in three joint ventures. We accounted for these entities under the equity method. Refer to Note 6 of the notes to the consolidated financial statements in this report for further information regarding our equity investments in unconsolidated joint ventures. We are engaged by certain of our joint ventures to provide asset management, property management, construction management, leasing and investing services for such ventures' respective properties. We receive fees for our services, including a property management fee calculated as a percentage of gross revenues received. Guarantee A redevelopment agreement was entered into between theCity of Jacksonville , theJacksonville Economic Development Commission and the Company, to construct and developRiver City Marketplace in 2005. As part of the agreement, the city agreed to finance up to$12.2 million of bonds. Repayment of the bonds is to be made in accordance with a level-payment amortization schedule over 20 years, and repayments are made out of tax revenues generated by the redevelopment. The remaining debt service payments due over the life of the bonds, including principal and interest, are$8.0 million . As part of the redevelopment, the Company executed a guaranty agreement whereby the Company would fund debt service payments if incremental revenues were not sufficient to fund repayment. There have been no payments made by the Company under this guaranty agreement to date. 43
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Contractual Obligations
The following are our contractual cash obligations as of
Payments due by period
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
(In thousands)
Mortgages and notes payable:
Scheduled amortization $ 7,246 $ 2,508 $ 3,156 $ 1,582 $ -
Payments due at maturity 1,023,008 37,000 404,508 306,500 275,000
Total mortgages and notes payable (1) 1,030,254 39,508 407,664 308,082 275,000
Interest expense (2) 173,443 36,760 88,303 32,248 16,132
Finance lease (3) 1,200 100 300 200 600
Operating leases 99,135 1,469 4,095 1,757 91,814
Construction commitments 1,503 1,503 - - -
Development obligations (4) 2,831 638 593 371 1,229
Total contractual obligations $ 1,308,366 $ 79,978 (1)Excludes$1.1 million of unamortized mortgage debt premium and$3.6 million in deferred financing costs. (2)Variable rate debt interest is calculated using rates atDecember 31, 2020 . (3)Includes interest payments associated with the finance lease obligation of$0.3 million . (4)Includes interest payments associated with the development obligations of$0.6 million .
At
Mortgages and Notes Payable
See the analysis of our debt included in "Liquidity and Capital Resources" above.
Operating and Finance Leases
We have an operating ground lease at
We have an operating lease for our 12,572 square foot corporate office inSouthfield, Michigan , which commenced inAugust 2019 , and an operating lease for our 5,629 square foot corporate office inNew York, New York . These leases are set to expire inDecember 2024 andJanuary 2024 , respectively. OurSouthfield, Michigan corporate office lease includes two additional five year renewal options to extend the lease throughDecember 2034 and ourNew York, New York corporate office lease includes an additional five year renewal to extend the lease throughJanuary 2029 . We also have a ground finance lease at our Buttermilk Towne Center with theCity of Crescent Springs, Kentucky . The lease provides for fixed annual payments of$0.1 million through maturity inDecember 2032 , at which time we can acquire the land forone dollar . Construction Costs
In connection with the development and expansion of various shopping centers as
of
44
--------------------------------------------------------------------------------Planned Capital Spending
We are focused on enhancing the value of our existing portfolio of shopping centers through successful leasing efforts, including the reconfiguration of anchor-space and small shop lease-up.
For 2021, we anticipate spending between$30.0 million and$40.0 million for capital expenditures, of which$1.5 million is reflected in the construction commitments in the above contractual obligations table. Our 2021 estimate includes ongoing capital expenditure spending between$20.0 million and$27.0 million and discretionary capital expenditure spending between$10.0 million and$13.0 million . Ongoing capital expenditures relates to leasing costs and building improvements whereas discretionary capital expenditures relate to targeted remerchandising, outlots/expansion, and development/redevelopment. Estimates for future spending will change as new projects are approved.
Capitalization
At
December 31,
2020 2019
(In thousands)
Notes payable, net $ 1,027,751 $ 930,808
Unamortized premiums and deferred financing costs 2,503 1,773
Finance lease obligation 875 926
Cash, cash equivalents and restricted cash (211,484) (114,552)
Pro-rata share of unconsolidated entities cash, cash equivalents
and restricted cash (1,914) (1,120)
Net debt (1) $ 817,731 $ 817,835
Common shares outstanding 80,055 79,850
OP Units outstanding 1,909 1,909
Restricted share awards (treasury method) 410 995
Total common shares and equivalents 82,374 82,754
Market price per common share $ 8.65 $ 15.04
Equity market capitalization $ 712,535 $ 1,244,620 7.25% Series D Cumulative Convertible Perpetual Preferred Shares 1,849
1,849
Market price per convertible preferred share $ 49.84 $ 59.86
Convertible perpetual preferred shares (at market) $
92,154
Total market capitalization $
1,622,420
Net debt to total market capitalization 50.4 % 37.6 % (1) Net debt represents (i) our total debt principal, which excludes unamortized premium and deferred financing costs, net, plus (ii) our finance lease obligation, less (iii) our cash, cash equivalents and restricted cash, less (iv) our pro-rata share of cash, cash equivalents and restricted cash of each of our unconsolidated entities. We believe this calculation is useful to understand our financial condition. Our method of calculating net debt may be different from methods used by other companies and may not be comparable. AtDecember 31, 2020 , noncontrolling interests represented a 2.3% ownership in theOperating Partnership . The OP Units may, under certain circumstances, be exchanged for our common shares on a one-for-one basis. We, as sole general partner of theOperating Partnership , have the option, but not the obligation, to settle exchanged OP Units held by others in cash. Assuming the exchange of all OP Units, there would have been approximately 82.0 million of our common shares outstanding atDecember 31, 2020 , with a market value of approximately$709.0 million . 45
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Non-GAAP Financial Measures
Certain of our key performance indicators are considered non-GAAP financial measures. Management uses these measures along with our GAAP financial statements in order to evaluate our operations results. We believe these additional measures provide additional and useful means to assess our performance. However, these measures do not represent alternatives to GAAP measures as indicators of performance and a comparison of the Company's presentations to similarly titled measures of other REITs may not necessarily be meaningful due to possible differences in definitions and application by such REITs. Funds From Operations We consider funds from operations, also known as "FFO," to be an appropriate supplemental measure of the financial performance of an equity REIT.The National Association of Real Estate Investment Trusts ("NAREIT") is an industry body public REITs participate in and provides guidance to its members on Non-GAAP financial measures. Under the NAREIT definition, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable property and impairment provisions on depreciable real estate or on investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee, plus depreciation and amortization, (excluding amortization of financing costs). Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. We have adopted the NAREIT definition in our computation of FFO. In addition to FFO, we include Operating FFO as an additional measure of our financial and operating performance. Operating FFO excludes acquisition costs and periodic items such as gains (or losses) from sales of land and impairment provisions on land, bargain purchase gains, severance expense, executive management reorganization costs, net, accelerated amortization of debt premiums, gains or losses on extinguishment of debt, uncapitalized financing costs, insured expenses, net, accelerated write-offs of above and below market lease intangibles, accelerated write-offs of lease incentives andR2G Venture LLC related costs that are not adjusted under the current NAREIT definition of FFO. We provide a reconciliation of FFO to Operating FFO. FFO and Operating FFO should not be considered alternatives to GAAP net income available to common shareholders or as alternatives to cash flow as measures of liquidity. While we consider FFO and Operating FFO useful measures for reviewing our comparative operating and financial performance between periods or to compare our performance to different REITs, our computations of FFO and Operating FFO may differ from the computations utilized by other real estate companies, and therefore, may not be comparable. We recognize the limitations of FFO and Operating FFO when compared to GAAP net income available to common shareholders. FFO and Operating FFO do not represent amounts available for needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. In addition, FFO and Operating FFO do not represent cash generated from operating activities in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs, including the payment of dividends.
The following table illustrates the calculations of FFO and Operating FFO:
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Years Ended December 31,
2020 2019 2018
(In thousands, except per share data)
Net (loss) income $ (10,474) $ 93,686 $ 18,036
Net loss (income) attributable to noncontrolling partner interest 241 (2,175) (417)
Preferred share dividends (6,701) (6,701) (6,701)
Net (loss) income available to common shareholders (16,934) 84,810 10,918
Adjustments:
Rental property depreciation and amortization expense 76,649 78,095 86,970
Pro-rata share of real estate depreciation from unconsolidated joint ventures (1)
7,044 459 191
Gain on sale of depreciable real estate - (81,485) (3,699)
Gain on sale of joint venture depreciable real estate - (385) (307)
Provision for impairment on income-producing properties - - 13,434
Other gain on unconsolidated joint ventures - (237) (5,208)
FFO available to common shareholders 66,759 81,257 102,299
Noncontrolling interest in Operating Partnership (2) (241) - 417
Preferred share dividends (assuming conversion) (3) - 6,701 6,701
FFO available to common shareholders and dilutive securities $
66,518
Gain on sale of land (318) (371) (295) Provision for impairment on land available for development 598 - 216 Transaction costs (4) 186 - 233 Insured expenses, net (2,745) 2,276 - Severance expense (5) 506 130 1,117 Executive management reorganization, net (5)(6) - 1,402 9,673 R2G Venture LLC related costs (5)(7) - 499 - Above and below market lease intangible write-offs (256) (3,525) (5,619)
Pro-rata share of acquisition costs from unconsolidated joint ventures (1)
407 - -
Pro-rata share of above and below market lease intangible write-offs from unconsolidated joint ventures (1)
(626) - -
Loss on extinguishment of debt - 2,571 134
Payment of loan amendment fees (5) 184 - -
Bond interest proceeds (8) (213) - -
Other gain - - (398)
Operating FFO available to common shareholders and dilutive securities
$
64,241
Weighted average common shares 79,998 79,802 79,592 Shares issuable upon conversion of OP Units (2) 1,909 - 1,912 Dilutive effect of restricted stock 496 939 496 Shares issuable upon conversion of preferred shares (3) - 6,981 6,858 Weighted average equivalent shares outstanding, diluted 82,403 87,722 88,858 Diluted (loss) earnings per share (9) $
(0.21)
1.02 (0.04) 1.10
FFO available to common shareholders and dilutive securities per share, diluted
$
0.81
Per share adjustments for Operating FFO available to common shareholders and dilutive securities
(0.03) 0.04 0.06
Operating FFO available to common shareholders and dilutive securities per share, diluted
$
0.78
(1)Amounts noted are included in Earnings from unconsolidated joint ventures. (2)The total noncontrolling interest reflects OP Units convertible on a one-for-one basis into common shares. The Company's net income for the year endedDecember 31, 2019 (largely driven by gain on sale of real estate), resulted in an income allocation to OP Units which drove an OP Unit ratio of$1.14 (based on 1,909 weighted average OP Units outstanding) as ofDecember 31, 2019 . In instances when the OP Unit ratio exceeds basic FFO, the OP Units are considered anti-dilutive, and as a result are not included in the calculation of fully diluted FFO and Operating FFO for the year endedDecember 31, 2019 . (3)7.25% Series D Cumulative Convertible Perpetual Preferred Shares of Beneficial Interest,$0.01 par value per share paid annual dividends of$6.7 million and are currently convertible into approximately 7.0 million common shares. They are dilutive only when earnings or FFO exceed approximately$0.96 per diluted share per year. The conversion ratio is subject to adjustment based upon a number of factors, and such adjustment could affect the dilutive impact of the Series D convertible preferred shares on FFO and earnings per share in future periods. (4)For 2020, costs associated with a terminated acquisition and a terminated disposition. (5)Amounts noted are included in General and administrative expense. (6)For 2019, largely comprised of severance to a former executive officer and performance award expense related to the Company's former Chief Executive Officer. For 2018, includes severance, accelerated vesting of restricted stock and performance award charges and the benefit from the forfeiture of unvested restricted stock and performance awards associated with our former executives, in addition to recruiting fees, relocation expenses and cash inducement bonuses related to the Company's current executive team. (7)For 2019, comprised of special incentive expense related to the execution of theR2G Venture LLC joint venture agreement. (8)Amounts noted are included in Other (expense) income, net. (9)The denominator to calculate diluted (loss) earnings per share includes weighted average common shares only for the year endedDecember 31, 2020 , includes weighted average common shares, restricted stock and preferred shares for the year endedDecember 31, 2019 , and includes weighted average common shares and restricted stock for the year endedDecember 31, 2018 . 47 --------------------------------------------------------------------------------
NOI, Same Property NOI and NOI from Other Investments
NOI consists of (i) rental income and other property income, before straight-line rental income, amortization of lease inducements, amortization of acquired above and below market lease intangibles and lease termination fees less (ii) real estate taxes and all recoverable and non-recoverable operating expenses other than straight-line ground rent expense, in each case, including our share of these items from ourR2G Venture LLC unconsolidated joint venture. NOI, Same Property NOI and NOI from Other Investments are supplemental non-GAAP financial measures of real estate companies' operating performance. Same Property NOI is considered by management to be a relevant performance measure of our operations because it includes only the NOI of comparable operating properties for the reporting period. Same Property NOI for the three and twelve months endedDecember 31, 2020 and 2019 represents NOI from the Company's same property portfolio consisting of 41 consolidated operating properties acquired or placed in service and stabilized prior toJanuary 1, 2019 and five previously consolidated properties contributed to the newly formed joint venture,R2G Venture LLC , inDecember 2019 . Same property NOI from these five properties includes 51.5% of their NOI as a consolidated property for the periodJanuary 1, 2018 throughDecember 9, 2019 and 51.5% of their NOI as an unconsolidated property accounted for under the equity method for the periodDecember 10, 2019 throughDecember 31, 2019 . Same Property NOI excludes properties under redevelopment or where activities have started in preparation for redevelopment. A property is designated as a redevelopment when planned improvements significantly impact the property. NOI from Other Investments for the three and twelve months endedDecember 31, 2020 and 2019 represents NOI primarily from (i) properties disposed of and acquired during 2019 and 2020, (ii) 48.5% of the NOI prior toDecember 10, 2019 from the five previously consolidated properties contributed to theR2G Venture LLC unconsolidated joint venture, (iii)Webster Place andRivertowne Square where the Company has begun activities in anticipation of future redevelopment, (iv) certain property related employee compensation, benefits, and travel expense and (v) non-comparable operating income and expense adjustments. NOI, Same Property NOI and NOI from Other Investments should not be considered alternatives to net income in accordance with GAAP or as measures of liquidity. Our method of calculating these measures may differ from methods used by other REITs and, accordingly, may not be comparable to such other REITs. The following is a summary of our owned properties for the periods noted with consistent classification in the prior period for presentation of Same Property NOI: Three Months Ended December 31, Twelve Months Ended December 31, Property Designation 2020 2019 2020 2019 Same property 46 46 46 46 Acquisitions (1) 1 - 1 - Redevelopment (2) 2 2 2 2 Total properties 49 48 49 48 (1)Includes the following property for the three and twelve months endedDecember 31, 2020 :Lakehills Plaza . (2)Includes the following properties for the three months and twelve months endedDecember 31, 2020 and 2019:Rivertowne Square andWebster Place . The entire property indicated for each period is completely excluded from the Same Property NOI. 48
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The following is a reconciliation of our Operating Income to Same Property NOI
at Pro-Rata:
Three Months Ended December
31, Twelve Months Ended December 31,
2020 2019 2020 2019
(in thousands)
Net (loss) income available to common
shareholders $ (7,407) $ 71,055 $ (16,934) $ 84,810
Preferred share dividends 1,675 1,675 6,701 6,701
Net (loss) income attributable to
noncontrolling partner interest (135) 1,727 (241) 2,175
Income tax provision (benefit) 12 97 (25) 179
Interest expense 9,826 9,707 39,317 40,057
Costs associated with early extinguishment of
debt - 1,949 - 2,571
Earnings from unconsolidated joint ventures (76) (128) (1,590) (581)
Gain on sale of real estate (318) (75,783) (318) (81,856)
Gain on remeasurement of unconsolidated joint
venture - - - (237)
Insured expenses, net - 2,276 (2,745) 2,276
Other expense (income), net 108 (24) (214) 203
Management and other fee income (478) (52) (1,395) (230)
Depreciation and amortization 20,210 18,782 77,213 78,647
Transaction costs - - 186 -
General and administrative expenses 6,822 8,789 25,801 27,634
Provision for impairment 598 - 598 -
Pro-rata share of NOI from unconsolidated joint
venture (1) 1,999 521 8,155 521
Lease termination fees (183) (409) (368) (743)
Amortization of lease inducements 212 160 766 519
Amortization of acquired above and below market
lease intangibles, net (655) (1,218) (2,903) (6,762)
Straight-line ground rent expense 76 76 306 306
Straight-line rental income 8 (459) 2,026 (2,408)
NOI at Pro-Rata (2) 32,294 38,741 134,336 153,782
NOI from Other Investments 1,479 (1,049) 3,082 (5,284)
Same Property NOI at Pro-Rata (3) $ 33,773 $ 37,692 (1) Represents 51.5% of the NOI from the five properties contributed toR2G Venture LLC afterDecember 9, 2019 . (2) Includes 100.0% of the NOI from the five properties contributed toR2G Venture LLC prior toDecember 10, 2019 and 51.5% of the NOI from the same five properties afterDecember 9, 2019 . (3) Includes 51.5% of the NOI from the five properties contributed toR2G Venture LLC for all periods presented.
Inflation
Inflation has been relatively low in recent years and has not had a significant impact on the results of our operations. Should inflation rates increase in the future, substantially all of our tenant leases contain provisions designed to partially mitigate the negative impact of inflation in the near term. Such lease provisions include clauses that require our tenants to reimburse us for real estate taxes and many of the operating expenses we incur. Also, many of our leases provide for periodic increases in base rent which are either of a fixed amount or based on changes in the consumer price index and/or percentage rents (where the tenant pays us rent based on a percentage of its sales). Significant inflation rate increases over a prolonged period of time may have a material adverse impact on our business.
Recent Accounting Pronouncements
Refer to Note 2 of the notes to the consolidated financial statements in this report for a discussion of Recent Accounting Pronouncements.
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