Citi initiates neutral coverage on Curbline Properties amid growth, valuation risk

Investing.com -- Citi Research has initiated coverage on Curbline Properties Corp. (NYSE:CURB ) with a “neutral” rating, positioning the stock within their model portfolio with an overweight stance. 

Curbline, a recent spin-off from SITE Centers (NYSE:SITC ), constitutes about 66% of the former combined entity and specializes in convenience retail real estate, a niche market that includes smaller, non-anchored strip properties. 

The initiation follows Curbline’s capitalization of approximately $800 million in cash, alongside an undrawn $100 million term loan, which provides a solid financial foundation for future growth.

The company's appeal lies in its potential for above-trend earnings growth, driven by accretive acquisitions on a smaller asset base. 

Citi analysts flagged the company’s strong tenant credit and projected a comparatively lower long-term capital expenditure compared to its peers. 

Despite these favorable attributes, Citi's analysts, led by Craig Mailman, Seth Bergey, and Nick Joseph, maintain a balanced outlook due to Curbline’s premium valuation compared to strip retail peers and the execution risks related to scaling its acquisition strategy.

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

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

While the premium valuation reflects Curbline’s potential to grow faster than its peers, Citi remains cautious about the firm’s ability to execute on its acquisition strategy, particularly its plan to buy $125 million in assets per quarter.

Citi analysts identified key catalysts for potential outperformance, including Curbline’s ability to grow externally without relying heavily on capital markets, the resilience of its convenience retail assets during economic downturns, and strong operational execution marked by tight expense controls. 

However, they also flagged several risks, including the company's premium valuation relative to its peers, the challenges of being the first public REIT to focus exclusively on convenience assets, and the potential for slower-than-expected acquisition growth.

While Curbline’s high-risk profile is flagged in Citi’s quantitative model, the analysts refrained from applying a formal high-risk rating due to the seasoned management team and the familiarity of its assets in the public market. 

Source: Investing.com