SITE Centers Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. SITE Centers is a REIT focused on owning, leasing, managing, and redeveloping shopping centers. At quarter-end, its portfolio included 173 centers, including 104 held through joint ventures; portfolio occupancy was 89.2% on a pro rata basis.
Financial and operating performance
- Revenue: $131.0 million, down 39% from $215.1 million. The decrease largely reflected property sales and the 2018 RVI spin-off; fee and other income rose to $18.8 million from $9.3 million. Lease-accounting presentation changes also affected reported revenue but, according to the filing, did not affect net income or cash flow.
- Profit: Net income was $36.1 million versus a $53.9 million loss. Net income attributable to common shareholders was $27.4 million, or $0.15 per diluted share, compared with a $62.5 million loss, or $0.34 per share, in Q1 2018. The improvement primarily reflected much lower debt-extinguishment and transaction costs and lower interest expense, partly offset by the effects of asset sales and the RVI spin-off.
- FFO and operating FFO: FFO attributable to common shareholders was $60.7 million, up from $33.2 million. Operating FFO was $58.7 million, down from $97.8 million; management attributed the decline mainly to the dilutive impact of asset sales and the RVI spin-off, partly offset by lower interest expense. These are non-GAAP measures and are not cash available for dividends or debt service.
- Property operations: Pro rata same-store NOI increased 2.0% (1.3% at 100%). Portfolio occupancy was 89.2%, versus 89.9% at December 31, 2018. Average annualized base rent per occupied square foot rose to $17.92 from $17.86 at year-end. Comparable new-lease and renewal spreads were 23.2% and 7.9%, respectively.
- Cash flow: Operating cash flow was $42.3 million, versus $57.8 million. Investing activities provided $76.5 million, versus $153.5 million, primarily reflecting lower real-estate sale proceeds. Financing activities used $120.7 million, versus $240.2 million. Cash, cash equivalents, and restricted cash ended the quarter at $11.7 million.
- Debt and liquidity: Consolidated debt was $1.824 billion, down from $1.884 billion at year-end. Debt to total market capitalization was 0.38:1, versus 0.54:1 a year earlier. The company reported $930 million of available revolving-credit capacity and compliance with debt covenants. Fixed-rate debt was 95.1% of consolidated debt; the weighted-average rate was 4.3%.
- Dividends and repurchases: The company declared a $0.20-per-common-share dividend and paid $45.3 million in dividends during the quarter. It repurchased 1.2 million common shares for $14.1 million during Q1.
Material changes and unusual items
- The RVI spin-off and subsequent property sales materially reduced the size of the portfolio and make year-over-year revenue and expense comparisons less representative of continuing operations.
- The company recorded a $16.4 million gain on disposition of real estate, a $0.6 million impairment charge on an operating property marketed for sale, and a $1.1 million increase in the valuation allowance on preferred investments in Blackstone joint ventures. The net reserve on those preferred investments was $73.5 million.
- Q1 2018 included $56.4 million of debt-extinguishment costs and $5.2 million of RVI-related transaction costs, contributing to the prior-year loss. Q1 2018 also included a $30.4 million impairment charge related to assets in the RVI spin-off.
- The company adopted lease accounting standard Topic 842 on January 1, 2019. It recognized operating lease right-of-use assets of $22.0 million and lease liabilities of $40.3 million at quarter-end; adoption did not materially affect net income or cash flow.
Outlook, commentary, and risks
Management emphasized low leverage, liquidity, asset sales, and using sale proceeds to repay debt and fund selected redevelopment and opportunistic investments. Redevelopment spending is discretionary; six significant consolidated projects had estimated gross costs totaling $83.6 million, of which $11.7 million had been incurred. Management said revolving facilities were sufficient for its liquidity strategy and that 2019 consolidated debt maturities had been addressed; $40.7 million of mortgage debt was due in April 2020. No specific earnings or FFO guidance was provided.
Management cited continuing tenant demand, including from value-oriented and off-price retailers, but warned that e-commerce competition, tenant bankruptcies, store closures, and weaker occupancy could pressure rents and require re-leasing capital. Other risks include refinancing and interest-rate exposure, joint-venture debt maturities, impairment of real estate or preferred investments, and the possibility that asset sales or financing may not occur on expected terms. Joint ventures had $1.08 billion of debt maturing through April 2020, with $146.5 million attributable to SITE Centers; expected extensions, refinancing, and asset sales are not assured. The filing reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of the revenue and operating FFO decline reflects portfolio divestitures and the RVI spin-off versus underlying property performance; review the non-GAAP reconciliations and same-store metrics.
- Whether occupancy stabilizes and leasing spreads translate into sustained rent and cash-flow growth, particularly given anchor-tenant bankruptcies and re-leasing costs.
- Repayment, extension, or refinancing progress for the company’s April 2020 mortgage maturity and the joint ventures’ near-term maturities.
- Future valuation changes in the Blackstone joint-venture preferred investments and the assumptions supporting the $73.5 million valuation allowance.
- The filing’s summary says four shopping centers were sold for $170.9 million, while detailed disclosures list one consolidated sale of $66.2 million and three joint-venture sales of $92.3 million. Verify the differing sale totals and related company-share proceeds.