Yahoo Finance SITE Centers Corp. (NYSE:SITC) Q1 2024 Earnings Call Transcript
SITE Centers Corp. (NYSE:SITC) Q1 2024 Earnings Call Transcript April 30, 2024
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 the SITE Centers' First Quarter 2024 Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over your host today Stephanie Ruys, Vice President of Capital Markets. Please go ahead ma'am.
Stephanie Ruys: Thank you. Good morning and welcome to SITE Centers' first quarter 2024 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 10K 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 reconciliation 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 first quarter was highlighted by additional progress on 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 over $1 billion of completed dispositions and over $100 million of new acquisitions since the third quarter of 2023 has put us on a dual path of growing our Curbline portfolio through acquisitions and maximizing the value of the SITE Centers' portfolio through certain dispositions along with continued leasing and asset management. I'll start with an update on Curbline, shift next to transactions, then conclude with an update on the quarter and operations before turning it over to Conor to talk about the first quarter results, the outlook for the rest of the year, and the balance sheet.
Starting with Curbline, we began investing in convenience assets over five years ago and after several years of investments, reviewing data analytics, and financial and tenant analysis, we are more convinced than ever that convenience sector is a differentiated unique growth opportunity. As announced, to seize this opportunity, we are creating Curbline Properties as a first mover REIT that is unlike 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, 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 factor in all of these attributes.
As of quarter end, the Curbline portfolio included 67 wholly-owned convenience properties expected to generate about $79 million of NOI in 2024 after adjusting for first quarter results and acquisitions. 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 U.S., yet is only a fraction of the addressable market for this type of asset. Convenience properties, which primarily cater to customer daily needs, are an integral part of the suburban lifestyle, which has only become more entrenched with increased suburban migration and the adoption of hybrid work.
And combined with a balance sheet that is expected to have no outstanding debt, Curbline Properties is expected to generate compelling and elevated relative growth and returns for stakeholders. As of today, we expect the spin-off to be completed on or around October 1st of this year with Curb capitalized with $600 million of liquidity in the form of cash and a preferred investment in SITE Centers. Additionally, consistent with our commentary last quarter, should we continue to make progress on the disposition 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. On that point, moving to transactions, we have closed $170 million of wholly owned property sales year-to-date, with total closed transactions since July 1 of just under $1.1 billion at a blended cap rate of under 7%.
The volume of disposition activity has increased since our call last quarter, resulting in over $1 billion of real estate currently either under contract, in contract negotiation or with executed nonbinding LOIs, at a blended cap rate of roughly 7%. The bulk of this inventory is primarily, sub-market dominant power centers. Closings are expected to pick up, over the middle of the year, consistent with the time line that we discussed last quarter for the assets launched around year end. The participants in this bidding process have been a wide variety of private and institutional investors. This deep pool of interest is clearly showing an active and liquid market, for our well located and high quality portfolio of open-air shopping centers. Leasing momentum remains strong.
Market rents are growing and replacement costs continue to escalate, factors we believe, that are supporting strong buyer interest. These buyers are sophisticated, committed to the open-air retail format and often have been unlevered acquirers. There has certainly been capital markets volatility in recent weeks, and no asset sales are certain until closing. But the elevated level of demand for the assets on the market, speaks to the quality of the SITE Centers portfolio, and the opportunity that we identified with the spin-off announcement. In terms of acquisitions, we acquired two convenience properties in the first quarter for $19 million in Houston and Phoenix and have over $100 million of additional convenience assets awarded or under contract subject to standard closing and diligence provisions.
Average household incomes for the first quarter investments were over $113,000, with a weighted average lease rate of almost 100% highlighting our focus on acquiring properties, where renewals and lease bumps drive growth without significant CapEx. Going forward, we remain encouraged by the unique opportunity 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 of 1% of total US inventory meaning, we have plenty of room to grow. That said, while we expect to remain active acquirers prior to the spin, we continue to prioritize dispositions to take advantage of demand for site assets, which will likely result in significantly more dispositions as compared to acquisitions in 2024.
Ending with the quarter and operations. First quarter results, were ahead of expectations on lower G&A, higher occupancy and higher lease termination fees. Overall, quarterly leasing volume was up sequentially, but remains down from 2023 levels, which is a function of a smaller portfolio and certainly less availability. Leasing demand continues to be very strong for 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 leased rate was down 30 basis points sequentially in part as we held space offline to maximize proceeds, as part of the sale process. Looking forward, we have over 350,000 square feet at share in lease negotiations, which we expect to be completed over the next two quarters at similar spreads and economics to the trailing 12 month figures reporting today.
We continue to expect the commencement of executed 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 again thank everyone at SITE Centers, for their work these past few quarters, which has been nothing short of incredible. The spin-off of Curbline Properties is possible due to the work of the entire organization, and we believe the transaction unlocks a compelling opportunity to create significant value for the company's stakeholders. And with that, I'll turn it over to Conor.
Conor Fennerty: Thank you, David. I'll start with first quarter earnings and operations, before concluding with updates to our 2024 outlook and balance sheet. As David noted, first quarter results were ahead of budget due to better-than-expected operations, including higher than forecast occupancy and lease termination fees and lower G&A expenses. Outside of these items, there were no other material call-outs in the quarter. Moving to operations. First quarter leasing volume was sequentially higher, but remains lower than the 2022 and 2023 run rate as David highlighted, due to disposition activity. With this smaller denominator, operating metrics remain volatile though based on the leasing pipeline at quarter end we expect spreads to be consistent with trailing 12-month levels.
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 for space. Moving to our outlook for 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 other 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 did not provide a formal 2024 FFO guidance range with year-end results. We did provide projections though, for total portfolio NOI and for the SITE and Curb assets that have been updated to reflect first quarter 2024 acquisitions and dispositions.
And as we move forward over the course of the year, we expect to continue to update the projection ranges for future transaction activity. For the Curb portfolio, total NOI is now expected to be roughly $79 million, up from $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 now expected to be $257 million down from $265 million at the midpoint of the projected range before any additional dispositions. Details on the assumptions underpinning these ranges are in our press release and earnings slides. In terms of other line items, we continue to 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 remains elevated at over $7 million for the quarter, though that figure will obviously to be dependent on short-term rates and debt repayment activity. On that point, in the first quarter, we repurchased just under $62 million of unsecured bonds at a discount, resulting in a gain of approximately $800,000. Finally, transaction volume particularly the timing of asset sales is expected to be the largest driver of quarterly FFO. And in the first quarter, we included $937,000 of NOI from assets sold in the quarter as detailed in the income statement. Moving to the balance sheet. In terms of leverage at quarter end, debt to EBITDA was just over four times with a net debt yield north of 20%.
Prior to the effectiveness of the spin-off, we expect leverage to continue to decline with debt-to-EBITDA below four times. Before drawing on the $1 billion mortgage commitment, we also expect to maintain a significant primarily unencumbered asset base, providing additional scale and collateral for SITE stakeholders. As I mentioned, we repurchased $62 million of 2025 and 2026 notes in the first 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 38 properties that are expected to be part of SITE Centers post-spin, and 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, $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 convenience properties. Additionally, as David noted, depending on the level of asset sales completed prior to the 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 11 and 12 of the earnings slides. Lastly, as previously announced, SITE Centers paid in January 2024, a special dividend of $0.16 per share. The dividend was funded with cash on hand. And with that, I'll turn it back to David.
David Lukes: Thank you, Conor. Operator, we're now ready for questions.
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