SRG - Seritage Growth Properties

[koshigoe]

Today's SCHEDULE 14A says the annual meeting is in NY on April 25th.  Is anyone going?

 

I'm interested in going, but will have to fly in from Chicago. I'm guessing it won't be a dog and pony show like a Coke meeting considering the below the radar nature, maybe we can ask about why they pay the dividend?!

Found this helpful guide while researching http://www.concernedshareholders.com/CCS_ShareholderQuestions.pdf

[Mephistopheles]

Today's SCHEDULE 14A says the annual meeting is in NY on April 25th.  Is anyone going?

 

I'm interested in going, but will have to fly in from Chicago. I'm guessing it won't be a dog and pony show like a Coke meeting considering the below the radar nature, maybe we can ask about why they pay the dividend?!

Found this helpful guide while researching http://www.concernedshareholders.com/CCS_ShareholderQuestions.pdf

 

Someone on this board called management and asked them the dividend question. They basically said some bullshit like "all REITs pay dividends".

 

I believe the real reason is because dividends vest immediately on their restricted stock whereas the stock doesn't vest unless it's above a certain price by a certain date.

[CorpRaider]

EQC pay no divvy.  Is buying back stock tho.

[scorpioncapital]

There's some truth that all REITs pay dividends. Aren't they by law required to pay out 90% of profits each year? I.e. they can't have retained earnings? But I wasn't clear if this is net income or NOI. For example, SRG shows a net loss figure of $51 millionn in 2016 but if you back out certain non-cash charges and look at the cash-flow statement,  it is in fact earning an operating profit of $92 million for 2016.

 

[SlowAppreciation]

There's some truth that all REITs pay dividends. Aren't they by law required to pay out 90% of profits each year? I.e. they can't have retained earnings? But I wasn't clear if this is net income or NOI. For example, SRG shows a net loss figure of $51 millionn in 2016 but if you back out certain non-cash charges and look at the cash-flow statement,  it is in fact earning an operating profit of $92 million for 2016.

 

I'd be surprised if they were required to pay out 90% of a non-GAAP number? But I don't really know one way or the other

[scorpioncapital]

Yes I think you're right. I read that it is taxable income that should be distributed to not be taxed. And depreciation expense is deducted from taxable income. However, some websites write, "REITs also distribute money from operating profits that are currently tax sheltered by depreciation and other deductions. These payments are considered a return of capital that lowers one's cost basis. If an investor holds the REIT for more than one year, it is fair to assume that the return-of-capital adjustments to basis give rise to long-term gains taxed at a favorable rate. In 2013, return-of-capital distributions constituted 14% of REIT payments". I'm now wondering if the SRG dividend is in fact an income taxable dividend or adjusts the cost basis of your shares.

 

 

[SlowAppreciation]

Yes I think you're right. I read that it is taxable income that should be distributed to not be taxed. And depreciation expense is deducted from taxable income. However, some websites write, "REITs also distribute money from operating profits that are currently tax sheltered by depreciation and other deductions. These payments are considered a return of capital that lowers one's cost basis. If an investor holds the REIT for more than one year, it is fair to assume that the return-of-capital adjustments to basis give rise to long-term gains taxed at a favorable rate. In 2013, return-of-capital distributions constituted 14% of REIT payments". I'm now wondering if the SRG dividend is in fact an income taxable dividend or adjusts the cost basis of your shares.

 

Hmm interesting. I found this:

 

"What determines the breakdown of each distribution? Put simply, the REIT's earnings and profits and its business activities in general. A REIT generates earnings and profits. To the extent that it makes distributions out of these earnings and profits, this portion is taxable to unit holders at their ordinary income levels. To the extent that the REIT makes distributions that result from the sale of capital assets -- such as buildings -- this portion will be taxable to unit holders at long term capital gains rates. Finally, to the extent that the REIT makes distributions in excess of earnings and profits, this portion constitutes a return of capital. Why would a REIT make a distribution in excess of earnings and profits? There are a variety of reasons. A REIT that suffered a sharp decline in funds from operations, for example, might make a distribution with an unusually large "return of capital" component. REITs tend to avoid cutting back on distributions. As a result, a REIT facing a fairly unprofitable year but with a traditionally high distribution rate would necessarily need to draw on investors' capital to make the distributions."

 

I guess because GAAP income is negative, dividends are in excess and therefore considered return of capital? Odd since I my brokerage doesn't treat it as such.

 

I've got SRG in a rIRA so I think I'll need to figure this out. If memory serves me correctly, return of capital and Roth IRAs have some weird rules.

[koshigoe]

The reit.com website has the dividend classification, looks like ordinary income for seritage and not return of capital, but I'm not sure why.

 

https://www.reit.com/data-research/data/year-end-tax-reporting-data/2016/seritage-growth-properties

[scorpioncapital]

Yeah same here and I did see on bogleheads wiki (https://www.bogleheads.org/wiki/Return_of_capital_distribution):

 

"In the case of equity REIT funds, the return of capital distribution mainly reflects the accounting value of real estate depreciation (operating earnings are in excess of earnings including depreciation). As most dividends distributed by equity REITS are non-qualified dividends, taxed at marginal rates, the return of capital dividend serves, for taxable account investors, to both defer taxation and to switch the taxation of the distribution from marginal rates to usually lower capital gains rates"

 

Maybe there's an esoteric reason one can ask at the AGM - or you have to make a special election?

[SlowAppreciation]

Another new VIC writeup

 

https://valueinvestorsclub.com/idea/SERITAGE_GROWTH_PROPERTIES/139715

[beaufort]

I think the latest VIC write up captures the current situation very well.

 

As a shareholder, I am also encouraged by the reported significant short interest.  This will fuel the fire for gains eventually.

[CorpRaider]

Statistically, historically, (in the academic literature and elsewhere) high short interest is a correlated with underperformance, right?

 

<Edited to clarify>

[beaufort]

I think I understand the question. 

My anecdotal perspective is that short interest has always been bigly, but it has gone up somewhat.

[aalexa1225]

Can someone share the VIC investor write up?

 

AOA

[LongTermView]

This part of that latest VIC writeup is important:

at some point, it will be highly accretive to Seritage if Sears vacates all of the space in the SRG portfolio (either voluntarily or in bankruptcy). In the very short term, the loss of operating income might prove challenging. In the long run, however, if you believe in the redevelopment proposition and the value of the underlying real estate, it would be far more valuable to be able to reclaim 100% of the Sears GLA than just 50% at most locations where Sears is paying rent that is meaningfully below market rates.

 

It is kind of related to a point made in today's https://www.wsj.com/articles/surprise-outlet-malls-are-hot-1490094007 article:

The strong performance is partly due to the lack of department stores such as Macy’s, Sears or J.C. Penney in outlet centers, which cater to individual brands such as Coach Inc.

[koshigoe]

It's interesting that arguably one the best investment ideas in the current market could also be one of the most highly shorted stocks on the entire NYSE.

 

Sort of smells like the Wash Po opportunity in the mid 1970s when everyone knew it was worth 4x but no one bought except for those like Buffett and Berkshire

[beaufort]

I am not familiar with academic literature on short interest correlations.  I will paraphrase Buffett and say that we pay a hefty price for a cheerful consensus. 

[koshigoe]

Looks like Seritage has improved their website and added more details on development plans at a few locations. Has anyone participated in a stock yield enhancement program, loaning out their shares to shorts?

[beaufort]

The updated website looks great.  Not sure about lending out shares because IB won't let me do it in Canada.

 

I am also wondering whether we might see Seritage buy the next 1B in RE that Sears says it is shopping around.  The timeline would presumably be in the next year or so given Sears' cash burn.

[Mephistopheles]

The updated website looks great.  Not sure about lending out shares because IB won't let me do it in Canada.

 

I am also wondering whether we might see Seritage buy the next 1B in RE that Sears says it is shopping around.  The timeline would presumably be in the next year or so given Sears' cash burn.

 

I doubt it. They already have I think ~$500 million, going off of memory of development costs in the pipeline that they will need to fund. And you can bet Sears will be closing 100s more stores that they will have on their lap in the next year or two. Don't really have the capital to take on more stores.

[Spekulatius]

The updated website looks great.  Not sure about lending out shares because IB won't let me do it in Canada.

 

I am also wondering whether we might see Seritage buy the next 1B in RE that Sears says it is shopping around.  The timeline would presumably be in the next year or so given Sears' cash burn.

 

I doubt it. They already have I think ~$500 million, going off of memory of development costs in the pipeline that they will need to fund. And you can bet Sears will be closing 100s more stores that they will have on their lap in the next year or two. Don't really have the capital to take on more stores.

 

I think they will raise equity fairly soon. SRG will do a rights offering and Eddie will backstop it. I actually think they should do it now, before SHLD goes belly up.

[muscleman]

https://www.wsj.com/articles/short-sellers-pounce-on-sears-landlord-1490912176

[BTShine]

Shorting a stock that Buffett owns... ¯\_(ツ)_/¯

[Spekulatius]

Shorting a stock that Buffett owns... ¯\_(ツ)_/¯

 

It makes no sense to me either. This stock is owned by deep pocketed investors, not retail. I think folks short this as a derivative play of an SHLD short, because the borrow is way cheaper and there is more liquidity. It's appears a pretty stupid play, because a Sears bankruptcy will in my opinion not impact the investment thesis and in fact even may accelerate the value creation. I would laugh if SRG on the day of SHLD bankruptcy announcement gaps down $3 and then recovers the losses before the day is over. Wouldn't surprise me the least and I don't think there are quite a few in investors willing to step in when SRG shares fall, but what do I know.

 

disclosure: I don't own SRG

[tylerdurden]

Shorting a stock that Buffett owns... ¯\_(ツ)_/¯

 

It makes no sense to me either. This stock is owned by deep pocketed investors, not retail. I think folks short this as a derivative play of an SHLD short, because the borrow is way cheaper and there is more liquidity. It's appears a pretty stupid play, because a Sears bankruptcy will in my opinion not impact the investment thesis and in fact even may accelerate the value creation. I would laugh if SRG on the day of SHLD bankruptcy announcement gaps down $3 and then recovers the losses before the day is over. Wouldn't surprise me the least and I don't think there are quite a few in investors willing to step in when SRG shares fall, but what do I know.

 

disclosure: I don't own SRG

 

Don't you think SRG still needs some time to develop more properties to have the cash flows to stand by its own? If we see a Sears bankruptcy too soon, SRG might have to hold the bag with too many undeveloped properties and their existing costs etc. Perhaps you think SRG is already pass this point, not sure...