SITE Centers Corp. SITC recently agreed to sell its 15% stake in the DDRTC joint venture to the company’s partner TIAA-CREF. The transaction is based on a gross fund value of $1.14 billion and is anticipated to close in early 2020.
The expected sale also includes the repayment or assumption of outstanding mortgage debt undertaken by the partnership, aggregating $299.2 million as of the second-quarter end. Fee income from this joint venture for operational services provided is anticipated to be around $9-$10 million in 2019.
Specifically, the 22-property DDRTC portfolio spans 7.6 million square feet of space and was acquired in 2007. It mainly consists of large-format centers located predominantly in the Southeast United States. However, the properties are located in markets that have an average three-mile population and household income 40% and 15% lower, respectively, as compared with SITE Centers’ consolidated portfolio.
Hence, management believes the divesture will significantly improve the company’s portfolio quality and same-store net operating income (NOI) growth profile. Further, proceeds from the sale can be reinvested in other strategic opportunities.
The transaction also supports management's strategy to simplify its operating platform, enhance portfolio quality and drive growth. The company has been following an aggressive capital-recycling program through which it is divesting slow-growth assets and redeploying the proceeds for the acquisitions of premium U.S. shopping centers and redevelopment activities.
Notably, the company remains on track to meet its 5-year plan target of generating 5% average annual earnings growth and 2.75% same-store NOI growth. Additionally, the plan calls for annual investment of $75 million on property acquisitions through capital recycling and another $100 million on redevelopment opportunities. Such initiatives are likely to be conducive to top-line growth over the long term.
Shares of this Zacks Rank #3 (Hold) company have gained 9.8% in six months’ time, while the industry has rallied 2.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, the company will likely witness a decline in joint-venture fee income in 2020, when it ceases to provide operational services to the DDRTC portfolio. In fact, assuming no new joint ventures, SITE Centers expects 2020 joint-venture fee income to be in the $16-$20 million range. This indicates a decline of $7 million at the mid-point as compared with the 2019 guidance of $23-$27 million.
Moreover, the retail apocalypse in the retail sector is a concern for mall landlords. Specifically, the onslaught of e-commerce on physical retailers has made them rationalize their store fleet, while others unable to contend with online giants are filing bankruptcies. In fact, the recent bankruptcy filing by Forever 21 is a testament of the prevailing turbulent conditions affecting the sector.
Thanks to widespread store closures and retailer bankruptcies, retail real estate landlords, including Taubman Centers TCO, Macerich Company MAC and Federal Realty Investment Trust FRT, among others, have been witnessing a challenging environment.
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