SITE Centers Corp. (NYSE:SITC) Q1 2023 Earnings Call Transcript

SITE Centers Corp. (NYSE:SITC) Q1 2023 Earnings Call Transcript April 25, 2023

SITE Centers Corp. beats earnings expectations. Reported EPS is $0.06, expectations were $0.05.

Operator: Good morning. And welcome to the SITE Centers reports First Quarter 2023 Operating Results Conference Call. I would now like to turn the conference over to Stephanie Ruys de Perez, Vice President of Capital Markets, please go ahead.

Stephanie Ruys de Perez: Thank you, operator. Good morning, and welcome to SITE Centers’ first quarter 2023 earnings conference call. Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and a slide presentation on to our website at www.sitecenters.com, which are intended to support our prepared remarks during today’s call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements.

Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent report on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO, operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David Lukes: Thank you, Stephanie. Good morning, and thank you for joining our first quarter earnings call. We had a strong start to the year with results ahead of budget, another productive leasing quarter, which pushed our leased rate to an all-time high of 95.9% and continue progress on the lease-up, construction and delivery of our tactical redevelopment pipeline with delivery set to ramp into year end. The net result of all these activities is a $19 million signed, not opened pipeline, with commencements tend to accelerate over the next few quarters into 2024, which provides a significant tailwind for the next several years. I’ll start with some comments on leasing and tenant activity, including bankruptcies in light of recent macro and capital markets volatility, and then move to transactions before handing it over to Conor to give more details around the quarter and revised 2023 guidance.

In terms of leasing, the trends that allowed us to achieve the leasing volume and economics over the last three years remain in place, despite significantly more macroeconomic concerns. Supply in our sub-markets is extremely low and demand remains strong this quarter from national retailers looking to expand their footprints in the wealthiest suburban markets where we operate. Recent mobile phone data supports the fact that suburban customers are visiting our properties more frequently and more evenly spread through the week than pre-pandemic levels, and we were correct in our belief that this would ignite demand for store locations offering convenient access to goods and services. Beginning in 2020, we made a number of changes to position our organization to capture this demand and maximize leasing velocity and it feels like those changes continue to bear fruit.

Leasing demand can be highly cyclical and correlated with the overall economy, but to date, we just haven’t seen anything material of note that would indicate a slowdown. The one change that we have seen this year, as I noted in February, is the return of chain bankruptcies including Party City and the widely anticipated filing of Bed Bath & Beyond this past weekend among others. I’ll provide an update on these two identified tenants as we don’t have any real exposure to the other tenants that have filed to date. For Party City sites had 17 locations at quarter end with total exposure of about 90 basis points of base rent. At this time, we do not expect any of these locations to be rejected or stores to close with no material impact to full year NOI.

This result is a function of the high sales productivity within our portfolio, our asset quality with properties located in the top suburban markets in the U.S., and demand from other credit tenants for space, which provided us with significant leverage as we engaged with Party City. The final outcome is dependent on the company’s emergence from bankruptcy, but we are really pleased with the results to date and the implicit stamp of approval on our real estate. Shifting to Bed Bath & Beyond, we have 17 locations including four buybuy BABY stores, which represent 1.8% of base rent. Now that we finally have clarity on timing and control, we feel extremely well prepared for a focused marketing cycle and are confident that number one, there are single user backfill options for 16 of those locations given the amount of inbound activity we’ve seen over the last several months.

And two, that the majority of our stores will have executed leases over the next 12 months with rent commencements by year-end of 2024. Part of our confidence and demand for these spaces is the fact that our portfolio of assets can contain a Bed Bath or a buybuy BABY has a current lease rate of 99%. This portfolio has zero junior anchor space available, so the opportunity to access these properties is very attractive to growing national retailers. As you can imagine, we would very much like to recapture space from weak tenants while demand for that space is strong. So our leasing team has been highly focused on replacement tenants in preparation for the chance to upgrade our tenant roster at materially better economics. One such tenant upgraded executed in the first quarter was a new lease for a specialty grocer at our Tanasbourne property in Portland that will replace two legacy junior anchors that we terminated last year.

That lease brings the tactical pipeline to over 88% lease with deliveries expected to ramp into year-end. We made additional progress on a few other key locations in the first few months of 2023 and expect to add projects and details to the supplement in the coming quarters. These deals, while smaller scale in terms of total dollars are expected to boost the company’s NOI growth going forward given their returns and importantly are expected to be immediately accretive to earnings. Moving to overall portfolio leasing for the quarter as noted activity remained high with almost 500,000 square feet signed. In terms of new leasing, we signed 133,000 square feet of new deals with the leased rate for both anchors and shops up 50 basis points sequentially.

Putting that leased rate into context at 95.9%, our leased rate is now 210 basis points higher versus year-end 2019 and 160 basis points higher than the company’s all-time high watermark, which was 94.3% back in 2017. Looking forward, we have another 300,000 square feet at share of current lease negotiations with blended spreads above our trailing 12-month average. We expect this pipeline to be completed over the next two quarters, concentrated in a mix of national publicly traded credit tenants. That said, the absolute level of quarterly activity will remain volatile as we simply have less space to lease until we take possession of square footage from bankruptcies. And lastly, with respect to transactions, we had less activity in the first quarter as compared to year-end, but did successfully reinvest the remaining proceeds from the sale of $158 million of assets in the fourth quarter.

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Specifically, we repurchased $20 million of stock and acquired three convenience properties for $42 million. In terms of overall transaction activity, macro and capital markets volatility is having an impact on deal volume. And I would expect overall transaction volume to remain low until we have some stabilization in benchmark rates and therefore visibility on cap rates. There is capital available and deals are getting done. They’re just taking longer with more moving pieces and a higher risk of fallout. That said, volume for smaller properties including convenience assets is still running higher than other retail formats. In summary, we are pleased with our portfolio positioning, balance sheet and investments to date, which we believe prepare the company for a wide range of economic outcomes.

A special thank you to the entire SITE Centers team for another great start to the year. And with that, I’ll turn it over to Conor.

Conor Fennerty: Thanks, David. I’ll comment first on quarterly results, discussed our revised 2023 guidance, excuse me, and then conclude with the balance sheet and capital plans for the year. First quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including higher than forecast occupancy and ancillary income, earlier rent commencements and lower than expected G&A. The operational factors totaled about $0.02 per share relative to budget. In terms of operating metrics, trailing 12-month new leasing spreads accelerated from the fourth quarter with blended spreads roughly unchanged at just under 9%. We continued to see strong leasing economics of the pipeline, though quarter-over-quarter volumes and spreads will remain volatile given our denominator.

The SNO pipeline was up modestly sequentially to $19 million as new leases offset the impact of commencements. These signed leases represent just under 5% of annualized first quarter base rent and over 5% if you also include leases and negotiation in our pipeline, providing a tailwind to cash flow. We provided an updated schedule on the expected timing of the pipeline on Page 6 of our earning slides. Same-store NOI grew 4.2% in the first quarter with the uncollectible revenue line item a 130 basis point headwind to year-over-year growth. Same-store base rent growth also accelerated to 3.6%, which was up 80 basis points from the fourth quarter. Moving on to our outlook. We are revising 2023 OFFO guidance up to a range of $1.11 to $1.17 per share, driven primarily by first quarter outperformance, including better than expected same-store NOI and a higher outlook for full year occupancy.

Rent commencements, investment activity and potential tenant bankruptcies remain the largest swing factors expected impact where we end up in the full year range. We are also raising our same-store NOI guidance to a midpoint of 1.25%. Prior period reversals of $3.4 million in 2022 remain a roughly 100 basis point headwind to growth and we continue to include an annual bad debt reserve along with specific bankruptcy assumptions related to tenants that have filed for bankruptcy, along with others with well-publicized liquidity concerns. Through the first quarter, we have not used any of the credit loss reserve. We have three notable national tenants in bankruptcy as of today, and that includes Cineworld, y Party City and Bed Bath & Beyond. For Cineworld, we now have the executed agreements at all three of our locations, though the leases have not been affirmed by the court and remain subject to change until the company exits bankruptcy.

That said, the net result of a $1.3 million impact from 2022 remains unchanged from our fourth quarter call and first quarter earnings reflect the expected amended terms. For Party City, as David mentioned we do not expect any rejections or store closures as part of the company’s restructuring. Similar to Cineworld though this outcome is subject to Party City’s bankruptcy exit. And lastly, for Bed Bath, prior to their filing we did receive April rent for the majority of our locations with $300,000 unpaid as of last week. In the midpoint of guidance for both same store and OFFO continues to assume that we recapture all of their Bed Bath flag stores in the second quarter that we don’t know the ultimate outcome of store rejections, potential lease acquisitions or subsidiary sales at this time.

Moving to the second quarter of 2023, there are a few moving pieces to consider from the first quarter. First, G&A is expected to be approximately $1 million higher sequentially with a full year run rate of approximately $46 million. Second, interest expense is also expected to be higher as we repay the $87 million unsecured stub bond in May. And third, we are budgeting an increase in uncomfortable revenue as a result of bankruptcy activity including Bed Bath in the second quarter as compared to the first quarter, which had no material headwinds. A summary of these factors is on Page 9 of our earning slides. Finally, ending with the balance sheet and capital activity; at quarter end leverage was 5.3 times, fixed charge remained over 4 times and our unsecured debt yield was over 20%.

We have the aforementioned stub bond maturing next month, which we expect to repay at maturity with cash-on-hand and availability on the line of credit. Recall, we recently recast our $950 million line of credit less than a year ago, which provides significant liquidity and availability through 2027. To put this all in context at the midpoint of the guidance range, we expect debt-to-EBITDA to remain below 6 times to generate almost $50 million of retained cash flow with an AFO – AFFO payout ratio of relatively 70% and have no unsecured maturities until August of 2024. This leverage profile and liquidity provides substantial capacity and optionality to fund the company’s business plan. And with that, I’ll turn it back to David.

David Lukes: Thank you, Conor. Operator, we’re now ready to take questions.

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Q&A Session

Operator: Our first question will come from Todd Thomas with KeyBanc. You may now go ahead.

Todd Thomas: Hi. Thanks. Good morning. First question, I guess, look there’s been a lot of uncertainty around Bed Bath and the outcome now that they filed is still uncertain, but you mentioned 16 single user backfills and it seems like demand for their space may be solid. Any thoughts whether there might be a lot of leases sort of assumed or auctioned off during the bankruptcy process, how that might play out based on prior bankruptcies that you’ve sort of lived through and the overall environment today?

David Lukes: Yes. Good morning, Todd. It’s a great question. I mean, we obviously have no information, no more information than you do. The reality is that the mark-to-market on the portfolio of Bed Bath and buybuy BABY is somewhere in the 25% to 30% range, but it varies depending on properties. So number one, we feel really good about the backfill prospects. As I mentioned in our prepared remarks, if you take that portfolio where we have these properties, they’re 99% lease. There’s not a single other anchor space available. So they are very much attractive to a lot of growing retailers. There is some risk or opportunity depending on how I want to define it, that a couple of these leases get bought through the bankruptcy process, but I honestly have no idea one way or the other what the outcome will be.

Todd Thomas: Okay. And then Conor, you mentioned in your comments around the updated guidance that the midpoint assumes that you get all the Bed Bath boxes back during the second quarter. So you didn’t, $300,000 of April revenue was unpaid. But going forward now until stores, until leases are rejected, you’re expecting to collect rent? And in terms of the timing in the second quarter, is that sort of like a June 30 wind down or recapture of all the spaces that you’re assuming?

Conor Fennerty: Yes. Todd, it’s a good question. Look, to David’s point, we just don’t know yet. We had three leases or three wholly owned leases rejected last night. So obviously we won’t get rent on those three going forward for the rest of the year. But to David’s point and your question, I mean, this could be dragged out a little bit for a number of leases as they get auctioned and potentially as folks acquire them. But you’re right we’ve assumed a lost month for the month of April or May, depending on which location. And then call it one or two more months depending on which location. It’s not material if you assume on a May 31st or June 1st, or excuse me, June 30th rejection date, but it just depend on the location.

Todd Thomas: Okay. Got it. And it’s just last question, I guess also around Bed Bath, but more around investment activity. Does the filing and I guess plan wind down to their operations improve asset liquidity a little bit? There’s been so much uncertainty around Bed Bath. I’m just curious whether that does improve liquidity for transactions a little bit and whether you might be in a better position to sell or monetize certain assets, either before signing leases or someone else might take on the leasing risk or potentially after the backfill?

David Lukes: Well, there’s really – there’s two aspects to that question, Todd. It is very – it’s a really good question. The fact of the matter is what we’ve been selling are stabilized assets and we’ve gotten the best proceeds historically from core buyers that are looking at stabilized properties. We haven’t really been a seller of vacancy. So for us in particular, I think as we continue to recycle a little bit you’ll see us sell stable assets and buy growth assets. For the overall market liquidity, I completely agree with you that if there is a vacancy and there is a weaker tenant that’s now gone it’s considered an opportunity for a buyer. And so I think you’ll see more opportunistic buyers go into the transaction market when they have something to do and something to grow the property. But I wouldn’t expect that that’s going to be the type of property that we would be selling.

Todd Thomas: Okay, great. All right, thank you.

David Lukes: Thanks, Todd.

Operator: Our next question will come from Craig Mailman with Citi. You may now go ahead.

Craig Mailman: Hey. Good morning, guys. Conor, I just want to kind of clarify, are you, I think you guys were 250 basis points of bad debt at the midpoint for same store with initial guides. Is that still the assumption?

Conor Fennerty: Hi, Craig. Good morning. It’s come down modestly for couple of reasons. One, I made a comment that we are expecting higher occupancy over the course of the year, so visibility on some renewals is obviously higher today than it was three months ago, so that’d be point one. And then point two, just the calendar, Bed Bath filing, they are going for a historically quick liquidation right, two months. Now, obviously they’ve had quite a bit of time to prepare so, so there is a chance they’re able to pull that off. But as we just get later in the year, if someone files it’s going to take three to five months or longer for them to wind down operations. And so that just puts less pressure on potential bankruptcy risk for the year.

So the short answer is it’s come down modestly. It’s closer to 225 basis points today than 250, but that’s a function of our expectation for higher occupancy over the course of the year, and just as we get later in the calendar.

Craig Mailman: So as we think about the uptick in same search, really like 25 basis points from bad debt and 25 basis points from occupancy is how we should think about it?

Conor Fennerty: Yes. I mean, I think that’s fair. I mean, we could go – you could swing at a couple of basis points either way. I mean, I would just say, Craig, its April 25th David mentioned a number of kind of macro uncertainties we’re seeing. We’re not trying to push things too hard here. There’s a lot of time left and we’ll see how things go. But yes, I think it’s fair to assume it’s a little bit of both.

Craig Mailman: Okay. And then on the leasing front, it sounds like things are still going well. There’s a lot of demand. I’m just kind of curious on two fronts: one, in the first quarter was there any kind of change in cadence as we got into March and the banking issues kind of came to a head and how does activity look in the first quarter? Then secondly, I mean, is there enough space coming back from Bed Bath and Party City and some of these other retailers that would kind of be that outlet for demand going forward that could kind of set some of the additional leasing you guys may have otherwise seen?

David Lukes: Craig, its David. As far as sentiment changes due to kind of the mid-tier bank drama in the last month, we really didn’t see any change in the pace or the volume of lease negotiations. It just didn’t seem to infect those conversations. I think if anything that the biggest challenge we’re having is there’s just not – not much space left a lease. So to your second question, I’ll pivot to that. Getting back 17 locations in a portfolio that has zero available is really a great opportunity to upgrade credit. And right now I would say there’s more than 17 tenants that want to take those spaces. So it certainly will take a little bit of pressure off of the valve of the demand for space because it’ll satisfy some of those retailers.

But if 17 of 35 end-up getting the space, there’s still a leftover of those tenants that didn’t get the space. And whether that’s true across the country or whether that’s just true in our 100 assets and wealthier suburbs I don’t know. But I think for our portfolio in particular, I do feel like the demand right now is definitely higher than the supply.

Conor Fennerty: Yes. I would say, Craig, one thing we’ve been really encouraged about in the last two years is the breadth of demand. I think we have 75 anchors signed since the start of the pandemic with 46 different operators. And so what we’re encouraged by is for that 17 spaces, there’s the usual discounters and fitness operators, but there’s also some – a wider spread, I would say of folks that we don’t normally do business with, which is really encouraging. Again, that could change to your question around macro sensitivity, but we just haven’t seen that yet to date.

Craig Mailman: Then just last one. I guess to circle back to bad debt, aside from kind of the bigger chain bankruptcies, kind of what does the shop credit look like? Are you, I know that debt was better than expecting the first quarter, but is there any change in that credit profile, some of your smaller tenants, kind of what are you seeing on that front?

Conor Fennerty: Yes. It’s a good question, especially as we grow our convenience portfolio. Remember, we’re still 88/12 national, local from a credit mix. So we don’t necessarily have the exposure to kind of the mom-and-pops. All that said that, that story has changed dramatically since the GSE and there’s just less kind of traditional mom-and-pop leasing regardless of your property type. We haven’t seen any pressure yet, but I mean, typically you see a general lag, a six month lag between GDP growth and shop occupancy. And so if GDP growth starts to turn negative, you’re going to see some pressure on shop occupancy three, six, nine months from now. We haven’t seen that yet, Craig, but it’s a good question because it is a potential headwind in the future.

Craig Mailman: Great, thank you.

David Lukes: Thanks Craig.

Operator: Our next question will come from Haendel St. Juste with Mizuho. You may now go ahead.