SRG - Seritage Growth Properties

[ander]

What is the timeline of events from here? (e.g., lawsuits filed, stores actually closed, stores re-developed, etc.)?

[Foreign Tuffett]

What is the timeline of events from here? (e.g., lawsuits filed, stores actually closed, stores re-developed, etc.)?

 

No one here has this information. Right now we can only speculate. The Toys R Us liquidation happened surprisingly quickly (~3 months). I think SHLD's liquidation will take somewhat longer. Keep in mind that it hasn't been officially announced yet, and there are still other assets that have to be auctioned off, including the owned real estate.

 

I would expect SRG to continue selling stores and/or entering in to JVs to generate liquidity. Dividend will likely be canceled. 

[GCA]

What is the timeline of events from here? (e.g., lawsuits filed, stores actually closed, stores re-developed, etc.)?

 

https://www.reuters.com/article/us-sears-bankruptcy-lampert/sears-chairman-submits-new-5-billion-bid-to-save-bankrupt-retailer-idUSKCN1P41TJ

 

Lampert has submitted a bid that includes $35MM for a release of liability from the fraudulent conveyance claims (among others).  We'll see whether his bid is accepted on Jan 14th.  If it is, I would think that settles it.  If not, the saga continues and it will be litigated.  Full disclosure: not a bankruptcy lawyer (or any type of lawyer) so not 100% on this stuff.

[Candyman1]

Looks to me Eddie didn't improve his offer ... he just added $600 million plus more in assets to what he was bidding for in the last offer.

 

1. Assumption of Liabilities. In addition to the liabilities described in the Going Concern Proposal, Buyer proposes to assume up to $663 million in additional liabilities identified in consultation with the Debtors. This amount consists of the following, to be paid by Buyer in accordance with the Revised Asset Purchase Agreement:

a. Up to $166 million of payment obligations with respect to goods ordered by Debtors prior to the closing of the proposed transactions (but as to which goods Debtors have not yet taken delivery and title prior to closing);

b. Up to $139 million of 503(b)(9) administrative priority claims;

c. Up to $43 million of additional severance costs to be incurred by the Debtors;

d. All cure costs related to contracts to be assumed by Buyer (estimated to be up to $180 million); and

e. Up to $135 million of property taxes with respect to the properties to be acquired by Buyer.

 

In the event that the sum of the amounts outstanding under Debtors’ first lien ABL DIP facility and Debtors’ junior DIP facility (net of any cash available to pay down such amounts) is less than $1.2 billion at the time of closing the proposed transactions, Buyer’s obligation to assume the foregoing liabilities shall be reduced dollar-for-dollar to the extent of such shortfall, with such reduction allocated in accordance with the Revised Asset Purchase Agreement. In a schedule shared with Buyer’s representatives on January 6, 2019, the Debtors estimated cash available to pay down such outstanding amounts was $89 million.

 

2. Acquired Assets. The Revised Proposal includes the acquisition by Buyer of additional assets that were proposed to be left with the Debtors’ estate under the Going Concern Proposal, including:

 

a. Approximately 57 additional real estate properties;

b. Accounts receivable with respect to certain home warranties sold in FY 2018 with a book value of approximately $53.6 million;

c. Other accounts receivable with a book value of at least $256 million, inclusive of netting for allowances for bad debts;

d. Additional inventory with a book value of up to $166 million with respect to which Buyer shall assume payment obligations as described in item 1.a. above (and as to which inventory Debtors have not yet taken delivery and title prior to closing);

e. Prepaid inventory with a book value of at least $147 million as to which Debtors have not yet taken delivery and title prior to closing; and

f. All of the Debtors’ rights relating to the claims set forth in the class actions consolidated in the multi-district litigation In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05-MD-01720 (E.D.N.Y.).

 

3. Release. The proposed consideration for the release of liabilities of ESL and certain ESL-related parties as further described in the Going Concern Proposal is comprised of $35 million in cash, and the assumption of the additional liabilities of the Debtors described above.

 

[Candyman1]

Looks to me Eddie didn't improve his offer ... he just added $600 million plus more in assets to what he was bidding for in the last offer.

 

1. Assumption of Liabilities. In addition to the liabilities described in the Going Concern Proposal, Buyer proposes to assume up to $663 million in additional liabilities identified in consultation with the Debtors. This amount consists of the following, to be paid by Buyer in accordance with the Revised Asset Purchase Agreement:

a. Up to $166 million of payment obligations with respect to goods ordered by Debtors prior to the closing of the proposed transactions (but as to which goods Debtors have not yet taken delivery and title prior to closing);

b. Up to $139 million of 503(b)(9) administrative priority claims;

c. Up to $43 million of additional severance costs to be incurred by the Debtors;

d. All cure costs related to contracts to be assumed by Buyer (estimated to be up to $180 million); and

e. Up to $135 million of property taxes with respect to the properties to be acquired by Buyer.

 

In the event that the sum of the amounts outstanding under Debtors’ first lien ABL DIP facility and Debtors’ junior DIP facility (net of any cash available to pay down such amounts) is less than $1.2 billion at the time of closing the proposed transactions, Buyer’s obligation to assume the foregoing liabilities shall be reduced dollar-for-dollar to the extent of such shortfall, with such reduction allocated in accordance with the Revised Asset Purchase Agreement. In a schedule shared with Buyer’s representatives on January 6, 2019, the Debtors estimated cash available to pay down such outstanding amounts was $89 million.

 

2. Acquired Assets. The Revised Proposal includes the acquisition by Buyer of additional assets that were proposed to be left with the Debtors’ estate under the Going Concern Proposal, including:

 

a. Approximately 57 additional real estate properties;

b. Accounts receivable with respect to certain home warranties sold in FY 2018 with a book value of approximately $53.6 million;

c. Other accounts receivable with a book value of at least $256 million, inclusive of netting for allowances for bad debts;

d. Additional inventory with a book value of up to $166 million with respect to which Buyer shall assume payment obligations as described in item 1.a. above (and as to which inventory Debtors have not yet taken delivery and title prior to closing);

e. Prepaid inventory with a book value of at least $147 million as to which Debtors have not yet taken delivery and title prior to closing; and

f. All of the Debtors’ rights relating to the claims set forth in the class actions consolidated in the multi-district litigation In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 1:05-MD-01720 (E.D.N.Y.).

 

3. Release. The proposed consideration for the release of liabilities of ESL and certain ESL-related parties as further described in the Going Concern Proposal is comprised of $35 million in cash, and the assumption of the additional liabilities of the Debtors described above.

 

It looks like ESL added $800 million plus in assets in exchange for the "up to" $663 million in additional liabilities it is willing to assume. How one calls that "a sweetened offer" is a mystery to me.

[GCA]

How did you guys get details of the previous offer and do you know how I can see the new one?  Is it from following the bankruptcy case documents in PACER?  Been a long time since I looke dup legal documents but I'm interested in this case.  Any advice appreciated thanks.

[Foreign Tuffett]

SRG out with an update this morning. After 30 minutes of my neurons and synapses firing in random patterns, here are some thoughts:

 

- SRG has $117M in go-forward annual interest expense. If you take away the $56.5M in annual rent from SHLDQ, as of 12/31/18 SRG's combined opened and SNO (some of which won't be open for 1 year +) leases only amount to ~$147M in annual revenue (note that this includes their share of JVs). I think revenue from their non-SHLDQ leases is only approximately enough to cover their interest payments and G&A expenses.

 

- Given the above, it isn't surprising that SRG is aggressively selling properties to generate cash. They sold 5 properties in Q4 for gross proceeds of $47.3M + 13 other properties are under contract for a total of $59.8M.

 

- I continue to think they will cancel the dividend

 

- Given that SHLDQ was teetering on the verge of administrative insolvency and total liquidation before Lampert upped his bid, IMO it would have been in SHLDQ's interests to pursue the elimination of the Master Lease. However, this doesn't appear to have happened. I think this is because Lampert wants to preserve the value of his SRG equity.

 

- I continue to think fraudulent conveyance lawsuits are a risk, but I don't have the expertise to handicap this type of esoteric legal issue.

[scorpioncapital]

I think things are going quite well. They are funded with 2 billion in development capital from buffet. Sears income is now just 28 percent and very likely zero by mid 2020.

They can sell even 70 percent of their space and just densify 30 percent at ever higher prices , although I don't expect such a dramatic sale of property space.

What I think isn't visible yet is that this new rental income is not fixed. There is nowhere that says in 10 years rental income can't grow at a pace faster then debt expense with natural increase in quality and density of developments.

[SlowAppreciation]

https://www.businesswire.com/news/home/20190225006054/en/Seritage-Growth-Properties-Announces-Quarter-2019-Dividend

[Foreign Tuffett]

https://www.businesswire.com/news/home/20190225006054/en/Seritage-Growth-Properties-Announces-Quarter-2019-Dividend

 

The dividend being canceled shouldn't be much of a surprise for anyone who has been following the company closely. As I have attempted to enunciate in the pages of this hallowed forum, SRG needs moar cash.

 

The good news is that Sears Holdings isn't liquidating and the master lease (apparently) survived bankruptcy intact.

[LongTermView]

I've been thinking about this part of the 2018 annual report:

These 36 [premier] sites currently encompass approximately 7.4 million square feet of existing buildings and total roughly 510 acres. Recognizing that certain of these entitlement processes may take longer than anticipated, we believe the density on these sites could increase by twofold or more over time (growing from 7.4 million to 15+ million square feet) and could include 6,000 to 8,000 residential units.

 

Where do they list these 36 sites individually? The 4Q18 supplemental shows 22 projects with costs over $20 million each. And there are other sites where projects haven't been approved yet.

[Foreign Tuffett]

I've been thinking about this part of the 2018 annual report:

These 36 [premier] sites currently encompass approximately 7.4 million square feet of existing buildings and total roughly 510 acres. Recognizing that certain of these entitlement processes may take longer than anticipated, we believe the density on these sites could increase by twofold or more over time (growing from 7.4 million to 15+ million square feet) and could include 6,000 to 8,000 residential units.

 

Where do they list these 36 sites individually? The 4Q18 supplemental shows 22 projects with costs over $20 million each. And there are other sites where projects haven't been approved yet.

 

Insofar as I am aware, the company has never broken them out.

[LongTermView]

Insofar as I am aware, the company has never broken them out.

 

Thanks, Foreign Tuffett.

[LongTermView]

http://rebusinessonline.com/greenberg-gibbons-seritage-growth-partner-for-150m-redevelopment-project-at-metro-baltimore-mall/

 

From

$150 million expansion project also will include luxury apartments, office space and even a hotel

 

[Foreign Tuffett]

"Old Sears", aka the insolvent shell left behind when "New Sears" was bought by ESL, is pursuing....well, they are pursuing just about everyone and every entity (including SRG) that was involved with Sears in the years leading up to its bankruptcy. 

 

Docket #3728

 

https://restructuring.primeclerk.com/sears/Home-DocketInfo

 

I don't have the requisite legal knowledge to handicap the odds of this claim being successful, but I do think that SHLD was effectively insolvent in the years leading up to its bankruptcy.

 

[TwoCitiesCapital]

"Old Sears", aka the insolvent shell left behind when "New Sears" was bought by ESL, is pursuing....well, they are pursuing just about everyone and every entity (including SRG) that was involved with Sears in the years leading up to its bankruptcy. 

 

Docket #3728

 

https://restructuring.primeclerk.com/sears/Home-DocketInfo

 

I don't have the requisite legal knowledge to handicap the odds of this claim being successful, but I do think that SHLD was effectively insolvent in the years leading up to its bankruptcy.

 

I just have a hard time thinking anything could happen to Seritage or subsequent asset sales. Outside of Land's End, nothing was spun-off to shareholders without some payment to Sears.

 

Everything...and I mean everything....was paid for via rights offerings, IPOs, etc. Shareholders had to pay cash to maintain their ownership in existing assets OR have themselves diluted by IPOs of those assets to give Sears more cash.  No false conveyance. No shareholders stripping the assets and leaving the company with nothing.

 

Assets were sold, for cash, to shareholders and third party market participants.  That cash is what allowed Sears to live as long as it did. 

 

It's the primary reason I sold Sears - I was tired of Lampert monetizing the shareholders instead of the assets.

 

 

[Saluki]

I didn't read the whole filing, but I'm not particularly concerned.  SRG's price didn't move and if there was something to this, I think it would have.  It looks like they just added every possible person and entity that they could to the law suit to get them in the crosshairs before the statute of limitations expires.  Some of them will likely get dismissed early on after the discovery period. Suing board members?  If I were looking for a quick settlement from the Board of Director's insurance carrier, that's what I would do, but it would be a hard thing to win on with these facts.

 

Most of these transactions were open to all investors, not just insiders, so it would be hard to prove a fraudulent conveyance.  If you are being sued and, say, sell your house to your brother in law for half what it's worth to avoid your creditors getting a hold of it, that's fraudulent conveyance. Generally, you have two years to void a sale/transfer for fraudulent conveyance but some states allow a longer time frame.  Plus, its been a few years since these transactions were spun out and it doesn't look like investors got rich off them, so if they were really given away at fire sale prices, why is SRG at mid 40s from a mid 30s spin off price after 4 years and not much higher?

 

Disclosure:  I used to practice securities law, but have never practiced bankruptcy so take this opinion with a grain of salt.  If there is anyone that is regularly involved in bankruptcies (as an accountant , trustee or investor) and would like to chime in, please do. 

[GCA]

There's not one, but two entire VICs on this fraudulent conveyance stuff.  They're old enough now that you can read them and most associated comments.

 

My $0.02 (not a lawyer) is that the threat is real but the Sears estate isn't likely to win the case.  If I've got this right, then SRG probably settles at some point.  Remember, SRG already settled with SHLD shareholders once over this transaction, why wouldn't they have to settle with bondholders as well?  The fact that all shareholders got to participate doesn't really mean much because its the bondholders who are saying they got ripped off.

 

To prove FC you need to show two things:

1.  Insufficient consideration was paid in the transaction

2.  The company was insolvent at the time of the transaction

 

There is pretty good evidence for #1 in how SRG has traded above the consideration paid pretty much its entire existence (including a huge jump on day 1.  #2 is a bit trickier with arguments on both sides.  It had negative book value and never earned another year of positive EBITDA again but on the other hand had billions in positive market cap.

[LongTermView]

The 1Q19 numbers are interesting.

 

From the release:

Signed new leases totaling 440,000 square feet (365,000 square feet at share) at an average base rent of $30.37 PSF ($30.06 PSF at share).

 

...

 

Increased the Company’s share of annual base rent from diversified, non-Sears tenants to 83.3% of total annual base rent from 54.3% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured. Diversified, non-Sears rental income has increased by over 260% since inception to $158.7 million, including all signed leases.

 

...

 

[GLA at share is 33,210,000 and it is 55% leased.]

 

[Annual base rent: $31.7 mn Sears/Kmart; $74.7 mn in-place non-Sears; $84 mn SNO non-Sears.]

[Foreign Tuffett]

The 1Q19 numbers are interesting.

 

From the release:

Signed new leases totaling 440,000 square feet (365,000 square feet at share) at an average base rent of $30.37 PSF ($30.06 PSF at share).

 

...

 

Increased the Company’s share of annual base rent from diversified, non-Sears tenants to 83.3% of total annual base rent from 54.3% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured. Diversified, non-Sears rental income has increased by over 260% since inception to $158.7 million, including all signed leases.

 

...

 

[GLA at share is 33,210,000 and it is 55% leased.]

 

[Annual base rent: $31.7 mn Sears/Kmart; $74.7 mn in-place non-Sears; $84 mn SNO non-Sears.]

 

IMO there isn't much to get excited about here.

 

46.8% of their wholly-owned properties are vacant. Keep in mind that this % would actually be worse if they weren't selling off so many properties. At the spin they had 235 wholly-owned properties and 31 JV properties. Now they have 198 wholly-owned properties and 27 JV properties.

 

It will be interesting to see what Q2's cash flow statement looks like, as I believe that will be the first full Q with the revised master lease in effect.

 

 

[GCA]

This is something to get excited about: demolition finally starting on their Dallas mega-project

 

https://www.bizjournals.com/dallas/news/2019/05/06/mayor-rawlings-says-valley-view-redevelopment-will.html?ana=yahoo&yptr=yahoo#g/453555/4

https://www.nbcdfw.com/news/local/Former-Sears-Building-at-Valley-View-Mall-To-Be-Demolished-509385321.html

 

In general, I'd call the previous quarter pretty bad, other than they signed some high PSF leases (but not many of them).

[LongTermView]

This is something to get excited about: demolition finally starting on their Dallas mega-project

 

Indeed, this Dallas project is a big one.

[GCA]

This is something to get excited about: demolition finally starting on their Dallas mega-project

 

Indeed, this Dallas project is a big one.

 

Yes it is.  News articles state $1B project with 1.8MM sqft of office space (which I believe includes the retail near the bottom) + 300 residential units (phase 1).

 

I think this is the next big catalyst for the stock.  They have enough liquidity on their balance sheet only to complete the projects already in their official pipeline.  This is not in their official pipeline.  They'll be needing to bring on a partner to provide capital for this project much like they did with Santa Monica and La Jolla.  That means selling part of their interest in the development.  That means there will be a price tag put on the development and an 8k announcing it.  It also means this project will go on the official pipeline of projects so investors can see the eventual bump to annual rental income.  Will happen within the next 6 months.

 

This stock already has a lot of positive future developments priced into it but I think this is the next positive catalyst. 

[SlowAppreciation]

Why Amazon Is Gobbling Up Failed Malls:

[SlowAppreciation]

https://www.pressconnects.com/story/money/2019/07/09/oakdale-mall-sears-sold-3-million/1675604001/