SITE Centers Corp. (NYSE:SITC) Q4 2023 Earnings Call Transcript
SITE Centers Corp. (NYSE:SITC) Q4 2023 Earnings Call Transcript February 13, 2024
SITE Centers Corp. beats earnings expectations. Reported EPS is $0.92, expectations were $0.26. 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 SITE Centers Reports Fourth Quarter 2023, Operating Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stephanie Ruys de Perez, Vice President, Capital Markets. Please go ahead.
Stephanie Ruys de Perez: Thank you. Good morning, and welcome to SITE Centers fourth 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 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 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. Descriptions and reconciliations 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 fourth quarter was significant for SITE Centers to say the least, highlighted by 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 nearly $1 billion of transaction activity has put us on a dual path of growing our Curbline portfolio through acquisitions and realizing NAV of the SITE Centers portfolio through dispositions and asset management. We are only three months past the spin-off announcement, but have made substantial progress on the business plans for both SITE and Curb with more progress to come. I'll start with an update on Curbline, transition next to transactions and then conclude with an update on the quarter in operations, before turning it over to Conor, to talk about how all of this impacts the balance sheet and 2024 results.
Starting with Curbline, we began investing in convenience assets over five years ago, and after several years of transaction activity, reviewing data analytics and financial and tenant analysis, we are more convinced than ever that the convenience sector is both differentiated and a unique growth opportunity. As announced, to seize this opportunity, we are creating Curbline Properties as a unique first-mover REIT that is differentiated from all 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, a 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 factoring in all of these attributes. As of the year-end, the Curbline portfolio included 65 wholly-owned convenience properties expected to generate about $76 million of NOI in 2024. All 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 United States. These properties, which primarily cater to daily customer errands are an integral part of the suburban lifestyle, which has only become more entrenched with increased suburban migration and the rise of hybrid work.
And combined with the balance sheet that is truly unmatched with no outstanding debt and cash and a preferred investment on hand, Curbline Properties is expected to generate best-in-class growth and returns for stakeholders. As of today, we expect the spinoff to be completed on or around October 1 of this year. Based on the transactions completed to date, we now expect Curb to be capitalized with $600 million of liquidity or $100 million more than a few months ago in the form of cash and the preferred investment in SITE Centers. Additionally, should we make more progress on the dispositions 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. To that point, moving to transactions.
We sold $736 million of wholly-owned properties in the fourth quarter at a blended cap rate of 6.5%. Subsequent to year end, we sold another $82 million. As of today, the pace of dispositions has remained robust, and the pricing of those assets has remained strong, resulting in almost $750 million of real estate currently either under LOI or in contract negotiation at a blended cap rate of roughly 7%. The bulk of this inventory is primarily submarket dominant power centers, with roughly 30% of the assets by value containing a traditional grocer. Needless to say, the level of demand speaks to the quality of the SITE Centers portfolio and highlights the opportunity that we identified with the spin-off announcement. Over the past six years, this management team has sold over $7 billion of shopping centers.
Through that process, John Cattonar and his team have gained a very good understanding of which buyers are seeking high-quality assets. These parties include a wide range of market participants, including both private buyers and public REITs. In all cases, these buyers know the assets, they know our submarkets, and they are often unlevered acquirers of high-quality real estate. The SITE Centers portfolio fits that mold, having been carefully selected via the RVI spin-off and our joint venture unwinds and remained extremely attractive to a wide range of buyers looking to invest in open-air retail real estate. The retail operating environment has dramatically shifted post pandemic with limited supply and higher demand from a broader set of tenants, trends that should support fundamentals for the sector for years.
The macro tailwinds, along with company-specific factors like sites SNO pipeline, which represents 4.2% of spin adjusted base rent, along with redevelopment deliveries and the lease-up of vacant units are expected to generate substantial forward NOI growth. These two factors combined, our knowledge of the buyer universe plus sector and specific tailwinds, makes us very confident in maximizing value on additional SITE Centers properties via private market asset sales. Going forward, I would expect SITE to continue to focus on this compelling value creation opportunity and the NAV arbitrage. In terms of acquisitions, we acquired four convenience properties for $62 million in the quarter in Charlotte, Cape Coral, Atlanta and Phoenix. Average household incomes for the fourth quarter investments were over $104,000 and a weighted average lease rate of almost 100%, highlighting our focus on acquiring properties where the renewals and lease bumps drive growth without significant CapEx. Going forward, we remain encouraged by the unique opportunities 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 1% of total U.S. inventory meaning we have plenty of room to grow. That said, while we expect to acquire additional properties prior to the spin, we are prioritizing dispositions to take advantage of demand for SITE's assets, which will act as a governor of sorts to acquisitions volume in 2024. Ending with the quarter and operations, we had a very productive fourth quarter with results ahead of budget. Our property operations teams continue to do a great job getting tenants open for business ahead of schedule, which drove part of our outperformance this quarter. Overall quarterly leasing volume was down sequentially, but this was largely a function of a smaller portfolio and less availability.
Leasing demand continues to be very strong from 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 lease rate was down 10% -- 10 basis points sequentially due to a 50-basis-point headwind from significant fourth quarter asset sales, which averaged 98% leased. Looking forward, we have another 350,000 square feet at share in lease negotiation, including effectively all of our remaining Bed Bath square footage, which we expect to be completed over the next two quarters at similar spreads and economics than the trailing 12-month figures reported today. We continue to expect commencement of our signed 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 thank everyone at the SITE Centers team for their work leading into this announcement and over the last few months. The spin-off of Curbline Properties is possible due to the work of truly everyone across the organization, and it positions us for growth. We strongly believe that the compelling opportunity in front of us is to create significant value for the company's stakeholders. And with that, I'll turn it over to Conor.
Conor Fennerty : Thanks, David. I'll start with fourth quarter earnings and operations before concluding with the 2024 outlook and updates to the balance sheet. As David noted, the fourth quarter OFFO was ahead of budget due to better-than-expected operations and higher interest income, partially offset by higher operating and G&A expenses. Specific to operating expenses, we had about $2 million of higher landlord and CAM expenses in the quarter related in part to some seasonal items, including snow removal that we do not expect to reoccur. Outside of these items, there were no other material callouts in the quarter. Moving to operations. Fourth quarter leasing volume was lower due to the significant dispositions that David highlighted in the back half of the year, along with less available space.
With this small denominator, operating metrics will become more volatile. But based on the leasing pipeline at year-end, we expect spreads to be consistent with trailing 12-month levels over the course of the year. 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. Moving to 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 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 are not providing a formal 2024 FFO guidance range. We are providing projections though, for total portfolio NOI for the SITE and Curb portfolios that include all properties owned as of year-end. And as we move forward over the course of the year, we expect to update the projection ranges for transaction activity. For the Curb portfolio, total NOI is expected to be roughly $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 expected to be roughly $265 million at the midpoint of the projected range before any dispositions.
Additional details on the assumptions underpinning these ranges are in our press release and earnings slides. In terms of other line items, we 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 is likely to remain elevated in the first half of the year, though will obviously be dependent on short-term rates and any debt repayment activity. Transaction volume, particularly the timing of asset sales, is expected to be the largest driver of quarterly FFO and the fourth quarter included $4.5 million of NOI from assets sold in the quarter as detailed in the supplement. Moving to the balance sheet. In terms of leverage, at quarter end, debt-to-EBITDA was 4.2 times, with a net debt yield north of 20%.
Over the course of 2024, we expect leverage to continue to decline with debt-to-EBITDA below 4 times. Prior to drawing on the $1.1 billion mortgage commitment, we expect to maintain significant, primarily unencumbered asset base, providing additional scale and collateral for SITE stakeholders. We repaid the 2024 notes and one wholly-owned mortgage in the fourth 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 40 properties that are expected to be part of SITE Centers post-spin. 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, now $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 communities properties. Additionally, as David noted, depending on the level of asset sales completed prior to 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 12 and 13 of the earnings slides. Lastly, as a result of 2023 transaction activity, SITE Centers paid in January 2024, a special dividend of $0.16 per share. The dividend was funded with cash on hand. The company also declared its first quarter dividend of $0.13 per share, which is unchanged from the fourth quarter.
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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