SRG - Seritage Growth Properties

[accutronman]

With all the board discussion concerning Sears, there wasn't a dedicated thread regarding Seritage. I've held shares for awhile as I believe the property play is the endgame for Lampert and Berkowitz. Be interested in thoughts regarding Seritage.

[Sionnach]

http://valueinvestorsclub.com/idea/SERITAGE_GROWTH_PROPERTIES/137107

 

http://ir.seritage.com/Presentations

 

I think these two links summarize the thesis pretty nicely. Its a very interesting situation.

 

SRG is pretty similar to RSE which BAM bought not to long ago. So you have to figure there is some opportunity in redeveloping these beaten down properties.

[moneyball]

I'm a shareholder. The things I saw which led me to invest:

 

Significant ability to raise rents in next 3-10 years. Part of the knock on the stock is that pessimists argue you have to wait to raise rents (I've seen bullish projections that account for 100% recapture in 3 years which is dumb). But since the industry is based on P/FFO or NAV metrics there tends to be significant discounting of future growth in the current price.

 

Supply / Demand: malls aren't what they used to be as far as demand, but sales / sf have increased since recession (it's not all doom and gloom like you would be led to believe). Better than that however no one is building more malls really, but there is tenant demand and Sears spaces are huge and can be partitioned. Which leads me to my last point.

 

Large outlot / parking / standalone development opportunity and pipeline. Sears automotive units can be partitioned into in line outlets as shown in presentation above. Large standalone sites can be sold as dev opportunities (Santa Monica, St. Paul, Chicago) or developed in house. Since SRG already owns all the sites they can value add through entitlement process or complete development in house.

 

Lastly, major mall REIT JVs will, imo, be bought back by the partner at substantial premium as major mall reits have little area for inorganic growth.

[Sionnach]

can you explain that last point a little further moneyball? Are you saying GGP is going to buy back their seritage JV for example?

 

How long do you think it might to get the 50% recapture? Is 3-10 years the ballpark to get all 50% recaptures?

 

If you look at the VIC writeup - lets say they get to avg $9.05 /sqft in 5 years. They estimate that's a stock price of ~53, which is only 40% above todays price. Which wouldn't be the greatest CAGR if it took 5 years.

[scorpioncapital]

You know, I'm wondering if a mall tenant to replace Sears could be a large grocery chain like whole foods.

[accutronman]

I'm a shareholder. The things I saw which led me to invest:

 

Significant ability to raise rents in next 3-10 years. Part of the knock on the stock is that pessimists argue you have to wait to raise rents (I've seen bullish projections that account for 100% recapture in 3 years which is dumb). But since the industry is based on P/FFO or NAV metrics there tends to be significant discounting of future growth in the current price.

 

Supply / Demand: malls aren't what they used to be as far as demand, but sales / sf have increased since recession (it's not all doom and gloom like you would be led to believe). Better than that however no one is building more malls really, but there is tenant demand and Sears spaces are huge and can be partitioned. Which leads me to my last point.

 

Large outlot / parking / standalone development opportunity and pipeline. Sears automotive units can be partitioned into in line outlets as shown in presentation above. Large standalone sites can be sold as dev opportunities (Santa Monica, St. Paul, Chicago) or developed in house. Since SRG already owns all the sites they can value add through entitlement process or complete development in house.

 

Lastly, major mall REIT JVs will, imo, be bought back by the partner at substantial premium as major mall reits have little area for inorganic growth.

 

I agree the Sears auto center/outlot/parking provides some of the more intriguing possibilities. Additionally, the point made in the Value Investors Club article pertaining to what would occur in the event of a SHLD bankruptcy I hadn't thought about but is another positive for Seritage.

 

 

[moneyball]

can you explain that last point a little further moneyball? Are you saying GGP is going to buy back their seritage JV for example?

 

How long do you think it might to get the 50% recapture? Is 3-10 years the ballpark to get all 50% recaptures?

 

If you look at the VIC writeup - lets say they get to avg $9.05 /sqft in 5 years. They estimate that's a stock price of ~53, which is only 40% above todays price. Which wouldn't be the greatest CAGR if it took 5 years.

 

I think there is value accretion sooner than 5 years. I have been led to believe (by an executive at one of the jv partners) that the malls make a natural acquisition target that they would have to look at in the right scenario. Reading between the lines and considering that these jv assets were formed during the spin off, I think there's a good chance that after an initial safe harbor period that these assets get bid upon by the sponsor. Right now it seems that they are investing into these assets and repositioning the Sears space so that it can be leased. The big 3 mall reits now trade at something like  4.3 caps. I imagine they would add jump on the opportunity to add the SRG space to their portfolio at a 5 cap and own even more sf.

 

Then I think that longer term Sears will eventually file for bankruptcy / liquidate and the master lease will be rejected and all properties will revert back to SRG. The longer this takes to happen the better, as until then SRG has a robust pipeline were they can pick and choose which sites they want to redevelop. There are currently 21 properties were SRG has 100% recapture rights + 31 JV properties so a robust pipeline. I imagine SRG will continue to pick their spots and execute asset sales were appropriate. A portion of the non jv malls are still owned by Starwood, GGP and Simon. Plus you then have the standalones which are a different animal altogether. Note though some of the k mart spots are duds and probably completely worthless.

[moneyball]

You know, I'm wondering if a mall tenant to replace Sears could be a large grocery chain like whole foods.

 

It's not likely across a ton of the portfolio IMO, but there are instances where it is happening check link below:

 

http://www.seritage.com/retail/property/4588-virginia-beach-blvd/3312644/landing

 

[moneyball]

Also quickly to answer the question about the rents... by having the master lease in place we will see the highly opportunistic projects taken first (outparcel redevelopment at best malls, space reconfiguaration at malls with 99% occupancy, smaller spaces etc.) These opportunities can drive rents higher SRG quoted as being able to achieve ~25 per foot - 45 per foot at some of their developments. These move the needle only slightly when looking at overall rent psf basis across the portfolio, but if they are able to be sold off or recapped, then we see the needle move.

[Mephistopheles]

moneyball, jw how much do you account for redevelopment costs? Sears and Kmart stores aren't well maintained at all so with increased rents would come capex spend.

[scorpioncapital]

You know, I'm wondering if a mall tenant to replace Sears could be a large grocery chain like whole foods.

 

It's not likely across a ton of the portfolio IMO, but there are instances where it is happening check link below:

 

http://www.seritage.com/retail/property/4588-virginia-beach-blvd/3312644/landing

 

Good find. My idea is that one criticism is whether malls would be able to find more big time retailers - or even small time retailers in an age of belt-tightening or another recession. Food never goes out of style and I do know several malls that have food stores - access is key, sometimes people want to be able to get to it quickly without going through the whole mall though.

[accutronman]

Interesting to see how this shakes out: http://www.bizjournals.com/southflorida/blog/morning-edition/2016/01/department-store-owner-s-lawsuit-seeks-to-block.html?ana=yahoo

 

http://www.bizjournals.com/southflorida/news/2014/11/10/sears-proposes-redevelopment-of-aventura-mall.html#i1

[WeiChiLoh]

i did a rough valuation on SRG and got to a $40 fair value. Seems like the market is pricing this appropriately.

[WeiChiLoh]

i did a rough valuation on SRG and got to a $40 fair value. Seems like the market is pricing this appropriately.

 

Dependent on 3rd party rental rates though. I used 8.50

[scorpioncapital]

I always like to try to think about what Buffett saw in this. I think it's the ability to reinvest large sums of cash-flow back into capex via the rebuilding and re-leasing at higher prices. This is a pattern he's doing at Berkshire say with the utilities, railroad, etc.. A leveraged business that reinvests most of its profits can be a good business as inflation rises. The debt provides part of the excess return. Furthermore, being a REIT having to distribute 90% of profits, no wonder it's called 'growth properties'. I wonder if in fact the dividend may be very low because they can take all the money and use it. Using money in a business (with the exception of capital investment that only accrues to consumers such as seat upgrades on airplanes or even tech upgrades in cable companies) is quite tax efficient and is sort of like issuing shares for growth, it's the opposite of distributions because you can't find anything to invest in. Self-funded deployment of capital to earn a higher return. In the case of SRG, potentially 2x higher rent.

[accutronman]

For reference purposes:

 

Link to S-11 registration document:

http://edgar.sec.gov/Archives/edgar/data/1628063/000119312515216579/d836914ds11a.htm

 

Link to Master Lease: http://edgar.sec.gov/Archives/edgar/data/1628063/000119312515216579/d836914dex103.htm

[BTShine]

Seritage released their Q4 earnings this evening.

 

http://ir.seritage.com/file/Index?KeyFile=30193007

[doughishere]

Ya'll do know that Buffett has an 8% stake in this right? You should feel pretty good about that if you saw this before.

 

I think it speaks to what Bruce says on the values of SHLD RE.

[Picasso]

Actually a lot less than 8%.  There's a bunch of operating units not included in the share count.

[moneyball]

Yeah the 8% of the stockholders equity would work out to be ~4% of total diluted equity

[Green King]

Yeah the 8% of the stockholders equity would work out to be ~4% of total diluted equity

 

can you show me how you are doing the equity please ?

 

TIA

GK

[moneyball]

Yeah the 8% of the stockholders equity would work out to be ~4% of total diluted equity

 

can you show me how you are doing the equity please ?

 

TIA

GK

 

Yeah so from YE 10-k

 

Outstanding shares (class A & C) = 31.4k

Operating Partnership units = 24.2 k

 

So common shares end up being 56.5% of the equity of the company.

 

As a bit of background Operating Partnership units are common in reit ownership structures as it allows for a seller of a property to the reit to gain control of a security that will pay them dividends, but the taxable capital gain only occurs when the OP unit is converted into equity in the reit. So it becomes a tax deferral instrument. ESL owns all of the OP units not owned by by Seritage.

 

See the attached org chart for clarification

SRG_Org_Chart.pdf

SRG_Org_Chart.pdf

[Green King]

Yeah the 8% of the stockholders equity would work out to be ~4% of total diluted equity

 

can you show me how you are doing the equity please ?

 

TIA

GK

 

Yeah so from YE 10-k

 

Outstanding shares (class A & C) = 31.4k

Operating Partnership units = 24.2 k

 

So common shares end up being 56.5% of the equity of the company.

 

As a bit of background Operating Partnership units are common in reit ownership structures as it allows for a seller of a property to the reit to gain control of a security that will pay them dividends, but the taxable capital gain only occurs when the OP unit is converted into equity in the reit. So it becomes a tax deferral instrument. ESL owns all of the OP units not owned by by Seritage.

 

See the attached org chart for clarification

 

Thank you for the info

[moneyball]

There's a write up on VIC that came out recently (on 45 day delay) if anyone is interested.

[Picasso]

moneyball, what do you think of aviclara's comments on the original VIC writeup?  He/she is pretty good about looking at the short end of things so I'm curious to your thoughts.  I'm not that worried about fraudulent conveyance risk but that risk may pop up in the future if SRG purchases new assets from SHLD. 

 

I sort of look at SRG like a low cost funding vehicle for SHLD, except SRG has a lot of low hanging fruit to capture over the next few years.  I don't think Lampert cares as much about the value of SHLD these days except from the standpoint of keeping them out of bankruptcy.  He's going to have an easier time creating new value for himself in SRG and having SHLD as a cheap call option on the retail business that he seems so fond of being overly involved with.  I haven't looked at the numbers lately but I believe he has more net worth tied up in SRG if you exclude SHLD debt.

 

You almost have to marvel at the financial engineering here and say it might be worth taking another close look at SHLD.  I mean SHLD owners didn't have to put up a lot of capital to buy the assets at $29 (given the difference was made up in debt) and it's already being valued at $49 with Buffett buying stock for his personal account.  I don't think it's a stretch to say SRG could be worth $75 or more in a few years. 

 

If you exclude the way out of the money warrants, SHLD only has a $1.6 billion market cap and can pull this maneuver again if they can keep themselves out of bankruptcy.  I don't know if Lampert has the capital to do it, but another rights offering for more real estate sales could send SHLD back up to $30 within a week of the announcement.  When you look at the current liquidity picture for SHLD it's almost given that they'll need to do that.  What else can they sell at this point now that store closures aren't turning the business cash flow positive?

 

But the bearish side of me knows that Lampert is sitting majority position fulcrum in the 2019 bonds so maybe he just wants to get outside the fraudulent conveyance window given how little capital he has left after the last several rights offerings.  I don't get that vibe off his actions but it's a possibility.