SRG - Seritage Growth Properties

[thepupil]

39 minutes ago, thepupil said:

I agree w/ Greg /#3 and in fact see this as a potential (positive) catalyst for SRG but also one that cuts off the tail upside scenario to a degree.

 

I think a reasonable outcome would be Berkshire converts its $1.6B loan to 2 instruments: and $800-$1B loan that attaches to the stabilized portfolio and is prepayable at par with asset sales / and or refinancing. you could justify a 5-6% rate for this (2% above market to pay berkshire for the trouble of providing a scale solution) and then some sort of mezz/pref that enjoys a higher return.

 

You pay off the senior w/ mortgages/asset level financings over time (probably can't do this all at once, Berkshire is basically providing a senior bridge loan to permanent financing. it's honestly confusing to me why SRG hasn't been doing any partial paydowns w/ mortgages, I would think Berkshire would approve getting 60 cents back on the stabilized asset value as it would still have a lien on the equity of any property and would de-risk. 

 

That leaves $600-$800mm. Think you raise $200-600 million to add more equity to cap structure via rights offering/ equity offering and use to fund development, pay off the berkshire mezz w/ asset level financings from that.

 

you'd end up w/ 20-50% more shares and a more sustainable cap structure that can self fund development. 

 

 

 

 

 

 

 even penciling this out, it's hard for me to get there: 

 

$800mm senior mortgage @ 4.5% / 30 yr amort = $50mm / year of debt service

$400mm of mezz at 10% PIK = $40mm / year. 

$1.6B of common equity (following a $400mm raise) 

$2.8B EV

 

this cuts interest expense to $76mm, you'd have $30mm of g&a, so $105mm of carrying costs, let's say you get NOI to $150mm w/o much capex as a bunch of things lease up, so that gets you to a like a 3-4% FFO yield ($150mm -$76mm-$30mm) which isn't at all interesting. At $200mm NOI ($200-$105mm= $95mm) = 18x FFO, myeh. and you still don't have that much to fund development with / still reliant on external capital 

 

 

 

 

 

 

Edited June 10, 2021 by thepupil

[tiddman]

1 hour ago, samwise said:

What would BRK do if SRG can't pay back when the loan comes due? As the experienced real estate investors here have said, SRG hasn't yet stabilized a single asset and raised a low rate mortgage in the normal RE market (possibly the JVs were stabilized, but those were sold). 

 

Trying to see where you are getting that from. You can see the properties listed and the 35-40 properties that have occupancy 80-100% and so are probably pretty stabilized. Are you saying that they have not refinanced any of them?

 

My assumption has been that the terms of the Berkshire financing are that it is secured by the properties and it is a term loan so they can't refinance properties and use the proceeds to pay down some of the debt; it isn't a revolver or line of credit. A line would probably be more flexible and advantageous to SRG but that isn't what they have.

 

I am also not sure the extent to which Buffett has been or needs to be personally involved in what is a very small investment for Berkshire. If things at SRG went south, the loan is secured by the assets and so Berkshire could theoretically foreclose. I doubt they have any interest in getting involved in real estate operations so most likely would either give some concessions on the loan in exchange for greater collateral or probably package and sell the company and the assets (my speculation). This is the kind of thing that I'd expect Abel to handle or delegate post-Buffett.

[samwise]

5 minutes ago, tiddman said:

 

Trying to see where you are getting that from.

 

No in-depth research (hey I'm a spectator here), but seemed reasonable to me because: Its the cheapest form of financing but they haven't used it.  They could do it with BRK approval. BRK keeps approving asset sales, so why not allow a mortgage to finance Capex? My only explanation is that they mostly have partially leased assets, almost none that could be financed as stabilized.

 

So your comment made me check here: http://s23.q4cdn.com/949579163/files/doc_financials/2021/q1/v3/Supplemental-Ex-99.2-Final-(1).pdf

 

By my count they have 21 properties (of various sizes) > 90% leased. +1 (only!) in the JVs. Presumably these could be mortgaged.

They have 79 properties at 0.0% leasing, presumably emptied to redevelop. Or dead.

 

Their balance sheet in the AR shows Mortgage loans repayable of 34.6M. I couldn't make out what those are, but not enough to move the needle of financing needs.

 

I also found the reason they haven't been able to raise much cash via mortgages. Its in the annual report. BRK requested all the mortgages as part of the term loan in 2019 and the rest in 2020 as SRG failed its covenants. see commentary on page F-30. http://s23.q4cdn.com/949579163/files/doc_financials/2020/ar/Seritage-Annual-Reportv5.pdf

 

So this looks like half of a good business (ignoring price): lots of places to reinvest at 15% ROE, but no funds to reinvest and no-one who will give you those funds, except BRK. The mortgage option seems off the table. Seems there will be dilution for shareholders, or whatever else BRK decides is best.

[tiddman]

Just looking at the list in the 10-K I see 20 props 100% leased, 8 at 90-99% and 11 at 80-89%. Rental revenues are around $31M/quarter.

 

What you found is consistent with what I was thinking. BRK is in a first lien position and is secured by the assets and has to approve sales etc. It's one big term loan which is not ideal but the rate isn't too bad and should have given them enough capital to get over the hump but not quite.

 

And I agree with your overall assessment. They've mostly completed about 40% of their redevelopment, the rest is in various stages and some has not been started. The carrying costs of this are low but the development requires capital. The completed properties seem to be doing fine and represent a 10%+ unlevered ROE and there is probably decent equity there. But they're stuck in the middle, not enough properties developed to produce substantial cash flow or refinance their debt and not enough funding to complete the rest. So they're going to need another round of funding of some sort. The $400m of incremental financing from BRK would have helped but they could not get that in part because of the timing of the pandemic.

 

It is not in BRK's interest to play hard ball and prevent them from monetizing any assets or raising capital but they want their loan to be secure. They won't let any lender in front of them so the company has to find 2nd lien or equity financing. Lampert theoretically has the capital but somehow he always does 10 things that don't make sense for every thing he does that makes sense. Something like a $500-1000M line of credit or equity financing would probably be all it takes to get them over the hump.

Edited June 10, 2021 by tiddman

[samwise]

23 hours ago, thepupil said:

w/ 20-50% more shares

 even penciling this out, it's hard for me to get there: 

 

 ....you still don't have that much to fund development with / still reliant on external capital 

Then you need 100% more shares, which raises 1B @ current price, which tiddman also thought was enough "to get over the hump".

 

Now ESL (the man) hates issuing shares (except maybe to himself). So lets see what happens here.

 

@tiddman why do you think they have done 40% of their redevelopment? That would leave very little upside isn't it?

[peridotcapital]

On 6/9/2021 at 11:05 AM, tiddman said:

The bear theses I have heard do not seem to understand the value creation or development pipeline. They usually pick "B" mall REIT comps like CBL and PREIT, which are already struggling, and show that SRG's metrics/ratios/profitability are even worse than those, and conclude that SRG is headed out of business. This is often on the backdrop of assumptions that "retail is dead", "malls are dead" and "the Amazon effect". But as I noted I don't think these companies are comps at all, and I personally don't think retail is dead either.

 

To say that the costs of undeveloped space will outpace value creation only makes sense if the development either stops or is not successful since the see saw has been tipping for years. But I think it's not really debatable that they have executed their developments very well and have found good markets for JV's, leasing and selling and they have basically severed their ties with Sears.

 

I am not an ardent SRG bull necessarily but I have not heard a coherent bear thesis. The two main risks are in the execution of the development pipeline and that they either run out of funding or the cost of funding becomes so high that it is uneconomic to shareholders for example if they have to borrow at 12-15% or if they have to heavily dilute the common. I have not seen either of these things yet though as I noted I do think they are going to have to raise more funding at some point relatively soon.

 

The pandemic came at a really bad time for them because they were near an inflection point, and it disrupted not only their rent collections but their development pipeline. 2020 was pretty much a disaster but they appear to be intact currently and the economic environment for the next few years is very much in their favor.

 

 

I think a really simple bear thesis is that it will be hard for equity holders to earn outsized returns if they are paying ~$100/sf (at the current $19 stock price) for a portfolio that:

 

1) Is less than 30% leased

2) Had development costs estimated at ~$150/sf before additional labor and material cost pressures recently surfaced

3) Generates sub-$20/sf rents on new leases

 

It is hard to see how the equity will double or triple from here when your all-in starting cost today (current E/V plus future development spend) is probably pushing $275/sf (a 14x multiple on rent). The bear case really does not have to contemplate a bankruptcy or a forced restructuring of any kind.

 

[Pistachio_Lawyer]

I am not sure if this link has been shared here before, but here is an interesting and rather outdated presentation on SRG holdings:
Seritage Growth Properties (SRG) Investor Presentation - Slideshow (NYSE:SRG) | Seeking Alpha 

The management slides project an annual revenue figure of $235mil/yr generated from leasing activities on 13.1mil sf (1/3rd of the SRG portfolio).

SRG owns a total 33.6m sf. Lets ignore management's proposed lease figures for a sec and put all properties into one basket. We'll assume SRG does not own any premium real estate and all properties will be leased out at a fixed $5/sf.  If management can deliver on $5/sf, SRG is looking at $178mil/yr in revenues. As of April 2021, revenue figure is at $31.9mil/yr. Multiply this projected figure by 5.5 and you get ~$175mil/yr. 

To me, even if they fail to meet BRK loan terms, the downside doesn't look too bad. The upside is a 5x on revenue. What am I missing here?
 

[thepupil]

1 hour ago, Pistachio_Lawyer said:

 As of April 2021, revenue figure is at $31.9mil/yr. Multiply this projected figure by 5.5 and you get ~$175mil/yr. 

 

$31mm is the quarterly revenue, not yearly. 

 

as of last q, SRG's properties had $31mm of revenue ($120mm annualized), $20mm of property taxes and operating costs ($80mm annualized) or $40mm of net operating income on an annualized basis. They have about the same in corporate g&a costs ($40mm /year). things will presumable get better as they lease up the properties, just a question of how quickly they can. 

 

I don't really follow what you're talking about regarding the stuff about multiplying revenue.

 

 

[RetroRanger]

 

Very good Presentation, enough said

[thepupil]

probably best IR that SRG has done in my time following it.

 

Seems like a legitimate strategy shift and that she understands the problems and will take the necessary steps to address them. reading tea leaves, seems like a big portfolio sale of non-core is coming (rather than the slow bleed) is coming. 

 

I think the downside scenario of just a slow bleed where they fully fund mediocre developments while selling one off assets for 7 caps, all the while paying any meager value creation to berkshire, is a lower probability than before new mgt / Olshan came on. 

 

i think they could help themselves by disclosing more info on the 6 sub portfolios as she is asking investors to value those and is trying to highlight the value thereof. It would be easier if they broke down the portfolios by revenue / NOI, but perhaps they won't need to if there's a big asset sale coming. 

 

 

[RetroRanger]

50 minutes ago, thepupil said:

probably best IR that SRG has done in my time following it.

 

Seems like a legitimate strategy shift and that she understands the problems and will take the necessary steps to address them. reading tea leaves, seems like a big portfolio sale of non-core is coming (rather than the slow bleed) is coming. 

 

I think the downside scenario of just a slow bleed where they fully fund mediocre developments while selling one off assets for 7 caps, all the while paying any meager value creation to berkshire, is a lower probability than before new mgt / Olshan came on. 

 

i think they could help themselves by disclosing more info on the 6 sub portfolios as she is asking investors to value those and is trying to highlight the value thereof. It would be easier if they broke down the portfolios by revenue / NOI, but perhaps they won't need to if there's a big asset sale coming. 

 

 

Yes we will see if those words will follows actions. And yes probably 1-2 big asset sales are coming. Its also interesting how "failed" projects now shifted to an even better planing than before. So even with a "easy" business IT seems good good Management is crucial for the success Herr!