SITE Centers Corp (SITC)
What is going on here!?!?!
I don’t know what it is… Every time I say my portfolio is set for the foreseeable future, the universe conspires to make a liar out of me. I’m a little blown away here. This is a REIT that just paid off all its debt and is trading at a 13% dividend yield. I had to reallocate my portfolio to include SITC. This is another special opportunity.
A reminder about what a REIT is:
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One aspect I focus on when investing is: what is my edge? What do I understand that other investors don’t? Well, in this case, it’s that I have been investing in shopping center REITs for most of the last eight years. The winning business model here is the town center model. The idea is simple: eCommerce can’t compete with businesses that require your physical presence, a.k.a. lifestyle businesses. Malls and open-air shopping centers are far from dead—they just need to change how they handle leasing. If a mall landlord can attract lifestyle tenants, it will create foot traffic that becomes a virtuous cycle, even giving a boost to businesses that are directly challenged by eCommerce.
Unless we plan on being isolated for the rest of our lives, we still need to have places where we can do things with our friends. Bars, restaurants, arcades, movie theaters, rock climbing gyms, art studios, spas, etc., etc. Then layer onto that businesses that aren’t geared towards activities but still provide a service that can’t be duplicated online: daycare centers, dry cleaners, grocery stores, barber shops, salons, cell phone and computer repair shops, medical offices, veterinary care, banks, etc., etc. Think about all the businesses out there that just can’t translate online.
This creates a synergy with retail tenants that are challenged by eCommerce. Maybe I would have ordered something online, but I went in to get a haircut and then went shopping in person since I was already there. This is the town center model for shopping centers, and this is what people who spend their time drooling over Amazon’s stock don’t understand.
Hey, don’t take my word for it—the Wall Street Journal said just as much:
Here is a full list of the shopping centers that SITC owns:
Ahwatukee Foothills Towne Center - Phoenix-Mesa-Scottsdale, AZ
Deer Valley Towne Center - Phoenix-Mesa-Scottsdale, AZ
Paradise Village Gateway - Phoenix-Mesa-Scottsdale, AZ
The Pike Outlets - Los Angeles-Long Beach-Anaheim, CA
Chapel Hills West - Denver-Aurora-Lakewood, CO
FlatAcres MarketCenter - Denver-Aurora-Lakewood, CO
Parker Pavilions - Denver-Aurora-Lakewood, CO
Connecticut Commons - Hartford-West Hartford-East Hartford, CT
Shoppes at Paradise Pointe - Crestview-Fort Walton Beach-Destin, FL
Winter Garden Village - Orlando-Kissimmee-Sanford, FL
Perimeter Pointe - Atlanta-Sandy Springs-Roswell, GA
Towne Center Prado - Atlanta-Sandy Springs-Roswell, GA
Sandy Plains Village - Atlanta-Sandy Springs-Roswell, GA
3030 North Broadway - Chicago-Naperville-Elgin, IL-IN-WI
The Maxwell Chicago - Naperville-Elgin, IL-IN-WI
Deer Park Town Center - Chicago-Naperville-Elgin, IL-IN-WI
Brookside Marketplace - Chicago-Naperville-Elgin, IL-IN-WI
Independence Commons - Kansas City, MO-KS
The Promenade at Brentwood - St. Louis, MO-IL
East Hanover Plaza - New York-Newark-Jersey City, NY-NJ-PA
Edgewater Towne Center - New York-Newark-Jersey City, NY-NJ-PA
Route 22 Retail Center - New York-Newark-Jersey City, NY-NJ-PA
Nassau Park Pavilion - Trenton, NJ
Meadowmont Crossing - Raleigh, NC
Meadowmont Market - Raleigh, NC
Poyner Place - Raleigh, NC
University Centre - Wilmington, NC
Headquarter Office Buildings - Cleveland-Elyria, OH
Stow Community Center - Cleveland-Elyria, OH
The Blocks - Portland-Vancouver-Hillsboro, OR-WA
Southmont Plaza - Allentown-Bethlehem-Easton, PA-NJ
Ashley Crossing - Charleston-North Charleston, SC
Commonwealth Center - Richmond, VA
Downtown Short Pump - Richmond, VA
I encourage you to repeat an exercise that I did. I looked up every single one of these shopping centers on Google Maps. I went to a street-level view from the parking lot and visually checked the number of lifestyle tenants versus the number of retailers that compete with eCommerce. There were unexpected findings, both good and bad. For example, at Paradise Village Gateway, parts of the street view were outdated and showed a dying shopping center that, from the satellite view, had been torn down and was in the process of being replaced. Or The Pike Outlets, located near the Aquarium of the Pacific, which I view as a big plus. Then there’s the Commonwealth Center outside of Richmond, VA, which is the only major shopping center in the area.
You also come across properties like The Maxwell in Chicago that don’t immediately stand out as amazing pieces of real estate. Or The Blocks in Portland, Oregon, which eluded me on a map. There’s also a mixed bag, like Independence Commons, which is located near a medical center but doesn’t have a great lifestyle mix. There is certainly some mediocrity mixed into their portfolio of properties. However, it’s also important to note that every property, even the more average ones, is well-maintained. Every single one looked like a place where I would go shopping.
Now that I’ve dug into the properties the REIT is holding, next up are the charts and the 10-K.
Here are the links to the documents I will be referencing:
Quarterly Supplement September 30, 2024
First off, referring to the 2Q 2024 Earnings Presentation, there is a lot of information about the spin-off of approximately 80% of their business into a separate company. The intent is to create two more specialized REITs, which overall I am not bothered by—it’s a logical move. SITC is focused on large shopping center real estate, while CURB is focused on smaller convenience real estate. An example of convenience real estate can be found on page 18 of the PDF. I chose the 2Q 2024 earnings presentation over the most recent one since it provided more detailed information about the spin-off of CURB.
I’m not interested in CURB because the spin-off was so recent that I don’t have enough data to determine how successful of an investment it will be. Sometimes spin-offs happen to offload underperforming assets, or maybe management’s stated reason is entirely honest. Either way, it’s not a risk I’m interested in taking. I also prefer full shopping center real estate to smaller, isolated locations.
Now, moving on to Quarterly Supplement September 30, 2024 I am just going to quote some of it directly because it’s what initially impressed me:
Results for the Third Quarter
Third quarter net income attributable to common shareholders was $320.2 million, or $6.07 per diluted share, as compared to net income of $45.9 million, or $0.87 per diluted share, in the year-ago period. The increase year-over-year primarily was the result of higher gain on sale from dispositions and interest income partially offset by the impact of lower property Net Operating Income (“NOI") as a result of net property dispositions, debt extinguishment costs including the write-off of fees related to the original mortgage facility commitment and Curbline Properties Corp. ("Curbline" or "CURB") transaction costs.
Third quarter operating funds from operations attributable to common shareholders (“Operating FFO” or “OFFO”) was $42.8 million, or $0.81 per diluted share, compared to $69.9 million, or $1.33 per diluted share, in the year-ago period. The decrease year-over-year primarily was due to the impact of lower property NOI as a result of net property dispositions, partially offset by higher interest income.
Significant Third Quarter and Recent Activity
Sold 25 shopping centers during the third quarter for an aggregate price of $1.4 billion.
Acquired seven convenience shopping centers during the third quarter for an aggregate price of $145.3 million. All of these properties were included in the Curbline spin-off.
During the quarter, redeemed all remaining outstanding senior unsecured notes due in 2025, 2026 and 2027 for total cash consideration, including expenses, of $1.2 billion and recorded debt extinguishment costs of approximately $6.7 million. The 2027 notes were partially hedged and, in August 2024, the related swaption agreements, which did not qualify for hedge accounting, were terminated and the Company received a cash payment of $1.3 million.
In August 2024, repaid the $200.0 million term loan and terminated the revolving credit facility which had no balance outstanding and recorded $4.8 million of aggregate debt extinguishment costs. The term loan was hedged with an interest rate swap which was also terminated in August 2024 and the Company received a cash payment of $6.8 million.
In August 2024, the Company closed and funded a $530.0 million mortgage facility secured by 23 properties. At September 30, 2024, the outstanding principal balance on the mortgage facility was $206.9 million secured by 13 properties. The Company recorded debt extinguishment costs of $10.1 million in the three months ended September 30, 2024 due to disposition-related repayments. Additionally, the Company wrote off $10.9 million in fees in the third quarter relating to the termination of the original $1.1 billion mortgage facility commitment obtained in October 2023.
On August 19, 2024, the Company’s common shares began trading on a split-adjusted basis (one-for-four) on the NYSE at the opening of trading. All prior year common share and earnings per share amounts have been adjusted for comparability.
On October 24, 2024, the Company provided notice of its intent to redeem all of its outstanding 6.375% Class A Cumulative Redeemable Preferred Shares and the associated depositary shares.
Most of what is listed above is a direct copy and paste from the PDF.
You read that right—these guys have been paying off debt like maniacs, which is amazing. I’m going to jump into the 10-K, but this is very important to keep in mind: how management behaves is extremely important. If the corporation is flush with cash, what do they do? Are they paying off debts and being intelligent? Or are they riding a sugar rush and spending as fast as they earn? In this case, management is behaving very responsibly. I’m impressed. This is not always the case.
There’s also an interesting chart on page 10 showing their major tenants. With the larger tenants, I would expect to see many names that compete more directly with eCommerce. However, I’m very encouraged by how many of their larger tenants are considered lifestyle tenants, such as Whole Foods, Kroger, LA Fitness, Regal Cinemas, etc.
Now digging into the 2023 10-K:
Given the very recent spin-off of all their convenience properties, there isn’t much useful information in SITC’s most recent 10-K. This is because the 10-K includes the financial results of a large number of properties that SITC no longer holds. However, pages 3 and 42 caught my attention. The massive sale of properties and the mention of “The Mortgage Facility” stood out to me, as paying off debt is far less impressive if, in essence, it’s just refinancing.
The 3rd Quarter 2024 10-Q The Quarterly Supplement is much more relevant, as it contains information about SITC after the Curbline spin-off occurred. The important highlights include:
Page 8: Shows that cash flows have remained stable since the spin-off.
Page 13: Indicates total indebtedness is only $300.8 million, confirming that SITC has been paying off debt rather than simply restructuring it.
Page 20: States that lower earnings are expected following the Curbline spin-off and asset sales, which is logical.
Page 21: Announces that SITC will be redeeming all of its preferred stock.
Page 34: Includes a brief mention of a property redevelopment pipeline.
This is all fantastic in my book. At times, you’ll hear me express frustration about the COVID lockdowns. Back then, I was invested in a debt-heavy shopping center REIT that got wiped out when the government forced the closure of nearly all of its tenants. I lost a lot of money. Absent that black swan event, everything would have been fine. The company was slowly turning around and trading at a fat 20% dividend yield.
I learned a very important lesson from that investment about debt. When the very worst happens, it’s crucial for a company to have the ability to adapt. If SITC faced a forced lockdown, they would have the flexibility to take on debt and stay afloat until conditions returned to normal. I’m not expecting a repeat of COVID, but any number of unpredictable events could occur that might require a business to draw on credit. A business with very little outstanding debt is well-positioned to handle such situations.
It’s important to note that SITC’s PE ratio of 1.12 is misleading. This isn’t intentional on the part of the company, but a significant one-off property sale inflated earnings, which drove the P/E ratio artificially low. Institutional investors recognize this, which is why the share price hasn’t moved much despite the low P/E.
Calculating the P/E is further complicated by the spin-off and asset sales. It’s unclear how much of an earnings drop to expect from this now smaller REIT. In 2023, SITC’s EPS was 4.84; in 2022, it was 2.92; and in 2021, it was 2.04. Let’s assume a 60% drop in earnings due to the spin-off and property sales. That would result in an EPS of 1.3, which at the current share price implies a PE of 11.5.
An earnings drop would also likely mean a dividend cut, which management has more or less suggested. The current quarterly dividend per share is 0.52. A 60% reduction would result in a dividend of 0.208 per quarter, bringing the annual total to 0.832 and a dividend yield of 5.5%. Even in this worst-case scenario, I’m still comfortable being invested in the company. A PE of 11.5 is attractive, leaving room for stock appreciation, and a 5.5% dividend yield is a solid return while I wait.
If the earnings drop ends up being less than 60%—say, 40% or 30%—the investment becomes even more attractive.
I like REITs. From the moment I learned about them, I loved the concept. It’s not often that I find a REIT with such a strong portfolio of properties and almost zero debt. I’m growing increasingly fearful that the stock market may take a large plunge in 2025 or 2026, and SITC seems like a great place to keep my money invested—away from the tech stock bloodbath that is likely coming.
My Portfolio:
FI, ADP, MCD, AFL, AXR, VLO, SITC, 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.
Am I correct to observe that they are currently trading almost at net-net? or is that wrong? market cap at about $800 and cash net of debt is about $700