Notes t o Condensed Consolidated Financial Statements

Nature of Business

SITE Centers Corp. (formerly known as DDR 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 retailers.  Consequently, the Company’s credit risk is concentrated in the retail industry.  

Retail Value Inc.

On July 1, 2018, the Company completed the spin-off of Retail Value Inc. (“RVI”).  At the time of the spin-off, RVI owned 48 shopping centers, comprised of 36 continental U.S. assets and all 12 of SITE Centers’ shopping centers in Puerto Rico, representing $2.7 billion of gross book asset value and $1.27 billion of mortgage debt .

In connection with the spin-off, on July 1, 2018, the Company and RVI entered into a separation and distribution agreement, pursuant to which, among other things, the Company agreed to transfer the properties and certain related assets, liabilities and obligations to RVI and to distribute 100% of the outstanding common shares of RVI to holders of record of SITE Centers ’ common shares as of the close of business on June 26, 2018, the record date.  On the spin-off date, holders of SITE Centers ’ common shares received one common share of RVI for every ten shares of SITE Centers’ common stock held on the record date.  In connection with the spin-off, the Company retained 1,000 shares of RVI’s series A preferred stock (the “RVI Preferred Shares”) having an aggregate preference equal to $190 million, which amount may increase by up to an additional $10 million depending on the amount of aggregate gross proceeds generated by RVI asset sales.

The RVI Preferred Shares are classified as Investment in and Advances to Affiliate on the Company’s consolidated balance sheet.  The RVI Preferred Shares have a liquidation and dividend preference over the common stock, but do not have any substantive voting rights, with limited exceptions, or conversion rights and do not have a stated coupon.  The RVI Preferred Shares are carried at cost, subject to adjustments in certain circumstances, and will be periodically evaluated for impairment.  Dividend payments received up to $190 million by SITE Centers will be recorded as a reduction of the carrying value.  

On July 1, 2018, the Company and RVI also entered into an external management agreement, which, together with various property management agreements, governs the fees, terms and conditions pursuant to which SITE Centers will manage RVI and its properties.  Pursuant to these management agreements, the Company provides RVI with day-to-day management, subject to supervision and certain discretionary limits and authorities granted by the RVI Board of Directors.  RVI does not have any employees.  In general, either the Company or RVI may terminate the management agreements on December 31, 2019 or at the end of any six-month renewal period thereafter.  The Company and RVI also entered into a tax matters agreement, which governs the rights and responsibilities of the parties following the spin-off with respect to various tax matters and provides for the allocation of tax-related assets, liabilities and obligations.

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, 2018 and 2017, 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, 2017 .

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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 $205.9 million and $284.1 million as of September 30, 2018 and December 31, 2017, respectively.  

Reclassifications

Certain amounts in prior periods have been reclassified in order to conform with the current period’s presentation.  The Company reclassified $3.0 million and $9.8 million of costs for the three and nine months ended September 30, 2017, respectively, on the Company’s consolidated statements of operations related to property management and services of the Company’s operating properties from General and Administrative to Operating and Maintenance.

Common Shares

Common share dividends declared per share were as follows:

Effect of Reverse Stock Split on Presentation

On May 18, 2018, in anticipation of the spin-off of RVI, the Company effected a reverse stock split of its outstanding common shares at a ratio of one-for-two.  All share and per share data included in these unaudited condensed consolidated financial statements gives retroactive effect to the reverse stock split for all periods presented.

New Accounting Standards Adopted

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers .  The objective of ASU No. 2014-09 is to establish a single, comprehensive, five-step model for entities to use in accounting for revenue arising from contracts with customers that will supersede most of the existing revenue recognition guidance, including industry-specific guidance.  The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU No. 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification (“ASC”).  The new guidance was effective for public companies for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.  The Company has adopted the new accounting guidance for revenue from contracts with customers (“Topic 606”) on January 1, 2018

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using the modified retrospective approach and therefore, the comparative information has not been adjusted. The guidance has been applied to contracts that are not completed as of the date of initial application and the impact of the adoption was not material (Note 2).

Real Estate Sales

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from Derecognition of Nonfinancial Assets (Subtopic 610-20):  Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“Topic 610”) for gains and losses from the sale and/or transfer of real estate property. Topic 610 eliminates guidance specific to real estate sales in ASC 360-20.  As such, sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.  The effective date of this guidance coincides with revenue recognition guidance discussed in Note 2.  On January 1, 2018, the Company adopted Topic 610 using the modified retrospective approach for contracts that are not completed as of the date of initial application.  The Company has determined that the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards to Be Adopted

Accounting for Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases .  Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet.  Other significant provisions of this standard include (i) defining the “lease term” to include the non-cancelable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease, (ii) defining the initial lease liability to be recorded on the balance sheet to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components.  The lease standard is effective for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years), with early adoption permitted.  The Company will adopt the standard using the modified retrospective approach for financial statements issued after January 1, 2019.  

The Company is in the process of evaluating the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial statements and disclosures.  The Company has currently identified several areas within its accounting policies it believes could be impacted by the new standard, including where the Company is a lessor under its tenant lease agreements and a lessee under its ground leases.  In July 2018, the FASB approved targeted improvements to the Leases standard that provides lessors with a practical expedient by class of underlying asset, to avoid separating the non-lease components from the lease component of certain contracts.  Such practical expedient is limited to circumstances in which (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the stand alone lease component would be classified as an operating lease if accounted for separately.  The Company will elect the practical expedient which would allow the Company the ability to account for the combined component based on its predominate characteristics if the underlying asset meets the two criteria defined above.  

In addition, the Company has ground lease agreements in which the Company is the lessee for land beneath all or a portion of the buildings at three shopping centers.  Currently, the Company accounts for these arrangements as operating leases.  Under the new standard, the Company will record its rights and obligations under these leases as a right of use asset and lease liability on its consolidated balance sheets.  The Company is currently in the process of evaluating the inputs required to calculate the amount that will be recorded on its balance sheet for each ground lease.  Lastly, this standard impacts the lessor’s ability to capitalize initial direct costs related to the leasing of vacant space.  However, the Company does not believe this change regarding capitalization will have a material impact on its consolidated financial statements.

Accounting for Credit Losses

In June 2016, the FASB issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date. 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 July 2018, the FASB proposed an amendment to ASU 2016-13, Financial Instruments - Credit Losses to clarify that operating lease receivables

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recorded by lessors are explicitly excluded from the scope of the ASU.  The Company is in the process of evaluating the impact of this guidance.

The Company adopted the accounting guidance for revenue from contracts with customers (“Topic 606”) on January 1, 2018 using the modified retrospective approach and therefore, the comparative information has not been adjusted.  The guidance has been applied to contracts that are not completed as of the date of initial application.  Most significantly for the real estate industry, leasing transactions are not within the scope of the new standard.  A majority of the Company’s tenant-related revenue is recognized pursuant to lease agreements and are governed by the leasing guidance discussed in Note 1.

Historically, the majority of the Company’s lease commission revenue was recognized 50% upon lease execution and 50% upon tenant rent commencement.  Upon adoption of Topic 606, lease commission revenue is generally recognized in its entirety upon lease execution. The impact of adopting Topic 606 on the Company’s consolidated financial statements with respect to the change in revenue recognition as related to lease commissions revenue at January 1, 2018 and for the three and nine months ended September 30, 2018 was not material.

The following is disclosure of the Company’s revenue recognition policies:

Rental Revenue

Minimum rents from tenants in shopping centers generally range from one month to 30 years and are recognized on a straight-line basis over the noncancelable term of the lease, which include the effects of applicable rent steps and abatements.  Percentage and overage rents are recognized after a tenant’s reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease.  

Recoveries from tenants

Revenues associated with expense reimbursements from tenants for common area maintenance, taxes, insurance and other property operating expenses, based upon the tenant’s lease provisions, are recognized in the period the related expenses are incurred.

Lease Termination Fees

Lease termination fees are recognized upon the effective termination of a tenant’s lease when the Company has no further obligations under the lease.

Ancillary income and other property income

Ancillary and other property-related income, primarily composed of leasing vacant space to temporary tenants, kiosk income, parking and theatre income, is recognized in the period earned.

Business Interruption Income

The Company will record revenue for covered business interruption in the period it determines that it is probable it will be compensated and the applicable contingencies with the insurance company are resolved.  This income recognition criteria will likely result in business interruption insurance recoveries being recorded in a period subsequent to the period the Company experiences lost revenue from the damaged properties.

Disposition of Real Estate

Sales of nonfinancial assets, such as real estate, are to be recognized when control of the asset transfers to the buyer, which will occur when the buyer has the ability to direct the use of, or obtain substantially all of the remaining benefits from, the asset.  This generally occurs when the transaction closes and consideration is exchanged for control of the asset.    

Revenues from Contracts with Customers

The Company’s revenues from contracts with customers generally relate to asset and property management fees, leasing commission, and development fees.  These revenues are derived from the Company’s management agreements with RVI and unconsolidated joint ventures and, in the case of unconsolidated joint ventures, are recognized to the extent attributable to the unaffiliated ownership in the unconsolidated joint venture to which it relates.  Termination rights under these contracts vary by contract, but generally include termination for cause by either party or due to sale of the property.

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Asset and Property Management Fees

Asset and property management services include property maintenance, tenant coordination, accounting and financial services.  Asset and Property management services represent a series of distinct daily services.  Accordingly, the Company satisfies the performance obligation as services are rendered over time.  

The Company is compensated for property management services through a monthly management fee earned based on a specified percentage of the monthly rental receipts generated from the property under management.  The Company is compensated for asset management services through a fee that is billed to the customer monthly and recognized as revenue monthly as the services are rendered, based on a percentage of aggregate asset value or capital contributions for assets under management at the end of the quarter. The RVI management contracts have fixed fees for a six-month period prior to reset based upon the properties under management.

Property Leasing

The Company provides strategic advice and execution to third parties in connection with the leasing of retail space.  The Company is compensated for services in the form of a commission.  The commission is paid upon the occurrence of certain contractual events which may be contingent.  For example, a portion of the commission may be paid upon execution of the lease by the tenant, with the remaining paid upon occurrence of another future contingent event (e.g. payment of first month’s rent or tenant move-in).  The Company typically satisfies its performance obligation at a point in time when control is transferred; generally, at the time of the first contractual event where there is a present right to payment.  The Company looks to history, experience with a customer, and deal specific considerations, to support its judgment that the second contingency will be met.  Therefore, the Company typically accelerates the recognition of revenue associated with the second contingent event (if any) to the point in time when control of its service is transferred.

Development Services

Development services consist of construction management oversight services such as hiring general contractors, reviewing plans and specifications, performing inspections, reviewing documentation and accounting services.  These services represent a series of distinct services and are recognized over time as services are rendered.  The Company is compensated monthly for services based on percentage of aggregate amount spent on the construction during the month.

Disposition Fees

The Company receives disposition fees equal to 1% of the gross sales price of each RVI asset sold.  The Company is compensated at the time of the closing of the transaction.  

Contract Assets

Contract assets represent assets for revenue that has been recognized in advance of billing the customer and for which the right to bill is contingent upon something other than the passage of time. This is common for contingent portions of commissions.  The portion of payments retained by the customer until the second contingent event is not considered a significant financing component because the right to payment is expected to become unconditional within one year or less.  Contract assets are transferred to receivables when the right to payment becomes unconditional.

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Revenue from contracts with customers is included in Fee and Other Income on the consolidated statement s of operations and was composed of the following (in thousands):

The aggregate amount of receivables from contracts with customers was $1.6 million and $1.9 million as of September 30, 2018 and December 31, 2017, respectively.

Contract assets are included in Other Assets, net on the consolidated balance sheets.  The significant changes in the contract asset balances during the nine months ended September 30, 2018 are as follows (in thousands):

All revenue from contracts with customers meets the exemption criteria for variable consideration directly allocable to wholly unsatisfied performance obligations or unsatisfied promise within a series and, therefore, the Company does not disclose the value of transaction price allocated to unsatisfied performance obligations.  There is no fixed consideration included in the transaction price for any of these revenues.  

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At September 30, 2018 and December 31, 2017, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 103 and 136 shopping center properties, respectively.  Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

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Service fees and income earned by the Company through management, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures and interest income on its preferred interests in the BRE DDR Retail Holdings joint ventures are as follows (in millions):

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.  

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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 reassessed the aggregate valuation allowance at September 30, 2018, with respect to its preferred investments in BRE DDR III and BRE DDR IV.  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 $2.2 million and $4.5 million for the three- and nine-month periods ended September 30, 2018, respectively, resulting in a net valuation allowance of $65.5 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.

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 distribution or “PIK.”  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.

Disposition of Shopping Centers

From January 1, 2018 to September 30, 2018, the DDRM Properties joint venture sold 15 assets for $250.7 million, the BRE DDR III joint venture sold 17 assets for $374.9 million and the BRE DDR IV joint venture sold one asset for $40.0 million.  The Company’s pro rata share of the aggregate gain from these sales was $12.6 million.

In connection with the spin-off of RVI, RVI issued 1,000 shares of 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’s 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 real estate investment trust (“REIT”) and to avoid U.S. federal income taxes, the RVI Preferred Shares are 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’s asset sales subsequent to July 1, 2018 exceeds $2.0 billion. Notwithstanding the foregoing, the RVI Preferred Shares are only entitled to receive dividends when, as and if declared by RVI’s Board of Directors and RVI’s ability to pay dividends is subject to any restrictions set forth in the terms of its indebtedness.  Upon payment to SITE Centers of aggregate dividends on the RVI Preferred Shares equaling the maximum preference amount of $200 million, RVI is required to redeem the RVI Preferred Shares for $1.00 per share.

The RVI Preferred Shares are subject to mandatory redemption in certain other circumstances.  The RVI Preferred Shares are included in Investment in and Advances to Affiliate in the Company’s consolidated balance sheet.

In addition to the preferred investment, the Company has a receivable from RVI of $36.5 million at September 30, 2018, primarily consisting of restricted cash, insurance premiums and insurance proceeds owed by RVI pursuant to the terms of the separation and distribution agreement.  RVI made a payment of $3.1 million on this receivable in the third quarter of 2018.  

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Revenue from contracts with RVI is included in Fee an d Other Income on the consolidated statement of operations and was composed of the following (in millions):

Other assets consist of the following (in thousands):  

The following table discloses certain information regarding the Company’s Revolving Credit Facilities (as defined below) (in millions):

The Company maintains an unsecured revolving credit facility with a syndicate of financial institutions, arranged by J.P. Morgan Chase Bank, N.A., Wells Fargo Securities, LLC, Citizens Bank, N.A., RBC Capital Markets and U.S. Bank National Association (the “Unsecured Credit Facility”).  The Unsecured Credit Facility provides for borrowings up to $950 million if certain financial covenants are maintained, two six-month options to extend the maturity to September 2022 upon the Company’s request (subject to satisfaction of certain conditions) 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.  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 25 basis points on the entire facility at September 30, 2018.

The Company also maintains an unsecured revolving credit facility with PNC Bank, National Association (the “PNC Facility” and, together with the Unsecured Credit Facility, the “Revolving Credit Facilities”).  The PNC Facility terms are substantially consistent with those contained in the Unsecured Credit Facility.  In July 2018, the Company permanently reduced the borrowing

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capacity under the PNC Facility from $50 million to $20 million.   In addition, the Company provided an unconditional guaranty to PNC Bank, National Association (“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 (credit facility guaranty fee ) plus interest at a contracted rate.  

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 (1.2% at September 30, 2018) or the Alternative Base Rate, plus a specified spread (0.20% at September 30, 2018), as defined in the respective facility.  The specified spreads vary depending on the Company’s long-term senior unsecured debt rating from Moody’s Investors Service, Inc. and S&P Global Ratings 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, 2018.  

Secured Financing

In contemplation of the spin-off transaction, which occurred on July 1, 2018 (Note 1), certain wholly-owned subsidiaries of RVI, entered into a loan agreement in February 2018 which provided for a secured loan facility with an initial aggregate principal amount of $1.35 billion.  This loan was assumed by RVI in connection with the consummation of the spin-off of RVI.

Debt Repayments

In the first quarter of 2018, in connection with the $1.35 billion RVI mortgage loan and asset sales, the Company repaid $900.0 million aggregate principal amount of senior unsecured notes with maturity dates ranging from July 2018 to February 2025 through a tender offer, and subsequent optional redemption, $452.5 million of mortgage debt and $200.0 million of an unsecured term loan.  In connection with the redemption of the senior unsecured notes, the Company paid make-whole amounts totaling $28.4 million.  These make-whole amounts are included in Other Income (Expense), net in the Company’s consolidated statements of operations.