SITE Centers (NYSE: SITC) is a very focused real estate investment trust (REIT), with just 80 or so shopping center properties in its portfolio. That focus enables it to create value by taking unloved assets and improving them over time via redevelopment, which might attract value-focused investors. But there's a bigger story here that you need to think about before hitting the buy button.
Once known as Developers Diversified, the REIT's name has changed a couple of times since its inception: First, it was shortened to just DDR, and then it was given an upgrade to SITE Centers in late 2018. However, the name change represents a rather large shift.
Back when the company was Developers Diversified, its portfolio contained more than 700 properties at one point and was heavily leveraged. Ultimately, it had to cut its dividend and seek external help to de-lever its balance sheet. Basically, Developers Diversified had to hit the reset button.
The REIT has remained committed to its specialty: the shopping center space. However, it's whittled down its once-massive portfolio to just 80 or so locations. It's now more of a sharpshooter with a core focus on using redevelopment activities to enhance value.
The company has a decent track record. By way of example, SITE Centers expects redevelopment efforts at its West Bay Plaza property in Ohio to increase the asset's net operating income by more than 40% between 2021 and 2023. The plan includes turning an old anchor-tenant building into smaller stores and adding a stand-alone bank property in the related parking area.
Doing this type of work isn't easy, and it requires a great deal of focus. So having a smaller portfolio makes a lot of sense. It is, more or less, the same logic that drives peer Federal Realty's (NYSE: FRT) shopping center business. Only Federal Realty has increased its dividend for more than five decades running, making it a Dividend King. So, SITE Centers is using a solid business model; unfortunately, the REIT has yet to show the kind of consistency that similarly managed Federal Realty has achieved.
Struggling through the downturn
It would be an understatement to suggest that 2020 was a difficult year for retail real estate. The economic shutdowns and social distancing used to slow the spread of the coronavirus was a body blow that tested the mettle of many REITs. Some withstood the hit in stride. For example, Federal Realty increased its dividend in 2020 by a token amount as a way to show investors that its long-term future remained strong. That was true even though rent collection rates dipped into the mid-60% range at one point early on in the pandemic.
SITE Centers saw a similar decline in its rent collections, with rental collection rates dropping into the low-60% range in the second quarter of 2020. However, the company didn't support its dividend like Federal Realty did. Instead it suspended its dividend when it released its first-quarter earnings update. Given the pandemic, that's not a shocking development. And while SITE Centers wasn't the only retail-focused REIT to make such a decision, it wasn't exactly a confidence-inspiring move.
At the end of 2020, the quarterly dividend eventually came back at $0.05 per share, just 25% of its previous level. The quarterly payment was increased to $0.11 per share at the start of 2021, with the announcement of a 9% increase in the second quarter. Now, at $0.12 per share, the dividend is still 40% below where it was at the start of 2020. Highlighting the percentage increase here feels a little disingenuous and, basically, tells investors that the payment has effectively been reset at a lower level.
SITE Centers is currently offering a roughly 3.2% dividend yield. Federal Realty has a 3.5% yield. Though they follow similar approaches, which sounds like the better deal, given their different dividend decisions in 2020?
The pandemic was a major test for REITs focused on retail assets. Some passed with flying colors, some muddled through, and some failed completely. SITE Centers probably falls into the muddled-through category.
After reworking its business some time ago, it now has an interesting, focused approach. But dividend investors took a big hit when the chips were down last year. And they still aren't anywhere near whole again. So, if you're looking at SITE Centers, you might want to consider other options before making your final decision.