SRG - Seritage Growth Properties

[DooDiligence]

http://www.businessinsider.com/this-is-what-sears-stores-will-look-like-in-the-future-2017-5/#heres-what-the-virginia-beach-sears-store-looked-like-before-the-redevelopment-1

 

Prob already posted here but I didn't see it (you didn't look?)

[DooDiligence]

I actually think there's a way for SRG to issue equity and buy SHLD properties in a way that is good for both SRG and SHLD.  If it's done in a way similar to the current master lease, then I'd say maybe not that great.  But if they're getting the ability to take 100% instead of 50% with various termination fees on better development yields, then you could say that SRG is an entity that can pay a bit more for these assets.  1) it would drive returns at SRG (and Lampert would benefit through his portion of a rights offering), 2) it would give SRG more time to work on the existing redevelopment (they clearly need more time to avoid triggering debt yield covenants), 3) anything credit positive at SHLD (such as large asset sales) is a positive for SRG (at least for the next couple or few years).  So say Lampert puts up a block of assets for sale, SRG could easily be the highest bidder, it's very possible that SRG would react favorably to this, any rights offering would be oversubbed and Lampert wouldn't need to foot the bill for another $1 billion on his own.

 

It might better explain the harsh unsecured loan to SRG.  Without ESL backstopping with asset sales or redevelopment capital it's hard to get anyone else to participate or jump in the water first.  Part of me thinks this unsecured loan would make me nervous as an equity holder of SRG, the other part of me thinks its just the first step to a more positive transaction.

 

Plus Lampert's incentives are now moving closer into the debt of SHLD and equity of SRG.  SHLD equity has become a call option (just based on $ value at ESL) and it's clear that he's got much more capital in other assets that are more reliant on the passing of time and slowing the bleed.  Will be interesting to see what happens.

 

++?

[writser]

You know that you can edit your own posts, right? No need to spam the same topic fifty times in a row with oneliners.

[DooDiligence]

You know that you can edit your own posts, right? No need to spam the same topic fifty times in a row with oneliners.

 

There! Instead of editing I just deleted all the offending one liners (except this one...)

[LongTermView]

For those that are actively bearish and those that stay away (or are agnostic to SRG) because of some concerns,  what are your concerns or reasons to be bearish on SRG?

 

I'm long but I'm also pragmatic such that I entertain both bullish and bearish thoughts.

 

Here are some concerns in no particular order:


 

1. Cash flow reliance on a single tenant. The Q1 2017 supplemental shows that only $44.5 million or 19.3% of the annual rent is from In-Place Third-Party Leases. It's true that SNO Third-Party Leases make up another $47.2 million or 20.4% but signed and opened are two different things. The annual rent from SHLD is $139.4 million or 60.3%.

 

2. Conflict of interest. Eddie Lampert is the chairman for both SHLD and SRG. One potential example of conflict involves the decision as to whether to do a 50% recapture now at a given property or whether to wait and do a 100% recapture in the future.

 

As I mentioned on May 29th, Art Coppola from Macerich says that 100% recaptures make the most sense in the https://seekingalpha.com/article/4066979-macerichs-mac-ceo-art-coppola-q1-2017-results-earnings-call-transcript?part=single transcription:

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.

 

Based on the above transcription and other information, I'm guessing the economics are often best for SRG with 100% recaptures. I'm guessing the economics are often best for SHLD with 50% recaptures as they bring in fresh tenants which increases foot traffic for the smaller SHLD stores.

 

3. Dividends. An argument can be made that SRG should not be paying dividends until SHLD is a smaller percentage of revenue. The "must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends" part of https://www.sec.gov/fast-answers/answersreitshtm.html shouldn't apply as the 2016 loss before taxes was $90,504,000.
 Of course we can back out most of the depreciation expense when looking at owner earnings such that there is enough money to pay dividends at this point. Still, it seems like it would be safer to not pay dividends until there is less dependence on SHLD. Some say the decision to pay dividends now is based more on incentives than economics.

 

[DooDiligence]

For those that are actively bearish and those that stay away (or are agnostic to SRG) because of some concerns,  what are your concerns or reasons to be bearish on SRG?

 

I'm long but I'm also pragmatic such that I entertain both bullish and bearish thoughts.

 

Here are some concerns in no particular order:


 

1. Cash flow reliance on a single tenant. The Q1 2017 supplemental shows that only $44.5 million or 19.3% of the annual rent is from In-Place Third-Party Leases. It's true that SNO Third-Party Leases make up another $47.2 million or 20.4% but signed and opened are two different things. The annual rent from SHLD is $139.4 million or 60.3%.

 

2. Conflict of interest. Eddie Lampert is the chairman for both SHLD and SRG. One potential example of conflict involves the decision as to whether to do a 50% recapture now at a given property or whether to wait and do a 100% recapture in the future.

 

As I mentioned on May 29th, Art Coppola from Macerich says that 100% recaptures make the most sense in the https://seekingalpha.com/article/4066979-macerichs-mac-ceo-art-coppola-q1-2017-results-earnings-call-transcript?part=single transcription:

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.

 

Based on the above transcription and other information, I'm guessing the economics are often best for SRG with 100% recaptures. I'm guessing the economics are often best for SHLD with 50% recaptures as they bring in fresh tenants which increases foot traffic for the smaller SHLD stores.

 

3. Dividends. An argument can be made that SRG should not be paying dividends until SHLD is a smaller percentage of revenue. The "must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends" part of https://www.sec.gov/fast-answers/answersreitshtm.html shouldn't apply as the 2016 loss before taxes was $90,504,000.
 Of course we can back out most of the depreciation expense when looking at owner earnings such that there is enough money to pay dividends at this point. Still, it seems like it would be safer to not pay dividends until there is less dependence on SHLD. Some say the decision to pay dividends now is based more on incentives than economics.

 

I'm prepared to wait a while for the recaptures to remove the single tenant risk (no denying it presents a problem in their ability to renovate if this cash goes away & it's anyone's guess how long Sears will take to die or morph into whatever.)

 

Who dictates whether it's a 50% or 100% recapture (SHLD or SRG?)

 

I like a 50% recapture especially because it would seem to help Sears lower expenses (they obviously don't need the space) & the increased traffic to new tenants should help Sears revs.

 

I agree re: dividend & I don't even want one.

 

I'm anchored to the rent increase theory without regards to whether they can pull it off (prob stoopid but in good company...)

[LongTermView]

I'm anchored to the rent increase theory

 

Yeah, for me the rent increases trump all the concerns.

 

On another note, I'm still trying to digest yesterday's news regarding Amazon acquiring Whole Foods. It looks like SRG has Whole Foods in two spots:

Clearwater, Florida

Albany, New York

[BTShine]

Report on regional malls

 

http://www.chainstoreage.com/article/report-regional-malls-upswing-010#

[LongTermView]

That SRG annex from '15 lists the property as 173k sqft.....according to articles recently.....215k.  Almost a 25% increase.

Yeah, the land densification opportunities should be tremendous over the years.

 

The Q1 2017 Macerich call talks about repurposing land:

As one of my peers said yesterday, the opportunity to make a lot of money on taking not only the square footage but the land that these departments stores were given 30 years go to help create these malls and to repurpose that land into today's use and they help us really position these centers for the 21st century. It’s a huge opportunity especially when you’re in high population trade areas in gateway cities.

 

The same call discusses the fact that parking rations should decrease over time:

it's also going to be the arrival of autonomous vehicles, so that we can adjust our parking rations to a more reasonable number and intensify the properties

[Foreign Tuffett]

Sears is closing more stores. I believe all or almost all of the stores listed are SRG-owned properties. It isn't clear if SHLD requested the lease terminations of its own accord, or SRG negotiated with SHLD for the rights to recapture 100% of the properties.

 

http://www.businessinsider.com/sears-is-closing-more-stores-2017-6

 

 

[thinkpad]

Correct, all belong to srg

http://ir.seritage.com/Cache/389209875.pdf

[Mephistopheles]

Sears is closing more stores. I believe all or almost all of the stores listed are SRG-owned properties. It isn't clear if SHLD requested the lease terminations of its own accord, or SRG negotiated with SHLD for the rights to recapture 100% of the properties.

 

http://www.businessinsider.com/sears-is-closing-more-stores-2017-6

 

 

 

So out of these 20 properties, only 6 were EBITDA negative in 2015 according to the annex, though many were close. Shows how quickly things are deteriorating at SHLD. 2 of these are in A class malls ($760 and $900 sales/sqft), La Jolla and Baybrook Mall, so there should be some good opportunities there for redevelopment, 400,000 sqft of space and 26 acres.

[jrydaf]

The SEC filing says all 20 stores are unprofitable, yet the JPM Annex shows La Jolla 2015 EBITDA was $3.26 million (not including the new rent payment) and $1.71 million after accounting for rent.  It was the 8th most profitable store in the transaction.  Either they really went downhill in two years or Seritage is lying in their SEC filing.

[Foreign Tuffett]

The Santa Monica Sears redevelopment now has its own website.

 

http://mark302.com/

 

Howard Hughes Corp has a website for the Landmark Mall in Alexandria, VA. HHC owns the entirety of this mall with the exception of the SRG-owned Sears store and is planning an elaborate redevelopment.

 

http://thenewlandmark.com/

 

 

Is anyone aware of any similar sites that can help shed light on individual SRG properties?

[scorpioncapital]

I hope they will take down the Sears name. I really feel the word itself is a liability from an image perspective for any redevelopment. I understand it's like they want Sears business to be one of many tenants but associating with a sick business just makes it look less professional.

[WneverLOSE]

The Santa Monica Sears redevelopment now has its own website.

 

http://mark302.com/

 

Howard Hughes Corp has a website for the Landmark Mall in Alexandria, VA. HHC owns the entirety of this mall with the exception of the SRG-owned Sears store and is planning an elaborate redevelopment.

 

http://thenewlandmark.com/

 

 

Is anyone aware of any similar sites that can help shed light on individual SRG properties?

 

Great find, thanks for sharing !

[bci23]

The SEC filing says all 20 stores are unprofitable, yet the JPM Annex shows La Jolla 2015 EBITDA was $3.26 million (not including the new rent payment) and $1.71 million after accounting for rent.  It was the 8th most profitable store in the transaction.  Either they really went downhill in two years or Seritage is lying in their SEC filing.

 

Have you seen the Sears SSS trends the last two years? Retail has extreme operating leverage, not difficult to go from solid profitable to breakeven/loser with moderate sales decline.

[jrydaf]

I hope they will take down the Sears name. I really feel the word itself is a liability from an image perspective for any redevelopment. I understand it's like they want Sears business to be one of many tenants but associating with a sick business just makes it look less professional.

 

Sears already moved out of the building. The sign will remain because Santa Monica designated the building as a historic landmark.

[SlowAppreciation]

https://www.wsj.com/articles/sears-holdings-to-close-43-more-stores-to-cut-costs-1499456195

[Eye4Valu]

https://www.bizjournals.com/austin/news/2017/07/07/sears-grandstore-in-austin-to-slim-down-make-way.html?ana=yahoo&yptr=yahoo

[Foreign Tuffett]

https://www.wsj.com/articles/sears-holdings-to-close-43-more-stores-to-cut-costs-1499456195

 

SHLD has gotten much more aggressive with its pace of store closings lately. None of these are SRG properties.

[Foreign Tuffett]

Anyone looking at SRG should read pages 11, 12, and 13 of Fairholme's recent conference call transcript.

 

http://www.fairholmefundsinc.com/Documents/ConferenceCall20170629.pdf

 

 

 

[Ballinvarosig Investors]

http://www.businesswire.com/news/home/20170713006151/en/Seritage-Growth-Properties-Announces-Joint-Venture-Transactions

NEW YORK--(BUSINESS WIRE)--Seritage Growth Properties (NYSE:SRG) (the “Company”) today announced that it has completed two transactions with GGP Inc. (“GGP”) whereby the Company received gross consideration of $247.6 million. Pursuant to the transactions, the Company has (i) sold to GGP the Company’s 50% interest in eight of the 12 assets in the existing joint venture between the two companies for $190.1 million; and (ii) sold to GGP a 50% joint venture interest in five additional assets for $57.5 million.

 

“In addition, these transactions demonstrate our ability to tap into the value generated through redevelopment activity in order to redeploy capital into our next wave of accretive projects.”

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As a result of these transactions, the Company reduced amounts outstanding under its mortgage loan by $50.6 million and received approximately $171.6 million of additional cash proceeds before closing costs, which it intends to use to fund its expanding redevelopment pipeline and for general corporate purposes.

 

“Over the last two years, our partnership with GGP has commenced a series of value enhancing redevelopments at high-quality Sears locations attached to dominant GGP retail centers. The transactions announced today allow Seritage to crystalize this value on eight of the existing 12 assets we held in partnership with GGP, and expand our partnership with GGP on five additional assets primed for redevelopment,” said Benjamin Schall, President and Chief Executive Officer. “In addition, these transactions demonstrate our ability to tap into the value generated through redevelopment activity in order to redeploy capital into our next wave of accretive projects.”

 

Benefits of the Transactions

 

Value Realization: as a result of leasing and development progress to date, the Company realized approximately $50.0 million of value creation above its basis across the 13 properties. The Company will continue to participate in the value creation opportunity at the remaining four assets in the original joint venture and the five new joint venture properties through its 50% ownership.

Incremental Liquidity: the Company received approximately $171.6 million before closing costs of unrestricted cash proceeds and reduced the amounts outstanding under its existing mortgage loan by $50.6 million. In addition, the Company’s share of future redevelopment costs was reduced as it no longer has funding obligations on the eight assets sold to GGP, and GGP will fund 50% of redevelopment costs at the five new joint venture assets as the properties are redeveloped.

Continued Partnership: the Company and GGP will build upon our successful partnership and expect to unlock additional value through the joint venture’s future redevelopment activities.

Summary of the Transactions

 

1) The Company sold to GGP its 50% interests in the Sears parcels at the following eight assets for $190.1 million:

 

– Coronado Center (Albuquerque, NM)

 

– The Mall in Columbia (Columbia, MD)

 

– Oakbrook Center (Oakbrook, IL)

 

– Paramus Park (Paramus, NJ)

 

– Pembroke Lakes Mall (Pembroke Pines, FL)

 

– Ridgedale Center (Minnetonka, MN)

 

– Staten Island Mall (Staten Island, NY)

 

– Valley Plaza Mall (Bakersfield, CA)

 

The existing joint venture will continue to own the Sears parcels at the following properties on a 50/50 basis:

 

– Alderwood (Lynwood, WA)

 

– Natick Collection (Natick, MA)

 

– Sooner Mall (Norman, OK)

 

– Stonebriar Centre (Frisco, TX)

 

2) The Company sold to GGP a 50% interest in the Sears parcels at the following five assets for $57.5 million:

 

– Altamonte Mall (Altamonte Springs, FL)

 

– Cumberland Mall (Atlanta, GA)

 

– Coastland Center (Naples, FL)

 

– Northridge Fashion Center (Northridge, CA)

 

– Willowbrook Mall (Wayne, NJ)

 

The new joint venture will own and operate these assets on substantially the same terms as the existing joint venture.

The cynic in me says that Seritage want to have ample liquidity on hand in-case Sears go into bankruptcy.

[Mephistopheles]

The optimist in me says they need the funding because redevelopment is about to skyrocket

[scorpioncapital]

So they were earning less than 12% on these? Because redevelopment will yield 12%...it's like investing vs owning a business. If you can get the same return with no headache or work :)