SITE Centers: High Quality Shopping Centers On Clearance Rack

SITE Centers’ (NYSE:SITC) share price has declined 28% year-to-date – a casualty of the dramatic 2022 REIT sell-off. While the share price has tanked, fundamentals remain robust as SITE continues to execute on maximizing the value of its curated portfolio of shopping centers featuring creditworthy national tenants (52% of rent comes from publicly traded tenants) in high income areas of the United States. As we sit today, SITE Centers trades at a significant discount to my estimate of NAV per share and represents an attractive entry point for long-term, conservative investors.

A Focused Shopping Center Portfolio

Formerly known as DDR, through asset sales and spin-offs, SITE Centers dramatically shrunk its portfolio of shopping centers, reducing its footprint by ~75% (shown above). In doing so, the company has retained market leading shopping centers located in neighborhoods with average household income greater than $110k. It has shed secondary properties and those located in less affluent areas.

A Robust Leasing Environment for Shopping Centers

The environment for retail leasing remains very strong – after several years of where retailers closed more stores than they opened, 2021-22 has seen a reversal of this trend with a dramatic increase in openings. This is driving increases in occupancy (all major shopping center operators are now mid 90s occupied vs. low 90s pre-COVID) and driving increased rental spreads which will positively impact NOI going forward.

Here is some recent commentary from Brixmor (BRX) management:

Similarly, on its 2Q conference call, Kimco (KIM) management noted strong demand for its space:

The strong leasing environment has shown up in increased occupancy numbers for SITE Centers. As we sit today, the overall portfolio is nearly 95% leased (up from 91-94% pre-pandemic) with small shop occupancy (small shops have the highest rent per square foot in shopping centers) at a multi-year high.

The strength of the leasing environment and high occupancy has allowed SITE Centers to increase rents and the company increased 2022 NOI growth guidance to 3.5-4.75% (midpoint increased 0.5% as shown below) upon releasing 2Q22 results.

Valuation & Conclusion

Here is my valuation of SITE Centers:

Share Price	11.5	A
Shares o/s	215	B
Market Cap	2472.5	C=A*B
Debt	1980	D
Pref	175	E
Total Cap	4627.5	F=C+D+E
NOI	400	G
Implied Cap	8.6%	H=G/F

Click to enlarge

Trading at an implied cap rate of 8.6% and P/FFO of just 10.2x, SITE Centers is about 50-80 basis points cheaper on a cap rate basis versus peers like Kimco and Brixmor which trade at mid 7s/low 8s cap rates. While Brixmor expects to see higher same store NOI growth in 2022 than SITE Centers, over the medium term Brixmor is expected to achieve similar (3-4%) same store NOI growth as SITE Centers. Ultimately I think the fair cap rate for these types of assets is somewhere around 6.5-7% which implies 40-50% upside in SITC shares.

I believe SITE Centers is overlooked by investors given its small size (sub $2.5 billion market cap) relative to Brixmor and Kimco which have market caps of $6 and $12 billion, respectively.

With a focused portfolio of shopping centers targeting high income consumers and trading at an 8-10% discount to peers, I believe SITE Centers is an attractive investment for long-term, conservative investors.

Risks

1. A sharper economic downturn could lead retailers to curb expansion plans. A severe downturn could lead to retailer bankruptcies and store closures.

2. Continued interest rate increases may lead to further near-term declines in REIT prices.