Short Stop Convenience Centers Will Drive Durable Long Term Demand And Earnings Power

Catalysts

About Curbline Properties

Curbline Properties is a publicly traded REIT focused exclusively on acquiring and operating top tier convenience retail centers along major traffic corridors across the United States.

What are the underlying business or industry changes driving this perspective?

• Scaling into a highly fragmented 950 million square foot convenience center universe, where Curbline currently controls only 4.5 million square feet, supports a long runway of accretive acquisitions that can compound revenue and FFO growth well above the REIT average.
• Structural consumer shift toward frequent, short stop errand trips along high traffic corridors, evidenced by high visit frequency and short dwell times, is driving robust tenant demand, double digit leasing spreads and rising base rents that should lift same property NOI and net margins over time.
• Capital efficient, low CapEx asset format with simple buildings and minimal tenant improvement needs, consistently running at roughly 6% of NOI, increases free cash flow conversion and supports faster earnings growth as the portfolio scales without a proportional rise in capital spending.
• Underlevered balance sheet with net debt to EBITDA below 1 times and over $250 million of cash on hand enables Curbline to fund roughly $750 million of annual investments at attractive cap rates, creating meaningful acquisition driven FFO per share growth with limited financing risk.
• Shorter lease terms with fewer tenant options in a setting where market rents are still growing allow Curbline to regularly reset rents to current levels on renewals, supporting durable same store NOI expansion and margin enhancement as embedded mark to market is realized in earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Curbline Properties's revenue will grow by 30.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.1% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $34.1 million (and earnings per share of $0.24) by about December 2028, down from $41.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $50.1 million in earnings, and the most bearish expecting $26.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 103.4x on those 2028 earnings, up from 59.6x today. This future PE is greater than the current PE for the US Retail REITs industry at 27.4x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The external growth strategy relies on deploying roughly $750 million of acquisitions per year into low 6 percent going in cap rates. Any sustained rise in interest rates or compression of debt spreads that narrows or eliminates the historical 100 basis point investment spread would make new deals less accretive, slowing FFO growth and pressuring earnings.
• Curbline is deliberately targeting shorter leases with fewer options and high mark to market opportunities, which boosts rent growth in favorable conditions but increases exposure to tenant turnover in a downturn. A cyclical or secular weakening in consumer spending or tenant health could hurt occupancy, reduce leasing spreads and weigh on same property NOI and net margins.
• The business model assumes deep and durable acquisition supply in the top quartile of convenience centers. Growing institutional and private competition for these same high traffic assets, especially if rates fall and more levered buyers enter the space, could drive cap rate compression that dilutes returns and constrains revenue and earnings growth.
• The company is still early in its scaling plan, with a rapidly changing same property pool and a heavy reliance on external acquisitions rather than mature organic growth. Any misstep in underwriting, overestimation of embedded rent growth or deterioration in credit quality across a diversified but heavily national tenant base could reduce free cash flow growth and pressure FFO per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $26.81 for Curbline Properties based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $363.4 million, earnings will come to $34.1 million, and it would be trading on a PE ratio of 103.4x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $23.21, the analyst price target of $26.81 is 13.4% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.