SRG - Seritage Growth Properties

[RadMan24]

SRG has both crown jewel assets and multiple levers to pull to raise liquidity.

 

can you be more specific?

 

I read Third Avenue's old thesis to get an idea of the crown jewels. They pointed to Honolulu (complete and included in the numbers), Santa Monica (JV'd and unleased at the moment but the JV was at $1000/foot and will be a hiqh quality asset, San Diego (already covered) and Aventura (already covered). I then looked at the locations in every state in which i have some knowledge (ie I live in Maryland, where do they have maryland locations? I ) and couldn't find too much that inspired me. Looked in a few other states. I know the Boca location, etc.

 

Where are the jewels? and how much are they worth?

 

I have no doubt that over the long term many of SRG's locations will be and are worth more than the EV/foot or EV/eventual foot, but I struggle to see why SRG's equity holders will benefit. Berkshire's loan is in violation of covenants. Its simultaneously high enough rate to take all of SRG's economics, but too low to be attractive to PE/opportunistic capital.

 

help me out. What are the multiple levers? thus far these are the levers I see:

 

1) deferring cash interest with Berkshire so that it accrues at 9% instead of 7%

2) not paying their suppliers / (note the $25mm in increase in payables making operating cash flow look $25mm better than it would in 1H2020)

3) selling their income producing properties for a 6% cap (pretty good!) at the pace they can, but selling something at 6% to pay off something at 7% isn't super exciting

4) doing more JV's, but doubt their JV partners are looking for more, given the state of things at MAC/Brookfield (to a much lesser extent Simon)

 

Have you read the covenants and the related penalty against SRG if breached?

 

Depends how you define crown jewels, in my mind, those are turning non=income producing assets into high quality assets. Just look for examples, like here: https://chicago.curbed.com/2018/5/16/17362108/sears-redevelopment-mixed-use-six-corners and what SRG discloses its plans for residential living across 14 sites.

 

If you look at something that looks uninspiring, that's fine, move on. Do you think this example of turning parking lot acres into sq ft can't be replicated?  https://www.seritage.com/retail/property/2300-tyrone-blvd-n/3312513/landing

As an side, who cares who agrees with whom - if you listened to Gregmal and bought SPG instead of SRG you would have missed 70+ percentage points of gains in a couple of months. 

 

Regardless, there's a lease rate of high-30s. Why are folks still worried about liquidity traps, as rent collection and store openings resume? Future tenants will be of solid prospects and looking to grow. Redevelopment opportunities will take place in a post-covid world. At this point, if you don't see it, then it's too hard.

 

With all due respect RadMan24, you were making comments regarding SRG being at "attractive levels" at the end of January when the stock was between $36 and $37. Given that, I have no idea why you are criticizing anyone for being bearish and missing the pop off the COVID lows. We are all wrong sometimes, but having some degree of humility is important.

 

You can quote what I said. But your point is taken. Now if I only had concrete evidence of big leverage and liquidity problems at SRG, or an immortal thesis taking place, I'd really learn something from this forum. 

[thepupil]

Now if I only had concrete evidence of big leverage and liquidity problems at SRG, or an immortal thesis taking place, I'd really learn something from this forum.

 

- 2019 (pre-covid): -$58mm CFOA

- Fixed charge coverage <1, attaching majority of properties to the term loan, needs berkshire's permission to do things

- Putting development pipeline on hold

- talking about paying 9% PIK to conserve cash

- not paying construction folks and getting sued for it (maybe this gets better as tenants pay):

https://www.levelset.com/blog/miami-esplanade-at-aventura-23-million-construction-liens/

https://www.levelset.com/blog/westfield-broward-plantation-florida-mall-owes-9-million-construction/

https://www.levelset.com/blog/westfield-shopping-mall-faces-lien-claims/

 

what would you need to see for "big issues"?

 

there's certainly some evidence of potential problems, no?

 

do you think the LTV on the Berkshire loan has increased or decreased since underwriting?

 

I’m a little skeptical of the construction lien thing because it’s all from one source but I find it concerning that it spans geographies and contractors/ is not an isolated incident. I imagine developers and construction guys / subs get in disputes all the time, just wierd for SRG to get in disputes with several all at once (for not paying).

 

EDIT:

Is the auditor covering their ass with respect to identifying liquidity as a "critical audit matter" not a sign of a little bit of some issues? The more bullish interpretation is "they looked into it" and agree with SRG and hey there's some mention of put rights on the JV's (if these were at above market prices, that'd help SRG a lot).

 

Auditors are not investors, but they are saying that figuring out whether SRG has enough liquidity is a "challenging, subjective, and complex judgement".

 

I agree with them.

 

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Liquidity — Refer to Note 1 to the financial statements

 

Critical Audit Matter Description

 

The Company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “obligations”), and the reinvestment in and redevelopment of its properties (“development expenditures”).  As a result of a decrease in occupancy levels due to the Company’s recapture of space for redevelopment purposes and the execution of certain termination rights by Sears Holdings Corporation under a master lease agreement, property rental income, which is the Company’s primary source of operating cash flow, did not fully fund obligations incurred during the year ended December 31, 2019. Obligations are projected to continue to exceed property rental income until such time as additional tenants commence paying rent, and the Company plans to incur additional development expenditures as it continues to invest in the redevelopment of its portfolio.

 

The Company plans to fund its obligations and development expenditures with a combination of capital sources including, but not limited to, sales of wholly owned properties, sales of interests in joint venture properties (which may include the exercise of certain rights that allow the Company to sell its interests in select joint venture properties to its partners at fair market value) and potential credit and capital markets transactions.

 

We identified the Company’s liquidity disclosure as a critical audit matter because of the significant judgments in management’s plans to fund its obligations and development expenditures. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusion that it is probable the Company’s plans will be effectively implemented within one year after the date the financial statements are issued and will provide the necessary cash flows to fund the Company’s obligations and development expenditures.

How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures related to the Company’s liquidity disclosure included the following, among others:

 

We tested the effectiveness of the controls over management’s plans and related disclosures.

 

We tested management’s key assumptions, including projected rental income and property operating costs by comparing such assumptions to underlying lease agreements and historical operating costs.

 

We evaluated management’s estimates relating to redevelopment costs by comparing to underlying development plans and costs spent to date.

 

We evaluated the timing and likelihood of potential sales of wholly owned properties and exercise of put rights within select joint ventures by comparing expected proceeds to comparable market information and historical transactions effectuated by the Company, as well as evaluating the terms and conditions present in joint venture agreements, as applicable.

 

We engaged in discussions with management, including the Chief Executive Officer and Chief Financial Officer regarding management’s intent and ability to generate the planned sources of capital.

 

We evaluated management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusion reached by management.

 

 

[scorpioncapital]

srg was around 40 before covid. It seems now almost everything is approaching the pre-covid levels. Even if it doesn't reach there again for a while and reaches 20 to 25, it's still a substantial return even after the 30% gain from the 10s.

[CorpRaider]

Yeah, it's a no from me dawg.  Many thanks, however, to all who shared their thoughts in this thread!

[changegonnacome]

Pabrai has joined the fun on his 13F - not sure if thats a good or bad sign :)

[scorpioncapital]

You just have to look at what Buffett has done to see what he is thinking here.

 

1. He has bought pure equity for Berkshire in STOR. This is a solid, well run REIT. So for Berkshire he buys the highest quality investments in equity with quality management. He is not willing to put Berkshire money into anything speculative.

 

2. He lent 1.6 billion to SRG via Berkshire. A loan at high interest with the kicker of getting it all if they stumble. This is what you do when you do not fully trust the management, or you think there are more risks but still think it won't go bankrupt. Credit analysis. Worst case you get all the properties. He did it via Berkshire again, to be conservative.

 

3. He bought a *small* 6% personal stake in SRG. This smells to me of a pure speculation. As Graham has said, speculation is neither illegal nor immoral, but also not very fattening to the wallet. It was a tiny bet that it could return alot but that his loan in Berkshire is well protected anyway and the way to go on an investment basis.

 

I am on board with this reasoning. For Berkshire, participate as conservatively as possible. Personally, perhaps a small speculation. Those who buy the equity today could have a huge upside with all the Fed liquidity and return to normal, but by no stretch of the imagination is SRG top management. They have been aggressive and in an industry (mall reits) that is really distressed. If inflation hits, the equity is a great little out of the money call option (similar to shorting 30 year bonds perhaps)

[gfp]

Pabrai has joined the fun on his 13F - not sure if thats a good or bad sign :)

 

This was widely known since he filed on SRG back on June 10th.  Dalal owned 4,835,205 shares (12.52%) as of that date.

 

https://www.sec.gov/Archives/edgar/data/1549575/000154957520000008/seritage13G.txt

[thepupil]

According to FCPT calls / earnings results, they are buying at 6-6.5% cap rates.

 

 

 

FCPT Announces Second Outparcel Portfolio With Seritage Growth Properties for $27.3 million

 

Business Wire

 

MILL VALLEY, Calif. -- August 24, 2020

 

Four Corners Property Trust (NYSE:FCPT), a real estate investment trust engaged in the ownership of high-quality, net-leased restaurant properties (“FCPT” or the “Company”), is pleased to announce that it has signed an amendment to the deal originally announced on October 30, 2019, for the purchase of nine additional single tenant outparcel properties from Seritage Growth Properties (NYSE: SRG) for $27.3 million. The transaction is priced at a cap rate in a range consistent with past FCPT transactions. The transaction is expected to close in various tranches with the majority closing in 2020 and the remainder in 2021, subject to customary closing conditions and regulatory approvals.

 

The nine outparcels span four restaurant brands, three bank branches and two retail brands. The portfolio’s restaurant brands are Arby’s, BJ’s Restaurant and Brewhouse, Popeyes, and Portillo’s. The portfolio’s non-restaurant tenants are three bank branches (operated by Bank of America, Chase and Truist Bank), a Recreational Equipment, Inc. (“REI”), and an auto services center operated by American Automobile Association (“AAA”). Four of the brands (AAA, Bank of America, Chase and Truist Bank) are new to FCPT’s portfolio. The properties in this transaction have contractual rent growth, net-lease structures and strong tenancy with credit-worthy operators.

 

The retail outparcels are located within highly trafficked and populated corridors in California, Louisiana, Maryland, Michigan, South Carolina, Utah, Wisconsin and Virginia (2). Of the nine leases, eight are with the brand’s corporate entities and one is with a franchisee (Popeyes). Each property has a separate individual lease and the leases have a weighted average remaining term of approximately 9 years.

 

The aggregate portfolios between FCPT and Seritage Growth Properties totaled $96 million / 32 properties, of which $45 million / 14 properties have closed to date. After adjusting for certain properties that have been removed from the first portfolio, FCPT currently has $36 million / 13 properties remaining under contract to acquire from Seritage Growth Properties.

 

Bill Lenehan, CEO of Four Corners Property Trust, stated: “Over the past year we have been encouraged by the cooperation between FCPT and Seritage and are excited we will continue to partner together to drive value for both companies’ shareholders. This portfolio reflects strong credit and real estate consistent with FCPT’s commitment to only acquire high-quality properties.”

 

About FCPT

 

FCPT, headquartered in Mill Valley, CA, is a real estate investment trust primarily engaged in the acquisition and leasing of restaurant properties. The Company seeks to grow its portfolio by acquiring additional real estate to lease, on a net basis, for use in the restaurant and retail industries. Additional information about FCPT can be found on the website at www.fcpt.com.

[thepupil]

FCPT keeps issuing press releases about how it’s buying high quality, long term leased small assets from SRG. If SRG has a good capital structure and was clearly adding a lot of value in development, I think the case could be made that SRG is right to sell stabilized assets to deploy in higher return opps.

 

But don’t they need more NOI/stabilized assets? I get the feeling they are getting picked off because they need liquidity.

 

It seems that a rights offering or issuance would be better for long term value than selling the stuff with the best corporate guarantees and longest lease term.

 

Haven’t seen any SRG asset sales of non earning assets that would help them de-lever / slow down the treadmill of interest and cash burn. Perhaps those are on the come.

[scorpioncapital]

Good article - https://www.fool.com/investing/2020/09/04/seritage-lines-up-more-asset-sales-to-buy-time/

 

It says that they gave up 8 million in income to sell 158.9 million of assets in q1 & q2. That's a 5% yield. I would probably also take 160 million cash versus 8 million a year in income. But this may be because it is not yet developed and FCPT will increase the rents further?

[Tintin]

I'm very open-minded on Seritage, so would be grateful if somebody who's bullish could help me place a missing link in my analysis.

 

When viewed as a 'cigar-butt' investment, I can see a liquidation value margin of safety at $10 or lower after the debt's been repaid.  But where I am having more trouble is making the link between where SRG is today, and the belief that it could become a multi-bagger 10 to 20 years down the road.

 

I respect and admire a lot of the 'guru' investors who have recently ploughed into the stock, and am particularly curious about the fact that Guy Spier added to his position in Q2.  Spier by his own admission is far more risk-averse than Pabrai, and yet he added a significant tranche to his position.  So I am still on a journey to try and make the link as to how this stock becomes a long-term compounder before I file it in the 'too hard' box.

 

Phil Town recently commented that the stock has the potential upside of reaching $140 a share long-term.  I have reverse-engineered this figure as follows;

 

$140 * 55.9m shares = $7.8bn

 

Add $1.6bn of existing debt for an EV of $9.4bn

 

Assume a more optimistic long-term cap rate on well developed properties at around 6%, and we get approx $550m NOI, which can be achieved if we optimistically assume $25 rents per sq foot on 22m sq ft of GLA (this also assumes that SRG sells another 7m sq ft of GLA in the coming years).

 

Even if we assume that these reasonably optimistic assumptions play out, here is the missing link I just can't piece together right now...

 

In the latest 10Q dated June 30th, SRG states that out a total GLA of approx 29.3m sq ft (including their share of JV properties), approx 18.8m sq ft is either being redeveloped or is available for lease.  As described above, if we assume that 7m sq ft gets sold off, that still leaves 11.8m sq ft of GLA that needs significant redevelopment expenditure in order to achieve a rental figure of $25 per sq ft.

 

Assuming a 15% yield on CapEx redevelopment, SRG would have to spend $166 per sq ft in order to achieve rental income of $25.  That's almost an additional $2bn that needs to be spent on the remaining 11.8m sq ft of GLA that is currently not generating any income for Seritage.  Some of this figure is clearly going to be covered by the sale of further properties, but nowhere near enough to cover the full sum.  And that's before we even factor in the cash burn they are going through right now (although Berkshire's leeway on interest payments should cash levels fall too low will clearly give them breathing space, particularly as the rate of cash burn declined a lot in Q2).

 

Therefore, when I look at a cautious investor such as Guy Spier adding to his position, I cannot bridge the link between the 'cigar-butt' outcome, which I can see a lot more clearly, and the 'multi-bagger' outcome, which I am struggling with.

 

Have I made erroneous assumptions regarding the redevelopment build costs?  Is it actually the case that a substantial number of the remaining properties are already in much better condition than I am envisaging, thereby requiring significantly less average redevelopment costs of $166 per sq ft?

 

I don't want to throw in the towel on this just yet so would appreciate any insights into where you might think I am going wrong.  Thank you.

[stahleyp]

Town and Spier are gurus? Man, the guru standard has really gone down hill lately.

 

Has Town ever published performance?

 

I'm pretty sure Spier hasn't beaten the index by much (if any) since he started in 1997.

[thepupil]

Tintin, nice first post and welcome!

 

Agree completely with your conclusion.

 

I think you either have to

 

a) own the stock and be comfortable with a rights / equity offering (or maybe more than one) to bridge the gap

 

b) wait to see what happens / not own the stock

 

c) explicitly identify how they delever.

 

I decided I couldn’t do C (see a few post back) after reviewing the assets, albeit over a weekend, so maybe the gurus have done better work.

 

so I am in camp B, recognizing that camp A may be right.

 

Enough cheap RE out there to not deal with an inability to figure out th eventual capital structure / path to sustainability. It obviously doesn’t have the scale of non earning assets / development, but I thin UE is much more straightforward / safer and I think CDR is a levered option with multibagger opportunity on a refi/liquidity bridge for crappy strip centers. I think these two are an interesting barbell as it relates to strip center / outparcel play. SRG has some stuff that’s in a different class (like their Santa Monica office asset) so they aren’t directly comparable.

 

 

[Saluki]

I wouldn't buy a pair of socks based on Phil Town's recommendation.  I know he made a lot of money public speaking and selling books but his claims of vast success in picking stocks (without providing evidence to back it up) seems dubious at best.

 

I own some SRG from when it was higher and didn't sell (or buy more) when it tanked.  I posted in the "what are you buying now" thread about getting some of the cumulative preferreds ($25 par). I got a couple of fills as low as $12.50 (13% dividend at that price) but not a lot of  volume of the preferreds trade and that dip didn't last very long.  It's almost $20 now (yielding 9.6%), so i'm not buying more now, but if you believe in the common, then the preferreds are a no-brainer to put on your watch list if they dip again, or if you just want a place to park some money.  I think they eventually get their financing sorted and money is so cheap now that they can call the preferreds at par in a couple of years.  If they suspend the dividend, they can't pay any dividend on the common until the preferreds are current and if they call the preferreds, they have to pay all the dividends in arrears.  Also, if they go under the preferreds have a $25 liquidation preference. 

[BG2008]

Money is cheap for companies that doesn't have perceived terminal risk 

The credit market is bifurcated into 1-3% cost of debt for those that are sustainable and growing even just 1-2% a year for the foreseeable future and usurious rates for assets that are deemed to have 10-15 year lives

 

I don't know what the psychological phenomenon is called.  Maybe there is a name for it.  People constantly ask me for my opinions on SRG and retail real estate investing in general.  I was approached by 20 people at an event once for my opinion on SRG.  It is almost like people are seeking confirmation that it is a good investment.  When I tell them I don't like it because it's just too hard for me.  The Amazon risk is too high.  Developments are risky.  Shit happens.  They somehow justifies it with Buffet/Munger, potential multi-bagger etc.  It is the most bizarre and weirdest psychological reaction.  I am probably being an asshole for pointing this out.  But it's a very peculiar phenomenon that I only observe with SRG, mall and retail real estate investing.  It's almost like people have made up their mind already and when I offer the bear case, they find a way to refute it.  I think I need to permanently walk around with a sign that says "no opinions on retail real estate investing."     

 

Maybe, the problem is that I am the asshole and I constantly project my negative views on SRG and I need to shut the F up.  No one needs a Debbie Downer.   

 

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.   

[Gregmal]

Money is cheap for companies that doesn't have perceived terminal risk 

The credit market is bifurcated into 1-3% cost of debt for those that are sustainable and growing even just 1-2% a year for the foreseeable future and usurious rates for assets that are deemed to have 10-15 year lives

 

I don't know what the psychological phenomenon is called.  Maybe there is a name for it.  People constantly ask me for my opinions on SRG and retail real estate investing in general.  I was approached by 20 people at an event once for my opinion on SRG.  It is almost like people are seeking confirmation that it is a good investment.  When I tell them I don't like it because it's just too hard for me.  The Amazon risk is too high.  Developments are risky.  Shit happens.  They somehow justifies it with Buffet/Munger, potential multi-bagger etc.  It is the most bizarre and weirdest psychological reaction.  I am probably being an asshole for pointing this out.  But it's a very peculiar phenomenon that I only observe with SRG, mall and retail real estate investing.  It's almost like people have made up their mind already and when I offer the bear case, they find a way to refute it.  I think I need to permanently walk around with a sign that says "no opinions on retail real estate investing."     

 

Maybe, the problem is that I am the asshole and I constantly project my negative views on SRG and I need to shut the F up.  No one needs a Debbie Downer.   

 

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade. 

 

Keep being as asshole. Its informative.

 

The phenomena is easily explained as the Ghosts of Sear's past. All the lunacy and delusional there just carried its way into this, probably because there is nothing left over there. Combining what you and pupil have said, why bother here? If you have something that may at best resemble some combo of UE or SPG or something in between, why not just go there? And if you want some high leverage bet, why not just go to those and buy slightly in the money LEAPs?

[Foreign Tuffett]

CFO just sold 10K shares

 

https://www.sec.gov/Archives/edgar/data/1600056/000089534520000914/xslF345X03/form4.xml

[RadMan24]

I'm very open-minded on Seritage, so would be grateful if somebody who's bullish could help me place a missing link in my analysis.

 

When viewed as a 'cigar-butt' investment, I can see a liquidation value margin of safety at $10 or lower after the debt's been repaid.  But where I am having more trouble is making the link between where SRG is today, and the belief that it could become a multi-bagger 10 to 20 years down the road.

 

I respect and admire a lot of the 'guru' investors who have recently ploughed into the stock, and am particularly curious about the fact that Guy Spier added to his position in Q2.  Spier by his own admission is far more risk-averse than Pabrai, and yet he added a significant tranche to his position.  So I am still on a journey to try and make the link as to how this stock becomes a long-term compounder before I file it in the 'too hard' box.

 

Phil Town recently commented that the stock has the potential upside of reaching $140 a share long-term.  I have reverse-engineered this figure as follows;

 

$140 * 55.9m shares = $7.8bn

 

Add $1.6bn of existing debt for an EV of $9.4bn

 

Assume a more optimistic long-term cap rate on well developed properties at around 6%, and we get approx $550m NOI, which can be achieved if we optimistically assume $25 rents per sq foot on 22m sq ft of GLA (this also assumes that SRG sells another 7m sq ft of GLA in the coming years).

 

Even if we assume that these reasonably optimistic assumptions play out, here is the missing link I just can't piece together right now...

 

In the latest 10Q dated June 30th, SRG states that out a total GLA of approx 29.3m sq ft (including their share of JV properties), approx 18.8m sq ft is either being redeveloped or is available for lease.  As described above, if we assume that 7m sq ft gets sold off, that still leaves 11.8m sq ft of GLA that needs significant redevelopment expenditure in order to achieve a rental figure of $25 per sq ft.

 

Assuming a 15% yield on CapEx redevelopment, SRG would have to spend $166 per sq ft in order to achieve rental income of $25.  That's almost an additional $2bn that needs to be spent on the remaining 11.8m sq ft of GLA that is currently not generating any income for Seritage.  Some of this figure is clearly going to be covered by the sale of further properties, but nowhere near enough to cover the full sum.  And that's before we even factor in the cash burn they are going through right now (although Berkshire's leeway on interest payments should cash levels fall too low will clearly give them breathing space, particularly as the rate of cash burn declined a lot in Q2).

 

Therefore, when I look at a cautious investor such as Guy Spier adding to his position, I cannot bridge the link between the 'cigar-butt' outcome, which I can see a lot more clearly, and the 'multi-bagger' outcome, which I am struggling with.

 

Have I made erroneous assumptions regarding the redevelopment build costs?  Is it actually the case that a substantial number of the remaining properties are already in much better condition than I am envisaging, thereby requiring significantly less average redevelopment costs of $166 per sq ft?

 

I don't want to throw in the towel on this just yet so would appreciate any insights into where you might think I am going wrong.  Thank you.

 

Hi Tintin, great post and questions. This is no doubt a butting-heads investment idea.

 

One of the initial thesis of SRG is location. A lot of Sear's real estate sits on prime entrance locations.

 

Second, redevelopment. While some say there's a lot of risk, etc., redevelopment is nothing new in the real estate industry. It's all around us.

 

Third, densification - the acres of parking lots and any future vertical growth of properties are not accounted for in today's sq ft.

 

The vast majority of SRG's tenants from here on out will be "pandemic survivors" and redevelopments tailored to the "new normal."

 

SRG has released tentative plans for multi-purpose developments as well, worth trying to understand how those opportunities might pan out, estimate a valuation when complete, and how many of those exist in SRG's portfolio, and capex needs for each one. Do note that SRG has been reported to have sold off its Chicago assets it was working on.

 

Best of luck,

 

Edit: added note about chicago projects

[Mephistopheles]

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.   

 

Thanks for the shout out. And for the GRIF suggestion, many people on the board have made a lot of $$$ because of it.

 

The one thing that stood out to me from what you said on the M thread was : "I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. "

 

So true, you can see even now Macy's insists on continuing a retail footprint. Except now it's a more dire position that even if they wanted to monetize the RE, they are behind everyone else who is trying to do the same. On top of that they've encumbered the RE at an expensive rate.

[BG2008]

The one investor who did acknowledge my suggestion is Mephistopheles from the Macy's thread.  I think he actually bought some GRIF when I suggested to invest in warehouses rather than retail real estate.  We can probably write a case study on all the money lost on Department store real estate plays in the last decade.   

 

Thanks for the shout out. And for the GRIF suggestion, many people on the board have made a lot of $$$ because of it.

 

The one thing that stood out to me from what you said on the M thread was : "I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. "

 

So true, you can see even now Macy's insists on continuing a retail footprint. Except now it's a more dire position that even if they wanted to monetize the RE, they are behind everyone else who is trying to do the same. On top of that they've encumbered the RE at an expensive rate.

 

When I was a little greener in this business, I always  asked "what do the older guys know that I don't?"  I used to get into pretty heated argument with a friend who is extremely intelligent and usually right.  He relied on his reasoning abilities.  But there are certain things that older guys have seen and they just know.  After a few rodeos, you know that Nikola looks like a scam.  After a few "deep asset value", you realize that these CEOs won't throw in the towels.  I find it extremely helpful to ask older investors who they saw.  Now, I am also thumb sucking because I missed out on opportunities like Goog, FB, and Amzn because I drew too much from Pets.com.  Someone who is 10 years younger probably won't have memories of late 90s bubble and the 08 bubble.  They grow up in a world of smart phones.  So it all intuitively makes sense.  The stuff that is possible, the targeted ads etc have been talked about 20-25 years ago.  But not everyone has a smart phone back then.  The hardware and software weren't there.  I was too skeptical when they actually become possible. 

[Tintin]

I wouldn't buy a pair of socks based on Phil Town's recommendation.  I know he made a lot of money public speaking and selling books but his claims of vast success in picking stocks (without providing evidence to back it up) seems dubious at best.

 

I own some SRG from when it was higher and didn't sell (or buy more) when it tanked.  I posted in the "what are you buying now" thread about getting some of the cumulative preferreds ($25 par). I got a couple of fills as low as $12.50 (13% dividend at that price) but not a lot of  volume of the preferreds trade and that dip didn't last very long.  It's almost $20 now (yielding 9.6%), so i'm not buying more now, but if you believe in the common, then the preferreds are a no-brainer to put on your watch list if they dip again, or if you just want a place to park some money.  I think they eventually get their financing sorted and money is so cheap now that they can call the preferreds at par in a couple of years.  If they suspend the dividend, they can't pay any dividend on the common until the preferreds are current and if they call the preferreds, they have to pay all the dividends in arrears.  Also, if they go under the preferreds have a $25 liquidation preference.

 

Agree that the preferreds would be an interesting play.  Here is my take on them - SRG cannot redeem them until December 2022, and even if real estate retail values tanked (which would lead to the preferreds trading well below par value beyond that date) the likelihood of near zero interest rates beyond 2022 would almost certainly lead SRG to redeem them.  Why continue to pay at 7% if you might be able to borrow for half that rate?  On this basis would it be fair to assume that preferred share holders almost certainly get their $25 back in December 2022?

[thepupil]

Here's my take:

 

SRG capital structure may need to change.

 

$1.6B-$2B <--Berkshire Hathaway

$70mm    <--Preferred owned by a bunch of scattered retail/diversified funds

 

Common Equity (ESL and others)

 

Restructurings are zero sum and it seems that there's no one to look out for that little old preferred's interest. That said, because it's so small, there's not a huge reward to be had in screwing them either.

 

I don't see why they necessarily take out the preferred at call date. I would say it's paying a BELOW market coupon for an illiquid, highly subordinated orphan in the capital structure. I'd underwrite it as a perpetual and hope they raise common to de-risk you, rather than, for example, issue to the common shareholders a right to buy a convert that pays down the Berkshire loan partially in exchange for a lower coupon and refinance/extension (which would kick preferred and non-participating commons to the back of the line)

 

That's what I'd do if I was Eddie and crew and SRG needed cash.

 

[Gregmal]

https://therealdeal.com/miami/2020/10/16/seritage-sells-hialeah-shopping-center-for-21m/

 

Interesting transaction here. Noticed they've been doing a bunch with Four Corners as well.

 

Perhaps interesting in the context of develop..sale/leaseback strategy. Typically you see these trade much differently. I would imagine they are probably getting better value being on the hook for a longer duration and a "guaranteed" clip. But the downside is obviously that you see Bed and Bath close, or another big tenant or two leave and you're bleeding out again. Time will tell I suppose. If I'm buying the asset from them, I like this. If I'm SRG, I guess its better than not sell it at all or selling it straight up(high cap/less cash). My understanding is that down the line they can buyout the lease as well...typical of developers looking for liquidity.

[thepupil]

The cynic in me says it’s a way to keep gross leasing revenue (a key metric wrt getting more cash from Berkshire) while printing a lower looking cap rate. Until we know more though, tough to conclude much.

[davel]

Hi guys,

 

I also started looking into SRG, but already stumbled when looking at their revenues vs. annual base rents (ABR).

In the attached image I plotted the ttm revenues, the total annual base rent as well as the annual base rent from only open properties (counting Sears and diversified but excl. signed-not-open (SNO)).

 

In their 2019 AR they define the following:

Revenue Recognition: Rental income is comprised of base rent and reimbursements of property operating expenses. Base rent is recognized on a straight-line basis over the non-cancelable terms of the related leases.

Revenue recognition under a lease begins when the lessee takes control of the physical use of the leased asset.

Annual Base Rent: [ABR is] based on signed leases and including JV Properties presented at the Company's proportional share.

 

Now I'm surprised by the fact that the ttm revenue can be so much higher than the annual base rent of the open properties. The one reason I see is that revenue is also recognized for properties which are SNO. It seems however strange to me that lessees would take control of the physical asset but not open it asap to generate revenues - so I don't think that's very realistic.

Also ABRs include SRG's share of JVs, while the revenues don't include this share. This is another fact, which should drive ABRs higher relative to revenues.

 

It is very possible, that I misunderstand their accounting/definition of ABR/revenues. So any clues on this one would be much appreciated!