SITE Centers Corp. Q1 FY2023 earnings call

• Leasing: Achieved leased rate of 95.9% (all-time high), signed nearly 500,000 sq ft in Q1, 133,000 sq ft new deals with leased rate up 50bps sequentially. Tactical redevelopment pipeline has $19M signed, not opened, with commencements accelerating.
• Tenant Activity: Party City has 17 locations with ~90bps base rent exposure, no material impact expected. Bed Bath & Beyond has 17 locations (1.8% base rent), confident in backfill options for 16 locations, majority leases to execute by 2024 year-end.
• Transactions: Less activity in Q1 vs year-end, reinvested $158M asset sale proceeds by repurchasing $20M stock and acquiring 3 convenience properties for $42M.

No detailed breakdown of product segments by revenue contribution provided in the transcript. Key focus on leasing, transactions, etc.

• Revised 2023 FFO guidance to $1.11-$1.17 per share, driven by Q1 outperformance and higher occupancy outlook.
• Raised same-store NOI guidance to midpoint 1.25%.
• Rent commencements, investment activity, tenant bankruptcies are key swing factors.
• G&A expected ~$46M for year, interest expense higher due to repaying $87M stub bond in May.

• Macro and capital markets volatility impacting transaction volume.
• Uncertainty around tenant bankruptcies like Bed Bath & Beyond and Party City, impact on occupancy and rent.
• Potential headwinds from economic slowdown affecting shop occupancy.

Q: Hi. Thanks. Good morning. First question, I guess, look there’s been a lot of uncertainty around Bed Bath and the outcome now that they filed is still uncertain, but you mentioned 16 single user backfills and it seems like demand for their space may be solid. Any thoughts whether there might be a lot of leases sort of assumed or auctioned off during the bankruptcy process, how that might play out based on prior bankruptcies that you’ve sort of lived through and the overall environment today?

A: Yes. Good morning, Todd. It’s a great question. I mean, we obviously have no information, no more information than you do. The reality is that the mark-to-market on the portfolio of Bed Bath and buybuy BABY is somewhere in the 25% to 30% range, but it varies depending on properties. So number one, we feel really good about the backfill prospects. As I mentioned in our prepared remarks, if you take that portfolio where we have these properties, they’re 99% lease. There’s not a single other anchor space available. So they are very much attractive to a lot of growing retailers. There is some risk or opportunity depending on how I want to define it, that a couple of these leases get bought through the bankruptcy process, but I honestly have no idea one way or the other what the outcome will be.

Q: Hey. Good morning, guys. Conor, I just want to kind of clarify, are you, I think you guys were 250 basis points of bad debt at the midpoint for same store with initial guides. Is that still the assumption?

A: Hi, Craig. Good morning. It’s come down modestly for couple of reasons. One, I made a comment that we are expecting higher occupancy over the course of the year, so visibility on some renewals is obviously higher today than it was three months ago, so that’d be point one. And then point two, just the calendar, Bed Bath filing, they are going for a historically quick liquidation right, two months. Now, obviously they’ve had quite a bit of time to prepare so, so there is a chance they’re able to pull that off. But as we just get later in the year, if someone files it’s going to take three to five months or longer for them to wind down operations. And so that just puts less pressure on potential bankruptcy risk for the year. So the short answer is it’s come down modestly. It’s closer to 225 basis points today than 250, but that’s a function of our expectation for higher occupancy over the course of the year, and just as we get later in the calendar.

Q: Hey there, good morning. What you guys discuss what you’re seeing out there in the market in terms of cap rates for the types of assets you’re looking to – you’re looking at in the, both the convenience and maybe open-air categories? I’m curious, what you’re seeing out there as well as kind of where you’re willing to execute perhaps and how you describe seller sentiment today? Thanks.

A: Sure, Haendel. Good morning. I guess it’s hard to speak to the overall shopping center sector just because number one, we’re not looking at every format type. And secondly, there just have not been that many transactions. From the convenience standpoint, there do seem to be – there’s more inventory than I think in other formats. So it’s giving us the opportunity for John and his team to do a lot of underwriting. I would say that the ask price if these were assets that we thought had strong markets, good solid tenant and good growth prospects, and we thought 5.5 caps were fair a year ago. It seems like those are 6.5 caps today. So, I think the ask has probably gone up a 100 basis points. And the question, I think, the second question you asked is where would we transact? I think that really depends on the source of the funds to purchase that. We are doing some minimal recycling, but it kind of depends of what we’re selling at and what we think the growth profile is of the acquisition target. But I guess to summarize, it feels like a 100 basis points is probably fair from the ask side.

Q: Hey, good morning. So two questions. Maybe David, following up on Haendel’s question on the shopper trends, so if customers are shopping more evenly throughout the week, does this change either the tenants who are interested in your centers or the way they merchandise and thus maybe a tenant who is satisfied with one sort of format or space and configuration suddenly wants to shift or do something? Basically, does this change in shopping allow you guys to drive more rents because of the way people are changing their and shopping more evenly? Or you would say, hey, this all just wraps up in increased tenant demands per space, so it really doesn’t matter how the customer shop, the bigger overriding theme is just tenant demand. I’m trying to understand if there is a difference or not on the shopping trends versus overall, tenant demand.

A: Well, it seems Alex, and good morning, that there’s two different categories. One are the more regional tenants, the junior anchors that are drawing from three, five or ten miles away. A lot of these have gotten very sophisticated with their in-store pickup or their delivery from store, they are using the store as part of their supply chain. I think that those tenants are simply looking at the increase in population in the suburbs and the convenience of having something delivered from the store. And that’s kind of what’s driving a lot of demand. The cell phone data that I was talking about, I think, is more applicable to the smaller shop tenants, and particularly in the convenience assets, because with customers around more frequently during the week and making more kind of quick in and out trips, that is definitely sponsoring demand from tenants that just want to get as close as they can to the households recognizing that they are probably going to get multiple trips per week as opposed to once per week. The simplest example is QSR chains, I mean, QSR chains are looking to get very close to the wealthy customers and they really want to drive through. And I think those are both societal shifts that seem like they’re pretty sticky because an awful lot of tenants want that type of format.

Q: Thanks. Good morning guys. Couple of questions. Obviously look you’ve done a really nice job, Conor, with the balance sheet, de-risked the company. You talk about the fact that you have got interest rate caps on all of your floating rate debt. Maybe you can talk a little bit about the maturity profile of those caps and sort of as you are thinking about higher rates, what are the things that you worry about right now?

A: Hey, good morning, Floris. I worry about quite a bit right now to our commentary… But that’s like throwing [indiscernible]. Yes, that’s – you are talking the right person about concerns. Look, I mean, there is quite a bit to your point. We are worried about a rising rate environment. I know the forward curve shows a lower benchmark rate environment three, six, nine months from now. I just think we generally operate the business, assuming rates are being higher. It is not our job to predict interest rates and as a result, we generally have looked to hedge a hundred percent of our capital structure or debt structure. So, for us, as I mentioned in my prepared remarks, we do have the May unsecured maturity to stub bond coming up. Our plan is to pay that off with cash on hand in the line. And as a result of that higher line balance, we entered into a interest rate cap in the first quarter to cap so for at 5% the next year. That gives us the optionality and ability to wait for a window to term out that debt. To your point, to mitigate some of that future interest rate risk. And so whether that’s an unsecured offering, a secured offering, we don’t know, we have the flexibility to go either direction. But you’re right, we are intently focused and acutely focused on making sure we have minimal interest rate risk and as much duration as possible. The good news is just given the company of our size one offering, whether that’s secured or unsecured has a dramatic impact on our duration. And so, as you know, for the first couple of years we are here, we focus one on reducing leverage, but two, we are even more focused on pushing out our duration. And so again it’s an acute focus of ours, one or two transactions can have a dramatic impact, but we’ve been, I would say, overly cautious to making sure that our interest rate risk and duration risk are minimal over the last six years we’ve been here.

Q: Hey good morning, everyone. I’m sorry, Conor, just want to make sure on the G&A front. Did you say that it was going to be – thought it was going to be $46 million for the year because I know you guided for $40 million?

A: Yes. Sorry to cut you out there, Samir. Yes, so I think the last quarter we said was closer to $48 million. This is closer to $46 million and we’re trending modestly ahead. There will be a sequential increase in G&A from this – from the first quarter to the second quarter, but we’re running a little bit ahead of plan. Again, it’s April 25, we feel a little bit better about the number, but nothing material change wise.

Q: Hey guys, good morning. This is Adam Kramer on for Ron. Look, appreciate all the color. I think everything was really helpful on kind of the retail front and bankruptcy front. We just wanted to ask about kind of the Bed Bath and kind of that, that mark-to-market I think you cited with those locations assuming that’s kind of not in your sign, but not opened kind of number of commencement schedule on Slide 6. We’re really just wondering when we think out whether it’s 2024, 2025, kind of further upside to the model, right, further upside from that SNO schedule and how potentially Bed Bath locations could factor into that?

A: Hey Adam, good morning. It’s Conor. Let me know if I’m answering your question, but as of the first quarter, the $19 million SNO excludes any of the Bed Bath locations, we don’t have any executed leases outside of the one we mentioned last quarter that that Bed Bath already vacated in Princeton. So signing those, obviously we’ll have the lost rent from Bed Bath and then any new locations we sign will be additive to it. But there’s probably I guess if you could take the Bed Bath rent, multiply by 1.2 and that will get you kind of the net upside to base rent for the portfolio post Bed Bath coming back online. But David’s point’s going to take us a year to get those open and rent paying, so you’ll see a dip in occupancy before you start to CVS. No pipeline start to ramp. But let me know if I’m answering that question directly or not.

Q: Hi. I think you said earlier for the Bed Bath & Beyond centers, there’s no inline space available, and then you have 17 anchor boxes, and then more than 17 tenants looking for spaces. Could you talk about some of those tenants? I think you also said that there were some that aren’t ones that you typically see more interested in those?

A: Yes. Good morning, Linda. It’s David. I think Conor did a pretty good job, I think of summarizing it before. There’s a long history of discounters taking locations, very large national change discounters, Ross, Burlington, TJX concepts. But in the last couple of years what we’ve also seen is new concepts, many of which are sponsored by those investment grade companies. TJX certainly has sponsored a couple of new concepts, same as with exporting goods, same with Dollar General. So we’ve seen new concepts that are IG rated that have started to become very active in the space. And then on top of that, we’ve seen more regional chains that I have really good balance sheets that are anything from home furnishings to furniture to entertainment. So the variety is pretty wide. I mean, if you think about the number of anchor leases we’ve done in the last couple of years, and the percentage of those that are new concepts or individual concepts, it’s pretty high.

Q: Hey there. Thank you. Just one more, Conor, maybe. I understand the timing of the bad debt is one of the factors you’ve highlighted as a swing factor, but can you talk a bit about the expected cadence for the same-store NOI growth this year, the low 2% at the midpoint? And as we look ahead, given your SNO related documentary visibility that the band you’re seeing, I’m curious what type of ballpark same for NOI growth that implied for next year. I think many of us have thought about this as a long-term, 2% to 2.5% same-store NOI business. I’m curious if you guys think you can top that long-term average next year. Thanks.

A: Hey, Haendel, can you repeat the first half of the question? Sorry, I just missed that piece. Sure. So there’s two major factors and you hit one of them on the head in terms of the SNO pipeline and the commencement dates. And so Page 6 on our slides has that laid out by quarter, and you can see it’s a cumulative chart. The fourth quarter is the most impactful, as I talked about, I think it’s on Mike’s question. Typically, you just have for the law of the national anchors a fall – a spring or fall and in this particular year’s, quite a few fall openings. So it is back half weighted from a commencements perspective. And then the other piece is occupancy and what happens with bankruptcies, Bed Bath, depending on Todd and Mike’s questions, when they reject these leases, when they ultimately move out, it feels like the third quarter could be your trough from an occupancy based rent perspective and then you kind of accelerate from there as rents commence. To your question on future years, future growth, look, we’ll save that for 2024. I would just say as an industry in general, you have a setup just given what’s going on with rent growth and the occupancy upside, given these historically high SNO pipelines for an above trend same-store NOI outlook. Now, let’s see what happens to the economy. Obviously a hard landing, soft landing, we don’t know, but you do have the ingredients between a lack of supply and I would call outsized SNO pipelines for the industry to do above 2%, above 2.5% for a number of years. And then I would say just kind of augmenting that or further accelerating that given I would say the accretion from our tactical redevelopment pipeline, you could further add to that. So我 would just tell你 we’re very macro aware. We’re trying to be sensitive to the uncertainties we’re seeing in the environment, but you do have the ingredients from potentially outsized same-store for the sector for a couple years now. And we’ll see what happens with the economy.