SRG - Seritage Growth Properties

[koshigoe]

Outlined in the latest Seritage annual letter was a cryptic comment from Schall,

 

"we expect there to be a growing bifurcation between developers and platforms that possess the scale, expertise, capital, and support from their investors to proactively redevelop prime real estate into dominant retail and mixed-use hubs – and those that do not possess those characteristics."

 

Could he have been referring as well to Westfield, and even GGP, two of the largest and strongest mall retailers in the US and both recently (and most probably in GGP's case) acquired?

 

While both strong companies with strong malls, they lack the freedom to wholly transform their malls into mixed use centers, exactly the premise of the GGP takeout by BPY. How is Mathrani going to say we're just going to go willy nilly to mixed use? No capital, no patience in the markets. He needed the cover of a BPY.

 

Buffett has said in past about how time is the friend of the wonderful business. Once free from the Sears bankruptcy miasma (which arguably has already passed) SRG strengths will blossom for the investment community to see, with total control over large acreage that others want in on.

 

And SRG won't have to just sell out to another developer (a BPY or Unibail), they will be in the catbird's seat, and able to command comically good terms compared to their acquisition price, as evident by the Santa Monica deal and potentially later this year with several other large scale redev JVs.

 

This most critical structural advantage seems lost in the fog of war now with most talk on the immediate funding issues.

 

I also believe SRG exhibits the characteristics of a platform company a la Ackman, though for the non-believers in the SRG story this might be a bridge too far at the moment!

 

 

[scorpioncapital]

All the true, the only liability I see is the name on the Board of Trustees with initials ESL and a major unitholder. Hopefully a REIT has more protections than a corporation and there's less damage he can do to this business than to Sears. Other than that, agree with the thesis.

[Foreign Tuffett]

Outlined in the latest Seritage annual letter was a cryptic comment from Schall,

 

"we expect there to be a growing bifurcation between developers and platforms that possess the scale, expertise, capital, and support from their investors to proactively redevelop prime real estate into dominant retail and mixed-use hubs – and those that do not possess those characteristics."

 

Could he have been referring as well to Westfield, and even GGP, two of the largest and strongest mall retailers in the US and both recently (and most probably in GGP's case) acquired?

 

While both strong companies with strong malls, they lack the freedom to wholly transform their malls into mixed use centers, exactly the premise of the GGP takeout by BPY. How is Mathrani going to say we're just going to go willy nilly to mixed use? No capital, no patience in the markets. He needed the cover of a BPY.

 

Buffett has said in past about how time is the friend of the wonderful business. Once free from the Sears bankruptcy miasma (which arguably has already passed) SRG strengths will blossom for the investment community to see, with total control over large acreage that others want in on.

 

And SRG won't have to just sell out to another developer (a BPY or Unibail), they will be in the catbird's seat, and able to command comically good terms compared to their acquisition price, as evident by the Santa Monica deal and potentially later this year with several other large scale redev JVs.

 

This most critical structural advantage seems lost in the fog of war now with most talk on the immediate funding issues.

 

I also believe SRG exhibits the characteristics of a platform company a la Ackman, though for the non-believers in the SRG story this might be a bridge too far at the moment!

 

I broadly agree with your thoughts here, although I would frame things differently. Instead of thinking about SRG as a platform company, I think it's more helpful to think of it as having massive optionality + more control over its own destiny than the enclosed mall operators. The optionality comes from owning ~230 properties spread over 49 states, many with outsized land parcels. SRG can largely pick and choose where and when to deploy capital in a way that REITs with smaller or less geographically dispersed footprints cannot.

 

Enclosed mall operators are constrained by the interests and rights of both inline and anchor tenants. This makes it hard for them to engage in large scale redevelopment projects unless they can get all their constituencies on board. A great example of this is the underperforming SHLD stores that have been the thorns in the sides of many enclosed malls. SRG's contractual right to partially or wholly kick SHLD out of properties it wants to redevelopment significantly mitigates this problem.

 

 

 

 

 

 

[GCA]

I'm not sure just how much of an advantage SRG has in redeveloping their properties versus the mall owners.  I agree SRG has more focus here, and support from their investors... but other than that?  Yeah these operators need to get their anchor tenants on board, but my understanding is that SRG can't really do much either without getting the go ahead from the other anchor tenants.  Hah, maybe that's another reason for under-investment in the stores (make 'em so bad that the other anchors are happy to get rid of the "Sears blight").

 

In any case, here is an example of Simon doing just that... redeveloping 5 properties into mixed use... and in fact its the 5 JV properties that SRG recently sold to Simon:

 

http://www.insideindianabusiness.com/story/37921409/simon-to-redevelop-five-properties

 

 

[koshigoe]

Yes it would be interesting to learn the development economics Simon will achieve on those 5 ex JV properties, and also the thinking of SRG management on why to sell at a 10% profit rather than participate in the redev.

 

Simon has said they were about 7% return with a 50% recapture, perhaps after paying SRG the 'finders fee' they won't achieve much better on a 100% basis.

 

It seems in this case Simon isn't at a disadvantage to SRG in redeveloping these ex JV sites. But I don't see how one can extend the 'just as favorable as SRG' economics to other mall owners with a Sears that aren't in or were in a JV.

 

These owners don't have the benefit of Eddie working both sides of the deal to shut the store down nor a master lease that allows the mall owner to kick out Sears.

 

For example, WPG being obligated to bid for Bon Ton to basically pay itself back in rent so there's no gaping hole there in its malls. SRG has no such ugly decision to contemplate.

 

I think the intangible blank slate advantage discussed doesn't lend itself to smoking gun examples just yet, but will be important as the retail evolution plays out in next few years.

 

And there are some potentially blockbuster deals on the near horizon for SRG including plans at Hicksville, Valley View and possible JVs at Aventura, La Jolla. Right there is enough to justify current market price and fully fund the pipeline to 150 m NOI, and then you're left with 75% of GLA for growth on your terms.

[Foreign Tuffett]

I'm not sure just how much of an advantage SRG has in redeveloping their properties versus the mall owners.  I agree SRG has more focus here, and support from their investors... but other than that?  Yeah these operators need to get their anchor tenants on board, but my understanding is that SRG can't really do much either without getting the go ahead from the other anchor tenants.  Hah, maybe that's another reason for under-investment in the stores (make 'em so bad that the other anchors are happy to get rid of the "Sears blight").

 

In any case, here is an example of Simon doing just that... redeveloping 5 properties into mixed use... and in fact its the 5 JV properties that SRG recently sold to Simon:

 

http://www.insideindianabusiness.com/story/37921409/simon-to-redevelop-five-properties

 

I think you are somewhat misinterpreting what I am trying to say. The mall operators can redevelop the anchor boxes as well or better than anyone else, but by-and-large they don't own or control them. The boxes are generally controlled by the department stores (M, DDS, SHLD) via either outright ownership or very long term leases. One easy way to frame this is the frustration and powerlessness mall operators saddled with underperforming SHLD stores have probably felt over the last decade.

 

I've yet to see much, if any, evidence that SRG needs the sanction of other anchor tenants to redevelop its boxes. Do they have to work with the mall operators and city planners? Yes. Do they need the sanction of the department store operator which controls the box on the other side of the mall? Not that I'm aware of.

 

The JV properties are a special case. The original intent of the JVs was to redevelop the 50% of the properties' that SHLD did not have rights to. SRG has the contractual right to force the mall operators to buy its share of the JV properties once certain 3rd party leasing thresholds are met. Simon and Macerich subverted this process by sitting on their hands instead of working with SRG to redevelop. Given their liquidity positions relative to SRG's, as well as the inevitability that the SHLD stores in the JVs would (eventually) close, this has probably been a smart strategy. I think the mall operators will buy out all of SRG's interests in the JVs over time.

[koshigoe]

Simon and Macerich subverted this process by sitting on their hands instead of working with SRG to redevelop. Given their liquidity positions relative to SRG's, as well as the inevitability that the SHLD stores in the JVs would (eventually) close, this has probably been a smart strategy. I think the mall operators will buy out all of SRG's interests in the JVs over time.

 

I wonder if this action was an oversight during the initial JV structuring?

[RadMan24]

Provides liquidity to SRG if needed. Plus, who wants a vacant Sear’s store at their mall?

[GCA]

And there are some potentially blockbuster deals on the near horizon for SRG including plans at Hicksville, Valley View and possible JVs at Aventura, La Jolla. Right there is enough to justify current market price and fully fund the pipeline to 150 m NOI, and then you're left with 75% of GLA for growth on your terms.

 

Aventura and La Jolla have already been added to the official project slate, and so if we assume the other projects that got on the slate last quarter generate no income, then those two put together would appear to offer $51MM in income (once stabilized) in a few years, and after spending a lot of money to get there (just look at the Aventura plans).

 

That leaves Hicksville, Valley View, Redmond, and Boca Raton.

 

Here's what I think the first three might generate in rent:

Redmond - $40MM

Valley View -  $90MM

Hicksville - $38MM

 

So, leaving out Boca Raton for now, $51MM or Aventura and La Jolla plus all the above gets you to $219mm in rent... which I guess depending on the cap rate you choose really could get you to today's EV.  Of course keep in mind these are really big developments that are going to take hundreds of millions of dollars and multiple years to complete...

[SlowAppreciation]

Q1: http://ir.seritage.com/Cache/1500110255.PDF?O=PDF&T=&Y=&D=&FID=1500110255&iid=4584761

 

• Signed new leases totaling 391,000 square feet at an average rent of $20.24 PSF. Since the Company’s inception in July 2015, new leasing activity has totaled over 5.2 million square feet at an average rent of $17.98 PSF
  
• Net income: $9.1 million
  
• NOI: $36.9m
  
• FFO: $11m
  
• 4.1x releasing multiples for space currently or formerly occupied by Sears Holdings Corporation
  
• Annual base rent from tenants other than Sears Holdings: 54.3%
  

[GCA]

The more exciting stuff from my perspective are the land deals.  The Redmond deal values that land at 9 times what it was assessed for in the July 2015 CMBS.  The other two deals value those plots of land at 2 times what they were assessed at in the CMBS.  Equally as important these are the first retail to residential projects that have been officially mentioned by SRG (though they and others have been kicking around for some time).

[GCA]

The more exciting stuff from my perspective are the land deals.  The Redmond deal values that land at 9 times what it was assessed for in the July 2015 CMBS.  The other two deals value those plots of land at 2 times what they were assessed at in the CMBS.  Equally as important these are the first retail to residential projects that have been officially mentioned by SRG (though they and others have been kicking around for some time).

 

Scratch that, I didn't realize the Newark deal was for only half the property so it values the plot at 4 times the CMBS appraisal value...

[TwoCitiesCapital]

Please forgive my ignorance, as I suspect this is a stupid question with a simple/obvious answer, but:

 

How do these numbers jive?

 

Financial Results

For the quarter ended March 31, 2018:

 Net income attributable to common shareholders of $9.1 million, or $0.26 per diluted share

 Total Net Operating Income (“Total NOI”) of $36.9 million

 Funds from Operations (“FFO”) of $11.0 million, or $0.20 per diluted share

 Company FFO of $12.4 million, or $0.22 per diluted share

 

What I see is that $9.1M net income = $0.26 per diluted share but total FFO is $11.0M or $0.20 per diluted share.

 

If the diluted per share figure remains static, how does 9M translate to a higher per share value than $11M?

 

:-\

[Spekulatius]

Please forgive my ignorance, as I suspect this is a stupid question with a simple/obvious answer, but:

 

How do these numbers jive?

 

Financial Results

For the quarter ended March 31, 2018:

 Net income attributable to common shareholders of $9.1 million, or $0.26 per diluted share

 Total Net Operating Income (“Total NOI”) of $36.9 million

 Funds from Operations (“FFO”) of $11.0 million, or $0.20 per diluted share

 Company FFO of $12.4 million, or $0.22 per diluted share

 

What I see is that $9.1M net income = $0.26 per diluted share but total FFO is $11.0M or $0.20 per diluted share.

 

If the diluted per share figure remains static, how does 9M translate to a higher per share value than $11M?

 

:-\

 

 

The earnings were boosted by roughly $41M profit from property dispositions, but proceeds from property disposition don’t contribute to NOI (which is property operating profit).

[treasurehunt]

Please forgive my ignorance, as I suspect this is a stupid question with a simple/obvious answer, but:

 

How do these numbers jive?

 

Financial Results

For the quarter ended March 31, 2018:

 Net income attributable to common shareholders of $9.1 million, or $0.26 per diluted share

 Total Net Operating Income (“Total NOI”) of $36.9 million

 Funds from Operations (“FFO”) of $11.0 million, or $0.20 per diluted share

 Company FFO of $12.4 million, or $0.22 per diluted share

 

What I see is that $9.1M net income = $0.26 per diluted share but total FFO is $11.0M or $0.20 per diluted share.

 

If the diluted per share figure remains static, how does 9M translate to a higher per share value than $11M?

 

:-\

The financial supplement has the information needed to figure out the answer. The denominator is different for the two calculations - 35,501 for EPS and 55,719 for FFO per share. For FFO the 20,218 outstanding units are added to the number of A and C shares outstanding. I think 55,719 is the share count that actually matters when analysing the company.

[LongTermView]

http://ir.seritage.com/file/Index?KeyFile=393586630

SERITAGE GROWTH PROPERTIES AND FIRST WASHINGTON REALTY ANNOUNCE PARTNERSHIP TO OWN THE CORBIN COLLECTION IN WEST HARTFORD, CONNECTICUT

Company Release - 5/21/2018 4:59 PM ET

NEW YORK--(BUSINESS WIRE)-- Seritage Growth Properties (NYSE:SRG) and First Washington Realty, a national real estate investment and management company, today announced a joint venture partnership to own The Corbin Collection, the 163,700 square foot redevelopment of the former Sears store and auto center in West Hartford, Connecticut.

 

The transaction values The Corbin Collection at approximately $52 million, including costs remaining to complete the project. Seritage sold a 50% interest in the project to an affiliate of First Washington Realty, and received proceeds of approximately $23 million at closing, which it utilized primarily to repay existing mortgage debt associated with the property.

[LongTermView]

Pretty big announcements the last few days. It's kind of surprising there isn't more talk about them here.

 

http://ir.seritage.com/file/Index?KeyFile=393597384

SERITAGE GROWTH PROPERTIES AND INVESCO REAL ESTATE ANNOUNCE PARTNERSHIP TO OWN THE COLLECTION AT UTC IN LA JOLLA, CALIFORNIA

Company Release - 5/22/2018 9:12 AM ET

Joint Venture to Redevelop Former Sears Site into Premium Shopping, Dining and Entertainment Destination

 

NEW YORK--(BUSINESS WIRE)-- Seritage Growth Properties (NYSE: SRG) and Invesco Real Estate, a global real estate investment manager, today announced a joint venture partnership to own The Collection at UTC, the adaptive re-use of the existing Sears store and auto center at Westfield UTC in La Jolla, California.

 

The transaction values The Collection at UTC at approximately $165 million, including costs remaining to complete the project. Seritage sold a 50% interest in the project to a separate account managed by Invesco and received proceeds of approximately $44 million at closing, which it utilized primarily to repay existing mortgage debt associated with the property. The partnership will invest, or pursue construction financing to fund, the additional capital required to convert the Sears store and auto center into 226,200 square feet of premium space leased to a collection of growing retailers and leading dining, entertainment and fitness concepts.

 

[cubsfan]

I don't think anyone wants to hear about anything to do with Sears.

 

Like Brookfield, I think Seritage is going to be a good one. These announcements are under the radar,

No conference calls, non-promotional management.

 

Add in a short position of 50% of the float - and you get a pretty combustible mix if good news arises.

If the hedge funds are so short Seritage because of the "Sears is dying story" they'll have a tough

time covering as Sears continues to come up with creative ways to finance the company.

[scorpioncapital]

One thing I admire about buffett is the ability to think a few moves ahead. It's like chess. Now times are good for some companies, over time, the race will be won by making the right moves. Can mistakes be made? Sure. IBM for example. But in investing there are BIG mistakes and small mistakes. You can switch horses if you feel a better one comes around. If you cover your bases, the loss on the underperformer won't be too bad. In other words there is time to decide your optimal portfolio.

[Broeb22]

https://www.businesswire.com/news/home/20180529005568/en/Seritage-Growth-Properties-Announces-Appointment-Sharon-Osberg

 

Buffett's bridge buddy joining SRG board a coincidence?

 

No position here, but I would find it surprising that a person Buffett plays bridge with 3-4x per week would not be some kind of connection to the board for Buffett...

[LongTermView]

Good, maybe Warren and Sharon can get them to lower the dividend or cut it completely for a few years.

[cubsfan]

Not likely to see a dividend cut since it will endanger the REIT status.

[LongTermView]

Not likely to see a dividend cut since it will endanger the REIT status.

 

I was under the impression they have some room since their earnings are near zero.

[Foreign Tuffett]

https://www.businesswire.com/news/home/20180529005568/en/Seritage-Growth-Properties-Announces-Appointment-Sharon-Osberg

 

Buffett's bridge buddy joining SRG board a coincidence?

 

No position here, but I would find it surprising that a person Buffett plays bridge with 3-4x per week would not be some kind of connection to the board for Buffett...

 

My thoughts exactly......

 

 

[cubsfan]

Not likely to see a dividend cut since it will endanger the REIT status.

 

I was under the impression they have some room since their earnings are near zero.

 

I'm sorry - I thought you meant they should cut dividend to zero!