SRG - Seritage Growth Properties

[Mephistopheles]

I think the SRG preferred may be a good bet at low enough prices. They are cumulative, yield 7%, par value of $25 currently trading for around $20. I picked some up at $15 but they are very illiquid so hard to get a good amount. BRK has the properties by the balls, but I think there is enough cash on the balance sheet to pay interest on the loan for at least a year, even assuming nobody pays their rent like peridot mentioned. I don't see lockdowns lasting that long and we are starting to see openings. Future of retail is uncertain of course but in the mean time I think this preferred is safe. They will probably turn off the dividend for some time. The EV of the pref + net debt is trading for like $50/sqft, assuming the common is a zero. If it goes back to $15 or lower I'm a buyer.

[Compounder]

On May 5, 2020, the Company and Berkshire Hathaway, the administrative agent and the lender under the Term Loan Facility, entered into an amendment (the "Amendment") to the agreement governing the Term Loan Facility that permits the deferral of interest payments based on the amount of Available Cash (as defined in the Amendment) for each period. If Available Cash is less than or equal to $30 million in a period, the Company shall pay current interest to the extent such Available Cash exceeds $20 million (provided any such interest payment will not exceed the amount otherwise due under the Term Loan Facility). Any deferred interest payments will accrue interest at 2.0% in excess of the then applicable interest rate and shall be due and payable when the Term Loan Facility matures on July 31, 2023; provided that the Company is required to pay any deferred interest from Available Cash in excess of $30 million (unless otherwise agreed to by the administrative agent under the Term Loan Facility in its sole discretion), and the repayment of any outstanding deferred interest will be a condition to any borrowings under the $400 million Incremental Funding Facility described below. Additionally, the Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions, subject to the Administrative Agent’s right to approve the terms of individual transactions due to the occurrence of a Financial Metric Trigger Event, as such term is defined under the Term Loan Facility.

[johnny]

Additionally, the Amendment provides that the administrative agent and the lenders express their continued support for asset dispositions,

 

Boy is that weird wording

[Foreign Tuffett]

Did ya'll notice the below?

 

"In light of the current environment, the Company’s Board of Trustees is currently evaluating the payment of dividends on the Company’s preferred shares for the quarter ending June 30, 2020 and subsequent periods."

 

Not good

[TwoCitiesCapital]

Did ya'll notice the below?

 

"In light of the current environment, the Company’s Board of Trustees is currently evaluating the payment of dividends on the Company’s preferred shares for the quarter ending June 30, 2020 and subsequent periods."

 

Not good

 

 

Well, if they tank after the cancellation, they probably become a better play than the common given that survival no longer seems assured.

 

 

[RadMan24]

Shares adequately trade where they should given the economic uncertainties. The relief by Berkshire is welcome. Until Tenants stop deferring rent though, this is going to be a tense situation.

[scorpioncapital]

But then how do you explain that many REITs are up 40, 50, 80 percent off March lows while srg wallows at 8 a share ? I'm convinced this is operator mismanagement/incompetence/lack of any thoughts to risk management or financial strength. Just ploughing ahead recklessly and now forced to retrench. 

Eddie once again shows his poor record.

 

[bci23]

Did Buffett imply permanent impairment at SRG with his comment at the annual meeting?

 

If you own a shopping center, you’ve got a bunch of tenants that don’t want to pay you right now. And the supply and demand for retail space may change fairly significantly. The supply and demand for office space may changed significantly. A lot of people have learned that they can work at home or that there’s other methods of conducting their business than they might’ve thought from what they were doing a couple of years ago. And when change happens in the world, you adjust to it.

[InelegantInvestor]

He said you need to adjust to it. I think that the kind of multi-use developments SRG has been pursuing are one form of adjustment. They've halted Capex now, basically and are waiting to see what further adjustments are necessary. Maybe the new demand is for well-located warehouse space. Or whatever. I feel very comfortable with these assets at the current price.

[RadMan24]

But then how do you explain that many REITs are up 40, 50, 80 percent off March lows while srg wallows at 8 a share ? I'm convinced this is operator mismanagement/incompetence/lack of any thoughts to risk management or financial strength. Just ploughing ahead recklessly and now forced to retrench. 

Eddie once again shows his poor record.

 

SRG hit a low of $5.00.

[RadMan24]

Did Buffett imply permanent impairment at SRG with his comment at the annual meeting?

 

If you own a shopping center, you’ve got a bunch of tenants that don’t want to pay you right now. And the supply and demand for retail space may change fairly significantly. The supply and demand for office space may changed significantly. A lot of people have learned that they can work at home or that there’s other methods of conducting their business than they might’ve thought from what they were doing a couple of years ago. And when change happens in the world, you adjust to it.

 

Yes - SRG mentioned they had an unfavorable outlook regarding Movie Theaters in their most recent development projects (the big ones). It will be interesting to see what happens, but retail space inside malls is greatly impacted. Also, you could have office space free up as more people work from home, or implement shift work coming into office to reduce office space needs and to reduce crowding. Who knows, but as always, it's about location location location.

[Spekulatius]

Doesn’t SRG had many ongoing developments where they closed leases where the customer hasn’t taken possession yet and maybe never will?

[bci23]

He said you need to adjust to it. I think that the kind of multi-use developments SRG has been pursuing are one form of adjustment. They've halted Capex now, basically and are waiting to see what further adjustments are necessary. Maybe the new demand is for well-located warehouse space. Or whatever. I feel very comfortable with these assets at the current price.

 

Are you comfortable with their liquidity situation and ability to raise capital over the next couple years here?

[Mephistopheles]

He said you need to adjust to it. I think that the kind of multi-use developments SRG has been pursuing are one form of adjustment. They've halted Capex now, basically and are waiting to see what further adjustments are necessary. Maybe the new demand is for well-located warehouse space. Or whatever. I feel very comfortable with these assets at the current price.

 

Are you comfortable with their liquidity situation and ability to raise capital over the next couple years here?

 

With the cash on hand, even if they get zero rent, they are good for a year. Now with interest being deferred, they'll be ok for even longer.

Berkshire does have their hands tied, but with this latest amendment it may indicate some support for asset sales in the future. At $60-70/sqft EV, it really depends on the future of retail and office space vs. alternate uses. I'm sure some of that space is worthless but some is worth 10x the current value. But that's what makes it so cheap. It's either a home run or a dud.

[bci23]

He said you need to adjust to it. I think that the kind of multi-use developments SRG has been pursuing are one form of adjustment. They've halted Capex now, basically and are waiting to see what further adjustments are necessary. Maybe the new demand is for well-located warehouse space. Or whatever. I feel very comfortable with these assets at the current price.

 

Are you comfortable with their liquidity situation and ability to raise capital over the next couple years here?

 

With the cash on hand, even if they get zero rent, they are good for a year. Now with interest being deferred, they'll be ok for even longer.

Berkshire does have their hands tied, but with this latest amendment it may indicate some support for asset sales in the future. At $60-70/sqft EV, it really depends on the future of retail and office space vs. alternate uses. I'm sure some of that space is worthless but some is worth 10x the current value. But that's what makes it so cheap. It's either a home run or a dud.

 

Unlocking the value of SRG seems so dependent on a ton of capex spend and it takes a decade or longer to play out. They were previously targeting 10-12% unlevered returns which are very good if you can borrow at 5-6% but if office and retail space demand is permanently lower than unless there is a equal decline in the cost of construction it seems like that reinvestment story is on indefinite pause.

[AdjustedEarnings]

I have not kept up with this. Does Buffett sill personally own a stake in SRG? I don't think I saw a 13G amendment saying that he didn't but could be wrong. Does anyone know if he still owns this personally?

[Cicero]

He was listed on the last proxy so I think he still does

[Seth Lowry]

Hey all, still ramping on this one - but why isn't a DDE the likely outcome here? Seems like equity has already priced this in and value could be unlocked if leverage was right sized to execute redevelopment long-term.  Sure dilution massive and takes $200/share or whatever super bull case off table.

 

shooting from the hip: 25%-50% dilution for $400M debt swap, tap additional $400M facilities, waivers and 2-3 years more of term?

 

Also would mitigate politics/reputational harm of BH/WB cross ownership in dictating a hairier long term mess of a refi or BK scenario.

 

Why doesn't this thing go down this path sooner rather than later given anything better than sitting on hands while reinvestment capex is throttled.

 

IDK, I guess with all the sophisticated counterparties here and a lot to work with in a r/s, it seems like the worst path is to continue status quo - but I am likely missing something, new to story

[Foreign Tuffett]

Good overview of the situation as it stands today from a former long:

 

https://www.fool.com/investing/2020/06/13/warren-buffett-is-making-money-on-this-reit-but-yo.aspx

[shamelesscloner]

Trying to wrap my head around the current value of those 175 wholly-owned properties. Has anyone run comps using CoStar or other commercial real estate software? Another way to value is to use Schall's estimate of $240M rental income by end 2021 and apply a conservative cap rate, but perhaps this estimate has changed significantly given recent events. Thoughts?

[Saluki]

The cumulative preferred stock isn't very liquid (sometimes the bid/ask is like 12/15), but I managed to get a couple of fills at 12.50 (25 par) and more at 13.  I still have some of the common and I rationalized it as "if I believe the common will do okay, then the preffereds should be a better bet."  If it returns to par (or gets redeemed) I'll double my money; if the common goes belly up, then after the bondholders get paid, i'll get $25 before the common get's a penny, and even if it's not a full payout, anything more than .50 on the dollar and I'll do okay and still get over 12% dividend while I wait. 

 

(I own a lot of ATCO too and I'm kicking myself that I didn't try this same magic trick when their preferreds were paying 20% in March). 

[Mephistopheles]

If it returns to par (or gets redeemed) I'll double my money; if the common goes belly up, then after the bondholders get paid, i'll get $25 before the common get's a penny, and even if it's not a full payout, anything more than .50 on the dollar and I'll do okay and still get over 12% dividend while I wait. 

 

 

The dividend is cancelled, and they're unlikely going to be paying a dividend if you're taking a 50% haircut. But I get your point, I have the same thoughts. I have some prefs and no common. I figure if they ever turn on the dividend back on, then things will be looking good and it's a near instant double + unpaid accumulated divs, whereas the common may go to 2-3x return from the current price.

 

Edit: dividend is NOT cancelled. Please ignore above

[peridotcapital]

 

The dividend is cancelled, and they're unlikely going to be paying a dividend if you're taking a 50% haircut. But I get your point, I have the same thoughts. I have some prefs and no common. I figure if they ever turn on the dividend back on, then things will be looking good and it's a near instant double + unpaid accumulated divs, whereas the common may go to 2-3x return from the current price.

 

Ummm... when did they cancel the preferred dividend? The last SEC filing was the one where they declared the Q2 payout...

[Mephistopheles]

 

The dividend is cancelled, and they're unlikely going to be paying a dividend if you're taking a 50% haircut. But I get your point, I have the same thoughts. I have some prefs and no common. I figure if they ever turn on the dividend back on, then things will be looking good and it's a near instant double + unpaid accumulated divs, whereas the common may go to 2-3x return from the current price.

 

Ummm... when did they cancel the preferred dividend? The last SEC filing was the one where they declared the Q2 payout...

 

Wow, I could have sworn I remembered them cancelling it a few months back. I must have confused for another company. Yes you are right, I just double checked.

[scorpioncapital]

I believe there were murmurs or considerations of it being cancelled. Earnings are coming out soon, maybe more update then.