SITE Centers Corp. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited quarterly results. SITE Centers owns, leases, redevelops and manages U.S. shopping centers as a REIT.
Business context and material changes
SITE Centers completed a major portfolio transformation in 2018, including the July 1 spin-off of Retail Value Inc. (RVI), which received 48 shopping centers, including all 12 of SITE Centers’ Puerto Rico properties. SITE Centers retained a preferred investment in RVI and management contracts. It also contributed 10 properties to a newly formed 20%-owned joint venture and continued asset sales and debt reduction.
At year-end, SITE Centers reported 177 shopping centers, including 107 owned through joint ventures, with 60.6 million total square feet of GLA. The portfolio was 89.9% occupied, versus 90.9% in 2017; average annualized base rent per occupied square foot rose to $17.86 from $16.46. Management attributed lower occupancy primarily to anchor lease expirations and tenant bankruptcies, including Toys “R” Us, and partly to dispositions.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $707.3 million | $921.6 million |
| Net income (loss) attributable to common shareholders | $80.9 million | $(270.4) million |
| Diluted earnings (loss) per share | $0.43 | $(1.48) |
| FFO attributable to common shareholders | $180.1 million | $256.8 million |
| Operating FFO attributable to common shareholders | $307.3 million | $432.4 million |
| Cash from operating activities | $264.8 million | $410.4 million |
| Cash from investing activities | $816.9 million | $478.6 million |
| Cash used in financing activities | $(1,162.8) million | $(833.5) million |
| Total debt at year-end | $1,884.4 million | $3,849.3 million |
Revenue fell 23%, mainly because of the RVI spin-off and property dispositions. GAAP net income improved largely because of higher real-estate disposition gains and lower impairment charges; these gains are not equivalent to recurring operating performance. SITE Centers recorded $225.4 million of net disposition gains and $69.3 million of consolidated real-estate impairment charges. Operating FFO declined mainly due to the spin-off and asset sales.
Fourth-quarter 2018 revenue was $136.6 million. Net income attributable to SITE Centers was $180.8 million and net income attributable to common shareholders was $172.5 million, including a $182.3 million gain on sale; the quarter included $0.9 million of impairment charges.
At December 31, cash and cash equivalents were $11.1 million, with $870.0 million of available revolving-credit capacity. Consolidated debt was substantially reduced, and management said maturities were addressed through February 2020. Debt to total market capitalization was 0.43:1.0. Fixed-rate debt was $1.735 billion and variable-rate debt was $149.7 million; the weighted-average rate on consolidated debt was 4.3% for fixed-rate and 3.8% for variable-rate debt.
Same-store NOI increased 2.3% at SITE Centers’ ownership interest (1.2% at 100%), attributed to rent increases, better occupancy in comparable properties and favorable expense recoveries. Leasing spreads were 20.9% on new leases and 6.7% on renewals, or 8.2% blended. The 2018 common dividend was $1.16 per share; the company declared a first-quarter 2019 dividend of $0.20 per share.
Outlook, commentary and risks
Management identified rental increases, lease-up, redevelopment and opportunistic investment as growth avenues. It expects to use proceeds from future sales of lower-growth assets, including sales to joint ventures, largely for redevelopment and investments. Redevelopment spending is discretionary; no numerical earnings or FFO guidance is provided.
Management reported tenant demand, particularly from value-oriented retailers, service businesses and specialty grocers, while noting store closures, bankruptcies and e-commerce pressures. Major risks include tenant credit and anchor vacancies, retail-market and consumer changes, joint-venture exposure, refinancing and interest-rate risk, real-estate impairments, redevelopment execution, weather and environmental liabilities, and maintaining REIT qualification.
Unusual items included $68.2 million of debt-extinguishment costs, $37.0 million of RVI spin-off transaction costs, and an $11.4 million reserve increase on preferred equity investments in Blackstone joint ventures. The company recorded a $72.4 million cumulative valuation allowance on those preferred investments. Hurricane-related business interruption income was $6.9 million; the Puerto Rico properties transferred to RVI.
Unconsolidated joint ventures had $2.2 billion of mortgage debt at year-end, of which SITE Centers’ proportionate share was approximately $0.4 billion. Joint-venture refinancing and repayment depend in part on extensions and asset sales. The company said it was compliant with debt covenants and expected to remain compliant.
Important facts for investors to verify
- Reconcile recurring performance with disposition gains, impairments and non-GAAP FFO measures; FFO and Operating FFO are not cash flow or amounts available for dividends.
- Track occupancy, anchor vacancies, tenant bankruptcies and the execution of re-leasing and redevelopment plans.
- Review post-spin-off results and the value, repayment prospects and dividend terms of the $190 million RVI preferred investment, plus the $34.0 million receivable from RVI.
- Assess the company’s liquidity and debt maturities alongside joint-venture debt and refinancing needs, rather than consolidated debt alone.
- Confirm the sustainability of the common dividend against operating cash flow, capital needs and REIT distribution requirements.