SITE Centers Corp. Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Curbline Update: Began investing in convenience assets over five years ago. Created Curbline Properties as a unique REIT with high organic cash flow potential. The portfolio has excellent visibility, access, and compelling economics with limited CapEx needs. Same-store NOI for 2024 is expected to grow 3.5%-5.5%, and average >3% over the next three years.
• Transactions: Sold $736 million of wholly-owned properties in Q4, subsequent to year-end sold another $82 million. Currently, almost $750 million of real estate is under LOI or in contract negotiation. Acquired 4 convenience properties for $62 million in the quarter.
• Q4 Operations: Results were ahead of budget. Leasing volume was lower due to significant dispositions and less available space, but the leasing pipeline at year-end was strong, with expectations of spreads consistent with trailing 12-month levels.

Segment Performance

• Curbline Properties: As of year-end, the portfolio included 65 wholly-owned convenience properties expected to generate about $76 million of NOI in 2024. Same-store NOI for 2024 is expected to grow between 3.5% and 5.5%, with an average of greater than 3% for the next three years. Revenue contribution: The Curbline portfolio's NOI of $76M is a key component of the overall performance.
• SITE Centers Portfolio: In the fourth quarter, $736 million of wholly-owned properties were sold at a blended cap rate of 6.5%. Subsequent to year-end, another $82 million was sold. As of today, almost $750 million of real estate is either under LOI or in contract negotiation at a blended cap rate of roughly 7%. Additionally, 4 convenience properties were acquired for $62 million in the quarter. Revenue contribution: The dispositions and acquisitions impact the overall revenue mix of the SITE Centers portfolio.

Guidance

• No formal 2024 FFO guidance range. Projected total portfolio NOI: SITE Centers portfolio is expected to have a midpoint of roughly $265 million before any dispositions, and Curbline portfolio is expected to have a midpoint of roughly $76 million before any additional acquisitions. Curbline's same-store NOI growth is expected to be between 3.5% and 5.5% in 2024. Leverage is expected to continue to decline with debt-to-EBITDA below 4 times in 2024.

Risks

• Uncertainty in transaction timing and volume, which is a significant driver of quarterly FFO.
• Market conditions impacting cap rates and asset valuations, affecting the pricing of dispositions.
• Dependence on private market buyer demand for SITE Centers' assets, which could impact the pace and pricing of dispositions.

Question and Answer

Q: Good morning. Just a few questions here. Just first, a big one, David. You're not outlining an RVI type entity for legacy SITE, but still it's hard not to think about SITE ultimately sort of going away, if you will, especially at the pace of dispositions that you're doing and clearly, management's focus on Curb. So can you just give a little bit more color on how we should think about SITE post October 1, 2024?

A: Sure, Alex. I'd be happy to. I think it really depends on what signals we're getting from the public markets and what signals we're getting from the private markets. And at this point, the signals are very strong that the private market values assets at a higher value. And so we're listening to those signals, and we continue to sell assets. Should that continue, then those asset sales, I think, probably pick up. You can see how much activity we have going on right now at values that I think are very strong. So moving forward, all I can say is, in the time being between now and the spin date, we will continue to sell assets, and we'll reconsider what the strategy is and what the eventual outcome is at that time.

Q: Thank you. And then on cap rates, I think the prior batch that you sold year-end into early this year, I think you averaged the 6.5% on dispositions. You're saying now the next batch looks to be a 7%. And I don't recall what you said on the Curb asset acquisitions. But can you just talk a little bit more about cap rates? And then also, can you talk about IRR? So when you look at these assets, the ones you're selling and then the ones you're buying, it almost sounds like, based on your comments, literally, the convenience assets not only have lower CapEx needs, but actually have higher returns, which sounds incredible, but just wanted to get a little bit more perspective on that. And then maybe as part of that, you could just talk about what you're finding on credit quality as far as expectations for bad debt as you underwrite the Curb assets.

A: Sure. Well, on cap rates, I think you and I have discussed numerous times. It's difficult to pin down cap rates when the number of transactions are a handful here and there. I will say that the assets closed in the fourth quarter that were averaging a 6.5% cap did have a wide range of formats as well as a wide range of cap rates. We sold some assets in the low 5s, and we sold some assets in the high 7s. This next group where we're under LOI, we've awarded deals, and we're starting to negotiate contracts, it's the same thing. There are some properties that are low 6s, there's some properties that are high 7s. So I think the average is an interesting note, and I do think the average of 6.5% in the last batch, 7 in this batch, I don't know what that means going forward. I don't know if the additional properties we have are going to be higher or lower. What I have found is that the private market participants are less focused on retail format, and they're more intrigued by the credit quality, the submarket that the asset lies in and the duration of the lease term. And in that sense, the SITE Centers' portfolio fits that mandate of a lot of private buyers because we are in high-income demographics. The lease-up has been so robust in the last two or three years that the duration is pretty strong. And the weaker tenants like Bed Bath & Beyond have largely left the portfolio. So it feels like the private market participants are putting a higher value on those assets, which means that we fit those mandates. One of the things that, as you know, also contributes to a lot of activity is the presence of a grocery store. We still have more than two dozen centers that have a grocery store attached to them in the portfolio today and the average sales are quite high. There's a number of them that are more than $1,000 a square foot. So, I do think that the valuation that we've been seeing feels to be consistent with what I would expect the next couple of months to be. So our view on cap rates is that buyers are seeing the value of this duration and this credit quality, and we're seeing the outcome of that. On the buy side, where we're buying convenience properties, the main difference between what we're selling and buying is that growth and the cost of that growth. So, if we can deliver a much higher same-store number, but the cost to generate that is significantly less, I do agree with you that the unlevered IRR of the convenience properties is higher than what we're selling today.