Description

REIT preferred stock

expected 20-25% return over ~12 months

sub-$1mn daily liquidity

SITC (fka DDR) is a strip center REIT with a weak history/reputation: there was an expensive recap during the GFC, and the REIT has never been able to shake its market image as, "the power center REIT."  Power centers are generally viewed as the least attractive strip center format because the higher mix of large format stores translates to lower rent growth and more CapEx + downtime to retenant.  CEO David Lukes has worked hard over the past half-dozen years to fix this impression - turning over a majority of the properties - but SITC has not managed to get out of the valuation "doghouse" relative to other strip center REITs.

Lukes has now decided to, "rip off the bandaid," by liquidating the remaining power centers and spinning the unanchored convenience centers into a new entity called Curbline.  SpinCo Curbline will be the "GoodCo;" managment will be going with CURB, and the balance sheet of CURB will have material net cash.  RemainCo (BadCo) SITC will have $1.2bn of debt and $500mn of prefs supported by $250mn of power center NOI - a 20% yield (5x) through the debt, and a 15% yield (7x) through the prefs.  In actuality, there will be less NOI and less debt by the time of the spin (Q4 2024), as the company has aggressively been liquidating those power centers (pricing in the 6-8% cap rate range).

PF SITC will have two prefs: the series A pref that this write-up covers, and a pref 100% owned by CURB.  The Series A is about 1/3rd of the PF prefs and will be effectively senior to the CURB-owned pref.  Given the pace of liquidation thusfar, I expect the Series A to be liquidated/redeemed at par at some point in H1 2025.  Possible it extends into H2, but it's more likely IMO that SITC gets down to a size where someone buys the stub RemainCo, and the prefs are taken out at par before then.  Depending upon how many coupons we get between now and then, this offers a 20%+ return over the next year - a return that I find exceptionally attractive, given the risks.

Speaking of risks, I think they are very low:

• Interest rate risk - since the plan contemplates these being taken out at par, the level of interest rates does not matter
• Liquidation yields inadequate proceeds - on my math, these prefs are >2x covered.  The SITC portfolio may be power centers, but they are prime assets.  They dumped their nonprime assets into RVI pre-COVID, and COVID has been a positive for strip centers.  Maybe they have one or two properties that will trade wide, but the vast majority they will be able to liquidate at sub-8% cap rates, compared to a 15% yield through the prefs.  I am not worried about this risk.
• Spin plan is cancelled - I think this is highly unlikely, given the incentives and how far they have already gone down this path.  Moreover, these prefs would probably trade up with a "going concern" SITC, as comps FRT, KIM, REG, and BFS suggest that these prefs are a bit cheap through that lens.
• Prefs don't get liquidated/redeemed (i.e., survive a change of control) - these have standard REIT pref terms, meaning that a private buyer must effectively offer to cash them out at par.  They could survive if another listed REIT were the buyer, but (a) that is unlikely b/c REITs don't want to buy power centers; and (b) it would probably trade up, as it becomes the obligation of a larger, better-capitalized buyer.
• Other stranding shenanigans - it's hard to envision any such scenario because: (a) there is no distress here; (b) the size of this issue is small relative to the more junior claims ($300mn in CURB pref and ~$1-1.5bn+ in common equity liquidation proceeds); (c) managment has stated their intent to liquidate the Series A ahead of the CURB pref and SITC common; and (d) CEO Lukes owns a small amout of the Series A prefs, bought during COVID.

Why is the market willing to offer such an attractive opportunity?  I think size/liquidity are clear contributors.  Obscurity is another factor: REIT prefs have been battered by interest rates for the last 30 months; with that as the dominant driver, it's easier than normal for these special situations to get lost, and SITC-A doesn't jump out vs. peers in screens (it's trading slightly above the KIM/FRT/BFS prefs, relative to par). The situation is complex: the history has layers; the asset quality/mix is very different versus a decade ago; the reverse spin/liquidation dynamic is unusual; the timeline is long; the capital stack has multiple moving pieces; and managment barely ever mentions this tiny pref issue (which is less than 5% of EV).

In summary, the SITC Series A prefs offer a ~20% return over the next year or so with neglible risk, making them the best risk-reward that I see in REIT-land.

Catalyst

liquidation