SITE Centers Corp. Q3 FY2023 earnings call

Management Statement and Operational Highlights:

• Announced plans to spin off the convenience portfolio into Curbline Properties. Reasons for liking convenience retail include visibility/access, attractive economics, and high-quality tenants.
• SITE Centers has sold $646 million of properties since July 1 and has $242 million of assets under contract. The retail operating environment post-pandemic has favorable trends supporting fundamentals.
• Third quarter OFFO was ahead of budget due to better-than-expected operations, including higher occupancy and below-market lease adjustments. Leasing volume and spreads picked up in the third quarter, with over 1.2 million square feet leased and 58% new leasing spreads.

Segment Performance:

• SITE Centers (excluding the convenience portfolio that will be part of Curbline): A carefully curated mix of grocery, power, lifestyle, and net lease assets. Since July 1, 11 properties have been sold for $646 million at a blended cap rate of 6.5%. An additional 6 properties are under contract for $242 million at a similar mid-6 cap rate. Aggregate expected asset sales are nearly $1 billion.
• Curbline Properties: Initially seeded with 61 wholly owned convenience properties, no debt, and $500 million of liquidity in cash and a preferred investment in SITE Centers. The addressable market for convenience assets is 950 million square feet, and Curbline's initial portfolio is 2.1 million square feet, representing 0.25% of the total U.S. inventory.

Guidance:

• Increased same-store NOI guidance to a range of 2.5% to 4.0% growth driven by results to date and earlier-than-expected rent commencements.
• Increased OFFO guidance to a range of $1.16 to $1.18 per share, including announced dispositions closed to date and assets under contract.
• SITE Centers is expected to declare a special dividend of at least $0.10 per share payable in January 2024.

Risks:

• Market turbulence could impact asset sales and valuations.
• Dependence on successfully backfilling vacated spaces and executing the spin-off smoothly.

Question and Answer: Q: Congratulations on the announcement. Can you walk through the acquisitions and disposition plans you have ahead of the spin and the pricing you're seeing?

A: Conor Fennerty mentioned details on completed dispositions to date and assets under contract, noting further sales and acquisitions are expected with details on the deck.

Q: What kind of premium would you expect Curb to trade at relative to SITE as Curb sort of gets going on a multiple basis?

A: Conor Fennerty said they are excited about the growth potential and the market will set the premium.

Q: A couple of questions here. Just on the cap rates of what you sold and what's under contract, the 6.5%, is that just today's cap rate? Or is that sort of -- should we think about a pretty good kind of bogey for where the stabilized Cap rate?

A: David Lukes said the cap rate is based on forward 12-month NOI, with closed assets averaging 6.5% on forward 12, and recent contracts still in the mid-6s.

Q: A number of years ago, when you -- first one, when you guys took over the company, you did a significant repurposing of the portfolio. And then you said about buying the convenience assets because the NOI growth was faster than the traditional SITE Center shopping centers plus they work better with your cost of capital at the time and it was a -- turned out to be prescient just given with what happened during COVID. My question is, if we think about size and scale of management, because it sounds like you guys are going to be running both companies, cost of capital and just overall earnings growth. Why does it make sense to split the 2 entities apart versus keep them together and they both benefit the same way?

A: David Lukes said convenience is a unique asset class deserving aggregation, and SITE Centers and Curbline appeal to different investors, allowing each to maximize value.

Q: A lot to digest here. A couple of questions. I guess following up on Alex's question. I hear your comments about the spin not being quite the same as the RVI spin off, which was executed on several years back, but there are some similarities. And I guess I wanted to ask about the shared services and the infrastructure, which here lie within SITE Centers, but you mentioned that they may continue to monetize assets over time and have flexibility to pay down the mortgage, can you just provide, I guess, a little bit more detail around what you're expecting for Curb to develop or acquire its own asset management and infrastructure over time and whether there's a specific time line or agreement on the shared services agreement?

A: David Lukes said a shared services agreement is to ensure orderly transition of resources, with a 2-year period for transition, and both companies to stand on their own in 3-4 quarters.

Q: For a while now, your acquisitions have primarily been focused on kind of these convenience assets. How should we think about acquisition volumes and pricing going forward since I presume convenience assets will be purchased through Curbline and SITE Centers will be focused more on traditional strip centers?

A: David Lukes said they will be more selective on acquisitions in the near term, but Curbline has a large addressable market for convenience assets with high acquisition potential.

Q: Just to go back to an earlier topic. The SITE Centers pro forma will have about 4.5x more NOI than Curbline. And going back to kind of the management interest and alignment with shareholders. I just want to make sure I understand that as a shareholder, I'm going to own a lot more SITE than Curbline. I just want to make sure that the alignment with interest with shareholders kind of reflect that? Or do you think your incentive comp and G&A would be more aligned to Curb?

A: Conor Fennerty said NOI figures will change as assets are sold and acquired, expecting Curbline's NOI to increase and the enterprise value of Curb to be equal to or greater than SITE's today in a couple of years.

Q: What kind of premium would you expect Curb to trade at relative to SITE as Curb sort of gets going on a multiple basis?

A: Conor Fennerty said they are excited about growth potential and the market will set the premium.

Q: What do you consider to be like the closest comps to Curb in terms of your peer set?

A: Conor Fennerty said Curb has unique attributes, combining elements of net lease, industrials, and other property types, with strong financial and economic models.

Q: Last question. Is there any differential in terms of the credit quality of the tenant base between the 2?

A: Conor Fennerty said Curb has excellent credit quality in top 25 tenants, better diversification, and easier backfilling compared to SITE Centers.

Q: Do you guys know what the pref pricing will be on Curbline's preferred and SITE?

A: Conor Fennerty said the preferred investment could take various forms, with no current details on coupon or maturity.

Q: Just a couple of quick ones. Do you guys know what the pref pricing will be on Curbline's preferred and SITE?

A: Conor Fennerty said the preferred investment structure is to position both companies, with details to evolve.

Q: Just last one, Conor, for you. You mentioned industrial and net lease. And is this just your commentary around valuation that this is going to be the lowest CapEx kind of burden in the retail space, and that's why you guys feel like this should give you that multiple expansion relative to everyone else? Is that how I should take that comment?

A: Conor Fennerty said Curb has unique attributes with embedded growth, differentiating it from retail peers with better valuation potential.

Q: So my follow-up is it sounds like that there may be additional sales here from SITE Centers and that the acquisitions going forward will be geared towards Curb. So I hear you that SITE Centers is not planning to liquidate like RVI was designed to do. But can you help us understand what the growth outlook is like for SITE Centers? It sounds more likely to shrink than grow over time, particularly if the private market continues to value assets of pricing that's in the same ballpark perhaps as pricing was for the 3Q and 4Q dispositions that you announced?

A: David Lukes said SITE Centers will continue to transact if market signals indicate favorable valuations, aiming to recycle capital into the convenience business.