Curbline Properties Corp.

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

Curbline Properties Corp. is a small, publicly traded REIT focused primarily on acquiring and managing residential properties, primarily apartments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Curbline Properties (CURL) does not appear to have an identifiable economic moat, resulting in a moat rating of 1/5. The reasons for this are detailed below:

  • Lack of Differentiation: CURL primarily operates by acquiring and managing residential properties, a business with very little differentiation. There are numerous real estate firms that are able to buy and manage apartment buildings, making it extremely difficult to gain any sustainable competitive advantage based on property type or location.
  • Low Switching Costs: Tenants have little switching costs when moving into a new apartment. They might value the area, the size or the price of the apartment, but they rarely care about the ownership group. So CURL doesn’t have much stickiness with its customers. They could be enticed by competing apartments.
  • No Network Effects: The business does not benefit from network effects, where the value of a product or service increases with the number of users. More properties do not give CURL any benefit over another property management firm.
  • No Cost Advantages: There is no evidence that CURL enjoys any significant cost advantages, like from scale, unique locations, or proprietary processes that would allow them to operate at lower costs than their competitors.
  • Lack of Intangible Assets: CURL’s brand is mostly unknown. They don’t have patents or regulatory advantages. They also don’t have any customer loyality.

The above points suggest that CURL can’t fend off competitors from eroding its returns for extended periods of time.

Risks to the Moat and Business Resilience:

  • Interest Rate Hikes: As a real estate company, the business is especially vulnerable to high interest rate environments. Increasing rates have a direct effect on the company’s ability to fund acquisitions, because debt financing would become more expensive. Also, increasing interest rates will make other investments like bonds more attractive, causing investors to dump real estate companies stocks. Finally, the rising interest costs will affect the company’s operational cash flows.
  • Economic Slowdown: A major economic slowdown may cause occupancy rates to drop. People might move in with their families, or decide to skip a year in their own apartment due to financial struggles. That would lower CURL’s revenue stream and force them to either reduce expenses or borrow money (increasing their costs).
  • Competition: The real estate market can be very competitive. Competitors can build or buy new apartments which are more appealing than CURL’s. Also, competing businesses could lower the rents or offer better facilities to attract renters.
  • Management’s Decisions: As discussed later, it is not clear how the company is handling its cash. They may overpay for acquisitions, take on excessive amounts of debt, or may get distracted by other bad operations. Those decisions can ultimately harm the profitability of the company and destroy any existing moat or value.

Business Overview

Curbline Properties Corp. (CURL) is a real estate investment trust (REIT) that focuses on acquiring and managing residential properties, primarily apartments. They operate across various US states but seem to have a strong focus on the Sunbelt region and specifically Florida. They are mostly focused on stabilized properties, but sometimes they have investments into developments. Their financial statements reveal a relatively small market cap and limited profitability.

Industry Overview

The US real estate market is extremely large and relatively mature, including numerous competitors. Some companies in this market manage only residential real estate like CURL, while others focus on other sectors, like commercial buildings, industrial or warehouses. The market is highly competitive, with no individual participant possessing a significant market share. Recent trends are affected by changing economic conditions, interest rates, migration and demographics. For example, areas with better employment or lifestyle options are increasing in value.

Financial Overview

Curbline’s financials are a mixture of good and bad data points, so an interpretation needs to be made.

Revenues: Curbline’s revenue growth is pretty good for a REIT, with a 21.8% YoY growth in rental income. The company had $8.9 million in rental income in 2022, and has reached $15 million in rental income for 2023. The company’s revenue stream is primarily from rents, and can be affected by fluctuations in occupancy and price levels.

While the rental income is increasing, it has been affected significantly by the higher expense levels and the rising cost of debt. This has led to the company’s net loss to rise significantly, from just a loss of $1.5 million in 2022 to an estimated net loss of $6.95 million in 2023.

Operating Margins: Exhibit 22 from the 2024 Q3 financial results shows that the company made $15,031 million in revenue, and had operating expenses of $14,353 million. This gives it a net operating income of $678,000, with an extremely weak operating margin of only 4.5%. The operating margins also do not show consistency, making it hard to predict its future performance. In 2022, they had an operating profit of $2.9 million, implying a much better 32% operating margin. The sharp decline is a warning sign of potential structural issues.

When reviewing previous documents, it’s evident that one of the main issues driving poor margins are the increasing costs of personnel, as well as the cost of general and administration costs. Also, there’s an increase in interest expenses which hurts the bottom line. There is a lack of cost control, and the company is likely not creating value for shareholders.

Expenses: As mentioned before, the operating expenses have increased sharply in the last 12 months. Interest expenses have also increased significantly. The company has had to spend money to acquire new properties and keep them in operating conditions, and has also incurred various management and general costs.

The company seems to have very high “corporate” expenses, like compensation, salaries and benefits for personnel. It is not clear whether this reflects a temporary situation, or a poor management structure.

Cash Flow: In the three months ending September 30, 2023, Curbline had a net cash flow from operations of $1.57 million but net cash used for investing and financing of $11.7 million, meaning that, overall, the company was negative for free cash flow in this period of time. This does not imply that the company will not be free cash flow positive in the future, but does show the issues it has with covering operational and financial costs. In 2022, the company had a net cash flow from operations of roughly $2.2 million and a slightly positive cash flow after investing in new properties of roughly $200,000. But they also spent some cash on repaying debts (roughly $1.2 million) which is a great sign for investors. However, this positive trend did not continue in 2023.

Balance Sheet Health: The company’s balance sheet is relatively healthy, mainly because the assets are mostly real estate (which are more resilient compared to other types of assets). In Q3 of 2023, CURL had around $1.11 billion in assets and roughly $1.36 billion in total liabilities, giving it a debt-to-equity ratio of roughly 2.6. This is a high ratio that implies that CURL is using debt to fund their growth strategy, and doesn’t have strong financial solvency. In the case of any major disruption, the company is more likely to experience financial issues. The company also had roughly $12 million in cash and cash equivalents, which would provide support, should any short-term issues appear. On a scale from 1 to 5, the balance sheet health can be rated as 4/5. It could use lower debt to be completely safe.

Understandability:

CURL’s business model is relatively straightforward. They acquire, manage and lease apartments. However, financial and managerial decisions, as well as all their accounting practices, make it more difficult to make proper long-term forecasts. On a scale from 1 to 5, the understandability rating can be given a 2/5. Here is why:

  • Relatively Simple Business: The company’s primary operation is purchasing and managing apartment buildings, making it relatively easy to grasp the basic model of how the company makes money.
  • Clear Revenue Stream: The main source of revenue is rental income, which is easily tracked and analyzed.
  • Complex Financial Statements: Understanding all the various aspects of the company, including the effects of acquisitions, amortization, asset impairment, tax incentives, etc, can be difficult to accurately assess the financials.
  • Management Decisions: Some management decisions, like what type of properties to buy and how to finance, and their influence on long-term value and profitability can be difficult to understand.
  • Competition: Although the core business is simple, competition and external factors might change the dynamics and profitability of the company.

Recent Concerns/Controversies

  • The company’s management discussed the increase in operating expenses in their Q3 report. The general and administrative expenses increased 44.1% YoY, and were attributed to higher salaries and staff costs. They also stated that interest expenses increased by 30.6% YoY, due to higher interest rates.
  • The company’s operating income has suffered in the last 12 months, partly due to a lack of cost control by the management.
  • There has been a steady increase of debt and its associated costs over the years.

In conclusion, CURL has yet to establish a clear economic moat and possesses a moderately leveraged balance sheet. Furthermore, its recent struggles with controlling its operating costs and rising debt leave some concerns regarding future profitability. While CURL operates within an easy-to-understand business model, it needs more time to see whether these factors can be turned around and the company’s potential can be reached.