SITE Centers Corp. (NYSE:SITC) Q1 2024 Earnings Call Transcript

SITE Centers Corp. (NYSE:SITC) Q1 2024 Earnings Call Transcript April 30, 2024

SITE Centers Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the SITE Centers’ First Quarter 2024 Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over your host today Stephanie Ruys, Vice President of Capital Markets. Please go ahead ma’am.

Stephanie Ruys: Thank you. Good morning and welcome to SITE Centers’ first quarter 2024 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 slide presentation on 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 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 10K 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. Descriptions and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David Lukes: Good morning and thank you for joining our quarterly earnings call. The first quarter was highlighted by additional progress on the announced planned spin-off of the convenience portfolio from within SITE Centers into a new and unique focused growth company called Curbline Properties. This announcement along with over $1 billion of completed dispositions and over $100 million of new acquisitions since the third quarter of 2023 has put us on a dual path of growing our Curbline portfolio through acquisitions and maximizing the value of the SITE Centers’ portfolio through certain dispositions along with continued leasing and asset management. I’ll start with an update on Curbline, shift next to transactions, then conclude with an update on the quarter and operations before turning it over to Conor to talk about the first quarter results, the outlook for the rest of the year, and the balance sheet.

Starting with Curbline, we began investing in convenience assets over five years ago and after several years of investments, reviewing data analytics, and financial and tenant analysis, we are more convinced than ever that convenience sector is a differentiated unique growth opportunity. As announced, to seize this opportunity, we are creating Curbline Properties as a first mover REIT that is unlike other retail REITs and has what we believe to be the highest organic cash flow growth potential, driven by annual bumps, the ability to recapture and mark-to-market units, high quality, and diversified tenant roster with minimal concentration risk and limited CapEx needs as compared to other property types. Same-store NOI for the current Curbline portfolio is expected to grow 4.5% in 2024 and average greater than 3% for the next three years when factor in all of these attributes.

As of quarter end, the Curbline portfolio included 67 wholly-owned convenience properties expected to generate about $79 million of NOI in 2024 after adjusting for first quarter results and acquisitions. These assets share common characteristics including excellent visibility, access, and what we believe are compelling economics, highlighted by limited CapEx needs. Arguably what we own today represents the largest highest quality convenience portfolio in the U.S., yet is only a fraction of the addressable market for this type of asset. Convenience properties, which primarily cater to customer daily needs, are an integral part of the suburban lifestyle, which has only become more entrenched with increased suburban migration and the adoption of hybrid work.

And combined with a balance sheet that is expected to have no outstanding debt, Curbline Properties is expected to generate compelling and elevated relative growth and returns for stakeholders. As of today, we expect the spin-off to be completed on or around October 1st of this year with Curb capitalized with $600 million of liquidity in the form of cash and a preferred investment in SITE Centers. Additionally, consistent with our commentary last quarter, should we continue to make progress on the disposition front. It is likely that Curb would not retain a preferred investment in site, and would be capitalized simply with no debt and $600 million of cash. On that point, moving to transactions, we have closed $170 million of wholly owned property sales year-to-date, with total closed transactions since July 1 of just under $1.1 billion at a blended cap rate of under 7%.

The volume of disposition activity has increased since our call last quarter, resulting in over $1 billion of real estate currently either under contract, in contract negotiation or with executed nonbinding LOIs, at a blended cap rate of roughly 7%. The bulk of this inventory is primarily, sub-market dominant power centers. Closings are expected to pick up, over the middle of the year, consistent with the time line that we discussed last quarter for the assets launched around year end. The participants in this bidding process have been a wide variety of private and institutional investors. This deep pool of interest is clearly showing an active and liquid market, for our well located and high quality portfolio of open-air shopping centers. Leasing momentum remains strong.

Market rents are growing and replacement costs continue to escalate, factors we believe, that are supporting strong buyer interest. These buyers are sophisticated, committed to the open-air retail format and often have been unlevered acquirers. There has certainly been capital markets volatility in recent weeks, and no asset sales are certain until closing. But the elevated level of demand for the assets on the market, speaks to the quality of the SITE Centers portfolio, and the opportunity that we identified with the spin-off announcement. In terms of acquisitions, we acquired two convenience properties in the first quarter for $19 million in Houston and Phoenix and have over $100 million of additional convenience assets awarded or under contract subject to standard closing and diligence provisions.

Average household incomes for the first quarter investments were over $113,000, with a weighted average lease rate of almost 100% highlighting our focus on acquiring properties, where renewals and lease bumps drive growth without significant CapEx. Going forward, we remain encouraged by the unique opportunity in the convenience subsector including, the size of the opportunity itself. The addressable market for convenience assets according to ICSC is 950 million square feet. Curbline’s current portfolio comprising 2.2 million square feet represents one-quarter of 1% of total US inventory meaning, we have plenty of room to grow. That said, while we expect to remain active acquirers prior to the spin, we continue to prioritize dispositions to take advantage of demand for site assets, which will likely result in significantly more dispositions as compared to acquisitions in 2024.

Ending with the quarter and operations. First quarter results, were ahead of expectations on lower G&A, higher occupancy and higher lease termination fees. Overall, quarterly leasing volume was up sequentially, but remains down from 2023 levels, which is a function of a smaller portfolio and certainly less availability. Leasing demand continues to be very strong for both existing retailers and service tenants, expanding into key suburban markets along with new concepts competing for the same space. Despite the strength of execution from our leasing team, our leased rate was down 30 basis points sequentially in part as we held space offline to maximize proceeds, as part of the sale process. Looking forward, we have over 350,000 square feet at share in lease negotiations, which we expect to be completed over the next two quarters at similar spreads and economics to the trailing 12 month figures reporting today.

We continue to expect the commencement of executed leases to be the material driver of our same-property NOI growth, over the course of 2024. Before turning the call over to Conor, I want to again thank everyone at SITE Centers, for their work these past few quarters, which has been nothing short of incredible. The spin-off of Curbline Properties is possible due to the work of the entire organization, and we believe the transaction unlocks a compelling opportunity to create significant value for the company’s stakeholders. And with that, I’ll turn it over to Conor.

Conor Fennerty: Thank you, David. I’ll start with first quarter earnings and operations, before concluding with updates to our 2024 outlook and balance sheet. As David noted, first quarter results were ahead of budget due to better-than-expected operations, including higher than forecast occupancy and lease termination fees and lower G&A expenses. Outside of these items, there were no other material call-outs in the quarter. Moving to operations. First quarter leasing volume was sequentially higher, but remains lower than the 2022 and 2023 run rate as David highlighted, due to disposition activity. With this smaller denominator, operating metrics remain volatile though based on the leasing pipeline at quarter end we expect spreads to be consistent with trailing 12-month levels.

Overall leasing activity and economics remain elevated, and we remain confident on the backfill of the remaining vacancies, highlighting the quality of the portfolio and depth of demand for space. Moving to our outlook for 2024. As David noted, we are extremely excited to form and scale the first publicly traded REIT, focused exclusively on convenience assets. And based on the mortgage commitment announced in October, along with recent transaction and other financing activity, we have positioned both SITE and Curbline with the balance sheets that they need to execute on their business plans. As a result of the planned spin-off and significant expected asset sales, we did not provide a formal 2024 FFO guidance range with year-end results. We did provide projections though, for total portfolio NOI and for the SITE and Curb assets that have been updated to reflect first quarter 2024 acquisitions and dispositions.

And as we move forward over the course of the year, we expect to continue to update the projection ranges for future transaction activity. For the Curb portfolio, total NOI is now expected to be roughly $79 million, up from $76 million at the midpoint of the projected range before any additional acquisitions and same-store NOI growth is expected to be between 3.5% and 5.5% for 2024. For the SITE portfolio, total NOI is now expected to be $257 million down from $265 million at the midpoint of the projected range before any additional dispositions. Details on the assumptions underpinning these ranges are in our press release and earnings slides. In terms of other line items, we continue to expect JV fees to average around $1.25 million per quarter and G&A to average around $12 million per quarter prior to the planned spin-off.

Given the significant cash balance on hand, interest income remains elevated at over $7 million for the quarter, though that figure will obviously to be dependent on short-term rates and debt repayment activity. On that point, in the first quarter, we repurchased just under $62 million of unsecured bonds at a discount, resulting in a gain of approximately $800,000. Finally, transaction volume particularly the timing of asset sales is expected to be the largest driver of quarterly FFO. And in the first quarter, we included $937,000 of NOI from assets sold in the quarter as detailed in the income statement. Moving to the balance sheet. In terms of leverage at quarter end, debt to EBITDA was just over four times with a net debt yield north of 20%.

Prior to the effectiveness of the spin-off, we expect leverage to continue to decline with debt-to-EBITDA below four times. Before drawing on the $1 billion mortgage commitment, we also expect to maintain a significant primarily unencumbered asset base, providing additional scale and collateral for SITE stakeholders. As I mentioned, we repurchased $62 million of 2025 and 2026 notes in the first quarter and expect to retire the majority of outstanding consolidated debt prior to the spin with proceeds from the mortgage commitment. This mortgage will be secured by 38 properties that are expected to be part of SITE Centers post-spin, and funding is expected to occur prior to the spin-off, subject to the satisfaction of closing conditions. For Curbline Properties, the company at the time of the spin is expected to have no debt, $300 million of cash and a $300 million preferred investment in SITE Centers.

This highly liquid balance sheet will allow Curbline to focus on scaling its platform while providing the capital to differentiate itself from the largely private buyer universe acquiring convenience properties. Additionally, as David noted, depending on the level of asset sales completed prior to the spin, we may look to fund Curb entirely with cash and no preferred investment in SITE. Details on sources and uses and projected capital structures can be found on pages 11 and 12 of the earnings slides. Lastly, as previously announced, SITE Centers paid in January 2024, a special dividend of $0.16 per share. The dividend was funded with cash on hand. And with that, I’ll turn it back to David.

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

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Q&A Session

Operator: Yes. Thank you. [Operator Instructions] And today’s first question comes from Dori Kesten with Wells Fargo.

Dori Kesten: Thanks. Good morning. You noted a blended cap rate for $1 billion under contract and negotiation of just under 7% I believe. Is that in line with your initial expectations for these assets? Or has interest been better than expected.

David Lukes: Hi. Good morning, Dori. I think you’re merging two comments. We’ve sold and closed on over $1 billion at a price just below a 7% cap rate. The $1 billion we’ve awarded and are negotiating LOIs or negotiating contracts is approximately a 7% cap rate. I would say in general the pricing has been a little stronger than we expected six months ago.

Dori Kesten: Okay. And how should we think of the pacing of dispositions ahead of October 1?

David Lukes: That’s a really good question. I would say that with a $1 billion award of the buyers in various stages. Some of those may close. Some of those may not close. As you know there are contingent on a number of factors, but our confidence level in the buyers is pretty high. We’ve taken a lot of time to interview buyers and understand where their equity is coming from their need for debt and so forth. So our competence level of a lot of closings occurring in the next couple of months is pretty high. Having said that, anything that’s not awarded as of today is unlikely to close in the next couple of months. So I think you probably can guesstimate a pretty decent pipeline for the next few months. But having an increase substantially would be unlikely.

Dori Kesten: Okay. And I think last quarter you mentioned there might be a slowing in the pace and convenience acquisitions. Just since you’re focused on sales, we did complete a few in the quarter, should we assume a few per quarter heading up to the spin? Or is there more likely to be a greater acceleration in acquisitions ahead of it?

David Lukes: I think I mean, I’ll let Conor give some specifics, but in general the time that we’re allocating to our dispositions is a lot more than the time for acquisitions. And that’s just a function of demand, there’s been more demand to buy assets from us than we would have thought six months ago. So a lot of that time is spent on the dispositions pipeline. As far as acquisitions go, we do have $100 million that’s been awarded to us. That’s a number of deals. And so I think you can assume that a couple of per quarter leading into the spin is probably appropriate. But post spin, I think we’re going to reverse pretty quickly and spending a lot more time on acquisitions.

Conor Fennerty: Yeah, Dori. I’ve been consistent with what David has outlined, we’ve kind of highlighted $25 million to $50 million of acquisitions per quarter. Obviously, run the lighter end of that this quarter, but it probably needs to be at the higher end of that range in the next quarter.

Dori Kesten: Okay. Thank you.

Operator: Thank you. And the next question comes from Craig Mailman with Citi.

Craig Mailman: Hey, good morning. David, just wanted to go back to your comment around the capital markets volatility here. Clearly, we’ve seen the 10-year jump around and macro expectations changing here. Have you seen or had any shifting conversations with people who you thought you’re going to get under contract or under LOI. Is any one kind of slow rolling you given any issues in the debt markets? Or has that largely been not an issue at this point so far?

David Lukes: Yeah. Craig, it’s a really good question. I mean certainly, if rates are — all in rates are going up, you would expect that to have a commensurate reaction in cap rates going in yield. On the other hand, there’s been a lot more capital formation around the equity side of buying open-air properties and the rents keep rising. And so, I guess what we’ve really seen and kind of if you’re looking at our pipeline of awarded deals at a seven cap over $1 billion that kind of shows you that the market has been factoring in both the debt side of the equation and the potential growth of the revenue stream from this type of property. So I think to date, I wouldn’t say it’s had much of an impact on cap rates. I can’t say that’s always going to be the case.

But to date we just haven’t seen it. We’ve just had a significant amount of demand. And to your point about buyers in those conversations, when John and his team are interviewing potential buyers one of the first questions is where does your equity come from? And the second question is, are you using debt or not? And we’ve been tilting towards buyers that are either unlevered or have a very low attachment point. So I think the impact to date has been pretty muted. And Conor, I don’t know if you would add.

Conor Fennerty: Yeah. There’s a couple of factors. I pointed Craig. One is just the yields or cap rates of our sector versus other sectors. We never got down in the retail sector to the threes and fours that you saw in some other property types like industrial multifamily. So the sensitivity around the capital markets is definitely on a little bit lower result of that. The second thing I would say you’re right to point out obviously benchmark rates are higher than they are today. One the important factors we think about just capital markets health is just debt availability. And in that regard, I would say things are materially better than they were six months ago. And so yes underlying rates important, but underlying structure is as important. And I would just say that we’ve seen pretty significant improvements in underlying structure for borrowers over the last six months, which is a very important factor as you think through underwriting.

Craig Mailman: That’s helpful. And maybe another way to come at it of the $1 billion it’s kind of in some form of negotiations. What percentage of that has kind of money at risk from a buyer?

David Lukes: Off the top of my head Craig, I don’t know.

Craig Mailman: Okay. And then just flipping around the $100 million of convenience assets in the pipeline seems to be good pace. I’m just curious you guys have always said, your team is focused on dispositions today. If you had 100% focused on acquisitions given the pool of opportunities out there and the willingness of sellers to part with assets, what do you think would be a good quarterly pace to think of deals that could be getting done at this point if that was kind of your main focus?

David Lukes: On the acquisition side, what we’ve said before, I know we spent a lot of time in the last couple of years building spreadsheet of inventory across the country, building relationships with the local brokerage community, understanding which families or private owners might owns small to midsize portfolios. So I think even at the time of the spin announcement back in October, we said that our competence level of acquiring $500 million a year is pretty high at a minimum. So that’s kind of our baseline target.

Craig Mailman: Great. Thank you.

David Lukes: Thanks Craig.

Operator: Thank you. The next question comes from Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb: Hey, good morning.

David Luke: Good morning, Alex.

Alexander Goldfarb: Hey, so just a few questions. First, David, have you guys are you on track full steam ahead for October 1st spin out, but can you just give us a sense for on October 2nd, what will site look like and who will be running site and what will Curb look like and who’s running Curb just to get a sense because it sounds like site will still have assets — Conor is doing a great job, cleaning up the balance sheet, but just wanted to get a sense of what we’re going to look at on October 2nd?

David Lukes: Certainly, Alex, I think what you are going to see on October 2nd is some executives having a dedicated role and some having a dual role. I think the specifics around who has a dual and who has a singular role will be a subject that we can talk more freely about over the next couple of quarters. The Board of Directors is heavily involved in making sure that both companies have the stewardship both from the Board and the executive front that align with those individual company interests. And then, of course, there’s a shared service agreement where the bulk of the company is really servicing both for some period of time as the business plans emerge. So I wouldn’t say now is a great time to have specifics. But I would say that you could expect prior to the spin that we would have more specific announcements on specific leadership.

Conor Fennerty: Yeah. That will be detailed in the Form-10 as we detailed in our announcement, the timing of that is closer to end of summer for effective date. So we’re still five months out to David’s point, but all that detail will be laid out in the Form-10.

Alexander Goldfarb: Okay, okay. And then the next question is just given on one hand great retail environment and certainly credit seems to be very good in retail land. On the other hand, personal credit lines are expensive and we have the stagflation environment. So with you guys now have more experience running convenience assets, are there any differences that you’re discerning whether it’s a corporately run have a retailer, a franchisee retailer versus a truly independent mom-and-pop like either a small local chain or a one-off? Just trying to understand the credits, what credit trends you’ve seen across those three types of ownerships as you gain more experience running retail convenience retail?

David Lukes: Sure Alex. Well, I mean remember that the tenant roster that we have is pretty consistent throughout anchored and unanchored assets. I think from a convenience perspective when one’s purchasing convenience properties you do have a choice, as to whether you’re tilting towards more credit or more local. There’s, benefits to both. You’ll note from our on our tenant roster and Curbline today that were heavily tilted towards credit. I would expect that to remain tilted toward credit for probably a little bit less so. And the reason is that, if you can find assets that have some local tenants that may be in business for 10 or 15 years, the retention rates are pretty high and the ability to mark-to-market on a growing market rents is much higher.

So I think the balance between credit and non-credit is important over the long-term, but we are always going to be a company that’s focused on credit, simply because, I think in a downturn the performance is just better overtime.

Conor Fennerty: Yeah. Hold up, what we’ve got an updated top 20 by losing or CURB in the earnings slides. As David mentioned, we feel really good about that top 25. The other point is it’s a differentiated and highly fragmented tenant concentration level, especially versus the peer group. So you think about our exposure to any one tenant, it’s very limited on a relative and absolute basis. And to us that’s a really compelling part of the thesis in the sense that, you’ve got essentially the some very low risk of one tenant having an outsized impact to whether NOI, earnings or whatever maybe, that’s a really compelling part of the thesis that we think on an absolute and relative basis.

Alexander Goldfarb: Okay. Thank you.

David Lukes: Thanks, Alex.

Operator: Thank you. And the next question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas: Hi. Thanks. Good morning. Just first — first question, look, there’s been a lot of talk about new capital coming into the open-air shopping center space. And I’m just curious in your discussions with buyers and what you’re seeing, if you could comment on whether you see a shift at all in the interest level for retail centers from — from new private equity and institutional investors. Just give us a sense of what you’re seeing in terms of capital formation in recent months for the space?

David Lukes: Yeah. Todd, I would say, and as I think I’ve said this on our 4Q call. And I’ve been very surprised at the depth of demand on starting really at the beginning of the year, which tells me that, a lot of folks must have made allocations decisions towards the end of the year and they were ready to act on that. From an institutional perspective, there has been an increase in institutions in the bidding time for various assets. There’s also been a fairly large component of value add folks. It’s just that the on the pricing, I think has gotten away from a lot of the value add buyers, because there’s a deeper pool of institutions. And then lastly, Todd, I have been very surprised at how much Private Wealth is active in open-air shopping centers right now.

And we sold a tremendous amount of properties to local buyers. And those local buyers in many cases have been unlevered, wealthy family offices. They tend to know the properties pretty well. I think John gets a lot of inbound calls from local and regional families. So as much as we all talk about the Institutional Capital, the Private side has been pretty surprising.

Todd Thomas: Okay. And then, of the $1 billion pipeline that you’re talking about, it looks like about $152 million is under contract. Is that right? And then, based on the asset sales that you’re that you’re seeing here in the pipeline and the level of activity, that you’re anticipating, do you see potential for CURB to be in a net cash position at Spin?

Conor Fennerty: Help me out that last point, Todd, I’m sorry.

Todd Thomas: Do you expect with the level of dispositions that you’re seeing out of sight to expect that? Do you see that their potential for a CURB to be in a net cash position at Spin?

Conor Fennerty: Yeah. Obviously, that’s the base case. And to both David and my comments, we think there’s a very good chance that CURB has no preferred investment insight and is all cash with no debt. So I would tell you our confidence in CURB being in a net cash position is very high. To your point on what’s under contract with referred to on page 11, it’s a greater percentage or greater dollar amount. What we’re trying to show here is just what’s needed to kind of the minimum threshold to meet our business plan. I think to David’s point on the $1 billion plus of assets under contract or awarded, we feel really good about a very large percentage of that. And so the odds of us kind of having a significantly higher disposition proceeds number from page 11 of the slides, is very high.

And in that environment or in that case, you would not have a Pref you would have a significant amount of cash at CURB, $600 million plus. And you’d have a much lower leverage profile for SITE. So there’s a pretty significant flow through. Again, I think to David’s points where our expectation is just given the timeline we laid out in the last earnings call, you’ll start to see some of those dispositions pick up the next couple of months. And then, I think you’ll see us update pages 11 and 12 and see kind of flow through to the respective balance sheets of the two entities.

David Lukes: Which is a nice way to circle back to why – why are we holding so much of our time on dispositions, because disposition pipeline is increasing the future value of curve line because I don’t have so much liquidity. And it’s also de-risking SITE Centers in terms of its overall leverage and size. So I think our confidence level that what you’re seeing on page 11 is the base case and the counterpoint will likely become better is pretty good.

Todd Thomas: All right. Thank you.

David Lukes: Thanks Todd.

Operator: Thank you. And the next question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem: Hey, two quick ones, just going back to acquisitions on sort of Curb, maybe can you talk to what the cap rates look like on what IRRs you’re thinking? And importantly, has that sort of changes or shifted at all sort of rates are moving?

David Lukes: Ron on the acquisitions I can barely hear you, you’re saying that – you saying what’s the – what’s the return expectation for the acquisitions?

Ronald Kamdem: Yes. Yes, exactly. Only the acquisitions, cap rates return expectations and has that shifted as rates have moved?

David Lukes: Yeah I mean I’ll say a similar comment on the dispositions and what impact rates have had. When we’re buying convenience properties, the going in cap rate is pretty consistent with high-quality retail and other – in other formats, meaning today it’s kind of been in the low to mid sixes. What’s unique I think is that you’re getting a very similar top line growth or NOI growth absent changes in occupancy but the CapEx required to generate that growth is significantly lower. So while the going in cap rate I think is consistent with other high-quality retail formats, the unlevered IRR I think is higher. And although, I think we thought that rates changing might have had some impact on that going in cap rate number, the reality is shop rents have been growing. And so the offset to raising rates is raising rents and therefore the unlevered IRR is still moving in a positive direction.