DDR Corporation Is No More

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About: SITE Centers Corp (SITC)
by: Michael Boyd

Summary

The company is changing its name to SITE Centers with a new ticker, SITC, starting today (October 12th).

Shares have tumbled recently on macro concerns plus a weak interpretation by the market on the company's 2018 Investor Day.

The slides were admittedly a jumbled mess when looked at in isolation, but I think investors would walk away with a better understanding after listening to the audio webcast.

Today, SITE Centers trades at just 10x FFO, a discount to peers despite having an arguably stronger portfolio. I see 30% upside.

Concurrent with its most recent Investor Day, DDR Corporation announced that it was changing its name to SITE Centers Corp. Effective today, investors will be seeing their common shares trade under a new ticker symbol with market open: SITC. This marks an end to a beleaguered history for DDR Corporation. This rebrand is likely an attempt by new management - which has executed well since onboarding - to distance itself from a history that is marred by poor decisions on capital allocation, especially into the Great Recession. It is easy to forget that David Lukes and team have been in charge for 18 months. In that time, they've sold dozens of properties and spun off even more into Retail Value, Inc. (NYSE:RVI). There has been a lot of change - which is true of the entire retail commercial real estate market. Unfortunately, the Investor Day presentation fell flat with the market. I think this was largely due to the actual presentation slides which just were not workable to skim. Coupled with the ho-hum guidance (second-half 2018 below consensus; 2019 flat), it was easy to run to hit the sell button. For anyone that actually took the time to listen to the hour and a half long webcast (can find it here), management's guidance and vision rung a lot more clear.

Overview: Five-Year Plan

No matter where you look, shopping center REITs have been crushed this year as net asset valuations ("NAV") turn south as cap rates collapse. With limited visibility and fears rampant on what the future of the asset class looks like, institutional investors like pension funds and endowments have largely abandoned investment in the asset class. This largely leaves private capital to pick up the slack, and with bidding becoming more subdued, pricing has moderated. Timing could not have been worse - from a NAV perspective - for this management team which came over from Equity One (CEO, CFO, COO) after its sale to Regency Centers (NYSE:REG) was closed early on in 2017.

Still, this team has done extremely well in this environment. Property valuation trends have been disappointing to watch for a sector that is still posting low-single-digit same-store net operating income ("SSNOI") comps despite a wave of tenant bankruptcies. While all REITs with retail exposure have seen pressure, there just has not been undue pressure on reported results during this. While guidance for the remainder of the year was light versus sell-side expectations, SITE Centers does see a healthy path to growth off of the 2019 fiscal year base, which was set at largely similar levels to 2018:

Source: SITE Centers, 2018 Investor Day Presentation, Slide 151

With shares now back below $12.00/share - levels not seen since earlier this year on a split-adjusted basis - the company trades at 10x FFO. While there are other areas of the REIT universe that see these kinds of valuations, shopping centers are unique in that they do not have as much "hair" as markets like senior housing or malls. Leverage remains in check, access to debt markets remains, and growth is on the table. In fact, in this presentation, SITE Centers set a 2.75% SSNOI growth target for the next five years. Not too shabby.

Source: SITE Centers, 2018 Investor Day Presentation, Slide 133

Forming the foundation of this outlook is re-lease spreads. Management sees high likelihood of continuing high-single-digit re-lease spreads, driven especially within its anchors. The company currently has 60 vacant anchor boxes, 60% of which have leases signed or in progress. This is at a high level due to elevated recent bankruptcies and turnover. Keep in mind overall portfolio occupancy remains healthy (above 90%) when you read that number. Some of those boxes were only contributing a couple bucks per square foot of rent, so their loss has not really impacted NOI.

Looking back over the past several years, management has had great success repositioning the bankruptcies of Sports Authority, hhgregg, and most recently Toys "R" Us, capturing 30% re-lease spreads from new tenants on average. That is, in my opinion, indicative of the value of the underlying real estate. Commercial real estate, like residential, is all about location, location, location. Tenants will come and go as they have company-wide problems, but the stronger the scarcity of the underlying property, the easier it is to flip that over to a new tenant as they go. There was a clear upward shift in quality (measured by location and demographic positioning) of SITE Centers' assets post the Retail Value, Inc. spin-off. This is an aspect that I think many shareholders do not appreciate enough. I think management realizes this, as throughout this Investor Day, the team took quite a lot of time to go through individual properties and their outlook.

Source: SITE Centers, 2018 Investor Day Presentation, Slide 135

There is opportunity for more than $4mm of NOI based on these new anchor box leases as the company sits today. This figure will move higher as more tenants are filled. Importantly, this is NOI lift that is on the way without any major dollars going out the door as far as repurposing goes. Obviously filling anchor properties that are currently unoccupied lifts NOI, and coupled with a target of higher shop occupancy, management has set a lofty goal of 94% occupancy, up nearly 300bps from current levels.

Strong redevelopment ties into this as well. The company has some properties on its books that look in rough shape otherwise: Duvall Village in Washington D.C. (32% occupancy), Perimeter Pointe in Atlanta (71%), and Sandy Plains Village in Atlanta (56%). The redevelopment pipeline really hits these troubled properties, as well as strong ones that have a lot of underutilized acreage like Shoppers World in Boston (255 acres owned; the shopping center sits on just 7% of the land). This gives a lot of optionality for either expansion via new builds into more leasing opportunities or non-retail components like office space or multi-family housing. The company intends to spend about $500mm on redevelopment over the next several years, with a large chunk of that (more than 50%) spent on properties with a non-retail component.

Funding that should be no problem. The company expects to receive $228mm as part of the dissolution of two unconsolidated investments made with Blackstone that began in 2014 and 2015. While the wind-down in properties managed within these joint ventures ("JVs") has impacted FFO per share, SITE Centers is getting back its capital and then some. This was a solid investment, and it is time for the company to rotate capital. In a similar situation, SITE Centers is also party to a $190mm preferred equity stake in the Retail Value, Inc. spin-off. As the company winds down its portfolio in liquidation, SITE Centers will make full recovery ($190mm principal, plus $10mm kicker payment). While the capital needed to make these investments will come in lumpy, SITE Centers does hold a $1,000mm untapped Revolving Credit Facility that was amended and extended late last year. It's got plenty of liquidity to get this program done and can pay that debt down with received cash as it comes in.

Takeaway

The entire shopping center REIT space, which had started to make a solid recovery, is back down to dirt cheap levels after an interest-rate-driven sell-off. SITE Centers has sold off nearly 20% from its very recent highs, putting it right back into value territory in my opinion. While I understand some disappointment in the softness of near-term guidance, as the joint venture fees decline (it will take time for that capital to generate additional FFO per share) and further deleveraging, the reality is SITE Centers has transitioned to one of the safer shopping center REITs from a quality and leverage perspective. Despite that, it continues to trade at a relative discount to peers from an FFO perspective. I was pretty close to pushing the sell button - I think $15 or $16/share is a good place to walk away - and still think that is a good level of fair value. That gives nearly 30% upside from here.

Disclosure: I am/we are long DDR, RVI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.