SITE Centers Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. SITE Centers is a REIT focused on owning, leasing, developing, and managing shopping centers. Unless stated otherwise, dollar amounts below are in millions.
Business context and portfolio
The major comparability event was the July 1, 2018 spin-off of Retail Value Inc. (RVI), comprising 48 shopping centers, including all 12 of SITE Centers’ Puerto Rico properties. SITE Centers retained RVI preferred shares with a stated preference of $190 million, potentially increasing to $200 million, and continues to manage RVI’s properties. At quarter-end, SITE Centers reported 182 shopping centers, including 104 held through joint ventures, and managed an additional 18.1 million square feet for RVI.
- Pro rata portfolio occupancy was 90.4%; average annualized base rent was $17.47 per occupied square foot.
- Comparable leasing spreads in Q3 were 20.6% for new leases and 8.2% for renewals. The company leased approximately 1.4 million square feet.
- Occupancy faced pressure from anchor-tenant expirations and bankruptcies, including Toys “R” Us.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $144.1 | $227.4 | $570.7 | $704.0 |
| Net income (loss) | $(8.7) | $1.2 | $(65.2) | $(22.9) |
| Net income (loss) attributable to common shareholders | $(17.3) | $(7.4) | $(91.6) | $(44.0) |
| Diluted loss per share | $(0.09) | $(0.04) | $(0.50) | $(0.24) |
| FFO attributable to common shareholders | $60.7 | $46.3 | $141.8 | $161.7 |
| Operating FFO attributable to common shareholders | $61.0 | $111.2 | $249.2 | $328.5 |
Revenue declined mainly because properties were sold or transferred to RVI; the reported totals are therefore not like-for-like. The company reported pro rata same-store NOI growth of 1.9% for the first nine months, citing rental increases, improved occupancy, and favorable recoveries. FFO and Operating FFO are non-GAAP measures and are not substitutes for cash flow or funds available for dividends.
- Cash flow, nine months: Operating activities provided $197.5, versus $302.2 in 2017. Investing activities provided $291.0; financing activities used $569.9. Cash, cash equivalents, and restricted cash ended at $13.3.
- Debt and liquidity: Consolidated debt was $2.385 billion at September 30, down from $3.849 billion at December 31, 2017. Cash was $11.4 and available revolving-credit capacity was $865.0. Management identified $95.5 of February 2019 mortgage maturities and said available cash and revolver capacity covered maturities through October 2019.
- Capital structure: Debt to total market capitalization was 0.44:1, versus 0.51:1 a year earlier. The company reported compliance with debt covenants.
- Dividends: The Q3 common dividend was $0.20 per share, compared with $0.38 in Q3 2017. Management said the board would continue to review dividend policy.
Material changes, outlook, and risks
- The RVI spin-off and related asset sales reduced the portfolio and revenue base, while the company used financing and sale proceeds to repay debt. During the first nine months, SITE Centers sold 10 shopping centers and land for $314.9; joint ventures sold 33 shopping centers and land for $665.5 in aggregate.
- Q3 included $19.9 of property impairment charges. For nine months, consolidated impairment charges were $68.4; the filing also reports $14.1 of additional impairment related to RVI assets classified as held for sale before the spin-off. Impairments reflected sale bids, market assumptions, and asset dispositions.
- Nine-month other expense included $37.0 of RVI spin-off transaction costs and $58.4 of debt-extinguishment costs. Debt repayments included make-whole payments and write-offs of financing costs.
- The company increased its valuation allowance on preferred investments in Blackstone joint ventures by $4.5 during the first nine months; the allowance totaled $65.5. Further changes may occur as asset-sale values and timing evolve.
- Management plans to focus on redevelopment, leasing, and selective investment, while using asset-sale proceeds to reduce leverage and fund opportunities. It described redevelopment spending as discretionary and did not provide numerical earnings guidance.
- Risks include retail tenant bankruptcies and e-commerce competition, occupancy and re-leasing costs, property-sale and impairment uncertainty, refinancing and interest-rate exposure, and joint-venture investment risk. The company provided an unconditional guaranty of RVI’s obligations under a $30 million revolving facility.
- Hurricane Maria affected the transferred Puerto Rico properties. SITE Centers recorded $6.9 of business-interruption income for the first nine months, while $6.6 of lost rental revenue for the first half was not recorded; future insurance recoveries are subject to coverage and timing.
Important facts for investors to verify
- How RVI’s ability to pay dividends or redeem its preferred shares supports recovery of SITE Centers’ $190 million preferred investment, and when RVI will repay the separate $36.5 million receivable.
- Whether the $865 million of stated revolver availability and planned refinancing or asset-sale proceeds remain sufficient for upcoming maturities and covenant compliance.
- Whether occupancy, leasing spreads, and comparable-property NOI trends persist as anchor vacancies and tenant bankruptcies are addressed.
- Whether additional property or joint-venture impairments, including changes to the $65.5 million preferred-equity allowance, are required.
- How the reduced common dividend and discretionary redevelopment commitments affect cash generation, leverage, and future distributions.