Actual property funding trusts (REITs) make their residing by passing on to their shareholders dividends from the earnings stream their properties generate. Besides after they lose cash, which is what occurred within the second quarter to SITE Facilities Corp. (NYSE: SITC), a retail REIT who, like its competitors, has seen its tenants battle an extended — and in lots of instances, shedding — battle in opposition to e-commerce, even earlier than COVID-19 got here calling.
Cleveland-based SITE Facilities noticed its inventory plummet from a 52-week excessive of practically $16 a share to round $four a share in March. It is since recovered considerably, closing at $eight.25 a share on Monday, Aug. 10.
However that dividend? That is an issue. After paying $zero.20 a share for a couple of quarters, SITE Facilities paid no dividend within the second quarter simply ended and mentioned in its quarterly earnings announcement that it might not within the third quarter simply began both.
That is a yield of zero. REITs are required to pay out 90% of their web earnings to take care of their tax standing. But when there is no web earnings, SITE Facilities, after all, cannot. And since that is a REIT’s raison d’etre, does this imply SITE Facilities will probably be crushed by the retail apocalypse?
The sturdiness of their belongings
“Regardless of unprecedented working situations, second quarter outcomes exhibit the sturdiness of our belongings with 100% of our properties operational and over 90% of our tenants at present open for enterprise,” President and CEO David Lukes mentioned within the second-quarter announcement.
That is up from an open fee of 45% on April 5, on the top of the shutdowns that swept the nation. The issue is these tenants aren’t producing the earnings wanted to cowl bills after which present income to investors.
In their very own phrases, “As of July 24, 2020, the corporate’s tenants had paid roughly 64% of second-quarter rents and 71% of July rents. The corporate has reached deferral preparations with tenants representing a further 17% of second-quarter rents and 10% of July rents.”
July’s numbers will present up within the third-quarter report, after all. The second quarter, in the meantime, ended up with a web loss attributable to widespread shareholders of $9.7 million in contrast with web earnings of $eight.9 million within the year-ago quarter.
That is $zero.5 a share in losses in contrast with $zero.5 a share in income from the year-ago interval. It is laborious to take care of what has been to this point a decent history of payouts with that type of backside line.
A pandemic kilos the brick-and-mortar
“The year-over-year lower in web earnings was primarily attributable to the influence of the COVID-19 pandemic,” the corporate mentioned in its quarterly report.
Working funds from operations (OFFO) was $39.9 million for the quarter, down sharply from $57 million within the year-ago quarter, and including the primary two quarters collectively, to incorporate the 2 pandemic-free months of January and February, does not assist all that a lot.
Rental earnings for the second quarter and first six months of 2020 had been $98.1 million and $210.6 million, down from $112.three million and $224.5 million, respectively, in the identical durations of 2019. And same-store net operating income (SSNOI) was down 7.eight% for the primary six months in comparison with final 12 months.
A lot of good areas; a lot of massive names
So, why might things get better? Effectively, SITE Facilities has 148 properties — 69 of them wholly owned — in main markets throughout the nation. Try its areas listing on web page 26 of the supplemental report it issued on July 30, and you will see that 20 of these are within the Atlanta market alone, with six within the Chicago market, 9 in and round Miami, seven within the Orlando market, and eight in and round Columbus, Ohio.
The tenants in these extremely seen properties are a who’s who of nationwide retailers, led by a 6.1% focus within the TJX Firms (NYSE: TJX) household (T.J. Maxx, Marshalls) and a wholesome mixture of different main model names, together with Kroger (NYSE: KR), Publix, Goal (NYSE: TGT), Dick’s Sporting Items (NYSE: DKS), and so forth.
That is nice, however this is an issue. The Atlanta leased fee is at 89.5% and Chicago was at 81.5%. For its whole portfolio, the lease fee for area underneath 10,000 sq. ft was 86.5% at quarter’s finish, in contrast with 94.2% for areas bigger than that.
That speaks as a lot to the problem going through small-space retailers because it does to something SITE Facilities has accomplished, and the corporate itself does, because the CEO mentioned, have some resiliency baked into the experiences.
As an example, SITE Facilities repaid $360 million of the excellent stability on its $970 million unsecured strains of credit score, and complete liquidity was $813 million, together with $128 million of consolidated money and the remainder out there credit score, as of June 30.
SITE Facilities has $53 million in mortgage debt maturing this 12 months and subsequent, with no unsecured debt maturities on the books till 2023. The present market cap is about $2 billion and complete debt is about $2.1 billion.
Watch for a rising tide to elevate this boat
With many of the main names in distinguished facilities in wholesome markets across the nation, SITE Facilities would appear to have the ability to get well from the hit the pandemic has placed on its skill to return dividends to shareholders.
However that is solely so long as the financial system recovers and numbers like this flip round: SITE Facilities says uncollectable or at-risk income spiked to $13.2 million within the second quarter after being nearly nil right now final 12 months.
That appears just like the type of apocalyptic pockets hit that tens of millions of households have taken, too, and these tenants are the brick-and-mortar shops they store.
Though, as the corporate factors out on the home page of its website, its facilities are positioned in comparatively high-income areas (common family earnings of $107,365), it can take a rising tide that lifts all boats to make this inventory once more pay dividends and develop into a gorgeous purchase and maintain.
I would wait. The inventory can rise and you may find yourself shopping for increased than now, however with out the yield, you are lacking a lot of the purpose, and the payout, of a REIT anyway.