SRG - Seritage Growth Properties

[WneverLOSE]

It is a question that bothers me, I sent IR a message, hopefully this time I will get a reply :)

 

 

 

 

[BTShine]

I believe it may be due to the difference between tax accounting and GAAP accounting.

[glorysk87]

A) Tax accounting and GAAP accounting are different, so you can't just look at the income statement and make the call that they don't need to pay a dividend

 

B) They need to pay a decent dividend otherwise the already small investor base they have would vanish and their cost of equity would skyrocket.

[DooDiligence]

A) Tax accounting and GAAP accounting are different, so you can't just look at the income statement and make the call that they don't need to pay a dividend

 

B) They need to pay a decent dividend otherwise the already small investor base they have would vanish and their cost of equity would skyrocket.

 

Dividend addiction is just sad.

[bizaro86]

The cost of equity argument seems odd to me. There is no possible justification for their current valuation unless you think they have many accretive redevelopment opportunities.

 

If you believe that, you should want them to retain capital to pursue these opportunities as fast as possible. That has the side benefit of reducing the risk of significant poorly timed dilution if Sears files early.

 

If you don't believe they have good reinvestment opportunities, why would you buy this? The answer is you wouldn't.

 

 

[WneverLOSE]

A) Tax accounting and GAAP accounting are different, so you can't just look at the income statement and make the call that they don't need to pay a dividend

 

B) They need to pay a decent dividend otherwise the already small investor base they have would vanish and their cost of equity would skyrocket.

 

regarding A, I would argue tax accounting can't be THAT different from the income statement we all see, since if it was all REITs wouldn't have money to cover the depreciation. Maybe someone has more information about this subject ?

 

regarding B, the point may be valid but we should look as well at the positive effect of having more equity to deploy thus reducing leverage rate and by so making it more attractive to credit investors (reducing the dividend will be a positive to bond investors  and a negative to "dividend addicts" but what the management should focus on is creating long term value and not raising the stock price by deploying capital in dumb ways, sooner or later if management is creating value investors will enjoy it). Reducing the dividend will also enable to diversify away from sears much faster thus making the investment much more attractive to investors (who fear the sears bankruptcy).

[Mephistopheles]

The dividend question has been brought up before. Someone on this board asked management directly and the answer he got was pretty much "that's the way it is".

 

1) Maybe it's to keep the stock price up, but that would be silly because they have Eddie Lampert and Bruce Berkowitz as their biggest holders and these guys don't care about their stocks in their portfolios dropping (if you haven't noticed), and they are THE investor base. Oh and not to mention, Warren Buffett. My guess is if they cut the dividend they would have no problem finding enough buyers for their stock. Arguably the stock would go up because they'd be retaining all that capital free of dividend tax.

 

2) So maybe it's because of tax vs. GAAP accounting. I'm not an expert on this so I really don't know, someone else should chime in.

 

3) Look at the restricted stock units for management, they don't have access to shares until they vest, but any dividends paid on these shares vest immediately. When in doubt, follow the incentives, that's would Munger would do.

[LongTermView]

This.

3) Look at the restricted stock units for management, they don't have access to shares until they vest, but any dividends paid on these shares vest immediately. When in doubt, follow the incentives, that's would Munger would do.

[WneverLOSE]

3) Look at the restricted stock units for management, they don't have access to shares until they vest, but any dividends paid on these shares vest immediately. When in doubt, follow the incentives, that's would Munger would do.

 

I would buy you a beer if I could.

 

I am truly baffled at why would Warren invest, if reinvestment rates are low investors shouldn't expect great returns in the long term, if reinvestment rates are attractive (to me they look very attractive) the dividend is a killer and ruines about 50% of future returns.

I wish I could buy real estate that yields me 12-13%, I would do it all day long but I can't.

[scorpioncapital]

Is anyone factoring in the possible upside to the asset valuation if inflation runs hot in the next few years ? Of course offset somewhat by increasing supply from Sears and everyone else ?

[BTShine]

While the dividend is a large portion of current income (~50%) one could argue it's a fraction of the value SRG is creating every year.  There's a line of thought, which I understand and do not disagree with, that SRG is creating over $500 million of value every year via redevelopment and leasing to 3rd parties.  Anyone that subscribes to this thinking might feel that a $55 million dividend is not much of the 'true earnings' of SRG every year. 

 

 

[LongTermView]

3Q17 Operating Results: http://ir.seritage.com/file/Index?KeyFile=390921511

 

Some parts that stood out to me:

Increased annual base rent from tenants other than Sears Holdings to 45.4% of total annual base rent from 31.4% in the prior year period, including all signed leases and net of rent attributable to associated space to be recaptured, and after the impact of the GGP transactions.

 

...

 

Agreed to sell to Simon Property Group (“Simon”) the Company’s 50% interest in five of the ten assets in the existing joint venture between the two companies for $68.0 million, subject to certain closing conditions.

 

The supplemental is out too. Why did the total third party annual rent go down from the Q2 supplement to the Q3 supplement? Is it because of the Q3 sales to GGP?

 

Q2 supplement:

$47.2 million In-Place Third-Party

$55.8 million SNO Third-Party

------

$103.0 million

 

Q3 supplement:

$47.4 million In-Place Third-Party

$53.9 million SNO Third-Party

------

$101.3 million

 

[BTShine]

Sale of JV's?

 

Edit:  Looks like the sale of GGP JV's reduced annual rent by $7.997 million.

[LongTermView]

I think you're right, BTShine.

 

I edited/asked that without seeing that you mentioned it.

[thinkpad]

Hello,

 

did you notice the dilution on class A and C shares ?

" 28,001,411 and 25,843,251 shares issued and outstanding as of  September 30, 2017 and December 31, 2016, respectively"

 

"5,951,861 and 5,754,685 shares issued and outstanding as of  September 30, 2017 and December 31, 2016, respectively "

 

do you know where it is coming from ?

 

 

[namo]

It could be conversion of some units held by Berkowitz or ESL, no?

If one of their funds distributed units to holders, it would be natural for them to convert them to liquid stock.

 

But I don't recall off-hand whether / which units are convertible.

[LongTermView]

Hello,

 

did you notice the dilution on class A and C shares ?

" 28,001,411 and 25,843,251 shares issued and outstanding as of  September 30, 2017 and December 31, 2016, respectively"

 

"5,951,861 and 5,754,685 shares issued and outstanding as of  September 30, 2017 and December 31, 2016, respectively "

 

do you know where it is coming from ?

 

Yeah, it looks like the conversion of operating units.

 

Page 4 of the supplemental shows 55,785,000 shares and units as of 3Q17 and 55,774,000 as of 4Q16.

[scorpioncapital]

https://www.forbes.com/sites/kaipetainen/2017/10/25/betting-on-sears-seritage-and-a-short-squeeze-university-of-florida-students-win-stock-competition/

[Foreign Tuffett]

Contra the market reaction today, I actually think the quarter was pretty good with 600,000 sq feet leased at a 4.6X spread. Some of the financial metrics look bad because of the GGP transaction closing and only one redevelopment project having been completed in Q3. Neither of these should have been surprises for anyone who follows the company closely.

 

While I'm not entirely pleased with the price they got for the Simon properties, IMO SRG's redevelopment opportunities outweigh its liquidity. Also, Simon and Macerich have been stonewalling SRG about redeveloping their JV properties. As such it probably makes more sense for SRG to sell and redeploy the cash.

 

 

 

 

 

 

[Greyhound]

The dividend question has been brought up before. Someone on this board asked management directly and the answer he got was pretty much "that's the way it is".

 

1) Maybe it's to keep the stock price up, but that would be silly because they have Eddie Lampert and Bruce Berkowitz as their biggest holders and these guys don't care about their stocks in their portfolios dropping (if you haven't noticed), and they are THE investor base. Oh and not to mention, Warren Buffett. My guess is if they cut the dividend they would have no problem finding enough buyers for their stock. Arguably the stock would go up because they'd be retaining all that capital free of dividend tax.

 

 

 

As far as the dividend is concerned, the reason for the dividend is quite simple. They are required to distribute 90% of its taxable income otherwise the trust will have to pay tax on its income.

 

https://www.law.cornell.edu/uscode/text/26/857

 

 

REIT Qualification

We elected to be treated as a REIT commencing with the taxable year ended December 31, 2015 and expect to continue to operate so as to qualify as a REIT.  So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our shareholders.  In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, including, but not limited to, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute to our shareholders and the diversity of ownership of our stock.  In order to comply with REIT requirements, we may need to forego otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations.  See “Risk Factors—Risks Related to Status as a REIT.”

 

REIT distribution requirements could adversely affect our ability to execute our business plan.

 

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify to be taxed as a REIT (assuming that certain other requirements are also satisfied) so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to, at a minimum, make distributions to our shareholders to comply with the REIT requirements of the Code.

 

 

Note 8 – Income Taxes

The Company has elected to be taxed as a REIT as defined under Section 856© of the Code for federal income tax purposes and expects to continue to operate to qualify as a REIT.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to currently distribute at least 90% of its adjusted REIT taxable income to its shareholders.

As a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed to its shareholders.  If the Company fails to qualify as a REIT or does not distribute 100% of its taxable income in any taxable year, it will be subject to federal taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years.

Even if the Company qualifies for taxation as a REIT, the Company is subject to certain state, local and Puerto Rico taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.

 

 

http://www.snl.com/Cache/c38312861.html

[BG2008]

I haven't read through this whole thread.  Why buy Seritage when you can buy Simon at about 8.6% Cap rate today? 

[scorpioncapital]

Presumably the argument is that Seritage real estate is on an up escalator while the others are flat or - perhaps due to a flood of new development even a down escalator. Currently say an established REIT has rents of $40 per square foot and another has $4 per square foot. If the second reit rents at $15 per square foot, then merchants might think twice to continue renting at $40 and might switch over, pressuring the REIT of the established trust. Also each new incremental dollar of investment would seem easier if rents are below the competitors by a significant amount.

 

[frommi]

I haven't read through this whole thread.  Why buy Seritage when you can buy Simon at about 8.6% Cap rate today?

 

Maybe i did the math wrong but by my calcuation its at 7.3%, which is still a huge enough discount. I would argue that both SPG and SRG have similar return prospects at these prices, but SRG is more tax efficient when you have to pay taxes on dividends and plan to hold for a very long time.

[BTShine]

I haven't read through this whole thread.  Why buy Seritage when you can buy Simon at about 8.6% Cap rate today?

 

I'd recommend reading the presentation SRG released in September

http://ir.seritage.com/Cache/1001227621.PDF?O=PDF&T=&Y=&D=&FID=1001227621&iid=4584761

 

That's a fine place to better understand this story if you're not up for reading this thread.

[Spekulatius]

I haven't read through this whole thread.  Why buy Seritage when you can buy Simon at about 8.6% Cap rate today?

 

I am ny sure how you get the 8.6% cape rate. The number is almost certainly incorrect and I think the cap rate should close to 7% the or thereabouts.

 

It is difficult to calculate cap rate precisely because a lot of their properties are not in majority held JV, so it is difficult to account for the underlying debt in those, which is necessary to calculate the true cap rate.

(Corrected for spelling)