Citi Begins Neutral Coverage on Curbline Properties Amid Growth and Valuation Risks

Citi Research has begun coverage of Curbline Properties Corp. (NYSE: CURB) with a “neutral” rating, placing the stock in their model portfolio with an overweight stance.

Curbline, a recent spin-off from SITE Centers, represents about 66% of the former combined company and focuses on convenience retail real estate, which includes smaller, non-anchored strip properties.

This coverage comes after Curbline secured around $800 million in cash, supplemented by an undrawn $100 million term loan, establishing a strong financial base for future growth.

The company is considered appealing due to its potential for above-trend earnings growth, facilitated by accretive acquisitions in a smaller asset base.

Citi analysts noted the firm’s strong tenant credit and projected a lower long-term capital expenditure compared to its peers. Despite these positive aspects, the analysts, led by Craig Mailman, Seth Bergey, and Nick Joseph, expressed a cautious outlook due to Curbline’s premium valuation relative to strip retail counterparts and the associated execution risks of scaling its acquisition strategy.

Curbline currently trades at approximately 24 times its estimated 2025 funds from operations, which is significantly higher than the broader retail REIT sector’s typical valuation of around 14 times FFO.

The analysts have set a target price of $25 per share, slightly above the current price of $23.82, indicating a modest expected return of 5% by October 7, 2024.

While the higher valuation reflects Curbline’s potential for faster growth than its peers, Citi is cautious regarding the company’s ability to implement its acquisition strategy, particularly its goal of acquiring $125 million in assets each quarter.

Citi analysts highlighted several key catalysts that could lead to outperformance, such as Curbline’s capacity to expand externally with less reliance on capital markets, the resilience of its convenience retail properties during economic downturns, and effective operational execution with strict expense management.

However, they also pointed out risks associated with the company’s premium valuation, the challenges it faces as the first public REIT focusing exclusively on convenience assets, and the possibility of slower-than-expected growth in acquisitions.

Although Curbline’s high-risk profile is noted in Citi’s quantitative model, the analysts opted not to assign a formal high-risk rating due to the experienced management team and the familiarity of its assets in the public market.