SITC posted its Q2 results a few weeks ago which gave us a bevy of additional information about their wind down process.1 The most notable occurrences were several additional asset sales, and SITC exercising the buy/sell notice on its DTP joint venture. Unfortunately, the biggest wholly owned asset, the Maxwell, was sold for $15.3mm or only $64 psf, a price well below my original underwriting2. The DTP buy sell was also at a price well below original estimates, at a whopping ~8.85% cap rate on Q1 NOI.

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A Google street photo of the weak Maxwell center.

The news was not all bad however. SITC appears to be moving rapidly to liquidate its remaining assets, so I think it is reasonable to move up the potential liquidation timelines. The buy/sell must be completed by October 15th, and the partner must give their notice of intent to exercise by the end of August. So either the partner buys SITC’s interest by October 15th, or SITC knows they are buying the partner by September 1st, and SITC can then begin the marketing process for this portfolio in September. This means even if the partner elects to sell, the DTP could be resolved possibly by year or, or almost certainly by the end of Q1 2027. Therefore, it looks like SITC may be able to wind down the company by potentially as soon as end of the year, or worst case early 2027.3 SITC may have strategically decided to pick a lower buy/sell price on the DTP, as this actually offers some benefit to SITC by speeding up the liquidation process and thus saves potentially a significant amount of G&A expense. Either the partner buys out SITC, and the whole thing is done by mid October, or SITC gets to buy at a lower price and potentially resell for a small profit, which would allow SITC to offset much of the additional G&A incurred by a longer timeline.

The biggest remaining question mark, aside from timing, is what SITC will get for its two remaining wholly owned assets, the Blocks, retail condos in Portland’s Pearl District, and its HQ office building in suburban Cleveland Ohio.

Updated Values and Returns

Here is a table of updated values for the wholly owned assets.

Shoppes at Paradise Pointe came in a bit below my original underwriting, while Meadowmont was a bit above. Paradise Pointe’s price was low enough that I would guess Publix is planning to vacate their space there.

To be conservative, and given the miss on their other high vacancy asset, the Maxwell, I marked down the value on the Blocks asset significantly. While the Pearl District is a very nice area overall, downtown Portland has struggled since covid, and I am now assuming that rents here also need to be marked down a good bit to lease the asset up4. I am leaving the HQ office value the same - while Cleveland is a soft market overall, this is in probably the best location within Cleveland, being just east of Shaker Heights & west of Hunting Valley. And its a decent building.

At this point though, the cake is mostly baked. Even if worst case the HQ office sold for say $20 psf, that is only ~$6.5mm less in proceeds, or only about $.12 a share in lower proceeds.

The biggest remaining question at this point is the liquidation cost and the timing (the two being related as G&A is the largest component of said costs). Here are my updated estimates of those costs, assuming liquidation by the end of the year.

If the liquidation is wrapped up by Q1 2027, the cost is close to the same - you get a little more interest income, and the Curb termination fee would be $2.5mm lower, which nearly offsets the additional ~$7.5mm/quarter G&A cost.

Putting it all together, here is the updated estimates of final proceeds and returns.

Editors note: The share price is up slightly this morning, so upside is slightly less as of publication vs writing.

The returns here are lower than before, but I think given the DTP buy/sell at the lower price the outside scenarios of up to 2 years to fully liquidate is mostly off the table here, and its much more likely to be wrapped up relatively soon. So the IRR is actually relatively preserved to my original underwriting, a ~30% return in 4 to 7 months is quite attractive on an annualized basis.5

The biggest risk is something drags this process out, and really at this point the only thing that I can see doing that (barring an imminent recession) is some kind of dispute with the DTP limited partner, or a lawsuit that somehow prevents the liquidation from occurring. Those aren’t zero risk, but they seem fairly manageable to me. A full year end resolution may be a bit optimisitc, but I don’t see any reason why it shouldn’t be doable if the LP buys SITC’s DTP stake - all SITC has to do is sell 2 assets, and finish up the legal component. An asset sale is usually a few months of marketing than call it 3 months from LOI to final sale - 6 months should be sufficient.

The other big risk is I am off in my total liquidation cost estimates. I attempted to be conservative in these, but there is definitely still some unknown here. That said, it is hard to imagine this being so far off as to really impair the returns too badly. Even if they were 25%/$17mm higher, that would drop the return from 30% to 20%, still quite a nice annualized IRR. And the total figure I’m using compares reasonably to what we have from Elme’s liquidation.

Wrapping Up

The risk/ reward seems interesting here, with a potential ~30% return in 4-7 months. The main risk appears to be more timing oriented at this point given how nearly all the assets are sold or under contract now. I would hope management would give an update on target liquidation costs and timing soon after they have resolution on the DTP JV, which should happen within the next week.

As always, thanks for reading!

I was traveling and dealing with a few personal issues, so my apologies for the delay in the write up on the Q2 results.

My best guess is the miss was driven by me taking the existing rents at face value - they may need to be marked down significantly which is my best estimate of what is driving the lower value. This was fairly common in big boxes years ago but I incorrectly thought the current rents were relatively safe given the overall retail market strength and the fairly good location of this asset - there is a Whole Foods literally across the street! The space is also multistory, which is always tricky in retail and I underweighted the negativity of that in hindsight.

There is a big but here, and that is some kind of litigation or dispute with the DTP partner which drags out the sale process. I don’t think that is likely, as if anything SITC seems to be offering the LP a good deal, but you never know. The LP is a Chinese institution with links to the central government, so perhaps there could be some issue related to new investment in the US.

These may be famous last words, but I think the odds of a significant miss from the new lower price for the Blocks are pretty low, as these are a number of smaller, newer suites, so the odds of there being a single idiosyncratic reason bringing price downs significantly is lower (such as necessary capex or upcoming tenant move outs).

For those keeping score at home, the prior post dividend basis was $3.26, and the proceeds would have been $4.88/share after the special dividend, so from a $3.26 basis the return would be ~22.87%, or ~35-65% annualized depending on how long the liquidation takes (Q4 vs Q1, obviously if it went later IRR would drop further).

An Update on the SITC Liquidation