SRG - Seritage Growth Properties

[BG2008]

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 no calculator cap rate precisely because a lot of their properties are no in majority held JV, so it is difficult to account for the underlying debt in those, which is necessary that calculate the true cap rate.

 

Yeah, my cap rate is off due to JV adjustments.  SPG seems less interesting than I thought.

[dyow]

I don't own this stock, and i didn't see this brought up in thread, but it is something i would be asking as shareholder.

 

Most of Seritage are Sears stores.  If Sears files then that would hurt Seritage obviously. 

 

But what if Sears does not file.  The reason Jerk-pert placed more Sears stores in Seritage is bc the stores are too big, and he wants to reconfigure these stores to make them smaller.

 

Sears now has around 580+ Sears stores, and about 150+ of these are in Seritage.  People are worried that the company files and you would get a flood of properties hitting the market causing an oversupply (let's ignore the CF issues that would arise from losing Sears as a tenant). But, the remaining stores that Sears owns or has a below market lease are available for redevelopment right now.  All of them. 

 

So in effect Seritage is already competing with supply from Sears. 

 

This issue brings up several questions, but most importantly is there enough demand for everyone to win, or does this hurt Seritage short term in ways that can't be quantified..and other questions.  This might not change the thesis but it might impact your returns on the stock and pace of redevelopment.

 

I believe this would be a good question for management if you own the stock.  I am saying this because i want someone to ask and want to know the answer.

[Spekulatius]

I don't own this stock, and i didn't see this brought up in thread, but it is something i would be asking as shareholder.

 

Most of Seritage are Sears stores.  If Sears files then that would hurt Seritage obviously. 

 

But what if Sears does not file.  The reason Jerk-pert placed more Sears stores in Seritage is bc the stores are too big, and he wants to reconfigure these stores to make them smaller.

 

Sears now has around 580+ Sears stores, and about 150+ of these are in Seritage.  People are worried that the company files and you would get a flood of properties hitting the market causing an oversupply (let's ignore the CF issues that would arise from losing Sears as a tenant). But, the remaining stores that Sears owns or has a below market lease are available for redevelopment right now.  All of them. 

 

So in effect Seritage is already competing with supply from Sears. 

 

This issue brings up several questions, but most importantly is there enough demand for everyone to win, or does this hurt Seritage short term in ways that can't be quantified..and other questions.  This might not change the thesis but it might impact your returns on the stock and pace of redevelopment.

 

I believe this would be a good question for management if you own the stock.  I am saying this because i want someone to ask and want to know the answer.

 

Real estate is local and aggregate supply does not mean that much. If SRG owns a Sears box, it does not matter much if SHLD owns another Sears box 20 miles away as they don’t really compete with each other for tenants.

[dyow]

I don't own this stock, and i didn't see this brought up in thread, but it is something i would be asking as shareholder.

 

Most of Seritage are Sears stores.  If Sears files then that would hurt Seritage obviously. 

 

But what if Sears does not file.  The reason Jerk-pert placed more Sears stores in Seritage is bc the stores are too big, and he wants to reconfigure these stores to make them smaller.

 

Sears now has around 580+ Sears stores, and about 150+ of these are in Seritage.  People are worried that the company files and you would get a flood of properties hitting the market causing an oversupply (let's ignore the CF issues that would arise from losing Sears as a tenant). But, the remaining stores that Sears owns or has a below market lease are available for redevelopment right now.  All of them. 

 

So in effect Seritage is already competing with supply from Sears. 

 

This issue brings up several questions, but most importantly is there enough demand for everyone to win, or does this hurt Seritage short term in ways that can't be quantified..and other questions.  This might not change the thesis but it might impact your returns on the stock and pace of redevelopment.

 

I believe this would be a good question for management if you own the stock.  I am saying this because i want someone to ask and want to know the answer.

 

Real estate is local and aggregate supply does not mean that much. If SRG owns a Sears box, it does not matter much if SHLD owns another Sears box 20 miles away as they don’t really compete with each other for tenants.

 

I don't believe this is true.  It depends who the tenant is.  I would assume the vast majority of Sears box tenants would not be local mom and pop shops, they would be national brands with a lot flexibility to expand where they see fit.

 

If I am a tenant that has a national presence or a new international business looking to expand in the US, why would I not look at all available properties?  I would look at all available options, weigh the pros and cons, and then decide based on the best market/location to maximize cash flows. 

 

[scorpioncapital]

I think the key is to focus on the new renting per square foot and not the total volume of space owned. It really looks like a mining operation. In mining you have the areas with the highest concentration of your "gold" which you go after and then you have the "leftovers" which maybe require more effort for less payoff. If SRG mines the first 1/3 of its space at 3x the $4 base rent, you have total replacement - albeit without growth but with a more solid foundation. For growth you have to figure out how the other 2/3 will be used. To some degree this is a creative project. Imagining how these blocks of land strewn around various urban and suburban areas could work to create synergies. Watch for intelligent development projects. Whether movie theaters, grocery stores, and offices is enough is an open question. Maybe it's not different enough. I'd look at the management's team potential for creative projects.

[Foreign Tuffett]

I think the key is to focus on the new renting per square foot and not the total volume of space owned. It really looks like a mining operation. In mining you have the areas with the highest concentration of your "gold" which you go after and then you have the "leftovers" which maybe require more effort for less payoff. If SRG mines the first 1/3 of its space at 3x the $4 base rent, you have total replacement - albeit without growth but with a more solid foundation. For growth you have to figure out how the other 2/3 will be used. To some degree this is a creative project. Imagining how these blocks of land strewn around various urban and suburban areas could work to create synergies. Watch for intelligent development projects. Whether movie theaters, grocery stores, and offices is enough is an open question. Maybe it's not different enough. I'd look at the management's team potential for creative projects.

 

This is one way to think about it.

 

Tangentially related is a rationale I've seen some use as a reason to pass on investing in SRG: "I can't think which retailers will lease all that space, therefore I can't invest." I object to this line of reasoning, as it unrealistically assumes that a generalist value investor is in a position to have this information, or can somehow conjure it up a priori.

 

I think instead the proper question is "can SRG's professional management team, working with 3rd party leasing agents, lease the boxes over time." There's lots of room for debate on this question, but IMO at least it's the right question to be asking. 

[scorpioncapital]

"Real estate investment trusts, such as Seritage Growth Properties, are reconsidering use of space, carving many former malls into smaller parcels for retailers that produce more sales per square foot. They have found success by repositioning malls and giving people a reason to come beyond just filling shopping bags.

 

We will increasingly see some sort of combination of live-work-play. We are also more likely to see indoor-outdoor spaces, rather than sterile, old indoor malls, and mall transformations from traditional retail to office environments."

 

http://www.areadevelopment.com/distribution-warehousing/Q4-2017/reviving-dead-malls-as-warehouses-mixed-use-complexes.shtml

 

Is it me or do you think Buffett is reminded of his childhood days when he bought Coca Cola 6 to the pack and then sold them individually? I guess this is both the mining business and the pizza slice business :)

 

 

 

[TwoCitiesCapital]

"Real estate investment trusts, such as Seritage Growth Properties, are reconsidering use of space, carving many former malls into smaller parcels for retailers that produce more sales per square foot. They have found success by repositioning malls and giving people a reason to come beyond just filling shopping bags.

 

We will increasingly see some sort of combination of live-work-play. We are also more likely to see indoor-outdoor spaces, rather than sterile, old indoor malls, and mall transformations from traditional retail to office environments."

 

http://www.areadevelopment.com/distribution-warehousing/Q4-2017/reviving-dead-malls-as-warehouses-mixed-use-complexes.shtml

 

Is it me or do you think Buffett is reminded of his childhood days when he bought Coca Cola 6 to the pack and then sold them individually? I guess this is both the mining business and the pizza slice business :)

 

Isn't there a quote about finance where the general theme is "all money is made by packaging or unpackaging"?

 

Like, there was an argument for the conglomerates of decades ago and so companies packaged themselves up. Then there was an argument that more value could be obtained by spinning off unrelated units and giving them the focus/resources they needed to prosper. Then related entities come buy and purchased those units for vertical/horizontal integration.

 

This seems to fit that well.

 

Step 1. Unpackage

Step 2. Repackage.

Step 3. ???

Step 4. Profit.

[LongTermView]

https://www.bizjournals.com/southflorida/news/2017/11/17/open-air-retail-replacement-for-sears-at-aventura.html

[BTShine]

1 million square feet of office space planned for Dallas.

 

https://www.dmagazine.com/commercial-real-estate/2017/12/former-sears-at-valley-view-mall-to-become-office-campus/

[LongTermView]

1 million square feet of office space planned for Dallas.

 

https://www.dmagazine.com/commercial-real-estate/2017/12/former-sears-at-valley-view-mall-to-become-office-campus/

 

Wow, that's quite a change going from around 235k gla to around 1 million.

[scorpioncapital]

And the Santa Monica property is being developed for 50 million - http://www.latimes.com/business/la-fi-sears-santa-monica-20171126-story.html

 

[BTShine]

Does anyone have an estimate of what the Santa Monica property will lease for and what the property will be worth after redevelopment?

 

 

[AJB96]

Seritage's Dallas Midtown property is part of Dallas's proposal for Amazon's second headquarters:

 

"Dallas Midtown was one of the North Texas proposals being offered up by the Dallas Regional Chamber as a potential site for Amazon.com's HQ2 campus. In September, Dallas Midtown stakeholders — including Seritage and KDC — unveiled a proposal for a 100-acre urban campus next to 'Amazon Park,' within the planned project."

 

Source: https://www.bizjournals.com/dallas/news/2017/12/05/seritage-kdc-office-campus-dallas-midtown.html

 

Dallas appears to be the favorite for Amazon HQ2:

 

http://www.wsj.com/graphics/amazon-headquarters/

[bci23]

Does anyone have an estimate of what the Santa Monica property will lease for and what the property will be worth after redevelopment?

 

The article in the post before yours says 50k sq ft and that Santa Monica office space is commonly at $6/sq ft/month or $72/sq ft/yr so that would say $3.6m/yr of rent. 4% cap rate would say building is worth $90m or something.

[bci23]

1 million square feet of office space planned for Dallas.

 

https://www.dmagazine.com/commercial-real-estate/2017/12/former-sears-at-valley-view-mall-to-become-office-campus/

 

Wow, that's quite a change going from around 235k gla to around 1 million.

 

Has anyone looked through the portfolio or asked management about how many massive Sq Footage expansion opportunities exist such as this example?

[SlowAppreciation]

https://www.wsj.com/graphics/lampert/

[koshigoe]

saw the shelf registration today and prospectus for preferred. looks like they are starting the process of restructuring the capitalization

[scorpioncapital]

For the Dallas property?

The more I look at SRG I see why Buffett bought a tiny stake. He's smart.

It's classic don't bet on the jockey, bet on the opportunity.

It's like herding sheep. Have you noticed the accelerated rate of development? It's like Lampert has no choice. Buffett saw this before no doubt. Bet on the constraint and natural, unavoidable trend and it doesn't matter even if a monkey is running it :)

[HalfMeasure]

saw the shelf registration today and prospectus for preferred. looks like they are starting the process of restructuring the capitalization

 

Could be spun either way: i) good opportunities to allocate capital @ a rate above the cost of preferred equity, positive sign; or ii) need capital to expedite re-tenanting due to Sears closures - it just depends on how Mr. Market feels. Given the tough REIT environment, I wonder what the market appetite will be for the preferred and what kind of a rate they'll be able to issue them at.

[BTShine]

Could be both.  Sears leaving allows for more capex and therefore capital to be invested at attractive rates of return.  If SHLD was strong and kept stores open then SRG wouldn't have much redevelopment opportunity because SRG can only reclaim 50% of each property.  I think the ROI on reclaiming 50% of a location for redevelopment is much lower that a full redevelopment. 

[Foreign Tuffett]

1 million square feet of office space planned for Dallas.

 

https://www.dmagazine.com/commercial-real-estate/2017/12/former-sears-at-valley-view-mall-to-become-office-campus/

 

Wow, that's quite a change going from around 235k gla to around 1 million.

 

Has anyone looked through the portfolio or asked management about how many massive Sq Footage expansion opportunities exist such as this example?

 

I'm not aware of any others of the same scale. Here are some smaller scale redevelopments and possible redevelopments:

 

* Phase 1 of the "Esplanade at Adventura" redevelopment will expand SRG's sq footage somewhat. They are planning to do an additional 2nd phase that will add significantly more. This has probably already been mentioned in this thread, but Adventura is one of the highest quality enclosed malls in the country on a sales per sq foot basis.

 

* There have been news articles about SRG redeveloping the Hicksville, NY store into a mixed use development with a 300+ unit apartment complex. Note the 30 acres of land SRG controls here. Nothing I have seen indicates that any plans have been finalized. Type I (full recapture) property.

 

* The Westfield UTC luxury mall in San Diego is just finishing up a $600M redevelopment. I believe the Sears store has already closed, or is scheduled to close in the near future. SRG controls over 12 acres here.

 

* SRG owns over 18 acres at the Town Center at Boca Raton mall. The mall is in the midst of a "significant, multi-million-dollar renovation slated for completion by the end of 2018." The quote is from a local news article I found on the web.

 

* SRG owns almost 15 acres at the Overlake Fashion Plaza in Redmond, WA. I believe development renderings are floating around, but nothing is official yet.

 

* SRG owns approximately 18 acres at the Landmark Mall in Alexandria, VA. The Sears store is still open, despite the entirety of the rest of the mall being closed. HHC has a long term plan to redevelop the mall into an open air shopping center complex. I think at some point the Sears store will close, at which point I wouldn't be surprised to see SRG sell out to HHC, which is known to like to have full control of its developments.

 

IMO over time we will see more of these sorts of sq footage expansions and "densifications", especially as outparcels are redeveloped.

 

I believe SRG has many more redevelopment opportunities than they have capital, but management is taking steps to address the company's capital constraints.

[LongTermView]

saw the shelf registration today and prospectus for preferred. looks like they are starting the process of restructuring the capitalization

 

Could be spun either way: i) good opportunities to allocate capital @ a rate above the cost of preferred equity, positive sign; or ii) need capital to expedite re-tenanting due to Sears closures - it just depends on how Mr. Market feels. Given the tough REIT environment, I wonder what the market appetite will be for the preferred and what kind of a rate they'll be able to issue them at.

 

Yeah, it's hard to say how Mr. Market will react.

[BTShine]

They're offering Preferred Shares @ 7%

 

$70 million worth

 

http://ir.seritage.com/Cache/391382302.pdf

[HalfMeasure]

They're offering Preferred Shares @ 7%

 

$70 million worth

 

http://ir.seritage.com/Cache/391382302.pdf

 

Spread trade I guess, redevelop @ 10-12% and pay prefs @ 7%.