Despite not being primarily a dividend investor myself, I have written one or the other time about shares of this asset class. Quite popular among income investors, REITs offer exposure to the real estate market in an uncomplicated way. They come without the drawback of having to concentrate on a few objects due to high capital requirements (usually debt-financed) and the need to manage them. With Curbline Properties, a new stock has started trading some two weeks ago. What’s so special about this company is that it comes with a huge net cash position, uncommon for REITs. Is it worth a look?
Summary and key takeaways from today’s Weekly
– Curbline Properties is a new and at first sight very interesting REIT.
– With a unique business model and even a huge net cash position on its balance sheet, a first investigation is warranted.
– However, the valuation prices in much growth. No need to rush in at this point.
The only time I published a research report about a real estate company for my members (see here) was about an office REIT – a supposedly dying sector.
This was a very contrarian call where my thesis has proven to be correct. Until today, my pick is up by 50% plus dividends. However, I closed the case too early due to wanting to de-risk in the wake of a weakening economy. But my readers who sticked with it, have been greatly rewarded.
This was a hated deep value play, not the classical walk-in-the-park and tuck-it-away for years or even decades investment which REITs typically are due to their more or less stable business. Predictable cash flows and dividends are in most cases the deciding factors for investors, not growth or even special situations.
Not so for me. There are always exceptions to the rule.
Besides hated and pretty much undervalued cases which obviously have been thrown out with the bathwater, other setups that catch my eye are spin-offs, i.e. when a company cuts out and lists separately a part of its business (see for example my exclusive research report here). It can lead to interesting and in the short term under-covered situations.
This can be the case when the spun-off entity hasn’t published any earnings publicly so far, leaving analysts of the big banks on the sidelines until more details are available.
One such case could be Curbline Properties (ISIN: US23128Q1013, Ticker: CURB), an open shopping center REIT with the focus on convenience centers.
It is the first such type of publicly traded company which makes it interesting alone.
However, what was really unusual: the company was let out into autonomy with a huge net cash position. In many cases, the former mother parts with either problematic assets or uses a spin-off to get rid of some debt.
Here, it was exactly the other way around.
As a third of the market cap of Curbline is pure cash (!) and the stock seems to receive not much coverage (on Seeking Alpha not even 150 followers, one of them being me), I deem it to be worth an investigation.
The average total return of my best stock ideas is currently trailing the S&P500 and the Dow Jones.
However, there have been some promising developments in the background on a business level among several of my ideas:
– my spin-off idea just announced the date for when the separation will likely take place – a re-rating should be just a matter of time
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Huge net cash, a no-brainer buy?
Curbline Properties was spun off from SITE Centers (ISIN: US82981J8514, Ticker: SITC) and began trading on 01 October 2024, i.e. more or less two weeks ago.
SITE Centers is likewise an open shopping center REIT, however, with the main difference being that it has big anchor tenants, often grocery stores, which make up for a sizable chunk of rent income. They pay reliable rent and typically close their leasing contracts for many years into the future.
The drawback is that they usually pay below average rents. And longer-dated contracts have the risk of not being able to keep pace with a higher inflation, as yearly rent hikes, despite being automatic, seldom surpass 3%. New tenants can be more easily put into higher-rent leasing contracts.
Stability has its price.
In addition, SITE Centers is a REIT which has been coping with a huge debt burden over the last decades. Thus one can say this was a clear cut between a rather troubled legacy business (SITE Centers) and a new type of real estate business, focussing on growth opportunities in the convenience sector.
Below, we can see that SITC has had its heyday way in the past.
At least from the perspective of a stockholder.
The remaining SITC has been left with some debt (~1.2 bn. USD net debt vs. a market cap of ~900 mn. USD) and is of no further interest for today’s analysis. Shopping centers with big anchor tenants, whether open or closed, are a highly competitive sector with growth not being exciting.
Sometimes stocks of the ugly ducklings can be of interest, too, when they are massively sold off shortly after the spin, but this does not seem to be the case here. I’ll have a look into it when they announce their next earnings, but for now not interesting.
Curbline Properties on the other hand now after the separation has twice the market cap of SITC, which is also remarkable, as the spun-off entity is much bigger than the remain-co.
The property portfolio consists of 78 entities, covering in total 2.8 mn. sq. ft. (~280k sq. m.). Besides buildings, parking lots complement the portfolio. As can be seen below, Curbline has their real estate primarily in the most densely populated areas of the US.
Curbline has just one tenant that represents more than 2% of their annual rent – which is also rather unusual and a clear sign of a broad diversification.
The top 25 representing less than 25% is a comparatively low figure, too.
The strategy, respectively the setup for the start of its independent growth adventure, is to be equipped with 800 mn. USD in pure net cash plus also an undrawn credit line.
note: the material pre-spin shows 600 mn. USD of cash, but the number was upsized shortly before the separation took place.
Just for comparison, I am not aware of any REIT having net cash.
A low leverage is usually seen in the 4x–5x net debt to EBITDA range. In the case of Curbline, this offers a huge investment capacity of in total 1.5–2 bn. USD which they clearly stress as an competitive advantage.
They will seek to put that money to work and growth via acquisitions.
Basically, as a REIT, they are currently only half-invested, if you want to.
This leaves plenty of room to grow.
With so much firepower, it is rather safe to say that Curbline has enough financial means for the next couple of years, if not even three, rather easily.
This assumes they won’t suddenly switch back from their approach of a broad diversification approach and instead go for big deals. At the present, there’s no indication for that.
Year-to-date, they have spent 200 mn. USD on acquisitions. Even if they closed the year at 400 mn. USD, this would be only 20–25% of their initial capacity.
Another interesting aspect is that this type of business, circumventing anchor tenants, offers a much less capital intensive business model. With a ratio of only 7% (capital expenditures vs. net operating income), Curbline makes for a comparatively asset-light REIT model, worth following.
Plus, the heightened small shop exposure (vs. big anchor tenants) typically allows for higher margins immediately, but also higher rent escalations down the road due to shorter leasing terms. This can be a powerful growth driver, if occupancy rates continue to stay high (currently 95%).
Having discussed all the fine advantages, we must also put the negatives on the table.
The first thing which comes to my mind is that this selection of tenants tends to be more cyclical, because convenience consists of cyclical consumer companies, not those that cover the basic necessities.
While there are many big and stable companies where I am not afraid of, the other part of the truth is that many apparel, fitness or restaurant companies make the list, too. They pose a potential risk in times of an economic downturn.
So, Curbline is a bit more risky, respectively aggressive and prone to more issues during tougher times.
The other thing is – how is the company valued?
With 800 mn. USD in net cash and a market cap of currently 2.4 bn. USD as of writing, we have an enterprise value of 1.6 bn. USD.
What do we get for that?
First of all, an asset base (property, ex-cash) of ~0.9–1.0 bn. USD. Back the envelope, the market cap is roughly 2.5x the property values and even considering the net cash position, we are talking about a factor of give or take 1.5x.
So this is not a heavily discounted opportunity to shop on the cheap.
To the contrary, there’s a decent premium priced in.
Taking a look at their key operating data, we can find on p. 23 for the first six months of the year 2024 an FFO (funds from operations, a cash-flow-like metric for REITs before investments) of just 32 mn. USD. Last year, this number was 64 mn. USD and this year after growth investments could surpass 70 mn. USD.
But against a market cap of 2.4 bn. USD, this is a factor of let’s be generous 30x.
Lots of growth is already priced in on that metric, too.
The market seems to have valued this stock already fairly, if not even richly.
Let’s assume they are indeed half-invested and double their numbers (property and FFO), the result would be a half as high valuation multiple, i.e. a 15x price to FFO. As even factoring in a double still would contain a decent growth premium, the risk and reward does not seem to be very favorable.
Below 10x, I’d definitely be more interested, because that is the barrier where little to no growth is priced in.
There’s definitely no need to rush into this one.
As the company said to be the only publicly traded such REIT with the focus on convenience only, I’ll put it on my watchlist. I am interested in the first few deals and also the first conference call as a public company to develop a better feeling for where the potential for the business might be.
Until then, I’ll patiently sit on the sidelines.
Conclusion
Curbline Properties is a new and at first sight very interesting REIT.
With a unique business model and even a huge net cash position on its balance sheet, a first investigation is warranted.
However, the valuation prices in much growth. No need to rush in at this point.
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