SRG - Seritage Growth Properties

[SlowAppreciation]

I'm trying to figure out how long it will take to cover key expenses without relying on Sears.

 

The 2017 Q1 supplemental shows key expenses for the first quarter:

($ thousands)

  $4,472 Property Operating

$12,422 Real estate taxes

  $6,274 General and administrative

$16,592 Interest expense

---------

$39,760

 

Annualizing brings the total to about $160 million per year.

 

The supplemental breaks down Third-Party rent:

Annual    PSF        GLA

Rent

$44,528  $12.97  3,432  In-Place Third-Party


$47,194  $18.21  2,591  SNO Third-Party

---------

$91,722 thousand

 

The remaining Third-Party rent needed is around $160 million - $92 million or $68 million

 

The supplemental shows that over the last 4 quarters SRG has leased 2.4 million square feet at an average of $16.06 per sf:

Quarter  GLA    A_Rent    PSF

Q2 2016  422    $7,240  $17.15

Q3 2016  543    $7,470  $13.74

Q4 2016  891  $14,900  $16.72

Q1 2017  535    $8,780  $16.41

            ------  ---------  --------

            2,391  $38,390  $16.06

 

If they keep going at the same pace then $68 million/$16.06 means they need to lease about another 4.2 million square feet.

 

If they keep re-leasing 2.4 million sf per year then they'll re-lease another 4.2 million sf within 2 years, right?

 

Yeah I put them being "home free" from Sears in ~6-8 quarters.

[scorpioncapital]

Yes, but there are some assumptions in that.

 

-$16.06 is the correct average to use. I think in their documents they show a chart on their ROI and so forth and I estimate it only implies getting $11 or so per square feet. Needless to say this would extend the time frame to freedom from Sears.

 

-That the leases signed now and shown are actually collected now. I'm not entirely clear but doesn't the revenue they show in the supplement only flow when tenants actually start paying? Are SNO leases signed but not yet paying?

 

-Interest expense may rise if it's variable. 65 to 100m in interest expense could make some modest difference.

 

Probably best to build in a margin of safety.

[LongTermView]

Yeah I put them being "home free" from Sears in ~6-8 quarters.

 

Cool, it's nice to hear what others think about the numbers.

[LongTermView]

Yes, but there are some assumptions in that.

 

-$16.06 is the correct average to use. I think in their documents they show a chart on their ROI and so forth and I estimate it only implies getting $11 or so per square feet. Needless to say this would extend the time frame to freedom from Sears.

 

-That the leases signed now and shown are actually collected now. I'm not entirely clear but doesn't the revenue they show in the supplement only flow when tenants actually start paying? Are SNO leases signed but not yet paying?

 

-Interest expense may rise if it's variable. 65 to 100m in interest expense could make some modest difference.

 

Probably best to build in a margin of safety.

True, if it ends up being just $11 per sf then that extends the timeframe.

 

I think you're right about SNO, my understanding is that tenants have signed but not yet opened such that they haven't started paying.

[texual]

I believe these properties would still be required to pay their rent in the event. I'm also certain that the same pockets that would feed SRG would also be invested in preventing the Sears subsidiary from bankruptcy.

[peridotcapital]

I'm trying to figure out how long it will take to cover key expenses without relying on Sears.

 

The 2017 Q1 supplemental shows key expenses for the first quarter:

($ thousands)

  $4,472 Property Operating

$12,422 Real estate taxes

  $6,274 General and administrative

$16,592 Interest expense

---------

$39,760

 

Annualizing brings the total to about $160 million per year.

 

The supplemental breaks down Third-Party rent:

Annual    PSF        GLA

Rent

$44,528  $12.97  3,432  In-Place Third-Party


$47,194  $18.21  2,591  SNO Third-Party

---------

$91,722 thousand

 

The remaining Third-Party rent needed is around $160 million - $92 million or $68 million

 

The supplemental shows that over the last 4 quarters SRG has leased 2.4 million square feet at an average of $16.06 per sf:

Quarter  GLA    A_Rent    PSF

Q2 2016  422    $7,240  $17.15

Q3 2016  543    $7,470  $13.74

Q4 2016  891  $14,900  $16.72

Q1 2017  535    $8,780  $16.41

            ------  ---------  --------

            2,391  $38,390  $16.06

 

If they keep going at the same pace then $68 million/$16.06 means they need to lease about another 4.2 million square feet.

 

If they keep re-leasing 2.4 million sf per year then they'll re-lease another 4.2 million sf within 2 years, right?

 

The situation is actually better than that because the rent does not include the reimbursements for taxes and insurance. As a result, your denominator in reality would be higher because the non Sears tenants are paying more than $16/foot.

[LongTermView]

The situation is actually better than that because the rent does not include the reimbursements for taxes and insurance. As a result, your denominator in reality would be higher because the non Sears tenants are paying more than $16/foot.

 

Does SRG break out Sears reimbursements vs Third-Party reimbursements in any of the filings? In total Tenant reimbursement revenue dropped from $17,778 thousand in 2016 Q1 to $16,224 thousand in 2017 Q1. Is this drop because Third-Party leases are structured differently such that reimbursements are less of a factor?

[BTShine]

When trying to predict SRG's year, and the additional SNO lease revenue they will bring in, it's important to note that the CEO estimates they will see over $60 million in leases or SNO leases from early '17 to early '18. $500 million of capital investment and over 12% unlevered returns on capital.  This means that one year from now he expects us to meet  that $68 million hurdle (or gap) mentioned above.  Therefore, I think the company will be fine barring any major economic catastrophe or drastic changes in SRG's marketplace. 

[LongTermView]

When trying to predict SRG's year, and the additional SNO lease revenue they will bring in, it's important to note that the CEO estimates they will see over $60 million in leases or SNO leases from early '17 to early '18. $500 million of capital investment and over 12% unlevered returns on capital.  This means that one year from now he expects us to meet  that $68 million hurdle (or gap) mentioned above.  Therefore, I think the company will be fine barring any major economic catastrophe or drastic changes in SRG's marketplace.

This is encouraging.

 

It is hard to reconcile this against what Mohnish Pabrai said in Barron's:

“If Sears doesn’t file until 2020, Seritage is fine,” he says. “It is possible they are fine if there is a late-2019 filing. Any filing before that means taking extraordinary measures.”

 

I wish Mohnish would have been more specific with the numbers and thoughts behind his timeline estimates.

 

[scorpioncapital]

I find the argument in general that an investment will be alright if Sears bankrupts in 2019 but a disaster if bankrupts this summer a bit superficial. Perhaps the price will drop alot for srg but I see either a positive outcome either way or a negative one, independent of what happens to Sears or when.

[BTShine]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business. 

 

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

 

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.  Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

 

It all boils down to the market demand for this space continuing at it's current pace and price.

 

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way. 

 

 

[scorpioncapital]

Some nice visuals - http://www.businessinsider.com/this-is-what-sears-stores-will-look-like-in-the-future-2017-5/#a-birds-eye-view-of-the-area-shows-the-120000-square-foot-sears-store-built-in-1965-surrounded-by-a-parking-lot-with-its-former-auto-center-nearby-3

 

Sears is still a tiny little retailer there. But to be honest, and who knows what Buffett was thinking doesn't this look remarkably similar to what he did as a young kid,

 

"Buffett started selling Juicy Fruit chewing gum packs. When asked for 1 piece, he would not sell as he thought he may be left with 4 pieces he could not sell. He made 2 cents profit per pack.

 

Buffett would also purchase Coca-Cola six packs for 25 cents from his grandfather’s grocery store – Buffett and Son. He would sell each Coke for 5 cents. Profit of 5 cents per pack."

 

Seems these complexes are being divided up like a pizza. Instead of 1 giant Sears piece you now got Sears as one slice of a multi-flavoured pizza...Which makes sense considering nobody wanted the Sears slice but perhaps there are a few oddballs who might want a small slice once in a while :)

 

The premise of the investment is the success of some retail in general, not necessarily the success or failure of Sears. I still think that other retail operators have more to worry about. Imagine you have a giant supply of retail space and the others who did not have Sears tenants were renting out for $50 or $60 per square foot. I think if you look at the competitors that's the current number for top locations and malls. So if you are a tenant in those areas and you see these new developments for the bargain price of "only $15 per square foot", maybe you'd be tempted to switch or renegotiate lower with your current tenant. That means competitors could be pressured lower in relation to current prices. But this is not going to happen overnight.

[Spekulatius]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business. 

 

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

 

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.  Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

 

It all boils down to the market demand for this space continuing at it's current pace and price.

 

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way.

 

+1 for putting the math on SRG value added developments here in writing.

[LongTermView]

I find the argument in general that an investment will be alright if Sears bankrupts in 2019 but a disaster if bankrupts this summer a bit superficial. Perhaps the price will drop alot for srg but I see either a positive outcome either way or a negative one, independent of what happens to Sears or when.

 

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business. 

 

Yeah, I think they have several options if the rent from Sears suddenly gets disrupted.

 

Between December 2015 and March 2017 the SNO Third-Party annualized rent has gone up by $34.3 million but the In-Place Third-Party annualized rent has only gone up by $8.8 million. I'm guessing this is one of the reasons why the timeline given by Mohnish is longer than the one I posted earlier.

[Omm]

Buffett still holds.

 

How do you know Buffett still holds? Does he have to declare when he sells?

[LongTermView]

Looking at the 2017 q1 earnings call transcripts for Macerich and GGP, it sounds like 100% recaptures are preferred over 50% recaptures.

 

https://seekingalpha.com/article/4066979-macerichs-mac-ceo-art-coppola-q1-2017-results-earnings-call-transcript?part=single

Art Coppola

 

I never was looking to do 50% recaptures from any of the Sears stores. It was done in the early phases and I think it was a great move to put Primark in the half or so of the Sears box at Danbury and Freehold and that’s fine, that was a good idea. But honestly, I don’t see the economics makes sense to recapture 50% getting at the other seven locations and effectively pace Sears to them, shrink into the other half of the space. Because A, it costs too much money to do it and B, ultimately you're kicking the can down the road. So if and when Sears does fail, that the opportunity to redeploy the other half, probably doesn’t make a lot of sense. So at this point in time, I really don’t see anything happening on the development front of any of the other seven boxes.




https://seekingalpha.com/article/4067582-ggp-ggp-q1-2017-results-earnings-call-transcript?part=single

Floris van Dijkum - Boenning & Scattergood

 

Great. Good morning, guys. Question for you on your returns of your redevelopments. Sandeep, did you say that your returns from the Seritage redevelopments are lower than your wholly owned redevelopments?

 

Sandeep Lakhmi Mathrani - GGP, Inc.

 

Yes. At this moment in time, it's been and we've maintained – that's been 7%, and the large reason for that is obviously half the space is being leased back to Sears.

[glorysk87]

I wish Mohnish would have been more specific with the numbers and thoughts behind his timeline estimates.

 

You shouldn't put so much weight on what Mohnish did or said. He has been wrong (very wrong) many times in the past.

[LongTermView]

I wish Mohnish would have been more specific with the numbers and thoughts behind his timeline estimates.

 

You shouldn't put so much weight on what Mohnish did or said. He has been wrong (very wrong) many times in the past.

 

That's fair. I'm not saying his timeline is necessarily correct. However, it is something that interests me and I wish he would have been more specific in terms of the details leading up to the conclusion.


[BTShine]

Buffett still holds.

 

How do you know Buffett still holds? Does he have to declare when he sells?

 

I believe so.

[koshigoe]

We'd find out through an update to his 13d filing, but he could have sold and we wouldn't know until mid Feb 2018.

 

Berkowitz has been buying almost every week/day since it's been in low 40s/high 30s. He's on the board of Sears too. It's probably impossible for anyone to predict future when Sears dies, even board members, but if he's buying and ostensibly knows the contingency plans, seems it's a good coattail bet.

 

 

[AJB96]

Buffett would need to file an amendment to his 13G filling if he sold or materially added to his Seritage stake:

 

Amendment Requirements for 13G Filers

 

Qualified institutional investors, including investment advisors registered with the SEC or a state, must amend their Schedule 13G within 10 days after the end of the first time their "beneficial ownership" exceeds 10% of the class of equity securities at month end.

 

After that, qualified institutional investors must amend their Schedule 13G within 10 days from when their "beneficial ownership" increases or decreases by more than 5% of the class of securities over the amount held at the previous month end.

 

Qualified institutional investors must also file a Schedule 13D within 10 calendar days after they cease being eligible to file a Schedule 13G rather than a Schedule 13D.

 

In addition, passive investors beneficially owning less than 20% of an equity security must amend their Schedule 13G promptly, within two business days, after acquiring beneficial ownership of more than 10% of the class of equity securities, and after that, within two business days of increasing or decreasing their ownership by more than 5%.

 

You must also file an annual amendment to the 13G if there have been any changes - immaterial or material - to your filed 13G. This must be done within 45 days of year end. You do not need to file an amendment if there have been no changes to the information filed or if the only change is to the percentage of securities owned resulting solely from a change in the number of shares outstanding.

 

Source:

 

https://ibkb.interactivebrokers.com/node/2654

https://www.sec.gov/Archives/edgar/data/315090/000119312515399523/0001193125-15-399523-index.htm

[WneverLOSE]

Hey Alex, I was wondering if you can share a bit what's your view on the situation and how do you think about the valuation (or if you don't think about it at all), some info like how you see the future, what rate of return you expect for such "risk" and how do you calculate  if you will get it in this case ?

 

[LongTermView]

http://www.clearymawatch.com/2017/06/chancery-court-suggests-rights-offerings-may-limit-liability-transactions-controlling-stockholders/

[Mephistopheles]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business. 

 

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

 

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.  Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

 

It all boils down to the market demand for this space continuing at it's current pace and price.

 

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way. 

 

 

 

Hi BT, thanks for the analysis. Where are you seeing the bolded parts? I can't find this information in any presentation.

[BTShine]

Agreed.  If it happened in 2020 instead of 2017 there would be a difference of approximately $500m in cash flowing into SRG over the 3 years (much paid out via mandatory dividends).  $500 million dollars is significant for a company with an enterprise value of $3.5 billion, but shouldn't be a life changing factor for the business. 

 

It all boils down to if they continue to re-purpose and re-lease this space at 4X current rents.  If they do, this investment will be very profitable.  If they can't find new tennants in size, then the investment will be a big loss in one way or another.

 

In the May '17 presentation they show that the 38 redevelopments in process will be worth 1.3 Billion when finished.  This value essentially covers SRG's mortgage debt.  From here on out everything else is gravy. 

 

By SRG's calculations every 1 million square feet of redevelopment creates $160 million of net new value to equity.  An additional $110 million is also retained; this is existing value based upon acquisition value of RE.  The last 4 quarters they've signed 2.4 million sq ft of space.  If they get to 3 million a year, they'll create net new value to equity of $480 million, or about $8.75/share.  They'll also retain $330 million of existing value (think of what value exists w/ SHLD as a tennant) when leasing 3 million sqft. 

 

Overall, this example of redeveloping 3 million sqft per year means the company will lock in value of $810 million ($480m  + $330m).  If SHLD went bankrupt tomorrow we'd still have the $1.3 Billion of value in place from current redevelopments.  Then every year we'd see $810 million of value locked in, which brings us back to current enterprise value in 3 years.  From there, the company increase in value of $810m per year would give us a 33% return based upon a market cap of $2.2 Billion.

 

It all boils down to the market demand for this space continuing at it's current pace and price.

 

I think this company could redevelop and lease all of its 40 million sqft in the next 10 years, which would make shares worth about $200 and that doesn't include the dividends we'd collect along the way. 

 

 

 

Hi BT, thanks for the analysis. Where are you seeing the bolded parts? I can't find this information in any presentation.

 

You're welcome.

 

It's a combination of their information on page 7 of the June '17 Investor presentation (link below), which relates to the 38 referenced projects.  This info was also in the May Presentation.  The sq ft of those projects is in the 10-Q (and was in the 10-K, etc) and is 3.275 million square feet.  To be clear they never explicitly stated the numbers of $160 and $110 per square foot.  I use their information and get there with some simple division, etc.

 

http://ir.seritage.com/Cache/1500100572.PDF?O=PDF&T=&Y=&D=&FID=1500100572&iid=4584761