Normally, I don’t comment on quarterly earnings. I think Warren Buffett said it best when he stated that the focus on quarterly earnings encourages overly short-term thinking on the part of CEOs. Also, given how many businesses have a seasonal element to their revenue, I find quarterly earnings reports are rarely of much relevance to me. I prefer to analyze a business one year at a time.
Today, I took a look at SITC’s recent earnings report because there is so little data available about their operations since the spin-off of Curbline is a very recent occurrence, and SITC is now a substantially different REIT than before.
For SITC the news is fairly simple:
Quarterly Supplemental Earnings Report
Fourth quarter net loss attributable to common shareholders was $13.2 million, or $0.25 per diluted share, as compared to net income of $193.6 million, or $3.69 per diluted share, in the year-ago period. The decrease yearover-year primarily was the result of the spin-off of Curbline Properties Corp. (“Curbline” or “Curbline Properties”) (NYSE: CURB), lower Net Operating Income (“NOI”) as a result of property dispositions, lower gain on sale from dispositions, lower interest income and the write-off of the remaining original issuance costs relating to the 6.375% Class A Cumulative Redeemable Preferred Shares that were redeemed during the quarter.
and
On October 1, 2024, the Company completed the spin-off of 79 convenience properties and distributed $800.0 million of cash to Curbline Properties. The spin-off of the convenience properties represented a strategic shift in the Company’s business and, as such, the Curbline properties are reflected as discontinued operations for all periods presented.
I added the emphasis to the text. Given that SITC has spun off and sold off a large number of assets, it was expected that revenue and earnings would be lower than before since SITC is now a smaller, more focused company. But what about management's claim that a write-off is what caused a loss this quarter? Well, looking at their income statement, that’s not an entirely accurate claim. The quarterly loss was $13.248 million. However, preferred dividends and the associated write-off with the preferred shares only total up to $7.426 million. That accounts for over half of the shortfall, but it isn’t as though this is the only reason they are in the red.
I did start comparing the ratios of different expenses to net operating income, between this quarter and last quarter, to try and find what else is going on. It’s not as easy to see at a quick glance since the numbers have changed so drastically given the spin-off of Curbline. The ratio of interest expense to net operating income is relatively unchanged. The ratio of their depreciation expense to net operating income increased by about 10% from last quarter. The ratio of general and administrative expense to net operating income increased by 20.8% from last quarter. The remaining earnings loss of $5.82 million is just about exactly attributable to these two increases in expenses, which I actually think is a little encouraging since management can cut costs, and depreciation gets added back in on the cash flow statement.
Now, let's look at FFO and what damage handing $800 million to Curbline during the spin-off did. But first, a quick explanation of what FFO is and why you’ll see it on the financial statements of REITs:
FFO = Net Income + Depreciation + Amortization − Gains from Property Sales
Equity REITs aren’t complicated at all; they're just a collection of properties that generate rental income. Some of the fancier ones like SPG have other streams of revenue, but REITs are required by law to generate 75% of their revenue from real estate-related activities. Given these facts, FFO is an important non-GAAP accounting measure to consider, and there are some problems with GAAP accounting standards. FFO gives a more accurate picture of how much money a REIT is bringing in through rental income by adding back in depreciation and amortization costs and subtracting the gains from one-off real estate sales.
FFO for SITC this last quarter was $806 thousand. However, after adding back in the one-off costs associated with redeeming all of their preferred shares, then FFO for SITC becomes $8.287 million. In this light, management's claim that the quarterly loss was primarily due to the costs associated with redeeming the preferred stock makes sense. Now, this was when I wanted to take a look and see how large of a dividend they were issuing and if it is covered by cash from operations. That is when I noticed that they didn’t issue a cash flow statement in this supplementary report and their 10-Q isn’t available yet on the SEC’s website. Now, I’m annoyed with them again.
Given their absence of disclosure, I get to make my own estimation. Given that net operating income is 70% lower than it was last quarter, I am going to assume that cash from operations was also 70% lower. If management doesn’t want people making assumptions, then they should release all of their data at once. Last quarter, they had $36 million in cash from operations. This means this quarter, cash from operations could be as low as $10 million. Now, since they handed off all that cash to Curbline, they can’t exactly afford to issue a $30 million dividend since they only have $54 million in cash. That is when I noticed that really quietly on page 5, it states: “Common stock dividends declared, per share (2) $0.00.”
That means that SITC cut their dividend this quarter, which explains why the stock tumbled 4.40% as I am typing this. This is the risk of being an individual investor. Wall Street will always be faster than you. I was asleep when this report came out. Wall Street wasn’t. It’s also why I don’t like high PE stocks and think value investing is the best approach for an individual investor. Because when the time comes to move and move fast, the guys who pay tens of thousands of dollars a year for Bloomberg terminals and don’t have a life will be faster than you. But at least drop is relatively minimal and not a 20% nose dive because I don't buy overvalued stocks.
Now, this raises concerns on my part about SITC being able to issue a dividend that is satisfactory. On page 6, they state there are 5.247 million shares of SITC common stock outstanding. If SITC’s new normal is cash from operations to the tune of $8 - $10 million a quarter, then let’s say they pay out 80% of that to shareholders. I’ll take the low end and use the FFO number. $8 million * 0.8 = $6.4 million. $6.4 million / 5.247 million shares = a dividend of $1.22 per share per quarter, which is an annual total dividend of $4.88. With a current share price of $14, this would make SITC’s dividend yield 3.4%. I’m not happy about this. This ended up being a much worse reality than I expected.
I thought they had enough of a margin of safety that this wasn’t going to happen, but I was way off about the impact of the spin-off. They raided the piggy bank a lot more than I expected. I do love that their debt is so low, but a yield in the neighborhood of 3.4% isn’t good enough. I require more compensation for risk than that. It is somewhat of a comfort that Wall Street was just as blindsided as I was since SITC's share price had been rising leading up to this earnings report.
The moral of this story is that, this morning, I dumped all of my SITC stock. I need to maintain discipline by only investing in stocks with high amounts of free cash flow relative to cash from operations since those stocks have, by far, the best track record of success for me.
Okay, bye bye now.
My Portfolio:
MCD, MITSY, AFL, SHV
METC $17 Call 6/20/2025
FedEx Bond CUSIP: 313309AP1
JP Morgan Chase Bond CUSIP: 48130CVM4
*Disclaimer*
You can and will lose money in the stock market. You can lose all of your money. I can and will be wrong. I have been wrong in the past. I have lost money in the past. Investing in stocks is risky and should never be considered safe. Invest at your own risk.