Will Spin-Off Plans Help SITE Centers (SITC) Stock Trend Higher?
Shares of SITE Centers Corp. SITC have gained more than 10% since Oct 30, after it announced its plan to spin off the Convenience assets into a separate publicly-traded real estate investment trust (REIT) — Curbline Properties Corp. (“Curbline Properties” or “CURB”) — concurrent with its third-quarter 2023 results.
Moreover, on Nov 2, credit rating agency — Fitch Ratings — placed the ratings of SITE Centers, including its underlying senior unsecured debt and preferred shares, on Rating Watch Positive following the announcement.
The agency expects SITC’s pro forma post-spin-off leverage to be significantly lower. Given the retail REIT’s dispositions, it expects its leverage to decline to less than 4.0X in the fourth quarter of 2023 from 5.1X reported in the third quarter of 2023. This would be well below the company's positive sensitivity of 5.5X. Additionally, all unsecured debt outstanding will be paid off prior to the spin-off using the $1.1 billion financing commitment received with financing and disposition proceeds.
Following the spin-off, SITE Centers’ streamlined portfolio of retail properties located in the top submarkets in the United States, characterized by solid trade area demographics, is expected to open up scope to maximize value through leasing and tactical redevelopment efforts.
With enhanced leasing momentum, an encouraging redevelopment pipeline and a signed, not opened pipeline aggregating $14.4 million as of the end of the third quarter, SITC is expected to witness net operating income and cash flow growth in the upcoming period, making the latest move a strategic fit.
This will be the first and only public REIT exclusively focused on Convenience assets, offering attractive, inflation-protected returns driven by high renewal and retention rates, and limited operating capital expenditures. For the 2024-2026 period, the CURB portfolio is estimated to generate same-property net operating growth averaging more than 3%.
In addition, the portfolio is expected to be in a net cash position at the time of the spin-off with cash on hand, a preferred investment in SITE Centers, and an unsecured, undrawn line of credit. This is likely to provide scope for scalable investment opportunities in a fragmented yet liquid market.
The spin-off, subject to certain customary closing conditions, is anticipated to materialize in the second half of 2024. Shareholders of SITE Centers will receive shares of CURB through a taxable pro rata stock distribution.
In conjunction with the spin-off announcement, SITE Centers posted solid third-quarter 2023 results driven by better-than-anticipated revenues aided by a rise in pro-rata base rent per square foot.
Operating funds from operations (OFFO) per share of 33 cents beat the Zacks Consensus Estimate of 28 cents and climbed 13.8% from the prior-year quarter.
The company clocked in revenues of $143.1 million in the quarter, outpacing the Zacks Consensus Estimate of $135.1 million. Moreover, the figure rose 5.1% year over year.
Per David R. Lukes, president and CEO of SITC, “Third quarter results reflect a continuation of year-to-date trends including steady demand for vacant space in the Company’s supply constrained markets and recycling of capital from highly leased properties into Convenience assets. Rent commencements, the backfill of vacant space from bankruptcies and tactical redevelopment deliveries remain significant tailwinds for SITE Centers going forward.”
SITC reported a leased rate of 94.6% on a pro-rata basis as of Sep 30, 2023, down from 95.5% in the prior quarter and 95.0% in the year-ago quarter. The sequential decline was mainly related to the recapture of the remaining units leased by Bed, Bath & Beyond and the sale of properties with an average leased rate of 98.5%, partially offset by new leasing activity.
The base rent per occupied square foot was $20.20 on a pro-rata basis as of Sep 30, 2023, compared with $19.11 a year ago. The company generated pro-rata basis cash new and cash renewal leasing spreads of 58.2% and 6.6%, respectively, in the third quarter.
The same-store NOI improved 2.9% on a pro-rata basis in the reported quarter, inclusive of redevelopment, from the prior-year quarter.
Speaking of its portfolio activity, in the third quarter, SITC acquired three convenience shopping centers for $28.1 million. These included Towne Crossing Shops in Richmond, VA, for $4.2 million, Oaks at Slaughter in Austin, TX, for $14.1 million and Marketplace at 249 in Houston, TX, for $9.8 million. Subsequent to quarter end, it acquired two convenience properties — Estero Crossing in Fort Meyers, FL, for $17.1 million and Point at University in Charlotte, NC, for $8.9 million.
From the beginning of the third quarter of 2023 through Oct 30, the company disposed of 11 wholly owned shopping centers for $645.6 million. It has six additional assets under contract for sale, subject to standard closing conditions for $242 million.
Prior to the spin-off, SITC intends to acquire additional convenience properties to be included in the CURB portfolio. It expects to fund these through additional SITE Centers dispositions, retained cash flow and cash on hand.
Further, based on its third-quarter results and announced transaction activity, SITE Centers revised its guidance for OFFO per share in the range of $1.16–$1.18, up from the earlier estimation of $1.13-$1.17. The Zacks Consensus Estimate is currently pegged at $1.15.
Growth in same-store NOI (adjusted for 2022 uncollectible revenue impact) is expected in the band of 2.5-4.0%, revised upward from 1-4% projected earlier.
Also, concurrent with its third-quarter earnings release, SITE Centers announced its fourth-quarter 2023 dividend of 13 cents per share on its common stock. The dividend will be paid out on Jan 5, 2024, to shareholders on record as of Dec 11, 2023.
Moreover, based on its transaction activity in the current year, the company expects to pay a special cash dividend of at least 10 cents per share prior to Jan 31, 2024, subject to the final approval of its board of directors. It will also assess and adjust, if required, future quarterly dividends prior to the spin-off.
SITE Centers currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Its share have gained 8% in the past month compared with the industry’s growth of 6.5%.
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Performance of Other Retail REITs
Simon Property Group, Inc. SPG reported third-quarter 2023 FFO per share of $3.20, surpassing the Zacks Consensus Estimate of $2.98. Moreover, the figure increased 9.2% year over year.
Results reflected better-than-anticipated revenues on healthy leasing activity and a rise in the base rent per square foot and occupancy levels. However, higher property operating expenses and interest expenses partly offset the upsides. SPG also raised its 2023 FFO per share outlook.
Federal Realty Investment Trust’s FRT third-quarter 2023 FFO per share of $1.65 surpassed the Zacks Consensus Estimate of $1.62. The bottom line also witnessed a rise of 3.8% from the year-ago quarter’s tally of $1.59.
Results reflected healthy leasing activity and occupancy levels at its properties. FRT has also tightened and increased its guidance for 2023 FFO per share.
The Macerich Company MAC reported FFO per share, excluding financing expenses in relation to Chandler Freehold, of 44 cents, in line with the Zacks Consensus Estimate. However, the figure declined 4.3% from the year-ago quarter’s 46 cents.
The results reflected a year-over-year increase in quarterly revenues driven by a rise in occupancy. MAC also experienced an increase in same-center net operating income, including lease termination income, from the prior-year period.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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SITE CENTERS CORP. (SITC) : Free Stock Analysis Report
